Execute Sports (EXCS) 10-Q 2008 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2008
or
[  ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: _____________ to _____________

EXECUTE SPORTS, INC.(Exact name of registrant as specified in its charter)

NEVADA	333-125868	30-0038070
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

110 West C Street, Suite 1300, San Diego, CA 92101
(Address of Principal Executive Office) (Zip Code)

(310) 515-8902
(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)
-------

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.
[X]  Yes     [  ]  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer	[  ]	Accelerated filer	[  ]
Non-accelerated filer	[  ]	Smaller reporting company	[X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
[  ]  Yes     [X]  No
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
90,446,790 issued and outstanding as of November 10, 2008.

EXECUTES SPORTS, INC.
FORM 10-Q
INDEX

PART I FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Condensed Consolidated Balance Sheets at September 30, 2008 and December 31, 2007	1
	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Month Periods Ended September 30, 2008 and 2007	2
	Unaudited Consolidated Statements of Stockholder's Equity for the Nine months Ended September 30, 2008	3
	Unaudited Condensed Consolidated Statements of Cash Flows for the Three and Nine Month Periods Ended September 30, 2008 and 2007	4
	Notes to the Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	33
PART II OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 4.	Submission of Matters to a Vote of Security Holders	35
Item 5.	Other Information	35
Item 6.	Exhibits	35
SIGNATURES		36
EXHIBITS

Item 1.  Financial Statements

EXECUTE SPORTS, INC.
Consolidated Balance Sheets(Unaudited)
As of September 30, 2008 and December 31, 2007
			September 30, 2008		December 31, 2007
ASSETS
CURRENT ASSETS
	Cash		$	221,439	$	399,255
	Accounts receivable, net (Note A & B)			77,522		27,123
	Inventory (Note C)			120,408		65,617
	Deferred financing costs (Note G)			60,876		60,377
	Other current assets			-		5,441
		TOTAL CURRENT ASSETS		480,245		557,813
Fixed assets, net (Note D)				83,448		1,038,514
Deferred financing costs (Note G)				181,426		227,145
Intangible assets, net (Note E)				-		3,975,000
Loans receivable, net (Note F)				146,128		146,128
		TOTAL ASSETS	$	891,247	$	5,944,600
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
	Current portion of convertible debentures (Note G)		$	1,900,000	$	1,708,409
	Short term borrowings (Note H)			570,469		581,450
	Accounts payable and accrued expenses			100,011		72,918
	Interest accrued on convertible debentures (Note G)			818,377		314,490
		TOTAL CURRENT LIABILITIES		3,388,857		2,677,267
Long term borrowings (Note H)				10,000		-
Non-current portion of convertible debentures (Note G)				4,558,800		4,358,483
		TOTAL LIABILITIES		7,957,657		7,035,750
Commitment				-		-
STOCKHOLDERS' EQUITY (Note I)
	Common stock, par value $.001, 100,000,000 shares authorized authorized; issued and outstanding 90,446,790 and 87,456,541 at September 30, 2008 and December 31, 2007, respectively			90,442		87,452
	Additional paid-in capital			11,684,655		11,647,807
	Retained earnings (deficit)			(18,841,507)		(12,826,409)
		TOTAL STOCKHOLDERS' EQUITY (DEFICIT)		(7,066,410)		(1,091,150)
		TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	891,247	$	5,944,600

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F - 1
3

EXECUTE SPORTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
			Three Months Ended				Nine Months Ended
			September 30,				September 30,
			2008		2007		2008		2007
REVENUES & COST OF GOODS
	Net watersports sales		$	19,474	$	86,910	$	1,974,244	$	1,438,429
	Net Sugar Sand sales			-		-		1,621,208		-
		Total net sales		19,474		86,910		3,595,452		1,438,429
	Watersports cost of sales			17,387		69,201		1,565,396		787,188
	Sugar Sand cost of sales			-		-		1,401,944		-
		Total cost of sales		17,387		69,201		2,967,340		787,188
		Gross profit		2,087		17,709		628,112		651,241
EXPENSES
	General and administrative expenses			161,262		351,952		637,365		1,032,556
	Selling and advertising			16,682		44,375		173,915		91,868
	Depreciation expense			1,195		2,530		105,066		7,590
		Total expense		179,139		398,857		916,346		1,132,014
		Income (loss) from operations		(177,052)		(381,148)		(288,234)		(480,773)
OTHER INCOME AND EXPENSES
	Other income			145,500		53,224		145,500		100,807
	Other expense			-		-		(5,441)		-
	Interest expense			(256,142)		(224,142)		(786,319)		(437,682)
	Loss due to discount on conversion to stock			-		-		-		(54,250)
	Amortization of beneficial conversion feature of convertible debenture			(65,008)		(389,165)		(192,281)		(1,009,990)
	Amortization of warrant discount related to convertible debenture			(2,680)		(84,333)		(8,037)		(270,104)
	Amortization of deferred financing costs			(15,115)		(36,172)		(45,220)		(108,963)
	Impairment of Sugar Sand			-		-		(4,825,000)		-
		Total other income and expenses		(193,445)		(680,588)		(5,716,798)		(1,780,182)
	Net loss before discontinued operations			(370,497)		(1,061,736)		(6,005,032)		(2,260,955)
	Income (loss) from discontinued operations			-		-		-		(1,421)
	Gain (loss) on disposal of discontinued operations			-		-		-		208,112
		Total discontinued operations		-		-		-		206,691
	NET INCOME (LOSS)		$	(370,497)	$	(1,061,736)	$	(6,005,032)	$	(2,054,264)
Net (loss) per common share Basic and diluted from continuing operations			$	(0.004)	$	(0.017)	$	(0.067)	$	(0.039)
Net (loss) per common share basic and diluted after discontinued operations			$	(0.004)	$	(0.017)	$	(0.067)	$	(0.036)
Weighted average common shares outstanding basic and diluted				90,446,790		62,335,980		90,148,359		57,289,247
	The average shares listed below were not included in the computation per share because to do so would have been antidilutive for the periods presented:
	Stock options			-		450,000		-		450,000
	Warrants			15,661,667		12,868,016		15,826,502		7,619,868
	Debt collateralized with common stock			7,709,439,868		110,022,520		7,709,439,868		44,875,726

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F - 2
4

EXECUTE SPORTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 2007 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2008
		Common Stock			Additional Paid-in Capital		Retained Earnings <Deficit>		Total Stockholders' Equity
		Number of Shares	Amount
December 31, 2006		38,783,870	$	38,779	$	8,973,715	$	(10,154,999)	$	(1,142,505)
	Shares issued for director compensation	3,266,968		3,267		107,265.00				110,532
	Shares issued for services	3,177,271		3,177		98,342.00				101,519
	Shares issued to induce creditor to make loans to the Company	1,400,000		1,400		27,200.00				28,600
	Shares issued for notes payable	8,933,552		8,934		177,180.00				186,114
	Shares issued pursuant to put agreement for repayment of debenture	7,679,788		7,680		263,643.00				271,323
	Shares issued pursuant to put agreement for repayment of loans	22,302,887		22,303		313,752.00				336,055
	Shares issued pursuant to put agreement for cash	1,912,205		1,912		74,256.00				76,168
	Warrants issued for services					134,510.00				134,510
	Beneficial conversion feature of convertible debenture					1,424,185.00				1,424,185
	Warrant discount to convertible debenture					53,759.00				53,759
	Net loss							(2,671,410)		(2,671,410)
December 31, 2007		87,456,541		$ 87,452.00		11,647,807.00		$ (12,826,409)		(1,091,150)
	Shares issued for director compensation	750,000		750		11,250				12,000
	Shares issued for services	1,125,000		1,125		13,875				15,000
	Shares issued for notes payable	991,349		991		10,806				11,797
	Shares issued pursuant to put agreement for repayment of debenture	123,900		124		917				1,041
	Net loss							(6,015,098)		(6,015,098)
June 30, 2008		90,446,790	$	90,442	$	11,684,655	$	(18,841,507)	$	(7,066,410)

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F - 3
5

EXECUTE SPORTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
				Three Months Ended September 30,				Nine Months Ended September 30,
				2008		2007		2008		2007
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net loss from continuing operations			$	(380,563)	$	(1,061,736)	$	(6,015,098)	$	(2,054,264)
	Net gain from discontinued operations
	Adjustments to reconcile net loss to net cash used by operating activities:
		Depreciation and amortization			1,194		2,530		105,065		7,590
		Stock based compensation expense			-		176,090		27,000		350,421
		Loss on the conversion of convertible debt			-		-		-		54,250
		Amortization of beneficial conversion feature			65,008		389,165		192,281		1,009,990
		Amortization of warrant discount related to convertible debenture(s)			2,680		84,333		8,037		270,104
		Impairment of Sugar Sand			-		-		4,825,000		-
		Gain on cancellation of debt			-		(47,224)		-		(47,224)
		Issuance of common stock for notes payable			-		142,216		-		375,479
		Changes in assets and liabilities, net of effect of acquisitions:
			Accounts receivable		265,384		171,679		(50,399)		208,566
			Inventory		11,224		58,825		(54,791)		(2,456)
			Prepaid expenses		-		-		-		49,494
			Other current assets		-		1,000		5,441		(4,441)
			Accounts payable and accrued expenses		9,935		(24,304)		27,093		(619,350)
			Debenture interest payable		235,623		-		503,887		-
		Net cash provided (used) for operating activities			210,485		(107,426)		(426,484)		(401,841)
CASH FLOWS FROM INVESTING ACTIVITIES:
		Acquisition of trademarks			-		(5,000,000)		-		(5,000,000)
		Acquisition of furniture and equipment			-		-		-		(1,058)
		Net cash (used) for financing activities			-		(5,000,000)		-		(5,001,058)
CASH FLOWS FROM FINANCING ACTIVITIES:
		Issuance of common stock for cash			-		-		-		76,168
		Issuance of common stock for convertible debenture			-		-		-		53,126
		Proceeds from convertible debenture			-		5,877,907		193,447		5,930,120
		Proceeds from notes payable			10,000		344,000		1,102,412		1,454,299
		Repayment of notes payable			-		(141,471)		(1,092,411)		(1,263,107)
		Proceeds from related party notes payable			-		-		-		18,207
		Repayment of related party notes payable			-		(4,223)		-		(66,523)
		Secured borrowings			(225,460)		(102,248)		-		(42,501)
		Financing related costs			15,114		(271,328)		45,220		(198,537)
		Net cash provided (used) by financing activities			(200,346)		5,702,637		248,668		5,961,252
NET INCREASE <DECREASE> IN CASH					10,139		595,211		(177,816)		558,353
CASH, beginning of period					211,300		37,518		399,255		74,386
CASH, end of period				$	221,439	$	632,729	$	221,439	$	632,739
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
		Taxes paid		$	-	$	-	$	-	$	800
		Interest paid		$	-	$	-	$	46,191	$	-
Other non-cash investing and financing activities:
		Shares issued for services		$	-	$	176,090	$	27,000	$	350,421
		Shares issued for debt and accrued interest		$	-	$	142,216	$	906	$	645,668

