FORM
10-K




SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


(Mark
one)


x ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the
fiscal year ended December 31, 2007.


OR


 ̈ TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the
transition period from _____ to _____.





Commission
file number 1-7160





COACHMEN
INDUSTRIES, INC.


(Exact
name of registrant as specified in its charter)




Indiana
            35-1101097(State of incorporation or
      organization)
            (IRS
      Employer Identification No.)423
      North Main Street, Middlebury, Indiana 46540
            2831
      Dexter Drive, Elkhart, Indiana 46514(Current
      Address of principal executive offices) (Zip Code)
            (Former
      Address of principal executive offices) (Zip Code)(574)
      825-5821
            (574)
      262-0123(Registrant's current telephone
      number, including area code)
            (Registrant's former telephone
      number, including area code)





Securities
registered pursuant to Section 12(b) of the Act:




Common
      Stock, Without Par Value,and
      associated Common Share Purchase Rights
            New
      York Stock Exchange(Title
      of each class)
            (Name
      of each exchange on which registered)





Securities
registered pursuant to Section 12(g) of the Act: None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes  ̈ No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes  ̈ No x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes x No  ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  x





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.




Large
      accelerated filer   ̈
            
            Accelerated
      filer  x
            
            Non-accelerated
      filer   ̈
            
            Smaller
      reporting company   ̈


Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x





The
aggregate market value of Common Stock held by non-affiliates of the registrant
on June 30, 2007 (the last business day of the registrant's most recently
completed second fiscal quarter) was $150.0 million (based upon the closing
price on the New York Stock Exchange and that 98.5% of such shares are owned by
non-affiliates).





As of
January 31, 2008, 15,776,188 shares of the registrant's Common Stock were
outstanding.





Documents
Incorporated by Reference




Document
            Parts of Form 10-K
      into which the Document is IncorporatedPortions
      of the Proxy Statement for the Annual Meeting
              of
      Shareholders to be held on May 1, 2008
            Part
      III





Part
I





Item
      1.
            Business





Coachmen
Industries, Inc. (the "Company" or the "Registrant") was incorporated under the
laws of the State of Indiana on December 31, 1964, as the successor to a
proprietorship established earlier that year. All references to the Company
include its wholly-owned subsidiaries and divisions. The Company is publicly
held with stock listed on the New York Stock Exchange (NYSE) under the ticker
symbol COA.





The
Company operates in two primary business segments, recreational vehicles and
housing. The Recreational Vehicle ("RV") Segment manufactures and distributes
Class A and Class C motorhomes, travel trailers, fifth wheels, and camping
trailers. The Housing Segment manufactures and distributes system-built modules
for residential buildings.




The
Company is one of America's leading manufacturers of recreational vehicles with
well-known brand names including Coachmen®, Georgie Boy®, AdrenalineTM,
Sportscoach®, and Viking®. Through its Housing Group, Coachmen Industries also
comprises one of the nation's largest producers of system-built homes and
residential structures with its All American Homes®, Mod-U-Kraf®, and All
American Building SystemsTM. During 2006, the Company sold all of the operating
assets of Prodesign, LLC and its Miller Building Systems subsidiary; therefore,
these entities, along with the All American Homes of Kansas operation, which was
sold in December 2005, are considered discontinued operations and have been
reported as such in the accompanying financial statements.





The
Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports are made available free
of charge through the Investor Relations section of the Company's Internet
website (http://www.coachmen.com) as soon as practicable after such material is
electronically filed with or furnished to the Securities and Exchange
Commission.





Recreational
Vehicle Segment





RV
Segment Products





The RV
Segment consists of recreational vehicles. At December 31, 2007, this Group
consisted of the following operating companies: Coachmen RV Company, LLC;
Coachmen RV Company of Georgia, LLC; Viking Recreational Vehicles, LLC
and a Company-owned retail dealership located in Elkhart, Indiana. In
addition, the Company operates a service facility located in Chino,
California.





The
principal brand names for the RV Group are Coachmen®, Georgie BoyTM,
Sportscoach®, AdrenalineTM and Viking®.





Recreational
vehicles are either driven or towed and serve as temporary living quarters for
camping, travel and other leisure activities. Recreational vehicles manufactured
by the Company may be categorized as motorhomes, travel trailers or camping
trailers. A motorhome is a self-powered mobile dwelling built on a special
heavy-duty motor vehicle chassis. A travel trailer is a non-motorized mobile
dwelling designed to be towed behind another vehicle. Camping trailers are
smaller towed units constructed with sidewalls that may be raised up and folded
out.





The RV
Group currently produces recreational vehicles on an assembly line basis in
Indiana, Michigan, and Georgia. Components used in the manufacturing of
recreational vehicles are primarily purchased from outside sources. The RV
Group depends on the availability of chassis from a limited number of
manufacturers. Occasionally, chassis availability has limited the Group's
production (see Note 12 of Notes to Consolidated Financial Statements
for information concerning the use of converter pool agreements to purchase
vehicle chassis).





RV
Segment Marketing





Recreational
vehicles are generally manufactured against orders received from RV dealers, who
are responsible for the retail sale of the product. These products are marketed
through approximately 757 independent dealers located in 49
states and internationally and through a Company-owned dealership located in
Indiana. Subject to applicable laws, agreements with most of its dealers are
cancelable on short notice, provide for minimum inventory levels and establish
sales territories. A single recreational vehicle dealer network accounts for
approximately 12% of the Company's consolidated net sales.





The RV Group considers itself customer
driven. Representatives from sales and service regularly visit dealers in their
regions, and respond to questions and suggestions. Plant charters are
established for each manufacturing facility, aligning defined brand charters for
each product line with the manufacturing capabilities of each facility.
Divisions host dealer advisory groups and conduct informative dealer seminars
and specialized training classes in areas such as sales and service. Open forum
meetings with owners are held at campouts, providing ongoing focus group
feedback for product improvements. Engineers and product development team
members are encouraged to travel and vacation in Company recreational vehicles
to gain a complete understanding and appreciation for the products. The
RV Group continuously endeavors to improve its product offerings and reduce
product complexity. The Group has achieved a significant transformation of
product with its new product development process utilizing its Advanced Design
Team.


- 2
-


As a
result of these efforts, the RV Group believes it has the ability to adapt to
changes in market conditions. Most of the manufacturing facilities can be
changed over to the assembly of other existing products in five to eight weeks.
In addition, these facilities may be used for other types of light manufacturing
or assembly operations. This flexibility enables the RV Group to adjust its
manufacturing capabilities in response to changes in demand for its
products.





Most
dealers' purchases of RV's from the RV Group are financed through "floorplan"
arrangements. Under these arrangements, a bank or other financial institution
agrees to lend the dealer all or most of the purchase price of its recreational
vehicle inventory, collateralized by a lien on such inventory. The RV Group
generally executes repurchase agreements at the request of the financing
institution. These agreements typically provide that, for up to twelve to
fifteen months after a unit is financed, the Company will repurchase a unit that
has been repossessed by the financing institution for the amount then due to the
financing institution. Risk of loss resulting from these agreements is spread
over the Company's numerous dealers and is further reduced by the resale value
of the products repurchased (see Note
12 of Notes to Consolidated Financial Statements). Resulting mainly
from periodic business conditions negatively affecting the recreational vehicle
industry, the Company has previously experienced losses under repurchase
agreements. Accordingly, the Company has recorded an accrual for estimated
losses under repurchase agreements. In addition to the standard repurchase
agreement described above, as of December 31, 2007 the Company was contingently
liable to the financial institutions up to a maximum of $2.0 million of
aggregate losses annually, as defined by the agreement, incurred by the
financial institutions on designated dealers with higher credit risks that are
accepted into the reserve pool financing program.The RV Group does not
finance retail consumer purchases of its products, nor does it guarantee
consumer financing.





RV
Segment Business Factors





Many
recreational vehicles produced by the RV Group require gasoline or diesel fuel
for their operation. Gasoline and diesel fuel have, at various times in the
past, been difficult to obtain, and there can be no assurance that the supply of
gasoline and diesel fuel will continue uninterrupted, that rationing will not be
imposed or that the price of, or tax on fuel will not significantly increase in
the future. Shortages of gasoline or diesel fuel and significant increases in
fuel prices have had a substantial adverse effect on the demand for recreational
vehicles in the past and could have a material adverse effect on demand in the
future.





Recreational
vehicle businesses are dependent upon the availability and terms of financing
used by dealers and retail purchasers. Consequently, increases in interest rates
and the tightening of credit through governmental action, economic conditions or
other causes have adversely affected recreational vehicle sales in the past and
could do so in the future.





Recreational
vehicles are high-cost discretionary consumer durables. In the past,
recreational vehicle sales have fluctuated in a generally direct relationship to
overall consumer confidence and economic prosperity. It appears that the price
of gasoline can also affect the demand for recreational vehicles when gas prices
reach unusually high levels.





RV
Segment Competition and Regulation





The RV
industry is highly competitive, and the RV Group has numerous competitors and
potential competitors in each of its classes of products, some of which have
greater financial and other resources than the Company. Initial capital
requirements for entry into the manufacture of recreational vehicles,
particularly towables, are comparatively small; however, codes, standards, and
safety requirements enacted in recent years may act as deterrents to potential
competitors.





The RV
Group's recreational vehicles generally compete at most price points except the
ultra high-end, concentrating on the entry to mid level. The RV Group strives to
be a quality and value leader in the RV industry. The RV Group emphasizes a
quality product and a strong commitment to competitive pricing in the markets it
serves. The RV Group estimates that its current overall share of the
recreational vehicle market is approximately 3.5% of wholesale shipments, on a
unit basis.





The
recreational vehicle industry is fairly heavily regulated. The National Highway
Traffic Safety Administration (NHTSA), the Transportation Recall Enhancement,
Accountability, and Documentation Act (TREAD), state lemon law statutes, laws
regulating the operation of vehicles on highways, state and federal product
warranty statutes, and state legislation protecting motor vehicle dealerships
all impact the way the RV Group conducts its recreational vehicle
business.





State and
federal environmental laws also impact both the production and operation of the
Company's products. The Company has an Environmental Department dedicated to
efforts to comply with applicable environmental regulations. To date, the RV
Group has not experienced any material adverse effect from existing federal,
state, or local environmental regulations.




- 3
-


Housing
Segment





Housing
Segment Products





The
Housing Segment consists of residential structures. The Company's housing
subsidiaries (the All American Homes Group, All American Building Systems, LLC,
and Mod-U-Kraf Homes, LLC) produce system-built modules for single-family
residences, multi-family duplexes, apartments, condominiums, hotels and
specialized structures for military use.





All
American Homes and Mod-U-Kraf Homes design, manufacture and market system-built
housing structures. All American Homes is one of the largest producers of
system-built homes in the United States and has four operations strategically
located in Colorado, Indiana, Iowa and North Carolina. Mod-U-Kraf operates from
a plant in Virginia. Together these plants serve approximately 530
independent builders in 32 states. System-built homes are built to the same
local building codes as site-built homes by skilled craftsmen in a factory
environment unaffected by weather conditions during production. Production takes
place on an assembly line, with components moving from workstation to
workstation for framing, electrical, plumbing, drywall, roofing, and cabinet
setting, among other operations. An average two-module home can be produced in
just a few days. As nearly completed homes when they leave the plant, home
modules are delivered to their final locations, typically in two to seven
sections, and are crane set onto a waiting basement or crawl space
foundation.




All
American Building Systems, LLC (AABS) was established by the Company in 2003 to
pursue opportunities beyond the Company’s core single-family residential housing
business. AABS designs and markets system-built living facilities such as
single-family home subdivisions, apartments, condominiums, townhouses, senior
housing facilities and military housing facilities manufactured by the Company’s
housing plants. The modules are delivered to the site location for final
installation.





Due to
transportation requirements, system-built structures are often built with more
structural lumber and/or steel than site-assembled structures. Faster
construction times also allow our customers to occupy buildings much sooner when
compared to site-built buildings.





The
Company announced on September 21, 2007 that it would consolidate its All
American Homes production facility located in Zanesville, Ohio with its larger
facility located in Decatur, Indiana. This will increase production backlogs and
capacity utilization at the Indiana plant as all builders previously served by
the Ohio plant will now be served from Indiana. This consolidation was
completed during the fourth quarter of 2007.





On March
31, 2006, the Company sold 100% of its interest in the capital stock of Miller
Building Systems, Inc. for $11.5 million, consisting of cash of $9.0 million and
a $2.5 million secured note. The note, which is included in other long-term
assets on the Consolidated Balance Sheet, is to be repaid over 5 years and bears
interest at the 1 year LIBOR rate plus 2.75% per annum with quarterly interest
payments beginning September 30, 2006. Principal payments of $125,000 per
quarter commence on June 30, 2009 and continue through the maturity date of
March 31, 2011. In addition, the Company accepted a $2.0 million contingent
earn-out note. In October 2007, a subsequent agreement with Miller Building
Systems waived the interest on the secured $2.5 million note for two years;
hence no interest will be earned from March 31, 2007 to March 31, 2009. The
subsequent agreement with Miller Building Systems also canceled the $2.0 million
contingent earn-out note. There is no financial impact as a result of this
cancellation. In accordance with Statement of Financial Accounting Standard No.
144, the division qualified as a separate component of the Company’s business
and as a result, the operating results of the division have been accounted for
as a discontinued operation. Previously reported financial results for all
periods presented have been restated to reflect this business as a discontinued
operation. Net sales of Miller Building Systems, Inc. for the years ended
December 31, 2006 and 2005 were $7.5 million and $41.6 million, respectively,
and the pre-tax income (loss) for the years ended December 31, 2006 and 2005
were $1.5 million and $(8.2) million, respectively. In connection with this
sale, $1.7 million of industrial revenue bonds were paid off as of March 31,
2006. During April 2006, the Company terminated the $1.5 million and $235,000
interest rate swaps that had been associated with these revenue
bonds.