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

F - 4
6

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The unaudited consolidated financial statements of Execute Sports, Inc. ("Execute Sports" or the "Company") as of September 30, 2008 and for the three and nine month periods ended September 30, 2008 and 2007 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting. Accordingly, they do not include all of the disclosures required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Form 10-KSB for the fiscal year ended December 31, 2007 filed with the United States Securities and Exchange Commission on March 31, 2008. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the interim financial information have been included. The re sults of operations for any interim period are not necessarily indicative of the results of operations for the entire year.

Organization

Execute Sports was founded in 2002 as Padova International USA, Inc. to produce graphics kits and ancillary soft goods for the motocross, enduro and ATV markets.

In 2003, the Company launched its water sports division under the "Execute Sports" brand to provide wetsuits, vests, rash guards and ancillary products to the wake board and ski markets.

On March 3, 2005 the Company changed its name from Padova International U.S.A., Inc. (DBA Execute Sports) to Execute Sports, Inc.

In January 2006, the Company expanded its product mix by consummating the acquisition of Pacific Sports Group, Inc. ("PSG"), which owned and operated Academy Snowboards, Kampus Wakesk8s, Kampus Wake Shoes and Collective Development Bags and Bindings. In January 2007, the Company entered into a trademark transfer and assignment agreement whereby all rights, title, interest and good will in the Academy brand were transferred to the two former owners of PSG. In connection with the transfer, all of the Company's accounts payable and accounts receivable relating to the trademark were assigned as well.

F - 5
7

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Organization (Continued)

In August 2007, the Company further expanded its product mix by purchasing the right, title, interest and goodwill relating to the business of designing, manufacturing and marketing jet powered Sugar Sands boats, including the SUGAR SAND trade names, trademarks, service marks, and service names, including www.sugarsand.com. On April 25, 2008 the Company's only supplier and marketer of Sugar Sand boats filed for bankruptcy protection under Chapter 7 of the United States Bankruptcy Code and ceased operations and intends to liquidate. At this time the Company has determined that it is unlikely that it will be able to arrange any feasible means to produce Sugar Sand boats, and therefore, does not anticipate any revenue from the sale of Sugar Sand boats beyond our quarter ended September 30, 2008 (See Note E).

Summary of Significant Accounting Principles

Basis of Presentation

The unaudited consolidated financial statements include the accounts of Execute Sports and its wholly owned subsidiary PSG under the accrual basis of accounting.

Accounting estimates

The preparation of unaudited consolidated 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 revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of consolidation

The unaudited consolidated financial statements include the accounts of Execute Sports and its subsidiary, which is 100% consolidated in the financial statements. All material inter-company accounts and transactions have been eliminated.

Cash and cash equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

Accounts receivable

Accounts receivable are reported at the customers' outstanding balances less any allowance for doubtful accounts. Interest is not accrued on overdue accounts receivable. The Company evaluates receivables on a regular basis for potential reserve. As of September 30, 2008, the allowance for doubtful accounts was $0.

The Company has a factoring agreement with JD Factors. Pursuant to the agreement JD Factors will provide account receivable financing and factoring to the Company. JD Factors purchases the accounts receivable and may pay a portion of the purchase price, or lend money to the Company based upon accounts receivable of the Company.

F - 6
8

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Inventories

Inventories are valued at the lower of cost or market. Cost is determined using the average costing method. Management performs periodic assessments to determine the existence of obsolete, slow moving and non-salable inventories, and records necessary provisions to reduce such inventories to net realizable value.

Property and equipment

Property and equipment are stated at cost. Major renewals and improvements are charged to the asset accounts while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed. At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are credited or charged to income.

Depreciation is provided using the 200% declining balance and straight line methods. It is calculated over recovery periods as prescribed by management that range from 5 years for equipment to 7 years for furniture.

Goodwill and Other Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. This statement requires that goodwill and other intangible assets arising from an acquisition of a business be periodically assessed for impairment rather than amortized on a straight-line basis. Accordingly, the Company annually reviews the carrying value of this goodwill and other intangible assets to determine whether impairment, as measured by fair market value, may exist. SFAS No. 142 requires that goodwill and other intangible assets be assessed for impairment using fair value measurement techniques. Specifically, goodwill and other intangible asset impairment is determined using a two-step process. The first step of the goodwill and other intangible asset impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount. If the fair value of a reporting unit exceeds its carrying amount, then the goodwill and other intangible assets of the reporting unit are not considered to be impaired and the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss, if any. The second step of the impairment test compares the implied fair value of the reporting unit's goodwill and other intangible assets with their carrying amount. If the carrying amount of the reporting unit's goodwill and other intangible assets exceeds their implied fair value, then an impairment loss is recognized in an amount equal to that excess.

Long-lived assets

Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may not be recovered. The Company assesses recoverability of the carrying value of an asset by estimating the fair value of the asset. If the fair value is less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value.

F - 7
9

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue recognition policy

Revenue from the sale of water sports clothing and apparel, and Sugar Sand boats is recognized when the earning process is complete and the risk and rewards of ownership have transferred to the customer, which is generally considered to have occurred upon shipment to the customer.

The Company recognizes revenue under the guidance provided by the SEC Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" and the Emerging Issues Task Force ("EITF") Abstract No. 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent" ("EITF 99-19"). Pursuant to EITF 99-19, The Company recognizes revenue from the sale of Sugar Sand boats on a gross basis.

Shipping and handling costs

The Company's policy is to classify shipping and handling costs as selling, general and administrative expenses.

Advertising

The Company expenses all advertising costs as incurred. For the three months ended September 30, 2008 and 2007, the Company incurred approximately $8,335 and $4,972, respectively, in advertising expenses. For the nine months ended September 30, 2008 and 2007, the Company incurred approximately $19,935 and $13,090, respectively, in advertising expenses.

Loss per common share

The Company adheres to Statement of Financial Accounting Standards No. 128, which requires reporting of both basic and diluted earnings (loss) per share. Basic loss per share is calculated using the weighted average number of common shares outstanding in the period. Diluted loss per share includes potentially dilutive securities such as outstanding options and warrants, using the "treasury stock" method and convertible securities using the "if-converted" method. There were no adjustments required to net loss for the period covered in this report in the computation of diluted earnings per share.

Issuance of common stock

The Company accounts for stock-based compensation using the fair value method of Financial Accounting Standard No. 123R. Common shares issued for services rendered by a third party (both employees and non-employees) are recorded at management's estimate of the fair value of the shares issued or services rendered, whichever is more readily determinable.

Comprehensive loss

The Company adopted Financial Accounting Standards Board Statement of Financial Standards No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components in the financial statements. There were no items of comprehensive income (loss) applicable to the Company during the periods covered in the financial statements included in this report.

F - 8
10

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Income taxes

On November 1, 2004, the Company amended its Articles of Incorporation to make the transition from an S-Corporation to a C-Corporation. Prior to the transition, the S-Corporation was not a tax paying entity for federal or state income tax purposes and thus no provision for income taxes was recognized. Subsequent to the change, the Company began recognizing the full valuation for deferred tax assets.

Impact of accounting standards

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities". This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Company's Board of Directors long-term measurement objectives for accounting for financial instruments. This Statement is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. The Company does not believe that this recent accounting pronouncement will have a material impact on its financial position or results of operations.

In December 2007, the FASB issued SFAS 141(revised 2007), Business Combinations ("SFAS 141R"). SFAS 141R will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition costs, IPR&D and restructuring costs. In addition, under SFAS 141R, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income tax expense. SFAS 141R is effective for fiscal years beginning after December 15, 2008 and, as such, the Company will adopt this standard in fiscal 2010. The Company has not yet determined the impact, if any, of SFAS 141R on its consolidated financial statements.

In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 ("SFAS 160"). SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests (NCI) and classified as a component of equity. This new consolidation method will significantly change the account with minority interest holders. SFAS 160 is effective for fiscal years beginning after December 15, 2008 and, as such, the Company will adopt this standard in fiscal 2010. The Company does not believe that this recent accounting pronouncement will have a material impact on its financial position or results of operations.

F - 9
11

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Impact of accounting standards (Continued)

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133" (SFAS No. 161). The standard requires additional quantitative disclosures (provided in tabular form) and qualitative disclosures for derivative instruments. The required disclosures include how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows; the relative volume of derivative activity; the objectives and strategies for using derivative instruments; the accounting treatment for those derivative instruments formally designated as the hedging instrument in a hedge relationship; and the existence and nature of credit-related contingent features for derivatives. SFAS No. 161 does not change the accounting treatment for derivative instruments. We do not expect SFAS No. 161 to have a material impact on the preparation of our financ ial statements.

In May 2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" (FSP APB 14-1). FSP APB 14-1 requires recognition of both the liability and equity components of convertible debt instruments with cash settlement features. The debt component is required to be recognized at the fair value of a similar instrument that does not have an associated equity component. The equity component is recognized as the difference between the proceeds from the issuance of the note and the fair value of the liability. FSP APB 14-1 also requires an accretion of the resulting debt discount over the expected life of the debt. This FSP shall be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is not permitted. We are currently evaluating the impact of FSP APB 14-1.

In May 2008, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 162, The Hierarchy of Generally Accepted Accounting Principles. This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS No. 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission ("SEC") of the Public Company Accounting Oversight Board's amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We do not expect SFAS No. 162 to have a material impact on the preparation of our financial statements.

On June 16, 2008, the FASB issued final Staff Position (FSP) No. EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities," to address the question of whether instruments granted in share-based payment transactions are participating securities prior to vesting. The FSP determines that unvested share-based payment awards that contain rights to dividend payments should be included in earnings per share calculations. The guidance will be effective for fiscal years beginning after December 15, 2008. We are currently evaluating the requirements of (FSP) No. EITF 03-6-1 as well as the impact of the adoption on our financial statements.

F - 10
12

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Concentrations of credit risk

The Company performs ongoing credit evaluations of its customers. As of September 30, 2008, two customers accounted for 100% (81% and 19%) of accounts receivable. As of September 30, 2007, five customers accounted for 88% (36%, 16%, 12%, 12% and 12%) of accounts receivable.

For the three and nine months ended September 30, 2008, one customers accounted for approximately 96% and two customers accounted for 76% (43% and 33%) of sales, respectively. For the three and nine months ended September 30, 2007, three customers accounted for approximately 83% (42%, 23% and 18%) and 91% (53%, 24% and 14%) of sales, respectively.

For the three and nine months ended September 30, 2008, none of the Company's net sales were made to customers outside the United States. For the three and nine months ended September 30, 2007, none of the Company's net sales were made to customers outside the United States.

The Company is dependent of third-party manufacturers and distributors for all of its supply of inventory. No purchases were made during the three months ended September 30, 2008. For the nine months ended September 30, 2008, three suppliers accounted for approximately 93% (48%, 35%, and 10%) of product purchases, respectively. For the three and nine months ended September 30, 2007, the Company's single and two largest supplier(s) individually accounted for approximately 100% and 98% (72%, and 26%) of product purchases, respectively. The Company is dependent on the ability of its suppliers to provide products and services on a timely basis and on favorable pricing terms. The loss of certain principal suppliers or a significant reduction in product availability from principal suppliers could have a material adverse effect on the Company.

Disclosure about Fair Value of Financial Instruments

The Company estimates that the fair value of all financial instruments at September 30, 2008, as defined in FASB 107, does not differ materially from the aggregate carrying values of its financial instruments recorded in the accompanying balance sheet. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. Considerable judgment is required in interpreting market data to develop the estimates of fair value, and accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange.

F - 11
13

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE B - ACCOUNTS RECEIVABLE

On September 12, 2005, the Company entered into a factoring agreement with JD Factor (the "Factor"). The Factor purchases certain customer accounts receivable on a non-recourse basis with certain broad exceptions. The Factor initially advances 80% of the amount of the invoice with the remainder, less fees, paid to the Company once the customer pays the invoice. The Company performs substantially all collection efforts. Under certain circumstances the Factor has the right to charge back to the Company for specific invoices.

The interest rate charged to the Company varies depending on the age of the receivable upon customer payment. The factoring agreement is collateralized by substantially all of the Company's assets.

The Company is reporting the factoring agreement as a secured borrowing in accordance with FAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." As of September 30, 2008 the balance due to the Factor was $0.

NOTE C - INVENTORY

Inventories are comprised of finished goods ready for resale and are stated at the lower of cost or market, as determined using the average costing method. The following table represents the major components of inventory at September 30, 2008 and December 31, 2007:

	September 30,	December 31,
	2008	2007
Finished goods	$120,408	$65,617

NOTE D - PROPERTY AND EQUIPMENT

Property and equipment at September 30, 2008 and December 31, 2007 consists of the following:

	September 30, 2008		December 31, 2007
Computer and office equipment	$	127,745	$	127,745
Furniture and fixtures		2,281		2,281
Machinery and equipment		11,262		11,262
	$	141,288	$	141,288
Less:  Accumulated Depreciation		(57,840)		(52,774)
	$	83,448	$	88,514

Depreciation expense for the three months ended September 30, 2008 and 2007 was $1,195 and $2,530, respectively. Depreciation expense for the nine months ended September 30, 2008 and 2007 was $105,066 and $7,590, respectively.

F - 12
14

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE E - INTANGIBLE ASSETS

On August 29, 2007, the Company entered into an Asset Purchase Agreement (the "Agreement") with Challenger Powerboats, Inc. ("Challenger") and its wholly owned subsidiary, IMAR Group, Inc. ("IMAR", together with Challenger, the "Sellers"), pursuant to which Execute Sports purchased from the Sellers, and Sellers sold and transferred to Execute Sports, all right, title, interest and goodwill in and to certain assets, properties and rights relating to, used in or held for use in IMAR's business of designing, manufacturing and marketing water jet powered Sugar Sands boats, including the SUGAR SAND trade names and associated trade names, trademarks, service marks and service names, and the associated logos and their goodwill, and all associated domain names, in particular the domain www.sugarsand.com, trades secrets and copyrights and their goodwill. The purchase price was $5,000,000. Execute Sports did not assume any obligations of IMAR in connection with the acquisition, other than the oblig ation to procure or maintain permits in connection with the post-closing operation of the Business by the Company. The following trade names were included in the purchase: Sugar Sand, Sugar Sand Sting, Sugar Sand Tango, Sugar Sand Mirage, Sugar Sand Calais, Sugar Sand Oasis, and Sugar Sand Airwave.

In connection with the transaction, Execute Sports and IMAR entered into an Agreement for Exclusive Right of Supply, pursuant to which IMAR will manufacture and be the exclusive supplier of the Sugar Sand line of jet boats to Execute Sports, for an initial term of 10 years. In addition, Execute Sports entered into an Exclusive Sales and Marketing Agreement with Challenger, pursuant to which Challenger will provide sales and marketing services related to the Sugar Sand boats for an initial term of 10 years.

The $5,000,000 purchase price was allocated $1,000,000 to boat molds, $500,000 to marketing/sales infrastructure and client lists, and $3,500,000 to trademarks resulting in an increase of $1,000,000 to our net fixed assets and $4,000,000 to intangible assets.

Pursuant to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, the Company evaluated the Sugar Sand trademarks for impairment at December 31, 2007. At the time our analysis fair value was in excess of the $3,500,000 carrying balance of trademarks and the Company did not record any impairment expense.

On April 25, 2008, Challenger filed for bankruptcy protection under Chapter 7 of the United States Bankruptcy Code and indicated it intends to liquidate. At this time the Company has determined that it is unlikely that it will be able to arrange any feasible means to produce Sugar Sand boats, and therefore, does not anticipate any revenue from the sale of Sugar Sand boats beyond our quarter ended June 30, 2008. Thus, during the quarter ended June 30, 2008, the Company recognized an impairment charge of $4,825,000 million related to the entire investment made in Sugar Sand as it is unlikely that the Company will realize any future revenue from the sale of Sugar Sand boats beyond our quarter ending June 30, 2008 (see also Note N - "Subsequent Events").

F - 13
15

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE F - LOANS RECEIVABLE

During 2005 and 2006, the Company made strategic loans totaling $396,127 for potential future association to an unaffiliated company that accrues interest at 2% per year and due 12 months from the date of draw.

As of September 30, 2008, the entire balance of the loans was in default. However, we are in the process of collections and believe a portion will be collected. Therefore, the Company has created a reserve of $250,000 against the loans and classified the net balance into noncurrent assets, as collection cannot be assured to occur within the next twelve months.

NOTE G - CONVERTIBLE DEBENTURES

May 15, 2006 Debenture ($1,900,000)

On May 15, 2006, the Company completed a private placement of convertible debentures to Dutchess Private Equities Fund, L.P. ("Holder" or "Dutchess") generating gross proceeds of $1.9 million, and the issuance of warrants to purchase $475,000 worth of the Company's common stock. Third party fees totaled $191,000, which were paid in cash. The debentures are senior secured debt of the Company secured by a lien on all of the Company's assets. The Company was unable to make any of the scheduled interest or principal payments on the debentures during the three month and nine month periods ending September 30, 2008 and is in payment default on the debentures. At this time Dutchess has not initiated any collection action against the Company and has not exercised or given notice of its intent to exercise any remedies available to them under the terms of the notes. However, there can be no assurance that Dutchess will not exercise its rights and remedies as senior secured cre ditor at a future date.

The terms of the warrants and debentures are substantially the same. The exercise price of the warrants is calculated the same as for the conversion price of the convertible debentures. The warrants and debentures are immediately exercisable. The debentures bear interest at 12% per annum, interest payable monthly at the option of the Holder in cash or common stock. The debenture agreement payment schedule provides for full repayment by September 15, 2007, or sixteen (16) months from the closing date. However, the debenture agreement maturity date is September 30, 2011 at which time any remaining principal balance automatically converts to the Company's common stock. The Company has recorded the entire principal balance of $1,900,000 of this debenture as a current liability due to the short term nature of the agreement payment schedule.