Housing
Segment Marketing





The
Housing Group participates in the system-built or modular subset of the overall
housing market. Housing is marketed directly to approximately 530 builders in 32
states who will sell, rent or lease the buildings to the end-user.





The
Housing Group regularly conducts builder meetings to review the latest in new
design options and component upgrades. These meetings provide an opportunity for
valuable builder input and suggestions at the planning stage. The system-built
traditional homes business has historically been concentrated in the rural,
scattered-lot markets in the geographic regions served. The Company has also
successfully launched initiatives to supply product into additional markets,
including various forms of single and multi-family residential products for more
urban-suburban markets, group living facilities, military housing, motels/hotels
and other residential structures.





In 2003,
the Company formed All American Building Systems, LLC. All American Building
Systems is responsible for expanding sales into new markets for the Company's
products through channels other than the traditional builder/dealer network.
Many of these new markets are “large project” markets such as dormitories,
military barracks and apartments that typically have a long incubation period,
but can result in contracts of a substantial size. We also launched several
initiatives going direct in selected venues, with two “home stores” offering
turn-key houses to consumers at Mod-U-Kraf and at All American Homes of
Indiana. In addition, we are also introducing high-end modular homes to the
long ignored subdivision sector, where 80% of housing sales
occur.


- 4
-


The
success of system-built buildings in the commercial market is the result of
innovative designs that are created by listening to customer needs and taking
advantage of advancements in technology. While price is often a key factor in
the purchase decision, other factors may also apply, including delivery time,
quality and prior experience with manufacturers. A significant benefit to the
customer is the speed with which system-built buildings can be made available
for use compared to on-site construction. The sales staff calls on prospective
customers in addition to maintaining continuing contact with existing customers
and assists its customers in developing building specifications to facilitate
the preparation of a quotation. The sales staff, in conjunction with the
engineering staff, maintains ongoing contact with the customer for the duration
of the building project.





Housing
Segment Business Factors





As a
result of transportation costs, the effective distribution range of system-built
homes and residential buildings is limited. The normal shipping area from each
manufacturing facility is typically 200 to 300 miles for system-built homes and
600 miles for major projects.





The
overall strength of the economy and the availability and terms of financing used
by builders, general contractors and end-users have a direct impact on the sales
of the Housing Group. Consequently, increases in interest rates and the
tightening of credit due to government action, economic conditions or other
causes have adversely affected the Group's sales in the past and could do so in
the future. The Housing Group continued to face a challenging housing market in
2007. The December figures on housing starts from the U.S. Census Bureau show a
28.6% year to year decline in new single-family homes nationwide, and a 27.2%
decline in the Midwest region served by the Group’s plants in Indiana and Iowa.
The softening of the home markets includes the Southeastern and middle Atlantic
markets, which are served by the Group’s plants in Virginia and North Carolina.
Single-family housing starts in the South region showed a year to year decline
of 28.7% in December.




Housing
Segment Competition and Regulation





Competition
in the system-built building industry is intense, and the Housing Group competes
with a number of entities, some of which have greater financial and other
resources than the Company. The demand for system-built homes may be impacted by
the ultimate purchaser's acceptance of system-built homes as an alternative to
site-built homes. To the extent that system-built buildings become more widely
accepted as an alternative to conventional on-site construction, competition
from local contractors and manufacturers of other pre-engineered building
systems may increase. In addition to the competition from companies designing
and constructing on-site buildings, the Housing Group competes with numerous
system-built building manufacturers and manufactured home producers that operate
in particular geographical regions.




The
Housing Group competes for orders from its customers primarily on the basis of
quality, design, timely delivery, engineering capability, reliability and price.
The Group believes that the principal basis on which it competes with on-site
construction is the combination of: the timeliness of factory versus on-site
construction, the cost of its products relative to on-site construction, the
quality and appearance of its buildings, its ability to design and engineer
buildings to meet unique customer requirements, and reliability in terms of
completion time. Manufacturing efficiencies, quantity purchasing and generally
lower wage rates of factory construction, even with the added transportation
expense, result in the cost of system-built buildings being equal to or lower
than the cost of on-site construction of comparable quality. This process of
manufacturing the building modules in a controlled environment, while the
builder prepares the site, can significantly increase the quality of the end
product and reduce the time to completion on a customer's project.




Customers
of the Housing Group are generally required to obtain building installation
permits from applicable governmental agencies. Buildings completed by the Group
are manufactured and installed in accordance with applicable building codes set
forth by the particular state or local regulatory agencies.




State
building code regulations applicable to system-built buildings vary from state
to state. Many states have adopted codes that apply to the design and
manufacture of system-built buildings, even if the buildings are manufactured
outside the state and delivered to a site within that state's boundaries.
Generally, obtaining state approvals is the responsibility of the manufacturer.
Some states require certain customers to be licensed in order to sell or lease
system-built buildings. Additionally, certain states require a contractor's
license from customers for the construction of the foundation, building
installation, and other on-site work. On occasion, the Housing Group has
experienced regulatory delays in obtaining the various required building plan
approvals. In addition to some of its customers, the Group actively seeks
assistance from various regulatory agencies in order to facilitate the approval
process and reduce the regulatory delays.





Competition
in the major projects arena is comprised primarily of traditional site builders
and other system-built producers. Major projects are typically awarded through a
bid process and in the case of large government contracts, such as military
barracks projects, a larger prime contractor with adequate bonding capacity will
submit bids for all phases of the contract. Once awarded, the prime contractor
will arrange for the construction of buildings for the project to various
subcontractors, including the Housing Group. Typically, system-built producers
have a cost advantage over site builders, particularly relating to the Federal
wage requirements of the Davis-Bacon Act, speed of building completion and
minimization of weather-related construction delays. With non-government
contracts such as apartments and dormitories, the Housing Group may act as a
subcontractor or as the prime contractor for the project. In such cases,
advantages are held in the overall cost of the project through the speed of
completion afforded by the Housing Group’s production methods.




- 5
-


General


(Applicable
to all of the Company's principal markets)





Business
Segments





The table
below sets forth the composition of the Company's net sales from continuing
operations for each of the last three years (dollar amounts in
millions):




2007
            
            2006
            
            2005Amount
            
            %
            
            Amount
            
            %
            
            Amount
            
            %Recreational
      Vehicles
            
            $
            361.6
            
            
            75.2
            
            $
            404.7
            
            
            71.7
            
            $
            522.2
            
            
            74.3Housing
            
            
            119.2
            
            
            24.8
            
            
            159.7
            
            
            28.3
            
            
            180.2
            
            
            25.7Total
            
            $
            480.8
            
            
            100.0
            
            $
            564.4
            
            
            100.0
            
            $
            702.4
            
            
            100.0





Additional
information concerning business segments is included in Note
2 of the Notes to Consolidated Financial Statements.





Seasonality





Historically,
the Company has experienced greater sales during the second and third quarters
with lesser sales during the first and fourth quarters. This reflects the
seasonality of RV sales for products used during the summer camping season and
also the adverse impact of weather on general construction for the system-built
building applications.





Employees





At December
31, 2007, Coachmen employed 2,305 people, 609 of whom are
salaried and involved in operations, engineering, purchasing, manufacturing,
service and warranty, sales, distribution, marketing, human resources,
accounting and administration. The Company provides group life, dental, vision
services, hospitalization, and major medical plans under which the employee pays
a portion of the cost. In addition, employees can participate in a 401(k) plan
and a stock purchase plan. Certain employees also participate in deferred and
supplemental deferred compensation plans (see Notes
8 and 9 of Notes to Consolidated Financial Statements).
The Company considers its relations with employees to be good.





Research
and Development





During
2007, the Company’s continuing operations spent approximately $6.3 million on
research related to the development of new products and improvement of existing
products. The amounts spent in 2006 and 2005 were approximately $6.7 million and
$7.2 million, respectively.




Item
      1A.
            Risk
      Factors




(References
to "we", "us" or "our" in the following discussion refer to the
Company.)




Risks
Relating to Our Business





If any of
the following risks actually occur, they could materially and adversely
affect our business, financial condition or operating results.




The
recreational vehicle and housing industries are highly competitive, and some of
our competitors have significantly greater resources than us.





The
recreational vehicle industry is highly competitive. In the calendar year 2007,
sales from the ten largest manufacturers represented approximately 92.7% of the
retail market for motorhomes, while our sales represented approximately 7.8% of
the total retail market. The market for motorized products is highly
concentrated. This concentration is due in part to the higher barriers to entry
within the motorized market, including the significant capital required for
fixed asset investment, higher level of government regulation and dependence on
a limited number of chassis suppliers.




- 6
-


In
towable products, the ten largest manufacturers accounted for approximately
80.2% of retail sales, while our sales represented approximately 3.2% of
total retail sales in 2007. The towable market is much more fragmented,
partially due to the lower barriers to entry. New competitors enter this market
each year, causing increased competitive pressures for existing manufacturers.
Towables made in China are also now being offered for sale in the United States.
Competitive pressures, especially at the entry-level for travel trailers, have
resulted in a reduction of overall profit margins. Increased competition could
have a material adverse effect on our future results of
operations.





Consolidation
within the industry may also increase overall competitive pressure. A number of
our competitors have made acquisitions over the last five years that have
increased their market share. Existing or new competitors could adversely
affect our revenues and profit margins. For example, these competitors
could develop products that are superior to our recreational vehicle
offerings. Or, existing or new competitors’ products could achieve better
consumer acceptance than those we offer. Therefore, we cannot
assure that we will maintain our current market share.





The
housing industry is also highly competitive. Although we produce
system-built homes and residential structures, management considers competition
in the Housing Segment to come from four sources:





·
            traditional
      site-built homebuilders,


·
            traditional
      building contractors


·
            other
      system-built housing producers, and


·
            manufactured
      home producers.





Among
system-built competitors, management believes that we are one of the largest
competitors in the industry, which is characterized by numerous small, local
manufacturers throughout the country. Recently, consolidation is an increasing
trend among system-built manufacturers, resulting in competitors that are larger
and potentially better capitalized. Many of the largest nationwide traditional
homebuilders are much larger than we, with much greater access to cash and
other resources. As these large competitors expand into our markets, added
competitive pressure may adversely affect revenues and margins in the Housing
Segment.





In
addition to large national competitors, we also compete with smaller local
builders. These local builders can often offer prices and other products and
services that are competitive with those we offer because of their lower fixed
asset investment and smaller cost structure. These competitors may also have an
adverse impact on our builder partners in affected markets resulting in
reduced revenues and profitability of the Housing Segment.





Actions
taken pursuant to our restructuring plan may have an adverse impact
on our earnings and financial position.





A number
of actions to reduce expenses and improve capacity utilization were largely
implemented by the close of 2007. These actions included the sale of
unprofitable units, the closure or consolidation of certain production
facilities, the sale of non-operating assets and a reduction in salaried and
hourly workforce. The success of these initiatives depends on our ability
to realize estimated cost savings resulting from the restructuring. Inability to
realize these cost savings may materially adversely affect our future
operating results and financial position.





The
ability to attract and retain qualified senior managers may adversely
affect our operating results.





Over the
last three years we have experienced significant changes in senior management
throughout the Company. The current management team has been in place since late
2006. Although we strive to offer competitive salaries, benefit programs and
effective succession plans, there can be no assurance that we will be able to
attract and retain effective senior managers. Any inability to retain qualified
senior managers may adversely impact our ability to execute current and future
operating plans.





The
recreational vehicle and housing businesses are cyclical, which can lead to
fluctuations in our operating results.





The
industries in which we operate are highly cyclical and there can be
substantial fluctuations in production, shipments, wholesale and retail sales
and operating results, and the results for any prior period may not be
indicative of results for any future period. Both the recreational vehicle and
housing industries are subject to volatility due to external factors such as
economic, demographic and political changes.




We cannot
assure that the factors currently adversely affecting our business will not
continue, or have an adverse effect beyond their present scope.




- 7
-


Our businesses
are seasonal, leading to fluctuations in sales, production and operating results
at various times during the calendar year.





We have
experienced, and will likely continue to experience, significant variability in
sales, production and net income as a result of seasonality in our two
business segments. Demand for recreational vehicles and housing generally
declines during the winter season, while sales and profits in both segments are
generally highest during the spring and summer seasons. In addition, unusually
severe weather conditions in some markets may cause delays in laying foundations
or other site preparation work which may result in delayed deliveries
of our system-built homes. In some markets, so-called “frost laws” may
limit the size and weight of vehicles permitted on roadways, thus
limiting our ability to deliver and set our homes.
Consequently, we may experience lower production, revenues and
profitability with higher inventory levels in the Housing Segment due to weather
and weather-related factors.





A
rise in the frequency and size of product liability, wrongful death, workers’
compensation and other claims against us may result in a material adverse
effect on our business, operating results and financial
condition.





We
are frequently subject, in the ordinary course of business, to litigation
involving product liability and other claims, related to personal injury and/or
property damage. Our self-insurance retention is currently $250,000,
and we maintain insurance coverage through our primary insurance
carrier, as well as excess carriers, above the self-insurance retention. An
increase in frequency in claims below the self-insurance retention level may
adversely affect our financial results. In addition, insurance is not
available for some kinds of claims, such as exposure to mold or formaldehyde, or
punitive damages and occasionally an insurance carrier may deny coverage
resulting in potential litigation expenses and additional exposure to losses.
Workers’ compensation insurance costs are directly attributable to experience in
the workplace. In the past, we have experienced wrongful death claims and
work practices claims arising from alleged workplace injuries.





We cannot
be certain that our insurance coverage will be sufficient to cover all
future claims against us. Any increase in the frequency and size of such claims,
as compared to our experience in prior years, may cause the premiums
required for insurance to rise significantly. Further, sizable product liability
claims may damage our reputation among dealers, builders and consumers that
may adversely affect our future operating and financial
results.





Significant
warranty and “lemon law” claims against us may result in a material adverse
effect on our business, operating results and financial
condition.





We provide
customers of our products with a warranty covering defects in material or
workmanship for periods generally ranging from one to two years in length, and
up to ten years on certain structural components. We record a liability
based on our estimate of the amounts necessary to settle future and
existing claims on products sold. Such costs are accrued at the time products
are sold and included in the cost of sales. Such claims are generally not
insurable, and in some cases may give rise to a repurchase of an RV unit and
payment of other damages under “lemon laws.” Should warranty claims arise which
exceed our historical experience and associated accrued liabilities, such
costs may have a material adverse effect on our cost of sales and
profitability. During 2005, we experienced a $14.0 million increase in
warranty costs related to continuing operations due to specific warranty
reserves established and costs incurred for the recall of camping trailer lift
systems and the repair of laminated sidewalls of certain of our
recreational vehicles. The sizable product warranty claims relating to sidewalls
and camping trailer lift systems damaged our reputation among RV dealers and
consumers, which impacted our operating and financial results in 2006 and 2007,
and may continue to do so in the future. Further, some jurisdictions have laws
providing for a multiple recovery on warranty claims in some circumstances. The
possibility for class actions also exists.





Increased
costs, including costs of component parts and labor may adversely
affect our profitability if such costs cannot be offset because of market
forces or price-protected contracts with builders.




Our financial
results may be significantly adversely affected by the availability and pricing
of manufacturing components (particularly those with substantial steel, copper,
plastic or lumber content) and labor. We attempt to mitigate the effect of
any cost inflation in raw materials, components and labor by negotiating with
current or new suppliers, contract price escalators, increasing labor
productivity or increasing the sales prices of our products.
However, we cannot assure that such actions will not have an adverse impact
on the competitiveness of our products and result in declining revenues.
If we are unable to successfully offset increases in manufacturing
costs, this could have a material adverse impact on margins, operating income
and cash flows. If we increase prices to offset higher manufacturing costs,
the benefit of such increases may lag behind the rise in manufacturing costs.
Specifically, in the Housing Segment, it takes time to implement such price
increases. Further, we make a commitment to builders and consumers to
provide a minimum level of price protection during the period when consumers are
arranging financing for their home purchases.





During
the period of rapid material cost inflation in early 2004 and again with unusual
commodity increases in 2006 and 2007, our margins were adversely affected
by the number of price protected sales contracts with builders. Although we
took steps to mitigate this risk in the future, there can be no assurance that
rapid material or labor cost inflation will not have a negative impact
on our future operating or financial results.


- 8
-


Changes
to, or increases in, the regulations governing our businesses could have a
material impact on operating and financial results.





Both the
Recreational Vehicle and Housing Segments are subject to extensive federal,
state and local regulations, including:





·
            the
      National Highway Traffic Safety Administration
  (NHTSA),


·
            the
      Transportation Recall Enhancement, Accountability, and Documentation Act
      (TREAD),


·
            state
      lemon law statutes,


·
            laws
      regulating the operation of vehicles on
  highways,


·
            state
      and federal product warranty
statutes,


·
            state
      legislation protecting motor vehicle dealerships,
  and


·
            state
      and local zoning laws and building
codes.




Amendments
to any of these regulations and the implementation of new regulations could
significantly increase the costs of manufacturing, purchasing, operating or
selling our products and could have a material adverse impact on our
operating and financial results. Any failure to comply with present or future
regulations could result in fines, potential civil and criminal liability,
suspension of sales or production, or cessation of operations.





Changes
in favorable tax laws could adversely affect our results of
operations.





Certain
U.S. tax laws currently afford favorable tax treatment for the purchase and sale
of recreational vehicles that are used as the equivalent of second homes. These
laws and regulations have historically been amended frequently, and it is likely
that further amendments and additional regulations affecting us or our
products may be enacted in the future. Amendments to these laws and regulations
and the implementation of new regulations could have a material adverse effect
on our results of operations.





We
may not be able to fully utilize our deferred tax assets.





We have
historically carried as assets on our books tax loss carry-forwards from past
results and other deferred tax assets from continuing operations, which can be
used to offset taxes on future income for periods of up to 20 years. However,
because of the losses incurred in 2007, 2006 and 2005, financial accounting
standards required us to write down all of these deferred tax assets as of
December 31, 2007 and December 31, 2006 since we were not certain that we could
take full advantage of them over the next few years. In fact, the majority of
the Company’s operating loss carry-forwards do not begin to expire until 2026,
and may continue to be used to offset taxes on any potential income the Company
may generate until at least that time. As of December 31, 2007, the Company has
$38.0 million of deferred tax assets available for future use (see Note
10 of Notes to Consolidated Financial Statements).





Failure
to comply with environmental regulations could result in significantly increased
costs and capital expenditures.





State and
federal environmental laws also impact both the production and operation
of our products. We have an Environmental Department dedicated to
efforts to comply with applicable environmental regulations. To date, the
Company has not experienced any material adverse effect from existing federal,
state, or local environmental regulations. Failure to comply with present or
future environmental regulations may result in fines, potential civil and
criminal liability, and suspension of production or operations, alterations to
the manufacturing process, costly cleanup efforts or increased capital
expenditures.





Changes
in labor practices could adversely affect our labor costs and
profitability.





Currently,
none of our employees are members of any union or covered under any
collective bargaining agreement. We provide competitive wages and a variety
of benefits to our employees, including group life, dental, vision
services, hospitalization, and major medical plans, a 401(k) plan and a stock
purchase plan. Although we consider our relations with employees to be
good, any material changes in labor costs or practices, including those
resulting from union activity may have a negative impact on our
profitability.


- 9
-


Reduced
availability of financing for our dealers or retail customers could
adversely affect revenues and margins.





Our RV
dealers, as well as retail buyers of RV products, generally secure financing
from third party lenders. Any reduction in the availability of such financing or
significant increase in the cost of such financing resulting from higher
interest rates may have an adverse effect on our business. Availability of
financing is dependent on the lending practices of financial institutions,
financial markets, governmental policies and economic conditions, all of which
are largely beyond our control. For example, in the recent past, floorplan
lenders have tightened credit availability, which has negatively affected the
timing and accomplishment of our sales to our RV dealers, resulting in
higher levels of finished goods inventory and associated financing costs.
Increasing interest rates since mid-2004 have negatively impacted demand
for our RV products. In response to this lower demand, we offered
retail financing incentives to consumers resulting in increased selling expenses
which negatively affected profitability. Although rates have begun to decline in
late 2007 and early 2008, it is too early to see the benefits of these rate
reductions.





Repurchase
agreements with floorplan lenders could result in increased costs.





In
accordance with customary practice in the RV industry, we enter into
repurchase agreements with various financial institutions under which we
agree to repurchase product at declining prices over the term of the agreements
(typically 12 to 15 months), if an independent retailer defaults in its
obligation to these credit sources. The difference between the gross repurchase
price we pay and the price at which the repurchased product can then be
resold, which is typically at a discount to the original sale price, represents
a financial expense to us. As a result, if we were obligated to repurchase
a large number of recreational vehicles in the future, this could increase
costs, which could have a negative effect on earnings. A tightening of credit
standards by lenders and more aggressive collection efforts by lenders could
result in more defaults by dealers. These defaults could trigger repurchase
obligations on us that may be higher than historical levels. In
2007, we repurchased 78 recreational vehicles at an aggregate purchase
price of $3.3 million, incurring an additional discount of about $327,000,
compared to repurchases of 93 recreational vehicles at an aggregate gross
purchase price of $5.0 million, incurring an additional discount of
approximately $496,000 in 2006. Based on losses previously experienced under
these obligations, the Company has established a reserve for estimated losses
under repurchase agreements. At December 31, 2007 and 2006, $0.7 million and
$0.3 million, respectively, were recorded as an accrual for estimated losses
under repurchase agreements (see Note
12 of Notes to Consolidated Financial Statements).





High
inventories of recreational vehicles among dealers could continue to negatively
affect our sales volume and profit margins.





The level
of recreational vehicle inventories among dealers can have a significant impact
on manufacturing, shipments, inventory levels and operating results. As
wholesale shipments of recreational vehicles within the industry exceed retail
sales of vehicles, inventories at the dealer level expand to a point where
dealers significantly cut orders from manufacturers. As manufacturers respond to
reduced demand, many offer wholesale and retail discounts and incentives in an
effort to maintain production volumes. As a result, dealer inventories may
expand further resulting in increasing need for discounts and incentives, or in
the alternative, a need for dramatic reduction in overall production levels by
manufacturers. Both increased discounts and incentives, and reduced production
levels negatively affect our revenues and profitability.





Fuel
shortages, or higher prices for fuel, could have a negative effect on sales of
recreational vehicles.





The
motorized recreational vehicles produced by us require gasoline or diesel
fuel for their operation, while our towable products often require the use
of a vehicle requiring gasoline or diesel fuel for their operation. Gasoline and
diesel fuel have, at various times in the past, been difficult to obtain, and
there can be no assurance that the supply of gasoline and diesel fuel will
continue uninterrupted, that rationing will not be imposed or that the price of,
or tax on fuel will not significantly increase in the future. Shortages of
gasoline and diesel fuel have had a significant adverse effect on the demand for
recreational vehicles in the past and could have a material adverse effect on
demand in the future. Rapid significant increases in fuel prices appear to
affect the demand for recreational vehicles when gasoline prices reach unusually
high levels. Such a reduction in overall demand for recreational vehicles could
have a materially adverse impact on our revenues and
profitability.




Changes
in consumer preferences and our ability to effectively adapt to those
preferences may adversely affect revenues and profitability.





Consumer
preferences for our recreational vehicles are likely to change over time,
and as a result, we continually introduce new features, designs and models
to meet changing consumer demand. Delays in the introduction of new models or
product features, or a lack of market acceptance of new features, designs or
models, could have a material adverse effect on our business and operating
results. As a result, we may incur significant additional costs in
designing or redesigning models that are not accepted in the marketplace. We may
also experience production difficulties, such as inefficiencies in purchasing
and increased labor costs, as new models are introduced. In addition, new
product introductions may reduce revenues from existing models and adversely
affect operating results. There can be no assurance that any new models or
products will be introduced to the market on time or that they will be
successful when introduced.


- 10
-


New
product introductions may result in unanticipated expenses resulting in reduced
earnings.





The
introduction of new products is critical to the success of our RV
Segment. We incur additional costs when new products are introduced, such
as research and development costs, engineering costs, and initial labor or
purchasing inefficiencies. Additionally, we may incur unexpected expenses,
including those associated with unexpected engineering or design flaws that will
force a recall of a new product. In the past, we have experienced recalls
that resulted in temporary plant shutdowns and disruptions of the supply of
finished product to the wholesale market. In addition, we may be prompted
to offer additional incentives to stimulate the sales of products not adequately
accepted by the market, or to stimulate sales of older or obsolete products.
These types of costs could be substantial and could have a significant adverse
effect on our financial results.





We depend
on a small group of suppliers for some of our components, and any business
interruption among these suppliers could adversely affect our production
costs and profitability.





Most
commodity components for both of our business segments are readily
available from a variety of sources. However, a small group of suppliers produce
a few proprietary or specialty components, primarily in the case of motorhome
chassis. Freightliner is the primary supplier of diesel powered chassis for
Class A diesel motorhomes, while Workhorse Custom Chassis and Ford Motor Company
are the primary suppliers of gasoline powered chassis for Class A gas
motorhomes. Ford Motor Company and General Motors Corporation are the primary
suppliers of Class C chassis. In the past, we have also experienced supply
disruptions among other suppliers, such as appliance manufacturers. Shortages,
production delays or labor disputes at such suppliers could have a material
adverse effect on our revenues. Our inability to obtain adequate supplies
of needed components could negatively impact our revenues and
profitability.





The
consolidation of distribution channels within the RV industry could have a
material negative effect on revenues and profitability.





Over the
last several years, several large scale recreational vehicle dealers have grown
to represent a significant presence in the industry. In addition, one major
consolidator of RV dealers has grown through acquisition to 56 retail locations
throughout the United States.





The
expansion of large scale dealers and the continued consolidation of dealerships
among large players may result in increased pricing pressures in the industry in
general and on us in particular. Such pressure exerted by the distribution
channel may have a material adverse effect on the RV Group’s revenues and
profitability.





A single
RV dealer network accounts for approximately 12% of the Company's 2007
consolidated net sales.




The
market for our Housing Segment is heavily concentrated in the Midwestern
United States, and a continued weakness in demand in that area could have a
material negative effect on revenues and profitability.





Our Housing
Segment is geographically concentrated, with two of its largest production
facilities located in the Midwest. Softness in the housing market within the
Midwest negatively impacted revenues and profitability at our production
facilities in Indiana and Iowa in 2007. Softness in the housing market also
spread in 2006 and 2007 to the rest of the country, including the Southeast and
Middle Atlantic regions, which has negatively impacted revenues and
profitability at our production facilities in Virginia and North Carolina.
We can offer no assurance that the demand for housing will not remain weak
in the areas in which we have a high sales concentration. Any decline in
traditional home sales could have a material adverse effect on our revenues
and profitability.




The
performance of our Housing Segment in new markets may adversely affect
revenues and profitability.





Beginning
in 2003, our Housing Segment formed All American Building Systems to pursue
opportunities beyond its core single-family housing market. While we have
experience in producing multi-family residential structures, and experience in
managing large-scale construction projects, these markets present a number of
risks, including the following:





·
            potential
      inability to meet contract specifications and timetables for large-scale
      projects,


·
            performance
      of our business partners and (sub) contractors on large-scale
      projects,


·
            potential
      increased liability from possible larger claims resulting from large-scale
      projects,


·
            construction
      of new products with significantly different designs from single-family
      homes,


·
            compliance
      with state and local building codes and zoning laws,
  and


·
            production
      scheduling to meet demand from existing builders and large
      projects.