Prior to maturity, the debentures and warrants are convertible into the Company's common stock at a fixed conversion price equal to the lowest closing bid price of the common stock between the issuance date and the date of the filing the registration statement covering resale of the shares underlying the debenture, or at a conversion price of fifteen cents ($.15). Since the Company's stock price did not decline below $0.15 prior to the filing of the registration statement, $0.15 is the fixed conversion price for this debenture and associated warrants.

The debentures provide that the Holders may only convert the debenture if the number of shares held by the lender or its affiliates after conversion would not exceed 4.99% of the outstanding shares of the Company's common stock following such conversion.

F - 14
16

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE G - CONVERTIBLE DEBENTURES (Continued)

May 15, 2006 Debenture ($1,900,000) (Continued)

In connection with the transaction, the Company entered into a Registration Rights Agreement. Pursuant to the terms of the Registration Rights Agreement, within twenty-one calendar days following the initial closing date, or June 5, 2006, the Company was required to file with the Securities and Exchange Commission a registration statement under the Securities Act of 1933, as amended, covering the resale of all of the common stock underlying the convertible debenture and issuable upon the exercise of the warrants based on a conversion price of $0.15 per share.

The Registration Rights Agreement further provides that if a registration statement is not filed within 21 days from the initial closing date, then in addition to any other rights the Holder may have, and until the registration statement is filed, the Company would be required to pay the Holder an amount in cash, as liquidated damages, equal to an aggregate two percent (2%) of the purchase price of the debentures. In addition, the conversion price would decrease by 10% of the fixed conversion price for each fifteen (15) day calendar period that a registration statement is not filed. The Registration Rights Agreement further provides that if a registration statement is not declared effective within 80 days from the initial closing date, then the Company would be required to pay the Holder an amount in cash, as liquidated damages, equal to an aggregate two percent (2%) of the purchase price of the debentures until the registration statement becomes effective. The Company initially filed t he registration statement on May 24, 2006 and it was declared effective on June 15, 2006, or 30 days from the initial close date both within the time frames set forth in the Registration Rights Agreement.

The issuance costs related to the convertible debentures of approximately $191,000 in cash were capitalized to deferred financing costs on the balance sheet and are being amortized over the term of the repayment schedule which is calculated based upon the effective interest method. The Company recognized $36,172 and $108,963 during the three and six months ended September 30, 2007, respectively, as other expense related to the amortization of the issuance costs. The deferred financing costs were fully amortized as of September 30, 2007.

Pursuant to Paragraph 9-32 of EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock, the warrants issued in connection with the convertible debentures meet the requirements of and are accounted for as permanent equity since the filing of an effective registration statement within the allotted time frames negated any liquidated damages, settlement is by delivery of shares only and the exercise price is fixed. The initial value of the warrants was treated as a discount to the debenture and recorded as additional paid in capital. The Company calculated the initial value of the warrants on the closing date of the transaction as being $633,333 as determined using a Black-Scholes option pricing model with the following assumptions: expected term 5 years, exercise price $0.15, volatility 7.6%, risk free rate 5.15%, and zero dividend yield. The total value of the warrants and the debenture was $2.53 million of which the warrant s represented 25%. Thus, the relative value of the warrants to the total value, or 25% was applied to the debenture value of $1.90 million yielding a warrant discount of $475,000. The discount to the debenture was amortized over the term of the repayment schedule, or sixteen (16) months, and is calculated based upon the effective interest method. The Company recognized $84,333 and $270,104 during the three and nine months ended September 30, 2007, respectively, in non-cash amortization expense related to the warrant discount. The warrant discount was fully amortized as of September 30, 2007.

F - 15
17

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE G - CONVERTIBLE DEBENTURES (Continued)

May 15, 2006 Debenture ($1,900,000) (Continued)

The Company determined that the $1.90 million debenture was issued with a beneficial conversion feature ("BCF") due to the conversion price ($0.15) being less than the closing stock price ($.32) on the date of issuance, and the conversion feature being in-the-money. Thus, pursuant to EITF 00-27, 27, Application of Issue No. 98-5 to Certain Convertible Instruments, the BCF has been determined based on the gross debenture amount less the portion attributable to the warrants described above, and recorded as a discount to reduce the carry value of the debenture and increase additional-paid-in-capital. The Company calculated the initial BCF on the closing date of the transaction to be $1,615,000 using the intrinsic value method. Since this amount is greater than the $1,425,000 remaining value of the debenture after deducting for the warrant discount described above, the Company reduced the initial carry value of the debenture to zero effectively recording a BCF of $1,42 5,000 as additional-paid-in-capital. The BCF discount was amortized over the debenture repayment term of sixteen (16) months and calculated based upon the effective interest method. The Company recognized $389,165 and $1,009,990 during the three and nine months ended September 30, 2007, respectively, in non-cash amortization expense attributable to the amortization of the beneficial conversion feature discount. The beneficial conversion feature was fully amortized as of September 30, 2007.

During the three and nine months ended September 30, 2008, the Company made no payments nor issued any stock in repayment of this debenture. The debentures are senior secured debt of the Company secured by a lien on all of the Company's assets. The Company was unable to make any of the scheduled interest or principal payments on the debentures during the three month and nine month periods ending September 30, 2008 and is in payment default on the debentures. At this time Dutchess has not initiated any collection action against the Company and has not exercised or given notice of its intent to exercise any remedies available to them under the terms of the notes. However, there can be no assurance that Dutchess will not exercise its rights and remedies as senior secured creditor at a future date (see also Note N - "Subsequent Events").

During the three and nine months ended September 30, 2008, the Company recognized $61,705 and $178,411, respectively, in interest expense related to the May 2006 debenture. During the three and nine months ended September 30, 2007, the Company recognized $54,710 and $159,971, respectively, in interest expense related to the May 2006 debenture.

The debenture balance, including interest and principal as of September 30, 2008 is $2,071,407.

F - 16
18

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE G - CONVERTIBLE DEBENTURES (Continued)

August 23, 2007 Debenture ($5,750,000)

On August 23, 2007, the Company completed a private placement of convertible debentures to Dutchess Private Equities Fund LP generating gross proceeds of $5.75 million, and the issuance of warrants to purchase 5,750,000 shares of the Company's common stock for $.02 per share. Fees totaled $307,500, which were paid in cash. The debentures are senior secured debt of the Company secured by a lien on all of the Company's assets. The Company was unable to make any of the scheduled interest payments on the debentures during the three month period ending June 30, 2008 and is in payment default on the debentures. At this time Dutchess has not initiated any collection action against the Company and has not exercised or given notice of its intent to exercise any remedies available to them under the terms of the notes. However, there can be no assurance that Dutchess will not exercise its rights and remedies as senior secured creditor at a future date.

The warrants and debentures are immediately exercisable. The debentures bear interest at 12% per annum, interest payable monthly at the option of the Holder in cash or common stock. The debenture has a term of five (5) years and matures August 23, 2012. Any remaining principal balance automatically converts to the Company's common stock. The Company is not obligated to make principal payments until maturity. Therefore, the Company has classified the entire balance of $4,424,344 of this debenture as a non current liability.

Prior to maturity, the debentures are convertible into the Company's common stock at the lesser of (i) seventy-five percent (75%) of the lowest closing bid price of the Common Stock during the twenty (20) trading days immediately prior to a Conversion Notice; or (ii) 2/100 U.S. dollars ($.02).

The debentures provide that the Holders may only convert the debenture if the number of shares held by the lender or its affiliates after conversion would not exceed 4.99% of the outstanding shares of the Company's common stock following such conversion.

The issuance costs related to the convertible debentures of approximately $307,500 in cash were capitalized to deferred financing costs on the balance sheet and are being amortized over the term of the debenture which is calculated based upon the effective interest method. During the three and nine months ended September 30, 2008, the Company recognized $15,115 and $45,220, respectively, as other expense related to the amortization of the issuance costs. The balance of deferred financing costs as of September 30, 2008 was $242,302.

Pursuant to Paragraph 9-32 of EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock, the warrants issued in connection with the convertible debentures meet the requirements of and are accounted for as permanent equity since settlement is by delivery of shares only and the exercise price is fixed. The initial value of the warrants was treated as a discount to the debenture and recorded as additional paid in capital. The Company calculated the initial value of the warrants on the closing date of the transaction as being $53,759 as determined using a Black-Scholes option pricing model with the following assumptions: expected term 5 years, exercise price $0.02, Strike price $.025, volatility 14.28%, risk free rate 4.62%, and zero dividend yield. The discount to the debenture is being amortized over the term of the debenture and is calculated based upon the effective interest method. During the three and nine months ended S eptember 30, 2008, the Company recognized $2,680 and $8,037, respectively, in non-cash amortization expense related to the warrant discount.

F - 17
19

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE G - CONVERTIBLE DEBENTURES (Continued)

August 23, 2007 Debenture ($5,750,000) (Continued)

The Company determined that the debenture was issued with a beneficial conversion feature ("BCF") due to the conversion price ($0.020) being less than the closing stock price ($.025) on the date of issuance, and the conversion feature being in-the-money. Thus, pursuant to EITF 00-27, 27, Application of Issue No. 98-5 to Certain Convertible Instruments, the BCF has been determined based on the gross debenture amount less the portion attributable to the warrants, and recorded as a discount to reduce the carry value of the debenture and increase additional-paid-in-capital. The Company calculated the initial BCF on the closing date of the transaction to be $1,424,185 using the intrinsic value method. The BCF discount is being amortized over the term of the debenture. During the three and nine months ended September 30, 2008, the Company recognized $65,008 and $192,281, respectively, in non-cash amortization expense attributable to the amortization of the BCF discount.

During the nine months ended September 30, 2008, the Company issued 123,900 shares of common stock in payment of $1,041 of interest related to the August 2007 debenture.

During the three and nine months ended September 30, 2008, the Company recognized $173,918 and $517,973, respectively, in interest expense related to this debenture. During the three and nine months ended September 30, 2007, the Company recognized $71,836 in interest expense related to this debenture.

The debenture balance, including interest and principal as of September 30, 2008 is $6,396,970.

As of September 30, 2008, the actual dollar amount due to the Holders of the Company's May 15, 2006 ($1.9 million), and August 23, 2007 ($5.75 million) debentures, including accrued interest was $8,468,377. The following table represents the actual balance due compared to the amount recorded on the balance sheet as of September 30, 2008 and December 31, 2007:

	September 30, 2008	December 31, 2007
Amount borrowed under the convertible debentures	7,650,000	7,650,000
Accrued interest	818,377	314,490
Payments applied to principle	-	(191,591)
Debenture balance payable	8,468,377	7,772,899
Unamortized beneficial conversion feature	(1,149,046)	(1,341,327)
Unamortized Warrant discount	(42,154)	(50,191)
Recorded debenture balance	7,277,177	6,381,381
BALANCE SHEET ACCOUNTS
Current portion of convertible debentures	1,900,000	1,708,409
Interest accrued on convertible debentures	818,377	314,490
Non-current portion of convertible debentures	4,558,800	4,358,483
Recorded debenture balance	7,277,177	6,381,382

F - 18
20

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE G - CONVERTIBLE DEBENTURES (Continued)

Investment Agreement

In connection with the debenture, the Company entered into a separate Investment Agreement on May 15, 2006 with Dutchess Private Equities Fund, L.P., which provides for the sale and issuance from time to time of up to $10,000,000 in shares of Common Stock for a period of up to 36 months from the date the Registration Statement is declared effective. The maximum number of shares that the Company may put to Dutchess at any one time shall be equal to, at the Company's election, either (a) 200% of the average daily volume in the U.S. market of the Common Stock for the ten trading days prior to the date the Company notifies Dutchess of its intent to sell shares to Dutchess, multiplied by the average of the three daily closing bid prices immediately preceding the date a Put Notice is delivered, or (b) a number of shares having a value of $100,000. The Company may not submit a Put Notice until after the completion of a previous sale under the Investment Agreement. The purchase pric e for the Common Stock to be sold shall be equal to 93% of the lowest closing best bid price of the Common Stock during the five-day period following the date the Company delivers a Put Notice. Since the price of the shares put to Dutchess are expected to be below market price at 93% of the market price, there is no added benefit to the Company. Thus, the Company has not recorded an asset related to this agreement. Upon the delivery of shares and receipt of cash related to this Investment Agreement, the Company records the increase in cash or decrease in debenture interest and principal, and an increase in common stock and additional paid in capital.

During the three months ended March 31, 2008, the Company placed puts with Dutchess totaling $1,041 resulting in the issuance of 123,900 shares of common stock that reduced the same amount of accrued interest. No puts were placed with Dutchess during the quarters ended June 30, 2008 or September 30, 2008.

NOTE H - NOTES PAYABLE

Non Related Party Notes Payable

Notes payable at September 30, 2008 is as follows:

Unsecured demand note payable bearing interest at 2% per year; currently in default.	$	9,538
Unsecured demand note payable to John Helms bearing interest at 4% per year; matures 3/31/09.	$	63,370
Unsecured demand note payable to New Heart Ministries, bearing interest at 4% per year; currently in default.	$	2,925
Unsecured demand note payable to Pacific Sports Investors LLC, bearing interest at 15% per year; currently in default.	$	48,923
Secured demand note payable to Hector Peneda, bearing interest at 12% per year collateralized by 40,000 shares of common stock; currently in default.	$	8,800
Secured demand note payable to Craig Hudson, bearing interest at 12% per year collateralized by 116,000 shares of common stock; currently in default.	$	32,065
Unsecured demand note payable to Sheryl Gardner, former CFO, bearing interest at 4% per year; currently in default.	$	47,225
Secured promissory note to Dutchess Private Equities Fund, Ltd., bearing interest at 12% per year and collateralized by however many shares are needed to settle the debt; matures May 1, 2008; currently in default.	$	45,623
Secured promissory note to Dutchess Private Equities Fund, Ltd., bearing interest at 12% per year and collateralized by however many shares are needed to settle the debt; matures September 13, 2008.	$	312,000
TOTAL	$	570,469

F - 19
21

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE H - NOTES PAYABLE (Continued)

Non Related Party Notes Payable (Continued)

The interest rate offered on the 2% through 4% loans above is below market rate. The Company has determined the difference between the stated interest rate and the rate available at the date of the loan(s) would be immaterial to these financial statements.

In January 2008, the Company issued 991,349 shares of common stock to John Helms in exchange for $11,797 in amounts owed to him, including accrued interest of $816 and principal of $10,981.

On May 1, 2007, the Company issued to Dutchess a promissory note in the face amount of $132,000 for gross proceeds of $110,000. The Note bears interest at 12% per annum and matures on May 1, 2008. Pursuant to the Note, the Company is required to make payments to Dutchess in the amount of the greater of a) one hundred percent (100%) of each Put (as defined in the Investment Agreement (See Note G) between the Company and the Investor given to Dutchess from the Company; or b) eleven thousand seven hundred twenty-one dollars and 39/100 ($11,721.39) until the Face Amount is paid in full, minus any fees due. In connection with the issuance of the Note, the Company has agreed to provide Collateral to Dutchess in the form of thirty (30) Put Notices. In the event that the Company has not repaid the Face Amount by the maturity date, then as liquidated damages, the face amount shall be increased by ten percent (10.0%) as an initial penalty and an additional two and one-half percent (2.5%) per month (pro rata for partial periods), compounded daily, for each month until the face amount is paid in full.

As an incentive to enter into this note, the Company issued to Dutchess 800,000 shares of the Company's restricted common stock. During the year ended December 31, 2007, the Company issued 4,699,033 shares of common stock in repayment of $86,377 of the May 1, 2007 promissory note, which has a balance of $45,623 as of September 30, 2008.

On August 13, 2007, the Company issued to Dutchess a promissory note in the face amount of $312,000 for gross proceeds of $260,000. The Note bears interest at 12% per annum and matures on September 13, 2008. Pursuant to the Note, the Company is required to make payments to Dutchess in the amount of one hundred percent (100%) of each Put (as defined in the Investment Agreement until the Face Amount is paid in full, minus any fees due. In connection with the issuance of the Note, the Company has agreed to provide Collateral to Dutchess in the form of thirty (30) Put Notices. In the event that the Company has not repaid the Face Amount by the maturity date, then as liquidated damages, the face amount shall be increased by ten percent (10.0%) as an initial penaltyand an additional two and one-half percent (2.5%) per month (pro rata for partial periods), compounded daily, for each month until the face amount is paid in full.

During the three nine months ended March 31, 2008, the Company borrowed $55,915 from a single source for the purchase of goods for resale. The loan included a 4.5% fee, or $2,516 bringing the total amount due to $58,431. During the three month period ended June 30, 2008, the Company repaid the full amount due of $58,431.

During the three and nine months ended September 30, 2008, the Company recognized $4,315 and $13,664 respectively of interest expense related to notes payable. During the three and nine months ended September 30, 2007, the Company recognized $78,234 and $88,148 respectively of interest expense related to the notes payable. No interest was paid during the three and nine months ended September 30, 2008.

F - 20
22

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE H - NOTES PAYABLE (Continued)

Related Party Notes Payable

During the three month period ended March 31, 2008, the Company borrowed $90,000 from Phase 2 Sales, a corporation owned by Geno Apicella, former CEO. The funds were used to purchase goods for resale and carried interest of 4.5% per purchase transaction. During the three month period ended June 30, 2008, the Company repaid $90,000 and interest of $4,050.

During the three and nine months ended September 30, 2008, the Company recognized $1,434 and $4,303, respectively, of interest expense related to the notes above. During the three and nine months ended September 30, 2007, the Company recognized $1,434 and $4,303, respectively, of interest expense related to the notes above. No interest was paid during the three or nine months ended September 30, 2008 or 2007.

Purchase Order Financing

During the nine months ended September 30, 2008, the Company borrowed $1,002,412 from a non related party for the purchase of inventory. The borrowings were secured by the inventory financed. The Company repaid all amounts due and incurred approximately $42,141 of interest expense.

Notes Payable (Long-term)

On September 5, 2008, the Company issued a non convertible Senior Note, face value $10,000, in exchange for professional services valued at $10,000. The note matures on October 1, 2010 with interest only payments required quarterly prior to maturity beginning on January 1, 2009. The note bears interest of eight percent (8%) per annum and compounds annually. The note is secured and collateralized by all the assets of the Company.

NOTE I - STOCKHOLDERS' EQUITY

During the year ended December 31, 2007, the Company issued 3,266,968 shares of common stock valued at the closing price of the stock on the date of issuance, or $110,532 to two of its directors as payment in lieu of cash.

During the year ended December 31, 2007, the Company issued 3,177,271 shares of common stock valued at the closing price of the stock on the date of issuance, or $101,519 as payment for services rendered in lieu of cash.

During the year ended December 31, 2007, the Company issued 1,400,000 shares of common stock valued at the closing price of the stock on the date of issuance, or $28,600 to the Holders of our convertible debentures as an inducement to make short term loans to the Company for the purpose of financing production and working capital.