Further,
the per-project risks are higher for large-scale projects than with
single-family homes. If we fail to mitigate these risks, they may have
a material adverse effect on revenues and profitability.


- 11
-


Litigation
and recent Congressional inquiries regarding the use of materials containing
formaldehyde in the Company’s products may adversely affect the future financial
results.





In 2007,
the Company was named in one lawsuit alleging damages resulting from the use of
the Company’s travel trailers for temporary shelter in hurricane-affected areas
of the Gulf Coast resulting from formaldehyde contained in components used in
the construction of the Company’s travel trailers. In addition, the Company
is aware of other litigation regarding formaldehyde in which it may become a
party. The Company has also received an inquiry by the Committee on
Oversight and Government Reform of the United States House of Representatives
relating to certain of its products used as temporary housing by the
Federal Emergency Management Agency in the wake of Gulf hurricanes in late
2005. The results of such litigation and inquiries cannot be known at this
time, however the outcome may have a direct material adverse impact on the
Company’s financial results and may also have an indirect adverse affect on the
Company’s results arising from negative publicity, damage to the Company’s
reputation in the marketplace and negative perceptions of the Company’s product
by the public.





Item
      1B.
            Unresolved
      Staff Comments





None.


- 12
-


Item
      2.
            Properties





We own or
lease 2,823,311 square feet of plant and office space, located on 708.5 acres,
of which 2,323,191 square feet are used for manufacturing, 222,476 square feet
are used for warehousing and distribution, 10,024 square feet are used for
research and development, 128,940 square feet are used for customer service and
138,680 square feet are offices. Included in these numbers are 39,310 square
feet leased to others and 331,183 square feet available for sale or lease. The
properties that are shown as available for sale or lease are not classified as
real estate held for sale in the consolidated financial statements as they do no
meet the criteria for such classification outlined in SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.We believe that our present facilities,
consisting primarily of steel clad, steel frame or wood frame construction and
the machinery and equipment contained therein, are well maintained and in good
condition.





The
following table indicates the location, number and size of our properties by
segment as of December 31, 2007:





Location
            
            Acreage
            
            No.
      of
              Buildings
            
            Building
      Area
              (Sq.
      Ft.)Properties
      Owned and Used by Registrant:Recreational
      Vehicle GroupFitzgerald,
      Georgia
            
            
            29.6
            
            
            5
            
            
            170,670Elkhart,
      Indiana
            
            
            6.0
            
            
            1
            
            
            29,886Middlebury,
      Indiana
            
            
            170.8
            
            
            27
            
            
            1,138,643Centreville,
      Michigan
            
            
            105.0
            
            
            4
            
            
            84,865Subtotal
            
            
            311.4
            
            
            37
            
            
            1,424,064Housing
      GroupMilliken,
      Colorado
            
            
            23.0
            
            
            1
            
            
            151,675Dyersville,
      Iowa
            
            
            20.0
            
            
            1
            
            
            168,277Decatur,
      Indiana
            
            
            40.0
            
            
            2
            
            
            215,995Rutherfordton,
      North Carolina
            
            
            37.8
            
            
            1
            
            
            169,177Rocky
      Mount, Virginia
            
            
            44.7
            
            
            6
            
            
            137,693Subtotal
            
            
            165.5
            
            
            11
            
            
            842,817OtherElkhart,
      Indiana
            
            
            16.2
            
            
            3
            
            
            53,841Middlebury,
      Indiana
            
            
            1.3
            
            
            2
            
            
            4,800Subtotal
            
            
            17.5
            
            
            5
            
            
            58,641Total
      owned and used
            
            
            494.4
            
            
            53
            
            
            2,325,522Properties
      Leased and Used by Registrant:Recreational
      Vehicle GroupChino,
      California (1)
            
            
            4.7
            
            
            3
            
            
            84,296Elkhart,
      Indiana
            
            
            7.8
            
            
            1
            
            
            43,000Total
      leased and used
            
            
            12.5
            
            
            4
            
            
            127,296






(1)
            65,837
      Sq. Ft. sub-leased as of November 1,
2007




- 13
-





Location
            
            
            Acreage
            
            
            No.
      of
              Buildings
            
            
            Building
      Area
              (Sq.
      Ft.)Properties Owned by Registrant
      and Leased to Others:OtherCrooksville,
      Ohio
            
            
            10.0
            
            
            2
            
            
            39,310Total
      owned and leased
            
            
            10.0
            
            
            2
            
            
            39,310Properties
      Owned by Registrant and Available for Sale or Lease:Recreational
      Vehicle GroupEdwardsburg,
      Michigan
            
            
            30.4
            
            
            3
            
            
            115,120Subtotal
            
            
            30.4
            
            
            3
            
            
            115,120Housing
      GroupDecatur,
      Indiana
            
            
            3.3
            
            
            2
            
            
            86,310Zanesville,
      Ohio
            
            
            23.0
            
            
            2
            
            
            129,753Subtotal
            
            
            26.3
            
            
            4
            
            
            216,063OtherMiddlebury,
      Indiana
            
            
            132.8
            
            
            -
            
            
            -Pigeon
      Forge, Tennessee
            
            
            2.1
            
            
            -
            
            
            -Subtotal
            
            
            134.9
            
            
            -
            
            
            -Total
      owned and available for sale or lease
            
            
            191.6
            
            
            7
            
            
            331,183Total
      Company
            
            
            708.5
            
            
            66
            
            
            2,823,311




- 14
-


Item
      3.
            Legal
      Proceedings





During
the second quarter of 2004, the Company entered into an agreement to provide
financing of up to $4.9 million to a developer for the construction of a hotel
for which the Company was to provide modular units. The Company provided $2.3
million in financing to the developer under this arrangement. No funding
has been provided since December 2005. The loans are collateralized by a first
priority interest in all tangible and intangible property of the borrower. The
developer was unable to obtain a building permit, so the Company is pursuing its
legal remedies through litigation to recoup the financing extended to date.
During the fourth quarter of 2006, the Company obtained title to the real estate
that was partial collateral for this note. In the event the sale of the property
does not generate proceeds sufficient to cover the financing previously
provided, the Company will continue pursuing its legal remedies to recover any
shortfall. As of December 31, 2007, the Company has reserved an amount that
Management believes the Company may not recover; however, there is a potential
for exposure in excess of the amount reserved.





During
2005, the Company settled a personal injury suit for $5.0 million, $1.0 million
of which was paid by the Company’s primary insurance carrier. The Company’s
self-insured retention is $250,000. During 2005, the Company paid $1.5 million
in addition to the amount paid by its primary carrier and recorded another
current liability of $2.5 million to recognize the remaining amount to be paid
on the settlement and the $250,000 retention. During June 2006, the remaining
liability of $2.5 million was paid. Since the excess carrier initially denied
coverage, the Company filed suit against the excess carrier to enforce coverage.
During the first quarter of 2006, the matter was settled for $2.9 million, which
the Company received on March 15, 2006 and was recorded as a reduction to the RV
Segment’s general and administrative expenses. There remains ongoing litigation
against other parties to recover the balance over the retention.




On
November 21, 2006 the Company received a summons from the Internal Revenue
Service which requires the Company to produce various documents relating to its
research and development claims filed with the Internal Revenue Service for the
tax years 1999 through 2004. On March 6, 2007, the Company received an
additional summons from the Internal Revenue Service related to this matter
regarding tax years 1984 through 1988.





The
Company was named as a defendant in McGuire v. Gulf Stream Coach, Inc., which
was filed as a class action on April 9, 2007 in the United States District Court
for the Eastern District of Louisiana. The factual basis alleged is that the
plaintiffs were exposed to formaldehyde in FEMA travel trailers, which exposure
constitutes a manifest injury requiring medical monitoring to thwart development
of disease. Plaintiffs sought the following relief: class certification,
which was denied; payment into a court-supervised medical monitoring fund;
removal of all formaldehyde-existing materials from all trailers and
modification to provide adequate ventilation; repair and testing to prevent
further exposure; attorney’s fees and costs; and other appropriate
relief. Company filed a motion to dismiss on the basis that none of named
plaintiffs received a Coachmen trailer. The case and motion are currently
pending before the U.S. Judicial Panel on Multidistrict Litigation. Other
litigation has also been filed, in which the Company may become a
party.





The
Company is involved in various other legal proceedings, most of which are
ordinary disputes incidental to the industry and most of which are covered in
whole or in part by insurance. Management believes that the ultimate outcome of
these matters and any liabilities in excess of insurance coverage and
self-insurance accruals will not have a material adverse impact on the Company's
consolidated financial position, future business operations or cash
flows.





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





No
matters were submitted during the quarter ended December 31, 2007 to a vote of
security holders, through the solicitation of proxies or
otherwise.


- 15
-


Executive Officers of the Registrant





The
following table sets forth the executive officers of the Company, as of December
31, 2007:


Name
            PositionRichard
      M. Lavers
            President
      and Chief Executive OfficerColleen
      A. Zuhl
            Chief
      Financial OfficerMichael
      R. Terlep, Jr.
            President,
      CLI dba Coachmen RV Group and President, Coachmen Recreational Vehicle
      Company, LLCRick
      J. Bedell
            President,
      CBI dba Coachmen Housing GroupLeslie
      G. Thimlar
            Vice
      President, Human ResourcesW.
      Todd Woelfer
            General
      Counsel





Richard M. Lavers
(age 60) was named Chief Executive Officer of the Company in August 2006.
In December 2005, he was named Chief Financial Officer and Chief Administrative
Officer of the Company. Mr. Lavers assumed the position of Executive Vice
President of the Company in May 2000 and served as General Counsel and Secretary
of the Company from March 1999. He joined the Company in October 1997 as General
Counsel. From 1994 through 1997 Mr. Lavers was Vice President, Secretary and
General Counsel of RMT, Inc. and Heartland Environmental Holding Company. Mr.
Lavers earned both his B.A. degree and his J.D. degree from the University of
Michigan.





Colleen A. Zuhl
(age 41) assumed the position of Chief Financial Officer in August 2006 and
had previously served as the Company’s Vice President and Controller since
joining the Company in April 2004. In December 2005, Mrs. Zuhl also assumed the
duties of Chief Accounting Officer for the Company. From 1988 to 2004, Mrs. Zuhl
was employed by Ernst & Young, LLP, most recently as a Senior Audit Manager.
Mrs. Zuhl earned a B.S. degree from Hillsdale College.





Michael R. Terlep,
Jr. (age 46) was appointed President of Coachmen Recreational Vehicle
Company in June 1997. Prior to that he was Executive Vice President of Coachmen
RV, with retained responsibility for product development, among other duties,
since 1993. He was given the additional responsibility of General Manager of the
Indiana Division in 1995. Prior to his promotion to Executive Vice President,
Mr. Terlep served as Vice President of Sales and Product Development from 1990
to 1993. He has held several other management positions with the Company since
joining Coachmen in 1984. He received his B.A. degree from Purdue
University.





Rick J. Bedell (age
55) rejoined the Company as the President of Consolidated Building Industries,
LLC, dba The Coachmen Housing Group. Mr. Bedell was formerly the President of
Miller Building Systems and served on their Board of directors for four years.
Prior to that, he was Executive Vice President/COO, while Miller was a publicly
held company, with overall responsibility for sales, engineering, and plant
operations since 1998. Prior to his promotion to Executive Vice President, Mr.
Bedell served as Vice President of Operations in Miller’s Kansas facility from
1996 to 1998 and also in the California Division from 1989 to 1996. Before
joining Miller Building Systems in 1989, Mr. Bedell’s career in the modular
construction industry began in 1978, with PBS Building Systems followed by
Modulaire Industries in capacities including field project management, sales
management, and general management.





Leslie G. Thimlar
(age 52) was appointed Vice President, Human Resources for Coachmen Industries
in 2001. Prior to that, he was Assistant Vice President, Human Resources from
1996 through 2001 with responsibility for corporate human resource functions.
From 1986 until 1996 Mr. Thimlar served as Vice President, Human Resources for
Ancilla Health Care. He received his B.S. and M.P.A. degrees from Indiana
University.





W. Todd Woelfer (age
40) was appointed General Counsel in May of 2007. Mr. Woelfer practices law as a
partner at the firm of May Oberfell Lorber where he focuses on the
representation of corporate clients, including Coachmen Industries. Mr. Woelfer
earned both his B.S. in Business Administration and his J.D. degrees from
Valparaiso University.


- 16
-


Part
II





Item
      5.
            Market
      for Registrant's Common Equity and Related Stockholder
    Matters





The
following table discloses the high and low sales prices for Coachmen's common
stock during the past two years as reported on the New York Stock Exchange,
along with information on dividends declared per share during the same
periods.





High
      & Low Sales Prices
            
            Dividends
      Declared2007
            
            2006
            
            2007
            
            20061st
      Quarter
            
            $
            11.74
      - 10.53
            
            $
            13.28
      - 10.71
            
            $
            .03
            
            $
            .062nd
      Quarter
            
            
            11.20
      - 9.66
            
            
            11.95
      - 10.30
            
            
            .03
            
            
            .063rd
      Quarter
            
            
            9.76
      - 6.35
            
            
            12.16
      - 8.90
            
            
            -
            
            
            .034th
      Quarter
            
            $
            7.02
      - 5.00
            
            $
            12.90
      - 10.09
            
            $
            -
            
            $
            .03





The
Company's common stock is traded on the New York Stock Exchange: stock symbol
COA. The number of shareholders of record as of January 31, 2008 was
1,728.





See Item
12 for the Equity Compensation Table.





The
Company did not repurchase any shares of its stock during the fourth quarter of
the fiscal year ended December 31, 2007.