During the year ended December 31, 2007, the Company issued 8,933,552 shares of common stock in exchange for the retirement of $205,476 of principal amount owed and $14,145 of accrued interest thereon. The stock was valued at the closing price of the stock on the date of issuance and resulted in an increase to shareholders equity of $186,114 and a gain of $33,507.

F - 21
23

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE I - STOCKHOLDERS' EQUITY (Continued)

During the year ended December 31, 2007, the Company issued 31,894,880 shares to Dutchess pursuant to the Investment Agreement (See NOTE G). The total value of the shares on the dates of issuance was $683,543. Of this amount $76,168 was received in cash, $219,530 was applied to promissory notes made to the Company (See Note H), $54,250 was recognized as a loss due to the conversion discount, $217,073 was applied to accrued interest on the May 2006 debenture and $116,525 was applied to accrued interest on the August 2007 debenture.

During the three months ended March, 2008, the Company issued 750,000 shares of common stock valued at the closing price of the stock on the date of issuance, or $12,000 to two of its directors as payment in lieu of cash.

During the three months ended March 31, 2008, the Company issued 1,125,000 shares of common stock valued at the closing price of the stock on the date of issuance, or $15,000 as payment for services rendered in lieu of cash.

During the three months ended March 31, 2008, the Company issued 991,349 shares of common stock in exchange for the retirement of $10,981 of principal amount owed and $816 of accrued interest. The stock was valued at the closing price of the stock on the date of issuance.

During the three months ended March 31, 2008, the Company issued 123,900 shares to Dutchess pursuant to the Investment Agreement (See NOTE G). The total value of the shares on the dates of issuance was $1,041. This amount was applied to accrued interest on the August 2007 debenture.

There was no stock activity for the three months ended June 30, 2008 or September 30, 2008.

NOTE J - WARRANTS

At September 30, 2008, the Company had 15,661,667 Warrants outstanding entitling the holder thereof the right to purchase one share of common stock for each warrant held as follows:

Warrant Class	Number of Warrants	Exercise Price Per Warrant		Expiration Date	Fair Market Value
May 2006 Debenture	2,911,667	$	0.150	5/15/11		-
August 2007 Debenture	5,750,000	$	0.020	8/23/12		-
B	5,000,000	$	0.001	5/23/012		1,500
B	2,000,000	$	0.001	5/23/012		600
Total	15,661,667				$	2,100

The fair market value of warrants is calculated using the Black-Scholes Option Pricing Model using the following inputs: spot price $0.0011, volatility .136, risk-free interest rate 3.83% and the respective duration and exercise price per warrant issue.

F - 22
24

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE J - WARRANTS (Continued)

During the nine months ended September 30, 2008, the Company canceled 500,000 warrants that had expired.

Stock Warrants Issued to Third Parties

The Company accounts for stock-based compensation issued to non-employees in accordance with the provisions of SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18 ("EITF 96-18"), "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services."

In addition, the Company evaluates each derivative issued to determine whether treatment as either equity or a liability is warranted for that derivative pursuant to EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's Own Stock of that derivative.

The Company noted that if all warrants (15,661,667) were exercised and added to the currently outstanding shares (90,446,790), the Company would have 106,108,457 shares outstanding, which is 6,108,457 shares in excess of the authorized shares of 100,000,000. Pursuant to EITF 00-19, this should result in a portion of the warrants being reclassified from permanent equity to liabilities. However, given that the total fair value of debenture warrants is only 0.2% of total assets and that the debenture warrants which total 8,661,667 and have no fair value, the Company has elected to maintain the classification of all warrants as permanent equity.

NOTE K - GOING CONCERN AND MANAGEMENT'S PLANS

The Company has suffered recurring losses from operations since inception. In addition, the Company has yet to generate an internal cash flow from its business operations. These factors raise substantial doubt about its ability to continue as a going concern.

The Company is considering a range of options including liquidating its inventory in the ordinary course of business and ceasing its operations or developing a revised plan to manufacture and sell its products. Implementing a strategy to continue to manufacture and sell its products would encompass the following actions: 1) obtain funding from new investors to alleviate the Company's working capital deficiency; and 2) implement a plan to generate additional sales. The Company's continued existence is dependent upon its ability to resolve its liquidity problems and increase profitability in its current business operations. However, the outcome of management's plans cannot be ascertained with any degree of certainty. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these risks and uncertainty (see also Note N - "Subsequent Events").

NOTE L - RELATED PARTY TRANSACTIONS

In January 2008, just prior to his departure as a board member, the Company made payments totaling $2,000 to Craig Washington for accounting services.

During the three month period ended March 31, 2008, the Company borrowed $90,000 from Phase 2 Sales, a corporation owned by Geno Apicella, former CEO. The funds were used to purchase goods for resale and carried interest of 4.5% per purchase transaction. During the three month period ended June 30, 2008, the Company repaid $90,000 and interest of $4,050.

F - 23
25

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE M - CONTINGENCIES

Litigation

The Company is involved in various legal proceedings arising in the ordinary course of business. The ultimate outcome of these proceedings cannot be determined because of the uncertainties that exist. In the light of the Company's current financial condition, the Company's cash liability, if any, arising from legal proceedings, could have a material adverse effect on the Company's financial position, results of operations or cash flows.

NOTE N - SUBSEQUENT EVENTS

On October 13, 2008, Execute Sports, Inc. (the "Company") entered into an Intercreditor and Standby Agreement (the "Intercreditor Agreement"), made effective as of September 4, 2008, that governs the relationship between the Company and its senior secured creditors as well as the interrelationship between senior secured creditors. Among other matters, the Intercreditor Agreement accomplishes the following:

• Identifies the Collateral that secures the Company's Senior Debt, which is all of the Company's assets.
• Defines secured Senior Debt and what constitutes Senior Loan Documents and requires that certain minimum documentation accompany any Senior Debt, including a signed Intercreditor Agreement.
• Requires the Company to receive the approval of the holders of a majority of the Company's Senior Debt in order to issue additional Senior Debt.
• Prioritizes the liens against the Collateral that the Company's Senior Debt has by making all Senior Debt, that is accompanied by the appropriate Senior Loan Documents, equal in rank with one another regardless of the date that a UCC Financing Statement has been filed.
• Governs the distribution of proceeds from any liquidation or foreclosure of the Collateral (Senior Lenders share pro rata in such proceeds).
• Permits the holders of a majority of the Senior Debt to compromise, exchange or restructure the Senior Debt and that such compromise, exchange or restructuring shall be binding upon all holders of Senior Debt.
• Prevents any Senior Lender from taking any collection action of any kind without the approval of the holders of a majority of the Senior Debt.
• Allows that any sale of the Company's assets, not made in the ordinary course of business (including the Collateral, or portions thereof), and the disposition of proceeds therefrom, if any, shall be deemed to have been done in accordance with the procedures outlined in the Intercreditor Agreement if such asset sale was approved by the holders of a majority of the Senior Debt.

The terms of the Intercreditor Agreement, to the extent that they conflict with any of the Senior Loan Documents, shall prevail.

On October 13, 2008 the Company entered into an Asset Purchase Agreement made effective October 9, 2008 whereby it sold its Sugar Sand boat molds and fiber glass work-in-process inventory along with the SUGAR SAND trade names and associated trade names, trademarks, service marks and service names, and the associated logos and their goodwill, and all associated domain names, in particular the domain www.sugarsand.com, trades secrets and copyrights and their goodwill, and all designs, plans and customer and vendor lists related to Sugar Sand boats and the Bill of Materials for each Sugar Sand model, and one Sugar Sand 2008 Tango Extreme GT and trailer.

F - 24
26

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE N - SUBSEQUENT EVENTS (Continued)

The Assets were acquired by Coosaw Capital Partners LLC, the owner of Bentley Marine Group, headquartered in Lexington, South Carolina ("Bentley"). Bentley is a manufacturer of marine products employing approximately 450 people. The purchase price for the Assets was $25,000 plus a Residual Fee equal to two percent (2%) of the gross sales of all models of Sugar Sand boats sold by Bentley in the period beginning on the Effective Date through until January 1, 2014 (the "Residual Fee Period"). Gross sales of Sugar Sand boats made during the Residual Fee Period shall be the total of the amount received for each Sugar Sand boat including equipment or optional equipment included with each boat sale (but not including the proceeds from the sale of any trailer included with a boat, if any), prior to any rebate or dealer promotion or allowance. The

Residual Fee shall be paid on a quarterly basis for all sales made in the period ending through the last day of the month immediately prior to the month that the Residual Fee is due. The Residual Fee shall be due on the fifteenth (15^th) day of each January, April, July and October beginning on January 15, 2009 through January 15, 2014.

On October 23, 2008 the Company reached a settlement in the matter of Mikacich v. Execute Sports, Inc. The Mikacich matter concerned a claim for alleged unpaid services by Coburn Mikacich in the amount of $21,600 that was filed in the Superior Court of California, County of Sacramento (Case No. 07AS02941) on June 27, 2007 and was subsequently transferred to Los Angeles County, California. Pursuant to the terms of the settlement the Company made a one-time payment of $3,500 to Mikacich.

On October 29, 2008, the Company's Board of Directors concluded that the Company has no feasible alternative plan other than to discontinue its watersports operations and to allow the sale of its remaining watersports inventory in the ordinary course of business. As a result of this decision the Company anticipates that it shall be making its future quarterly and annual filings as a shell company as defined in Rule 12b-2 of the Exchange Act.