- 17
-


Item
      6.
            Selected
      Financial Data





Five-Year
Summary of Selected Financial Data


-Year
Ended December 31-


(in
thousands, except per share amounts)


2007
            
            2006
            
            2005
            
            2004
            
            2003Net
      sales
            
            $
            480,840
            
            $
            564,382
            
            $
            702,425
            
            $
            802,346
            
            $
            636,891Gross
      profit
            
            
            12,717
            
            
            20,216
            
            
            23,198
            
            
            78,821
            
            
            64,486Net
      income (loss) from continuing operations
            
            
            (38,752
            )
            
            (33,215
            )
            
            (19,360
            )
            
            14,258
            
            
            8,443Discontinued
      operations:Loss
      from operations of discontinued entities
            
            
            -
            
            
            (795
            )
            
            (6,370
            )
            
            (659
            )
            
            (1,078
            )Gain
      (loss) on sale of assets of discontinued entities
            
            
            -
            
            
            2,205
            
            
            (620
            )
            
            1,735
            
            
            -Income
      (loss) from discontinued operations
            
            
            -
            
            
            1,410
            
            
            (6,990
            )
            
            1,076
            
            
            (1,078
            )Net
      income (loss)
            
            $
            (38,752
            )
            $
            (31,805
            )
            $
            (26,350
            )
            $
            15,334
            
            $
            7,365Earnings
      (loss) per share - BasicContinuing
      operations
            
            $
            (2.46
            )
            $
            (2.12
            )
            $
            (1.24
            )
            $
            .92
            
            $
            .55Discontinued
      operations
            
            
            -
            
            
            .09
            
            
            (.45
            )
            
            .07
            
            
            (.07
            )Net
      earnings (loss) per share - Basic
            
            
            (2.46
            )
            
            (2.03
            )
            
            (1.69
            )
            
            .99
            
            
            .48Earnings
      (loss) per share - DilutedContinuing
      operations
            
            
            (2.46
            )
            
            (2.12
            )
            
            (1.24
            )
            
            .92
            
            
            .55Discontinued
      operations
            
            
            -
            
            
            .09
            
            
            (.45
            )
            
            .07
            
            
            (.07
            )Net
      earnings (loss) per share - Diluted
            
            $
            (2.46
            )
            $
            (2.03
            )
            $
            (1.69
            )
            $
            .99
            
            $
            .48Cash
      dividends per share
            
            $
            .06
            
            $
            .18
            
            $
            .24
            
            $
            .24
            
            $
            .24At
      year-end:Working
      capital (1)
            
            $
            25,336
            
            $
            62,784
            
            $
            93,308
            
            $
            121,312
            
            $
            95,963Total
      assets
            
            
            207,668
            
            
            243,134
            
            
            322,816
            
            
            357,723
            
            
            310,688Long-term
      debt
            
            
            3,010
            
            
            3,862
            
            
            12,913
            
            
            14,943
            
            
            9,419Shareholders'
      equity
            
            
            121,133
            
            
            160,331
            
            
            193,803
            
            
            224,418
            
            
            211,151Book
      value per share
            
            $
            7.70
            
            $
            10.20
            
            $
            12.30
            
            $
            14.27
            
            $
            13.58Number
      of employees
            
            
            2,305
            
            
            2,655
            
            
            3,677
            
            
            4,416
            
            
            4,490




(1)
Working capital is defined as current assets less current
liabilities.




Note: The
Five-Year Summary of Selected Financial Data above has been restated to reflect
discontinued operations and should be read in conjunction with Note
11, Restructuring
Charges and Discontinued Operations, of
the Notes to the Consolidated Financial Statements appearing in this report. The
Five-Year Summary of Selected Financial Data above has shipping and handling
costs reclassified for years prior to 2007, and should be read in conjunction
with Note 1, Nature of Operations and Accounting
Policies,of the Notes to the Consolidated Financial Statements appearing
in this report.


- 18
-


Item
      7.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations





The
analysis of the Company's financial condition and results of operations should
be read in conjunction with the Selected Financial Data and the Consolidated
Financial Statements.





EXECUTIVE
SUMMARY





The
Company was founded in 1964 as a manufacturer of recreational vehicles and began
manufacturing system-built homes in 1982. Since that time, the Company has
evolved into a leading manufacturer in both the recreational vehicle ("RV") and
housing business segments through a combination of internal growth and strategic
acquisitions.




The
Company's business segments are subject to certain seasonal demand cycles and
changes in general economic and political conditions. Demand in the RV Segment
and certain portions of the Housing Segment generally declines during the winter
season, while sales and profits are generally highest during the spring and
summer months. Inflation and changing prices have had minimal direct impact on
the Company in the past in that selling prices and material costs have generally
followed the rate of inflation. However, since 2004, rapid escalations of prices
for certain raw materials combined with a number of price protected sales
contracts have at times adversely affected profits in the Housing Segment.
Material surcharges are added to the price when appropriate and allowed. The RV
Segment was also affected adversely by raw material inflation, but to a lesser
degree due to material surcharges added to the prices of products sold to
dealers. Changes in interest rates impact both the RV and Housing Segments, with
rising interest rates potentially dampening sales.




In order
to supplement the Company’s single-family residential housing business, the
Housing Segment continues to pursue opportunities for larger projects in
multi-family residential and commercial markets for 2007 and beyond. The results
of the Company’s All American Building Systems (AABS) major projects efforts
continue to improve, and did contribute to earnings in 2007, primarily through
the production of military barracks. During 2006, AABS was a member of a
consortium that was awarded a contract for the second phase of barracks
construction at Fort Bliss in Texas, and contributed in excess of $10 million to
revenue in 2007. In addition, in January 2008, AABS signed an agreement to
provide military housing at Ft. Carson in Colorado. The Housing Group began
production of the barracks modules late in 2007 with initial deliveries
scheduled to commence in the first quarter of 2008. This agreement will result
in revenues of over $30 million during 2008. Another opportunity for the Housing
Group involves the reconstruction of the Gulf Coast regions damaged by
hurricanes in 2005. As the infrastructure, including basic utilities, vital
services and transportation networks are restored, the Company expects to
receive contracts for its modular homes and multi-family structures which offer
better costs, structural integrity and timeliness of completion than other
alternatives.





Intensive
Recovery Plan





During
2005, the Company’s Board of Directors approved a comprehensive operational and
cost structure realignment and restructuring plan (the Intensive Recovery Plan),
which was largely implemented by the end of 2006, and undertook further
restructuring and consolidation during 2007 intended to improve operating
performance and ensure financial strength.





Despite
the unacceptable bottom line results in 2007, the Company has begun to see
positive results from these actions. The Company has completed the sale of
several businesses and other properties, reduced expenses, and improved
operating efficiencies, partially through the consolidation of a number of
operations.





When
describing the impact of these restructuring plans, all determinations of the
fair value of long-lived assets were based upon comparable market values for
similar assets.





In
September 2005, the Company announced the relocation of Georgie Boy
Manufacturing, LLC (GBM) from Edwardsburg, Michigan to a newer, more
efficient motorhome production facility within its Middlebury, Indiana
manufacturing complex. GBM has continued to control and focus on its independent
product design, sales, and marketing efforts to ensure the continued strength of
the GBM brand with consumers and its separate dealer body. The relocation was
completed late in the fourth quarter of 2005. This internal restructuring
improved capacity utilization within the RV Segment.


- 19
-


On
January 13, 2006, the Company sold all operating assets of Prodesign, LLC. The
total sales price was $8.2 million, of which the Company received $5.7 million
in cash, a $2.0 million promissory note and $0.5 million to be held in escrow to
cover potential warranty claims and uncollectible accounts receivable, as
defined in the sale agreement. The promissory note is to be repaid over a period
of 10 years, using an amortization period of 15 years, and bears interest at 6%
per annum with interest only payments being required in the first three years.
The funds remaining in the escrow account of $0.4 million reverted to the
Company in February 2007 per the sales agreement. In accordance with Statement
of Financial Accounting Standard No. 144, Prodesign qualified as a separate
component of the Company’s business and as a result, the operating results of
Prodesign have been accounted for as a discontinued operation. Previously
reported financial results for all periods presented have been adjusted to
reflect this business as a discontinued operation. In conjunction with the
classification of Prodesign as a discontinued operation, management allocated
goodwill of $0.3 million to the discontinued operations from the RV Segment
goodwill based on the relative fair value of the discontinued operations to the
RV Segment. The $0.3 million of allocated goodwill has been included in the
calculation of the final gain on sale of assets in the first quarter of 2006.
Net sales of Prodesign for the years ended December 31, 2006 and 2005 were $0.4
million and $14.2 million, respectively, and the pre-tax income (loss) for the
years ended December 31, 2006 and 2005 were $2.0 million and $(0.7) million,
respectively.





The
Company ceased operations at the All American Homes operation in Springfield,
Tennessee in 2005. The closure of the Tennessee location resulted in an asset
impairment charge of approximately $1.1 million, which was recorded in the third
quarter of 2005. On December 15, 2006 the Company completed the sale of this
property for approximately $3.2 million, which resulted in a pre-tax gain of
approximately $1.1 million. In connection with the sale of this property, $1.2
million of industrial revenue bonds were paid off as of December 15, 2006.
During December 2006, the Company also terminated the $1.2 million interest rate
swap that had been associated with these revenue bonds. The closure and sale of
the Tennessee facility had minimal impact on revenues, as all existing builders
in that region have continued to be served by the Company’s housing operations
in Indiana and North Carolina.





On
December 31, 2005, the Company sold all operating assets of the All American
Homes Kansas division. In accordance with Statement of Financial Accounting
Standard No. 144, the division qualified as a separate component of the
Company’s business and as a result, the operating results of the division have
been accounted for as a discontinued operation. Previously reported financial
results for all periods presented have been restated to reflect this business as
a discontinued operation. Net sales of the Kansas division for the years ended
December 31, 2006 and 2005 were $0.0 million and $9.7 million, respectively, and
the pre-tax income (loss) for the years ended December 31, 2006 and 2005 were
$(0.4) million and $(2.9) million, respectively.





On March
31, 2006, the Company sold 100% of its interest in the capital stock of Miller
Building Systems, Inc. for $11.5 million, consisting of cash of $9.0 million and
a $2.5 million secured note. The note, which is included in other long-term
assets on the Consolidated Balance Sheet, is to be repaid over 5 years and bears
interest at the 1 year LIBOR rate plus 2.75% per annum with quarterly interest
payments beginning September 30, 2006. Principal payments of $125,000 per
quarter commence on June 30, 2009 and continue through the maturity date of
March 31, 2011. In addition, the Company accepted a $2.0 million contingent
earn-out note. In October 2007, a subsequent agreement with Miller Building
Systems waived the interest on the secured $2.5 million note for two years;
hence no interest will be earned from March 31, 2007 to March 31, 2009. The
subsequent agreement with Miller Building Systems also canceled the $2.0 million
contingent earn-out note. There is no financial impact as a result of this
cancellation. In accordance with Statement of Financial Accounting Standard No.
144, the division qualified as a separate component of the Company’s business
and as a result, the operating results of the division have been accounted for
as a discontinued operation. Previously reported financial results for all
periods presented have been restated to reflect this business as a discontinued
operation. Net sales of Miller Building Systems, Inc. for the years ended
December 31, 2006 and 2005 were $7.5 million and $41.6 million, respectively,
and the pre-tax income (loss) for the years ended December 31, 2006 and 2005
were $1.5 million and $(8.2) million, respectively. In connection with this
sale, $1.7 million of industrial revenue bonds were paid off as of March 31,
2006. During April 2006, the Company terminated the $1.5 million and $235,000
interest rate swaps that had been associated with these revenue
bonds.





In
conjunction with the actions noted above, during the fourth quarter of 2005
management allocated goodwill of $0.7 million to the discontinued operations
from the Housing Segment goodwill based on the relative fair value of the
discontinued operations to the entire Housing Segment. The $0.7 million of
allocated goodwill consisted of $0.6 million allocated to Miller Building
Systems, which was written off as part of the 2005 loss from operations of
discontinued operations and $0.1 million allocated to All American Homes of
Kansas, which was included in the 2005 loss on sale of assets of discontinued
operations. During the first quarter of 2006, an additional $0.3 million of
goodwill was allocated to Miller Building Systems based on the final sales
price relative to the fair value of the entire Housing Segment. The additional
$0.3 million of allocated goodwill was written off as part of the 2006 gain on
sale of assets of discontinued operations.





On March
31, 2006, the Company completed the sale of a property located in Grapevine,
Texas for approximately $2.0 million, consisting of cash of $1.7 million and a
note receivable of $0.3 million and resulting in a pre-tax gain of approximately
$1.8 million. Also during the first quarter, the Company completed the sale of
vacant farmland in Middlebury, Indiana for cash of approximately $1.0 million,
resulting in a pre-tax gain of approximately $0.8 million.


- 20
-


During
the third quarter of 2006, a number of smaller properties were sold for a net
pre-tax gain of approximately $0.3 million. On June 8, 2006, the Company
completed the sale of its corporate aircraft for approximately $2.3 million,
which resulted in a pre-tax gain of approximately $1.7 million. On June 30,
2006, the Company sold property located in Palm Shores, Florida for $2.5
million, which resulted in a pre-tax gain of approximately $1.2 million. During
June 2006, the Company also sold two parcels of the former Georgie Boy
Manufacturing complex for total proceeds of $0.7 million, which resulted in a
pre-tax gain of approximately $0.4 million.





On
December 28, 2006 the Company contracted for the sale of a property located
in Roanoke, Virginia for approximately $1.3 million, consisting of cash of $0.1
million and a note receivable of $1.2 million that was paid in 2007, which
resulted in pre-tax gain of approximately $1.2 million.





During
the first three months of 2007, the Company completed the sale of two parcels of
the former Georgie Boy Manufacturing complex for approximately $0.6 million,
resulting in a pre-tax gain of approximately $0.3 million. Also during the
first three months, the Company completed the sale of vacant farmland in
Middlebury, Indiana for cash of approximately $0.1 million, resulting in a
pre-tax gain of approximately $0.1 million.





During
the third quarter of 2007, two smaller properties were sold for a net pre-tax
gain of approximately $0.1 million.





During
July 2007, the Company announced plans to reduce overhead costs by consolidating
Class A production into a single facility, relocating the paint facility located
in Elkhart, Indiana to the main complex in Middlebury, Indiana, and
consolidating two towable assembly plants into a single facility in order to
reduce expenses and improve profitability through improved capacity utilization
of fewer facilities. The consolidation of the Class A assembly plants was
substantially completed in the third quarter of 2007. The consolidation and
subsequent mothballing of a towable plant was completed in the fourth quarter of
2007. The paint facility was relocated to the main complex in the fourth
quarter of 2007.





On
December 5, 2007 the Company sold property and the equipment of a paint facility
located in Elkhart, Indiana for $2.9 million consisting of cash of $0.3 million
and a $2.6 million secured note due in full December 2008. The sale resulted in
pre-tax gain of $0.4 million on the equipment and a deferred gain of $1.1
million on the property which is included in the accrued expenses and other
liabilities on the Consolidated Balance Sheet.





The
Company announced on September 21, 2007 that it would consolidate its All
American Homes production facility located in Zanesville, Ohio with its larger
facility located in Decatur, Indiana. This will increase production backlogs and
capacity utilization at the Indiana plant as all builders previously served by
the Ohio plant will now be served from Indiana. This consolidation occurred
during the fourth quarter. The closure of the Ohio facility had minimal impact
on revenues, as all existing builders in that region have continued to be served
by the Company’s housing operations in Indiana and North Carolina.





Housing
Segment





The
Housing Group faced a challenging housing market in 2007. The December full year
figures on housing starts from the U.S. Census Bureau show a 28.6% year to year
decline in new single-family homes nationwide, and a 27.2% decline in the
Midwest region served by the Group’s plants in Indiana and Iowa. The decline
includes the Southeastern and middle Atlantic markets, which are served by the
Group’s plants in Virginia and North Carolina. Single-family housing starts in
the South region showed a year to year decline of 28.7% in
December.





In the
backdrop of such a difficult market, the Housing Grouphas seen weakness
in its core Midwestern markets as well as in the Southeast and Middle Atlantic
regions, negatively impacting the Group’s operations in Indiana, Iowa, North
Carolina and Virginia. All of the Group’s markets have experienced sharp
discounts, larger incentives, and increased levels of new home inventories. As
the downward pressure on new home sales persists, the Group will likely see the
more aggressive discounts and incentives by home builders continue. To mitigate
these conditions, management is placing more emphasis on providing value to
builders and consumers through the Group’s products, including the launch of the
Green Catalog in the first quarter of 2008. Driven by consumer interest and high
energy costs, the housing industry is beginning to recognize the increasing need
for energy efficiency and the use of sustainable materials in the construction
of new homes. The Company has taken a leadership position in this market
transformation with this initiative. The Green Catalog will allow consumers to
choose what technologies and earth-friendly materials they want included in
their new homes. The Group is working with design/build architectural firms that
specialize in sustainable, innovative, high-quality modular architecture.
Sustainable, well-designed buildings should be accessible to more people.
Off-site modular technology is a means to create beautiful, eco-friendly homes
and buildings. This project resulted in the mkSolaire® home which will be
prominently displayed in the “Smart Home: Green & Wired” exhibit at the
Museum of Science and Industry in Chicago from May 2008 through January 2009.
This endeavor should put modular construction in a new light for the general
public and fits well with our commitment to sustainable construction.
Management’s overriding goal with these actions is to provide the Group’s
builders with the products and tools they need to best meet the challenges of
their markets.


- 21
-


Management
continued to work to mitigate the Group’s dependence on traditional
scattered-lot single-family housing markets by increasing the expansion into
multi-family residential structures through All American Building Systems, or
AABS. Many of these multi-family structures markets are “large project” markets
such as dormitories, military barracks and apartments that typically have a long
incubation period, but generally result in a significant contract. In 2007, AABS
was a leading member of a consortium that completed the second phase of barracks
construction at Fort Bliss in Texas. On January 24, 2008, the Company announced
that AABS had signed a final agreement to provide modules for barracks
construction at Fort Carson in Colorado. AABS continues to pursue military
opportunities with our partners, and AABS expects to make proposals in 2008 for
additional military housing contracts. The Company is delivering homes to the
Gulf Coast region and our major projects sales group is pursuing additional
opportunities now that the rebuilding effort is finally gaining momentum. The
Group has also targeted other “large projects” such as dormitories, condominiums
and apartment complexes.





Overall,
2007 was a difficult year for the Housing Group, but management
took aggressive steps to reduce operating costs and maintain profitability
despite lower revenues. Early in 2007, the Group installed a new senior
management team with the talent, experience and drive to lead it forward.
Management is aggressively seeking new ways to strengthen the Group’s
traditional markets while pursuing growth in new areas.





Recreational
Vehicle Segment





Despite
the improvements recognized in the RV Group’s operations throughout 2007, low
sales volumes and production levels resulted in unacceptable bottom line results
for the year. To address the unacceptable level of revenues, the RV Group has
embarked on a number of actions to drive revenue growth and enhance
profitability.





Management
believes that customers of the RV industry are demanding improved quality.
Accordingly, management believes it can differentiate Coachmen’s products from
those of its competitors, and gain a marketing advantage, by improving product
quality. The RV Group has launched a number of initiatives to this end. The most
important new program rewards meaningful, continuous improvement in the quality
of products at every production facility. The program provides our team members
with incentive to meet and exceed concrete, quantifiable measures of quality
applicable to each facility. The incentive program was launched as a pilot
program in 2006, and expanded into a company-wide program in 2007. The incentive
program has been very successful in reducing the average number of defects per
unit, and has resulted in greater satisfaction among dealers.





With
regard to efforts to build upon product line strengths that began in late 2006,
the RV Group continued to make significant strides in improving its product
offerings and reducing product complexity. The Group has achieved a significant
transformation of product with its new product development process utilizing its
Advanced Design Team. At the National RV Trade Show held annually in Louisville,
the Company’s products displayed showed continued improvement in innovation
resulting from the Group’s more robust product development process. Over 40% of
the products on display at Louisville were new or redesigned innovative products
including the new touring PrismTM Class C motorhome featuring yacht inspired
interiors and
estimated gas mileage of 17-19 miles per gallon, a FreelanderTM Class C motorhome
with an innovative rear wall slide out, a re-engineered Spirit of America®
travel trailer linethat
is fully laminated with aluminum cage construction providing high line features
at a reduced weight at an entry level price point, total redesign and step out
of the Leprechaun®Class C, and a very creative new floorplan offered in
both the Pursuit® and MiradaTM Class A product lines featuring dual living areas
with a unique Murphy bed.





During
July 2007, the Company announced plans to reduce overhead costs by consolidating
Class A production into a single facility, relocating the paint facility located
in Elkhart, Indiana to the main complex in Middlebury, Indiana, and
consolidating two towable assembly plants into a single facility in order to
reduce expenses and improve profitability through improved capacity utilization
of fewer facilities. The consolidation of the Class A assembly plants was
substantially completed in the third quarter of 2007. The consolidation and
subsequent mothballing of a towable plant was completed in the fourth quarter of
2007. The paint facility was relocated to the main complex in the fourth
quarter of 2007.





Management
believes there are still opportunities to reduce material costs, which make up
the majority of the Group’s cost of sales. In order to quickly achieve
significant results, in early 2007, consultants were engaged to assist with
identifying and executing strategic sourcing action plans, resulting in
significant savings. Management has reorganized its strategic sourcing team into
a cohesive unit that continues to apply the processes and practices developed
with the consultants’ guidance. The ultimate goal of these actions is to
continue to improve quality and reduce cost in order to improve margins.
Management is also applying best practices from this effort to purchasing and
material sourcing in the Housing
Group.





Despite
the difficult year, management is optimistic that the hard work of its entire
team will pay substantial future dividends. Management will strive to leverage
the many changes and improvements that have been made throughout the RV Group to
generate improved results and market share gains in 2008 and the years
ahead.


- 22
-


RESULTS
OF OPERATIONS





The
following table sets forth, for the periods indicated, the percentage of net
sales represented by certain items reflected in the Consolidated Statements of
Operations and the percentage change in the dollar amount of each such item from
that in the indicated previous year (in thousands):




Percentage
      ChangePercentage
            
            
            
            Percentage
            
            
            
            Percentage
            
            2007
            
            2006of
            
            
            
            of
            
            
            
            of
            
            to
            
            to2007
            
            Net
      Sales
            
            2006
            
            Net
      Sales
            
            2005
            
            Net
      Sales
            
            2006
            
            2005Net sales:Recreational
      vehiclesMotorhomes
            $
            235,873
            
            49.1
            %
            $
            266,246
            
            47.2
            %
            $
            350,876
            
            50.0
            %
            
            (11.4
            )%
            (24.1
            )%Travel
      trailers and fifth wheels
            
            106,779
            
            22.2
            
            
            118,375
            
            21.0
            
            
            149,263
            
            21.1
            
            
            (9.8
            )
            (20.7
            )Camping
      trailers
            
            13,667
            
            2.8
            
            
            13,549
            
            2.4
            
            
            15,152
            
            2.2
            
            
            0.9
            
            (10.6
            )Parts
      and supplies
            
            5,335
            
            1.1
            
            
            6,540
            
            1.1
            
            
            6,903
            
            1.0
            
            
            (18.4
            )
            (5.3
            )Total
      recreational vehicles
            
            361,654
            
            75.2
            
            
            404,710
            
            71.7
            
            
            522,194
            
            74.3
            
            
            (10.6
            )
            (22.5
            )Housing
            
            119,186
            
            24.8
            
            
            159,672
            
            28.3
            
            
            180,231
            
            25.7
            
            
            (25.4
            )
            (11.4
            )Consolidated
      total
            
            480,840
            
            100.0
            
            
            564,382
            
            100.0
            
            
            702,425
            
            100.0
            
            
            (14.8
            )
            (19.7
            )Gross
      profit:Recreational
      vehicles
            
            (130
            )
            (0.1
            )
            
            283
            
            0.1
            
            
            (972
            )
            (0.1
            )
            
            (145.9
            )
            129.1Housing
            
            12,847
            
            2.7
            
            
            19,933
            
            3.5
            
            
            24,170
            
            3.4
            
            
            (35.5
            )
            (17.5
            )Consolidated
      total
            
            12,717
            
            2.6
            
            
            20,216
            
            3.6
            
            
            23,198
            
            3.3
            
            
            (37.1
            )
            (12.9
            )Operating
      expenses:Selling
            
            22,712
            
            4.7
            
            
            23,230
            
            4.1
            
            
            28,320
            
            4.0
            
            
            (2.2
            )
            (18.0
            )General
      and administrative
            
            26,310
            
            5.5
            
            
            21,328
            
            3.8
            
            
            30,794
            
            4.4
            
            
            23.4
            
            (30.7
            )Asset
      impairments
            
            3,872
            
            0.8
            
            
            -
            
            -
            
            
            1,076
            
            0.1
            
            
            100.0
            
            (100.0
            )Gain
      on sale of assets, net
            
            (1.037
            )
            (0.2
            )
            
            (8,689
            )
            (1.5
            )
            
            (163
            )
            -
            
            
            (88.1
            )
            n/mConsolidated
      total
            
            51,857
            
            10.8
            
            
            35,869
            
            6.4
            
            
            60,027
            
            8.5
            
            
            44.6
            
            (40.2
            )Nonoperating
      expense
            
            1,403
            
            0.3
            
            
            1,047
            
            0.2
            
            
            525
            
            0.1
            
            
            34.0
            
            99.4Loss
      from continuing operations before income taxes
            
            (40,543
            )
            (8.5
            )
            
            (16,700
            )
            (3.0
            )
            
            (37,354
            )
            (5.3
            )
            
            (142.8
            )
            55.3Income
      taxes (credit)
            
            (1,791
            )
            (0.4
            )
            
            16,515
            
            2.9
            
            
            (17,994
            )
            (2.5
            )
            
            110.8
            
            (191.8
            )Net
      loss from continuing operations
            
            (38,752
            )
            (8.1
            )
            
            (33,215
            )
            (5.9
            )
            
            (19,360
            )
            (2.8
            )
            
            (16.7
            )
            (71.6
            )Discontinued
      operations:Loss
      from operations of discontinued entities
            
            -
            
            -
            
            
            (795
            )
            (0.1
            )
            
            (6,370
            )
            (0.9
            )
            
            100.0
            
            87.5Gain
      (loss) on sale of assets of discontinued entities
            
            -
            
            -
            
            
            2,205
            
            0.4
            
            
            (620
            )
            (0.1
            )
            
            (100.0
            )
            455.6Income
      (loss) from discontinued operations
            
            -
            
            -
            
            
            1,410
            
            0.3
            
            
            (6,990
            )
            (1.0
            )
            
            (100.0
            )
            120.2Net
      loss
            $
            (38,752
            )
            (8.1
            )%
            $
            (31,805
            )
            (5.6
            )%
            $
            (26,350
            )
            (3.8
            )%
            
            (21.8
            )%
            (20.7
            )%n/m
      - not meaningful





Note: The
Results of Operations above have been restated to reflect discontinued
operations and should be read in conjunction with Note
11, Restructuring
Charges and Discontinued Operations, of
the Notes to the Consolidated Financial Statements appearing in this report. The
Results of Operations above has shipping and handling costs reclassified for
years prior to 2007, and should be read in conjunction with Note
1, Nature of
Operations and Accounting Policies,of the Notes to the Consolidated
Financial Statements appearing in this report.