On November 10, 2008, the Company entered into a Letter Agreement (the "Agreement"), made effective as of November 7 2008, that appoints the Company as agent for Dutchess Private Equities Fund, Ltd.("Dutchess") for the purpose of helping facilitate the liquidation of the inventory of Challenger Powerboats, Inc and subsidiaries (collectively, "Challenger"). Challenger filed bankruptcy under chapter 7 of the Unites States Bankruptcy law in April of 2008 and Dutchess, as senior secured creditor of Challenger, has taken possession of the Challenger inventory, which was abandoned by the bankruptcy Trustee in the Challenger case.

In order to facilitate the liquidation of the Challenger inventory, certain documentation must be provided to any acquirer of such inventory, including the issuance of a Manufacturer's Statement of Origin ("MSO") or Certificate of Statement of Origin ("CSO") for any boat that is purchased (or owned) and the transfer of title for any boat trailer that is purchased. The Company shall issue such documentation, subject to the conditions contained in the Agreement, on behalf of Dutchess who has appointed the Company in its capacity as attorney-in-fact for Challenger (pursuant to a security agreement between Dutchess and Challenger, dated September 30, 2007).

F - 25
27

EXECUTE SPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

NOTE N - SUBSEQUENT EVENTS (Continued)

The Agreement also empowers the Company to transfer Sugar Sand boat trailer titles that were issued in the name of Challenger and acknowledges that all Sugar Sand inventory was also abandoned by the bankruptcy Trustee in the Challenger case and that the proceeds form any sale of Sugar Sand inventory shall be the property of the Company, subject to the first priority lien that Dutchess has against all of the Company's assets.

In exchange for entering into the Agreement and permitting Dutchess to keep the proceeds from the sale of two Sugar Sand powerboats totaling approximately $12,600, Dutchess agreed to (i) waive its right to repayment of that certain Convertible Debenture, and all interest accrued thereon, issued by the Company to Dutchess, original face value of $5.75 million, dated August 23, 2007, and (ii) forfeit its rights to any penalties or liquidated damages that have accrued through the Effective Date of the Agreement in connection with that certain convertible debenture issued by the Company to Dutchess, original face value of $1.9 million, dated May 15, 2006, provided however, that such forfeiture is subject to the Company having settled or resolved outstanding and/or threatened litigation existing as of the Effective Date of the Agreement to the satisfaction of Dutchess in its sole and absolute discretion.

On November 14, 2008 the Company reached a settlement made effective November 5, 2008 in the matter of Gardner v. Execute Sports, Inc. On December 12, 2007 the Company's former Chief Financial Officer, Sheryl Gardner ("Gardner"), brought a claim against the Company in the Superior Court of California, County of Los Angeles (Case No. BC382104) seeking payment on a note, unpaid vacation time, and alleging fraud in inducement to sign a subsequent note and for unpaid vacation time. Ms. Gardner sought $323,231.02 in damages. Pursuant to the terms of the settlement the Company paid Ms. Gardner $20,000 and issued her a senior secured note, face value $150,000, which is equal in rank with all other senior debt of the Company and is governed by the Intercreditor Agreement discussed above. The note accrues interest at the rate of six percent (6%) per annum until its maturity on November 3, 2018 at which time all principal and interest accrued thereon shall be due and payable. Additio nally, the parties entered into a mutual general release of all claims, known or unknown. Gardner must now dismiss her lawsuit with prejudice promptly upon receiving the cash payment and the note.

F - 26
28

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

This management's discussion and analysis of results of operations and financial condition contains forward-looking statements that involve risks and uncertainties. In some cases, you can identify these statements by forward-looking words such as "may," "might," "will," "should," "expect(s)," "plan(s)," "anticipate(s)," "believe(s)," "estimate(s)," "predict(s)," "intend(s)," "potential" and similar expressions. All of the forward-looking statements contained in this quarterly report on form 10-Q are based on estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market and other factors. Although we believe such estimates and assumptions are reasonable, they are inherently uncertain and involve risks and uncertainties. In addition, management's assumptions about future events may prove to be inaccurate. We caution you that the forward-looking statements contained in this Quarterly Report on Form 10 Q are not guarantees of future performance and we cannot assure you that such statements will be realized. In all likelihood, actual results will differ from those contemplated by such forward-looking statements as a result of a variety of factors, including, but not limited to, those factors discussed in "Risk Factors" and included in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007. Except as required by law, we undertake no obligation to update any of these forward-looking statements.

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements for the years ended December 31, 2007 and 2006, together with notes thereto included on Form 10-KSB as filed with the Commission on March 31, 2008.

Critical Accounting Policies

The Company's discussion and analysis of its results of operations, financial condition and liquidity are based upon the Company's 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 and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. Actual results may materially differ from these estimates under different assumptions or conditions. On an on-going basis, the Company reviews its estimates to ensure that the estimates appropriately reflect changes in its business.

Inventories

Inventories are valued at the lower of cost or market and primarily consist of wetsuits, sticker kits and related accessories. Cost is determined using the average cost method. The inventory balance reflects management's estimate of net realizable value. Management performs periodic assessments based on our understanding of market conditions and forecasts of future product demand to determine the existence of obsolete, slow moving and non-salable inventories, and records the necessary adjustment at the time of assessment directly to the statement of operations to reduce such inventories to their net realizable value. If the actual amount of obsolete inventory significantly exceeds the inventory balance, the Company's costs of goods sold and gross profit and resulting net income or loss would be significantly adversely affected.

29

Revenue recognition

The Company recognizes revenue when the product is shipped. At that time, the title and risk of loss transfer to the customer, and collectability is reasonably assured. Collectability is evaluated on an individual customer basis taking into consideration historical payment trends, current financial position, results of independent credit evaluations and payment terms. Additionally, an estimate of product returns are recorded when revenue is recognized. Estimates are based on historical trends taking into consideration current market conditions, customer demands and product sell through.  If actual sales returns significantly exceed the recorded estimated expense, the Company's sales would be adversely affected.

The Company recognizes revenue under the guidance provided by the SEC Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" and the Emerging Issues Task Force ("EITF") Abstract No. 99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent" ("EITF 99-19"). Pursuant to EITF 99-19, the Company recognizes revenue from the sale of Sugar sand boats on a gross basis.

Allowance for doubtful accounts

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. An estimate of uncollectible amounts is made by management based upon historical bad debts, current customer receivable balances and aging, the customer's financial condition and current economic conditions. If a significant number of customers with significant receivable balances in excess of the allowance fail to make required payments, the Company's operating results would be significantly adversely affected. Based on management's assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to the valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. The Company generally does not require collateral.

Product Warranty

The Company's Watersports products carry a ninety-day warranty. Warranty costs are charged against sales in the period products are sold as a reduction in the selling price. Historically, warranty costs have been less than 1% of sales. In estimating its warranty obligations, the Company considers various relevant factors, including the Company's stated warranty policies, the historical frequency of claims, and the cost to replace or repair the product. If the actual amount of warranty claims significantly exceeds the estimated expense, the Company's costs of goods sold and gross profit and resulting net income or loss would be significantly adversely affected.

Income taxes

On November 1, 2004, the Company amended its Articles of Incorporation to make the transition from an S-Corporation to a C-Corporation. Prior to this transaction, the S Corporation was not a tax paying entity for federal or state income tax purposes and thus no provision for income taxes was recognized. The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted rates recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In assessing the realizability of deferred income tax assets, the Company considers whether i t is more likely than not that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  SFAS No. 109 requires a valuation allowance to be recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. The Company has recorded a valuation allowance for the full amount of the net deferred tax asset because of uncertainties as to the amount of taxable income that would be generated in future years. 

30

Overview

Results of Operations

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

Revenue

Net Sales for the three months ended September 30, 2008 and 2007 were $19,474 and $86,910, respectively, representing a $67,436, or 78% decrease. Net Sales for the nine months ended September 30, 2008 and 2007 were $3,595,452 and $1,438,429, respectively, representing a $2,157,023, or 150% increase. The three month year-over-year decrease is due primarily to a decrease in watersports sales which are cyclical and typically slow during the third quarter. In addition to the cyclical nature of the downturn a reduction in sales is also attributable to the Company's decreased selling efforts as it evaluated the future of continuing its watersports business. The nine month year-over-year increase is due primarily to the inclusion of Sugar Sand boat sales of $1,621,208 which were not part of the Company's product portfolio during the same period in the previous year. Going forward we will not have Sugar Sand boat sales as a result of Challenger's chapter 7 bankruptcy filing and the sale of ou r interest in Sugar Sand (see Financial Footnote E - "Intangible Assets" and Note N - "Subsequent Events").

Gross Margin

Gross margin for the three months ended June 30, 2008 and 2007 was $2,087 or 11% of revenue and $17,709, or 20% of revenue, respectively. Gross margin for the nine months ended September 30, 2008 and 2007 was $628,112 or 17% of revenue and $651,241, or 45% of revenue, respectively. The decrease in gross margin over the previous year was primarily due to Sugar Sand sales which had approximately a 5% gross margin compared to watersports whose gross margin is higher than Sugar Sand boats. The Company also experienced higher watersports cost of goods as a result of increased fuel and rubber costs compared to the prior year.

Operating Expenses

Selling, General and Administrative expenses for the three months ended September 30, 2008 and 2007 was $189,139 and $398,857, respectively, representing a $209,718 or 53% decrease. Selling, General and Administrative expenses for the nine months ended September 30, 2008 and 2007 was $926,346 and $1,132,014, respectively, representing a $205,668 or 18% decrease. The year-over-year decrease was due to primarily to a decrease in personnel and stock compensation offset by higher sales and marketing costs and depreciation and amortization costs compared to the same quarter in the prior year.