- 23
-


The
following table presents key items impacting the results of operations for the
periods presented (in thousands):




2007
            
            2006
            
            2005Warranty
      - additional expense incurred related to RV sidewall issues and lift
      system recall (see Note
      1)
            
            $
            -
            
            $
            -
            
            $
            14,000(Gain)
      loss on sale of assets:Continuing
      operations:Tennessee
      facility (All American)
            
            
            -
            
            
            (1,061
            )
            
            -Virginia
      property
            
            
            (71
            )
            
            (1,202
            )
            
            -Texas
      property (Grapevine, TX)
            
            
            -
            
            
            (1,674
            )
            
            -Florida
      property (Palm Shores, FL)
            
            
            -
            
            
            (1,180
            )
            
            -Michigan
      property (Georgie Boy)
            
            
            (380
            )
            
            (650
            )
            
            -Indiana
      property (various)
            
            
            (138
            )
            
            (815
            )
            
            -Paint
      facility equipment
            
            
            (408
            )
            
            -
            
            
            -Corporate
      aircraft
            
            
            -
            
            
            (1,792
            )
            
            -Other
            
            
            (40
            )
            
            (315
            )
            
            (163
            )Total
            
            
            (1,037
            )
            
            (8,689
            )
            
            (163
            )Discontinued
      operations (see Note
      11):Miller
            
            
            -
            
            
            (2,522
            )
            
            -Prodesign
            
            
            -
            
            
            (1,899
            )
            
            -All
      American Homes - Kansas
            
            
            -
            
            
            76
            
            
            1,051Colfax
            
            
            -
            
            
            -
            
            
            -Total
            
            
            -
            
            
            (4,345
            )
            
            1,051Total
      (gain) loss on sale of assets
            
            $
            (1,037
            )
            $
            (13,034
            )
            $
            888Asset
      impairments:Miller
      Building Systems
            
            $
            -
            
            $
            -
            
            $
            7,895All
      American Homes - Tennessee
            
            
            -
            
            
            -
            
            
            1,077Other
            
            
            -
            
            
            -
            
            
            269Total
      asset impairments
            
            $
            -
            
            $
            -
            
            $
            9,241Legal
      expense recoveries (see Note 12)
            
            $
            -
            
            $
            (3,620
            )
            $
            (4,425
            )Litigation
      reserve (see Note
      12)
            
            $
            -
            
            $
            n/m
            
            $
            4,000Goodwill
      impairment charge
            
            $
            3,872
            
            $
            -
            
            $
            -





n/m - not
meaningful


- 24
-


Comparison
of 2007 to 2006





NET
SALES





Consolidated
net sales from continuing operations decreased $83.5 million or 14.8% to $480.8
million in 2007 from $564.4 million in 2006. The Company's RV Segment
experienced a net sales decrease from continuing operations of $43.1 million, or
10.6%, from 2006. Throughout 2007, as in 2006, the RV Segment worked through an
industry slowdown in retail activity and higher dealer inventories, in part
related to falling consumer confidence and significantly higher fuel costs, in
addition to the impact from the sub-prime and credit market crisis during 2007.
Full-year recreational vehicle wholesale unit shipments for the Company were
down 12.9% compared to 2006, while the industry was down 9.5%. For the full
year, the Company’s wholesale market share declined from 3.8% to 3.5% across all
product types. The Company’s retail market share for the same period declined
from 3.7% to 3.2% across all product types. Detailed market share data for 2007
and 2006 for each product type are set forth in the following
table:




Wholesale
      Share
            
            
            Retail
      Share2007
            
            
            2006
            
            
            2007
            
            
            2006Class
      A Motorhomes
            
            
            3.9
            %
            
            5.6
            %
            
            5.2
            %
            
            6.5
            %Gasoline
            
            
            n/a
            
            
            n/a
            
            
            6.2
            
            
            8.4Diesel
            
            
            n/a
            
            
            n/a
            
            
            4.3
            
            
            4.7Class
      C Motorhomes
            
            
            11.6
            
            
            9.5
            
            
            11.9
            
            
            10.6Travel
      Trailers
            
            
            2.7
            
            
            3.0
            
            
            3.3
            
            
            2.7Fifth
      Wheels
            
            
            1.7
            
            
            1.7
            
            
            1.8
            
            
            1.8Camping
      Trailers
            
            
            9.2
            
            
            8.6
            
            
            7.8
            
            
            8.1Total
            
            
            3.5
            %
            
            3.8
            %
            
            3.9
            %
            
            3.7
            %n/a
      - not availableWholesale
      share based on wholesale unit shipment data as reported by the
      Recreational Vehicle Industry Association.Retail
      share based on data provided by Statistical Surveys,
      Inc.




The
Company’s Class A shipments declined 30.3% while the industry shipments were
flat (up 0.6%) in 2007 following a decline in industry shipments of 13.7% in
2006 and 18.1% in 2005. The Company’s Class C shipments outperformed the market
as industry shipments of Class C motorhomes declined 4.0%, but the Company’s
Class C shipments increased a significant 17.8%. The non-motorized side of the
industry has been very challenging of late as the wholesale shipments of travel
trailers have declined year over year 11.5% compared to 2006 while the Company’s
shipments of travel trailers declined 20.9%. The Company’s fifth wheel trailer
shipments outperformed the market, declining only 4.4% in 2007, less than the
industry decline of 8.2%. The Company’s camping trailer shipments also performed
favorably compared to the wholesale market, declining 9.4% in 2007, while
industry shipments declined 15.3%. Total RV backlogs declined 7.6% to 1,505
units at December 31, 2007 compared to 1,628 units at December 31,
2006.





The
Housing Segment had a net sales decrease from continuing operations in 2007
of $40.5 million, or 25.4%. Wholesale unit shipments declined 29.7%
compared with the prior year. The Segment’s results were impacted by continuing
weakness in its core Midwest, Southeast and Middle Atlantic housing markets. The
most recent statistics on new home sales from the U.S. Census Bureau showed a
28.6% year to year decline in new
single-family homes nationwide, a 27.2% decline in year over year
comparison in the Midwest region, and a 28.7% decline in the South. This is
consistent with the challenges faced by the Housing Group operations in Indiana,
Iowa, North Carolina, Colorado and Virginia throughout 2007.





GROSS
PROFIT





Gross
profit from continuing operations was $12.7 million, or 2.6% of net sales,
in 2007, compared to $20.2 million, or 3.6% of net sales, in 2006. Gross
profit was negatively impacted in 2007 as a result of decreased sales,
discounting and corresponding production volume decrease, resulting in lower
utilization of the Company's manufacturing facilities yielding reduced operating
leverage.





During
2007, the Company took several actions to reduce costs and improve capacity
utilization including consolidation of Class A motorhome production into one
facility from two, consolidation of two RV towable plants into one plant, and
consolidation of a housing plant in Ohio into the larger Indiana
facility.


- 25
-


OPERATING
EXPENSES





Operating
expenses for continuing operations, consisting of selling and general and
administrative expenses, were $49.0 million and $44.6 million, or as a
percentage of net sales, 10.2% and 7.9% for 2007 and 2006. Selling expenses for
2007 were $22.7 million, or 4.7% of net sales, a 0.6 percentage point
increase from the $23.2 million, or 4.1% of net sales, experienced in 2006. The
$0.5 million decrease in selling expense was primarily the result of reductions
in payroll related expenses of $1.3 million offset by increased promotional
expenses of $0.8 million. General and administrative expenses were $26.3 million
in 2007, or 5.5% of net sales, compared with $21.3 million, or 3.8% of net
sales, in 2006. The increase of $5.0 million in general and administrative
expenses was primarily related to increases in professional services and
litigation settlements expense of $7.1 million, offset by decreases in payroll
related expenses and bad debt expense. The litigation expense increase largely
resulted from insurance settlements recovered in 2006 of approximately $3.6
million, resulting in reductions to the 2006 expense.





GOODWILL
IMPAIRMENT CHARGE





At
December 31, 2006, the Company had $16.9 million of goodwill, $13.0 million
attributable to the Housing reporting unit and $3.9 million attributable to the
RV reporting unit. The RV reporting unit goodwill originated from the
Company’s purchase of recreational vehicle assets. The Company conducted
its annual goodwill impairment test as required by FASB Statement No. 142, Goodwill and Other Intangible
Assets, during the fourth quarter of 2006 and the results indicated that
the estimated fair value of each of the Company’s reporting units exceeded their
carrying value. As a result of the continued weakness in the RV market, combined
with continuing losses incurred by the RV reporting unit, SFAS No. 142 required
the Company to perform an interim goodwill impairment evaluation during the
quarter ended June 30, 2007. Because the carrying value of the RV reporting
unit exceeded its fair value as calculated using the expected present value of
future cash flows, the Company concluded that the goodwill was impaired as of
June 30, 2007. Accordingly, the Company recorded a non-cash goodwill
impairment charge of $3.9 million in the quarter ended June 30, 2007. The
Company has performed the required annual impairment tests and has determined
that there was no impairment indicated for remaining Housing reporting unit
goodwill as of December 31, 2007.





GAIN
ON THE SALE OF ASSETS, NET





In 2007,
the Company had gains on the sale of assets of $1.0 million, compared to gains
on the sale of assets of $8.7 million in 2006. Gains on the sale of assets in
2007 resulted from the Company’s asset sales including properties in
Edwardsburg, Michigan and Rocky Mount, Virginia as well as paint equipment.
Gains on the sale of assets in 2006 resulted from the Company’s restructuring
plan and resulting asset sales including the former All American Homes facility
in Tennessee resulting in a $1.1 million gain, property from the former Georgie
Boy Manufacturing facilities resulting in a $0.7 million gain, the Company’s
aircraft resulting in a $1.7 million gain, and other idle properties in Indiana,
Virginia, Texas and Florida resulting in a $5.2 million gain. Assets are
continually analyzed and every effort is made to sell or dispose of properties
that are determined to be excess or unproductive.





OPERATING
LOSS





Operating
loss from continuing operations in 2007 of $39.1 million increased $23.4 million
compared with the operating loss of $15.7 million in 2006. This increase is the
result of the $7.5 million decrease in gross profit combined with a $4.4 million
increase in operating expenses, a goodwill impairment charge of $3.8 million and
a decrease in gain on sale of assets of $7.7 million.





INTEREST
EXPENSE





Interest
expense from continuing operations for 2007 and 2006 was $3.5 million and $3.8
million, respectively. Interest expense decreased due to the lower amount of
average outstanding balances of short-term borrowings incurred by the Company
combined with lower applicable interest rates. During 2007, the Company
continued to borrow from its line of credit ($20.1 million outstanding at
December 31, 2007) and continued to borrow against the cash surrender value of
its investment in life insurance contracts ($17.6 million outstanding at
December 31, 2007).





INVESTMENT
INCOME





Investment
income from continuing operations for 2007 and 2006 was $1.5 million and $1.6
million, respectively. Investment income is principally attributable to earnings
of the life insurance policies held (see Note
1 of Notes to Consolidated Financial Statements).


- 26
-


PRE-TAX
LOSS





Pre-tax
loss from continuing operations for 2007 was $40.5 million compared with a
pre-tax loss from continuing operations of $16.7 million for 2006. The Company's
RV Segment generated pre-tax loss from continuing operations of $33.9
million, or 9.4% of recreational vehicle net sales in 2007, compared with a
pre-tax loss from continuing operations of $25.4 million, or 6.3% of the RV
Segment's net sales in 2006. The Housing Segment recorded 2007 pre-tax
loss from continuing operations of $7.4 million or 6.2% of segment net
sales compared with pre-tax income from continuing operations of $2.7 million,
or 1.7% of segment net sales in 2006 (see Note
2 of Notes to Consolidated Financial Statements).





INCOME
TAXES





The
provision for income taxes related to continuing operations was a credit of $1.8
million for 2007 versus an expense of $16.5 million for 2006. Given the losses
incurred by the Company over the last two years, a non-cash charge from
continuing operations of $13.3 million and $24.4 million was recorded to
establish a valuation allowance for the full value of its deferred tax assets as
of December 31, 2007 and December 31, 2006, respectively (see Note 10 of Notes to Consolidated Financial
Statements).





DISCONTINUED
OPERATIONS





On
December 31, 2005, the Company sold all operating assets of the All American
Homes Kansas division. In accordance with Statement of Financial Accounting
Standard No. 144, the division qualified as a separate component of the
Company’s business and as a result, the operating results of the division have
been accounted for as a discontinued operation. Previously reported financial
results for all periods presented have been restated to reflect this business as
a discontinued operation. Net sales of the Kansas division for the years ended
December 31, 2006 and 2005 were $0.0 million and $9.7 million, respectively, and
the pre-tax losses for the years ended December 31, 2006 and 2005 were
$(0.4) million and $(2.9) million, respectively.





On
January 13, 2006, the Company sold all operating assets of Prodesign, LLC. The
total sales price was $8.2 million, of which the Company received $5.7 million
in cash, a $2.0 million promissory note and $0.5 million to be held in escrow to
cover potential warranty claims and uncollectible accounts receivable, as
defined in the sale agreement. The promissory note is to be repaid over a period
of 10 years, using an amortization period of 15 years, and bears interest at 6%
per annum with interest only payments being required in the first three years.
The funds remaining in the escrow account of $0.4 million reverted to the
Company in February 2007 per the sales agreement. In accordance with Statement
of Financial Accounting Standard No. 144, Prodesign qualified as a separate
component of the Company’s business and as a result, the operating results of
Prodesign have been accounted for as a discontinued operation. Previously
reported financial results for all periods presented have been adjusted to
reflect this business as a discontinued operation. In conjunction with the
classification of Prodesign as a discontinued operation, management allocated
goodwill of $0.3 million to the discontinued operations from the RV Segment
goodwill based on the relative fair value of the discontinued operations to the
RV Segment. The $0.3 million of allocated goodwill has been included in the
calculation of the final gain on sale of assets in the first quarter of 2006.
Net sales of Prodesign for the years ended December 31, 2006 and 2005 were $0.4
million and $14.2 million, respectively, and the pre-tax income (loss) for the
years ended December 31, 2006 and 2005 were $2.0 million and $(0.7) million,
respectively.