Other Income and Expenses

Other expense for the three months ended September 30, 2008 and 2007 was $193,511 and $680,588, respectively, representing a $487,077 or 72% decrease in expense. Other expense for the nine months ended September 30, 2008 and 2007 was $5,716,864 and $1,780,182, respectively, representing a $3,936,682 or 221% increase in expense. The nine month year-over-year increase is due primarily to the impairment of our Sugar Sand investment offset by lower amortization expenses related to our convertible debentures as a result of the May 2006 debenture related amortization ending in September 2007.

31

Net Loss

Net loss for the three months ended September 30, 2008 and 2007 was $380,563 and $1,061,736, respectively, representing a $681,173 or 64% decrease in the net loss from continuing operations compared to the same period last year. Net loss from continuing operations for the nine months ended September 30, 2008 and 2007 was $6,015,098 and $2,260,955, respectively, representing a $3,754,143 or 166% increase in the net loss from compared to the same period last year. The increase in net loss is due primarily to the recognition of an impairment charge of $4,825,000 related to our Sugar Sand investment and higher costs for goods offset by lower amortization costs related to our convertible debentures and slightly lower overall operating costs.

Net loss for the nine months ended September 30, 2008 and 2007 was $6,015,098 and $2,054,264, respectively, representing a $3,960,834 or 193% increase in net loss compared to the same period last year. The net loss for the nine months ended September 30, 2007 includes a net gain of $206,691 recognized by the Company upon the disposition of the Academy brand.

Financial Condition

From inception to September 30, 2008, we incurred an accumulated deficit of $18,841,507, and we expect to incur additional losses for the foreseeable future. This loss has been incurred through a combination of convertible debenture amortization, selling and operating expenses related to expensing of stock, support of our plans to expand sales and distribution channels, development of new products and higher than anticipated cost of sales relative to sales.

We have financed our operations since inception primarily through a combination of debt and equity financing. During the nine months ended September 30, 2008, we had a net decrease in cash of $177,816. Total cash resources as of September 30, 2008, were $221,439, compared with $399,255 at December 31, 2007. We currently do not have sufficient funds to continue for the next twelve months.

Our available working capital and capital requirements will depend on numerous factors, including progress in our distribution and sales of our products, the timing and cost of expanding into new markets, the cost of developing new products, changes in our existing collaborative and licensing relationships, the resources that we devote to developing new products and commercializing capabilities, the status of our competitors, our ability to establish collaborative arrangements with other organizations, our ability to attract and retain key employees, our management of inventory and our need to purchase additional capital equipment.

The Company's Liquidity Plan

Recent operating results give rise to concerns about the Company's ability to generate cash flow from operations sufficient to sustain ongoing viability. The Company is currently focused on reducing overhead as much as possible as it decides its future long-term strategy in light of recent developments The Company is considering a range of options in view of its liquidity concerns which include liquidating its inventory in the ordinary course of business and ceasing its operations and to finance operatioins from cash on hand and the proceeds from the sale of any of its assets. (see Footnote N - "Subsequent Events") In the event that the Company is unable to do so, the Company may be left without sufficient liquidity.

32

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4.  Controls and Procedures

(a)  Evaluation of Disclosure Controls and Procedures

As of September 30, 2008, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer (who is also our Chief Financial Officer) of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our Chief Executive/Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) accumulated and communicated to our management, including our Chief Executive/Financial Officer, as appropriate to allow timely decisions regarding required disclosure; and (ii) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. There was no change to our internal controls or in other factors that could affect these controls during the period covered by this report that has materially a ffected, or is reasonably likely to materially affect, our internal control over financial reporting.

(b)  Changes in Internal Controls over financial reporting

There have been no changes in our internal controls over financial reporting during our last fiscal quarter, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

33

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

On April 19, 2008, the Company brought a fraud and breach of contract claim against Duane Pacha and Jeff Baughn ("Pacha and Baughn") claiming $1,200,000 in damages suffered by the Company in connection with the purchase of Pacific Sports. The suit was filed in the Superior Court of California, County of San Diego and was given case number 37-2007-0065224-CU-BC-CTL. A breach of an employment agreement claim has been asserted by each of Messrs Pacha and Baughn in the aggregate amount of approximately $200,000. The Company's suit against Messrs Pacha and Baughn was filed and then stayed pending arbitration of the employment disputes. Presently, we are waiting for Messrs. Pacha and Baughn to proceed before the American Arbitration Association with their claims. The Company intends to aggressively pursue its cross-claim against Messrs Pacha and Baughn and vigorously oppose the claims by them.

A formerinvestor in the Company, Craig Hudson ("Hudson"), is attempting to collect on a former note with an alleged past due amount of approximately $32,000. Judgment was previously entered in the amount of approximately $50,000.  The outcome of any collection actions by Hudson is uncertain particularly in view of the lien that the Company's senior debt holders have against all of the Company's assets.

On June 27, 2007 the Company received notice of a claim for alleged unpaid services by Coburn Mikacich ("Mikacich") in the amount of $21,600. The Mikacich matter, filed in the Superior Court of California, County of Sacramento (Case No. 07AS02941) on June 27, 2007 is in the process of being transferred from Sacramento County to Los Angeles County, California. The parties are presently in the process of negotiating a settlement which will not have a material affect on the Company (see Footnote N - "Subsequent Events").

On December 12, 2007 the Company's former Chief Financial Officer, Sheryl Gardner ("Gardner"), brought a claim against the Company in the Superior Court of California, County of Los Angeles (Case No. BC382104) seeking payment on a note, unpaid vacation time, and alleging fraud in inducement to sign a subsequent note and for unpaid vacation time. Ms. Gardner is seeking $323,231.02 in damages. The parties will participate in a mediation and discovery has begun (see Footnote N - "Subsequent Events").

On September 17, 2007, Ta Hwa Manufacturer ("Ta Hwa"), a previous Chinese manufacturer of the Company's products, brought suit against the Company in the Superior Court of California, County of Los Angeles (Case No. YC055925) on September 17, 2007 alleging unpaid invoices in the amount of approximately $250,000. Discovery is almost complete and a mediation will be scheduled.  The Company is presently in settlement negotiations with Ta Hwa and believes that a settlement acceptable to the Company is likely to be reached.

On August 30, 2007, a former officer of the Company, Scott Swedener ("Swedener"), has brought a claim for indemnification for credit card charges and breach of contract. The suit was filed in the Superior Court of California, County of Orange (Case No. 07SL03977) on August 30, 2007. Swedener is seeking $24,000.00 damages.  Trial has begun and a status conference is scheduled.  The Company is presently in settlement negotiations with Swedener and believes that a settlement acceptable to the Company is likely to be reached.

On December 6, 2006, the Company has filed suit against 449 Corporation, WDHQ, Inc., Donald Swedo and Charlene Swedo for unpaid notes ("449") in the amount of approximately $500,000. The suit was filed in the Superior Court of California, County of San Diego (Case No. 37-2007-00069024-CU-BC-CTL) on December 6, 2006.  Discovery will be proceeding shortly. The Company intends to aggressively pursue its claims. An unfavorable outcome should have no material affect on the Company.

34

Item 1A.  Risk Factors

Not applicable.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

In January 2008 the Company issued 991,349 shares of restricted common stock in exchange for the retirement of $10,981 of principal amount owed and $816 of accrued interest.  The stock was valued at the closing price of the stock on the date of issuance.

In February 2008 the Company issued 1,125,000 shares of restricted common stock valued at the closing price of the stock on the date of issuance, or $15,000, as payment for services rendered in lieu of cash.

In February 2008 the Company issued 750,000 shares of restricted common stock valued at the closing price of the stock on the date of issuance, or $12,000, to two of its directors as payment for services rendered in lieu of cash.

Item 3.  Defaults Upon Senior Securities

The Company is in default on the payment of interest on two senior secured debentures issued to Dutchess Private Equities Fund LP having a combined unpaid principal balance of $7,650,000 as of September 30, 2008. As of September 30, 2008 the combined amount of unpaid interest in arrears on the two debentures is $818,377 (see also Financial Footnote G). The debentures are secured by a lien on all of the Company's assets. At this time Dutchess has not initiated any collection action against the Company and has not exercised or given notice of its intent to exercise any remedies available to them under the terms of the notes. However, there can be no assurance that Dutchess will not exercise its rights and remedies as senior secured creditor at a future date. Such remedies could include Dutchess taking action to foreclose on all of the Company's assets. Management is actively communicating with Dutchess in order to reach a mutually agreeable plan to repay and/or restructure the debenture s and avoid the initiation of any drastic collection action being taken against the Company (see Footnote N - "Subsequent Events").

Item 4.  Submission of Matters to a Vote of Security Holders

None

Item 5.  Other Information

None.

Item 6.  Exhibits

31.1	Certification Pursuant to 17 C.F.R Section 240.13a-14(a)-(Section 302 of the Sarbanes-Oxley Act of 2002)
32.1	Certification o Pursuant to 18 U.S.C Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
10.1*	Intercreditor Agreement dated as of September 4, 2008
10.2**	Asset Purchase Agreement between the Company and Coosaw Capital Partners dated as of October 9, 2008
10.3***	Letter Agreement between the Company and Dutchess Private Equities Fund, Ltd, dated as of November 7, 2008
*	Incorporated by reference to Exhibit 10.1 to Form 8-K filed on October 16, 2008
**	Incorporated by reference to Exhibit 10.2 to Form 8-K filed on October 16, 2008
***	Incorporated by reference to Exhibit 10.1 to Form 8-K filed on November 13, 2008

35

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	EXECUTE SPORTS, INC.
Dated: November 19, 2008	/s/James R. Arabia
	James R. Arabia
	Chief Executive Officer and Chief Financial Officer

36