On March
31, 2006, the Company sold 100% of its interest in the capital stock of Miller
Building Systems, Inc. for $11.5 million, consisting of cash of $9.0 million and
a $2.5 million secured note. The note, which is included in other long-term
assets on the Consolidated Balance Sheet, is to be repaid over 5 years and bears
interest at the 1 year LIBOR rate plus 2.75% per annum with quarterly interest
payments beginning September 30, 2006. Principal payments of $125,000 per
quarter commence on June 30, 2009 and continue through the maturity date of
March 31, 2011. In addition, the Company accepted a $2.0 million contingent
earn-out note. In October 2007, a subsequent agreement with Miller Building
Systems waived the interest on the secured $2.5 million note for two years;
hence no interest will be earned from March 31, 2007 to March 31, 2009. The
subsequent agreement with Miller Building Systems also canceled the $2.0 million
contingent earn-out note. There is no financial impact as a result of this
cancellation. In accordance with Statement of Financial Accounting Standard No.
144, the division qualified as a separate component of the Company’s business
and as a result, the operating results of the division have been accounted for
as a discontinued operation. Previously reported financial results for all
periods presented have been restated to reflect this business as a discontinued
operation. Net sales of Miller Building Systems, Inc. for the years ended
December 31, 2006 and 2005 were $7.5 million and $41.6 million, respectively,
and the pre-tax income (loss) for the years ended December 31, 2006 and 2005
were $1.5 million and $(8.2) million, respectively. In connection with this
sale, $1.7 million of industrial revenue bonds were paid off as of March 31,
2006. During April 2006, the Company terminated the $1.5 million and $235,000
interest rate swaps that had been associated with these revenue
bonds.





NET
LOSS





Net loss
from continuing operations for the year ended December 31, 2007 was $38.8
million (a loss of $2.46 per diluted share) compared to net loss from continuing
operations for the year ended December 31, 2006 of $33.2 million (a loss of
$2.12 per diluted shared). Net loss for the year ended December 31, 2007
was $38.8 million (a loss of $2.46 per diluted share) compared to net loss of
$31.8 million (loss of $2.03 per diluted share) for 2006.


- 27
-


Comparison
of 2006 to 2005





NET
SALES





Consolidated
net sales from continuing operations decreased $138.0 million or 19.7% to $564.4
million in 2006 from $702.4 million in 2005. The Company's RV Segment
experienced a net sales decrease from continuing operations of $117.4 million,
or 22.5%, from 2005. Throughout 2006, as in 2005, the RV Segment worked through
an industry slowdown in retail activity and higher dealer inventories, in part
related to falling consumer confidence and significantly higher fuel costs and
interest rates. Full-year recreational vehicle wholesale unit shipments for the
Company were down 21.9% compared to 2005, while the industry was up 1.6%.
For the full year, the Company’s wholesale market share declined from 4.9% to
3.8% across all product types. The Company’s retail market share for the same
period declined from 4.9% to 3.7% across all product types. Detailed market
share data for 2006 and 2005 for each product type are set forth in the
following table:







Wholesale
      Share
            
            
            Retail
      Share2006
            
            
            2005
            
            
            2006
            
            
            2005Class
      A Motorhomes
            
            
            5.6
            %
            
            7.6
            %
            
            6.5
            %
            
            7.9
            %Gasoline
            
            
            n/a
            
            
            n/a
            
            
            8.4
            
            
            10.2Diesel
            
            
            n/a
            
            
            n/a
            
            
            4.7
            
            
            5.5Class
      C Motorhomes
            
            
            9.5
            
            
            9.3
            
            
            10.6
            
            
            12.5Travel
      Trailers
            
            
            3.0
            
            
            4.4
            
            
            2.7
            
            
            4.0Fifth
      Wheels
            
            
            1.7
            
            
            1.7
            
            
            1.8
            
            
            2.1Camping
      Trailers
            
            
            8.6
            
            
            10.0
            
            
            8.1
            
            
            9.9Total
            
            
            3.8
            %
            
            4.9
            %
            
            3.7
            %
            
            4.9
            %n/a
      - not availableWholesale
      share based on wholesale unit shipment data as reported by the
      Recreational Vehicle Industry Association.Retail
      share based on data provided by Statistical Surveys,
      Inc.




The
decrease in wholesale Class A market share is partially attributable to an
overall slowdown in the Class A market, which declined 13.7% in 2006 following a
decline of 18.1% in 2005, as well as, being attributable to the sidewall
warranty issue that has damaged our reputation among RV dealers and consumers.
While industry shipments of Class C motorhomes declined 3.3%, the Company’s
Class C shipments declined 1.2%. The non-motorized side of the industry has been
very challenging of late as wholesale shipments of travel trailers have declined
year over year in excess of 30% for each of the last three months. Even though
industry travel trailer shipments were up 3.6% in 2006, comparisons are
difficult with the heavy 2005 shipments of FEMA-related units both by Coachmen
and within the industry as a whole. Camping trailers saw an increase in
industry shipments of 3.7%, while the Company experienced a decline in wholesale
shipments of approximately 11.8% during 2006, as issues surrounding the recall
of the Company’s products due to the lift mechanism employed in the product
negatively impacted sales. RV backlogs the end of 2006 decreased to 1,628 units
from 3,964 in 2005, primarily due to late 2005 hurricane relief related travel
trailer orders. Total travel trailer backlog declined from 2,857 units at
the end of 2005 to 607 units at the end of 2006.





The
Housing Segment had a net sales decrease from continuing operations in 2006
of $20.5 million, or 11.4%. Wholesale unit shipments declined 15.4%
compared with the prior year and backlogs at December 31, 2006 decreased to
$33.2 million, compared with $45.4 million at December 31, 2005. The Segment’s
results were impacted by continuing weakness in its core Midwest housing market,
which has spread into the Southeast and Middle Atlantic regions. The most recent
statistics on new home sales from the U.S. Census Bureau showed a 2.9% decline
in year over year comparison in the Midwest region, and an 8.9% decline in the
South. This is consistent with the challenges faced at the All American Homes
operations in Ohio, Indiana and Iowa through much of 2005 and throughout 2006,
and the 2006 challenges faced by the Company’s operations in North Carolina and
Virginia. For 2006, the Housing Segment experienced an 11.9% increase in
the average sales price per unit largely due to a shift in product mix, which
partially offset the decline in unit sales. Historically, the Company's
first and fourth quarters are the slowest for sales in both
segments.


- 28
-


GROSS
PROFIT





Gross
profit from continuing operations was $20.2 million, or 3.6% of net sales,
in 2006 compared to $23.2 million, or 3.3% of net sales, in 2005. For the RV
Segment, gross profit in dollars declined in 2006 as a result
of decreased sales and corresponding production volume decrease, resulting
in lower utilization of the Company's manufacturing facilities. For the Housing
Segment, gross profit in dollars declined due to the 11.4% decrease in sales
combined with higher insurance and workers compensation. Gross profit as a
percentage of sales increased due to expense reductions and operating
efficiencies, partially through the consolidation of a number of operations.
Margins were also squeezed by increases in commodity prices that were unusual in
terms of size and number of commodities affected in 2006.





OPERATING
EXPENSES





Operating
expenses for continuing operations, consisting of selling, general and
administrative expenses, were $44.5 million and $59.1 million, or as a
percentage of net sales, 7.9% for 2006 and 8.4% for 2005. Selling expenses for
2006 were $23.2 million, or 4.1% of net sales, a 0.1 percentage point
increase from the $28.3 million, or 4.0% of net sales, experienced in 2005. The
$5.1 million decrease in selling expense was primarily the result of reductions
in payroll related expenses and reductions in sales promotions expenses. General
and administrative expenses were $21.3 million in 2006, or 3.8% of net sales,
compared with $30.8 million, or 4.4% of net sales, in 2005. The decrease of
$9.5 million in general and administrative expenses was primarily related
to reductions in professional services and litigation settlements expense of
$6.3 million, plus reductions in payroll related expenses, insurance expenses
and property tax expenses. The litigation expense reduction largely resulted
from insurance settlements recovered of approximately $3.6 million.





GAIN
ON THE SALE OF ASSETS, NET





In 2006,
the Company had gains on the sale of assets of $8.7 million, compared to gains
on the sale of assets of $0.2 million in 2005. Gains on the sale of assets in
2006 resulted from the Company’s restructuring plan and resulting asset sales
including the former All American Homes facility in Tennessee resulting in a
$1.1 million gain, property from the former Georgie Boy Manufacturing facilities
resulting in a $0.7 million gain, the Company’s aircraft resulting in a $1.7
million gain, and other idle properties in Indiana, Virginia, Texas and Florida
resulting in a $5.2 million gain. Assets are continually analyzed and every
effort is made to sell or dispose of properties that are determined to be excess
or unproductive.





OPERATING
LOSS





Operating
loss from continuing operations in 2006 of $15.7 million decreased $21.1 million
compared with the operating loss of $36.8 million in 2005. This decrease is the
result of the $6.5 million decrease in gross profit offset by a significant
decrease in operating expenses of $18.1 million, a decrease of $1.1 million in
asset impairments and an increase in gain on sale of assets of $8.5
million.





INTEREST
EXPENSE





Interest
expense from continuing operations for 2006 and 2005 was $3.8 million and $3.2
million, respectively. Interest expense increased due to the higher amount of
average outstanding balances of short-term borrowings incurred by the Company
combined with higher applicable interest rates. During 2006, the Company
continued to borrow from its line of credit ($9.3 million outstanding at
December 31, 2006) and continued to borrow against the cash surrender value of
its investment in life insurance contracts ($15 million outstanding throughout
2006 and at December 31, 2006).





INVESTMENT
INCOME





Investment
income from continuing operations for 2006 and 2005 was $1.6 million and $2.2
million, respectively. Investment income is principally attributable to earnings
of the life insurance policies held and in 2005 also included realized gains on
the sale of preferred stock. (see Note
1 of Notes to Consolidated Financial Statements).





PRE-TAX
LOSS





Pre-tax
loss from continuing operations for 2006 was $16.7 million compared with a
pre-tax loss from continuing operations of $37.4 million for 2005. The Company's
RV Segment generated pre-tax loss from continuing operations of $25.4
million, or 6.3% of recreational vehicle net sales in 2006, compared with a
pre-tax loss from continuing operations of $40.8 million, or 7.8% of the RV
Segment's net sales in 2005. The Housing Segment recorded 2006 pre-tax
income from continuing operations of $2.7 million or 1.7% of segment net
sales compared with a pre-tax loss from continuing operations of $2.4 million,
or 1.3% of segment net sales (see Note
2 of Notes to Consolidated Financial Statements).


- 29
-


INCOME
TAXES





The
provision for income taxes related to continuing operations was an expense of
$16.5 million for 2006 versus a benefit of $18.0 million for 2005. Given the
losses incurred by the Company over the last two years, a non-cash charge from
continuing operations of $24.4 million was recorded to establish a valuation
allowance for the full value of its deferred tax assets as of December 31, 2006
(see Note 10 of Notes to Consolidated Financial
Statements).





DISCONTINUED
OPERATIONS





On
December 31, 2005, the Company sold all operating assets of the All American
Homes Kansas division. In accordance with Statement of Financial Accounting
Standard No. 144, the division qualified as a separate component of the
Company’s business and as a result, the operating results of the division have
been accounted for as a discontinued operation. Previously reported financial
results for all periods presented have been restated to reflect this business as
a discontinued operation. Net sales of the Kansas division for the years ended
December 31, 2006 and 2005 were $0.0 million and $9.7 million, respectively, and
the pre-tax income (loss) for the years ended December 31, 2006 and 2005 were
$(0.4) million and $(2.9) million, respectively.




On
January 13, 2006, the Company sold all operating assets of Prodesign, LLC. The
total sales price was $8.2 million, of which the Company received $5.7 million
in cash, a $2.0 million promissory note and $0.5 million to be held in escrow to
cover potential warranty claims and uncollectible accounts receivable, as
defined in the sale agreement. The promissory note is to be repaid over a period
of 10 years, using an amortization period of 15 years, and bears interest at 6%
per annum with interest only payments being required in the first three years.
Any funds remaining in the escrow account after a period of 13 months will
revert to the Company. In accordance with Statement of Financial Accounting
Standard No. 144, Prodesign qualified as a separate component of the Company’s
business and as a result, the operating results of Prodesign have been accounted
for as a discontinued operation. Previously reported financial results for all
periods presented have been restated to reflect this business as a discontinued
operation. In conjunction with the classification of Prodesign as a discontinued
operation, management allocated goodwill of $0.3 million to the discontinued
operations from the RV Segment goodwill based on the relative fair value of the
discontinued operations to the RV Segment. The $0.3 million of allocated
goodwill has been included in the calculation of the final gain on sale of
assets in the first quarter of 2006. Net sales of Prodesign for the years ended
December 31, 2006 and 2005 were $0.4 million and $14.2 million, respectively,
and the pre-tax income (loss) for the years ended December 31, 2006 and 2005
were $2.0 million and $(0.7) million, respectively.





On March
31, 2006, the Company sold 100% of its interest in the capital stock of Miller
Building Systems, Inc. for $11.5 million, consisting of cash of $9.0 million and
a $2.5 million secured note. The note, which is included in other long-term
assets on the Consolidated Balance Sheet, is to be repaid over 5 years and bears
interest at the 1 year LIBOR rate plus 2.75% per annum with quarterly interest
payments beginning September 30, 2006. Principal payments of $125,000 per
quarter commence on June 30, 2009 and continue through the maturity date of
March 31, 2011. In addition, the Company accepted a $2.0 million contingent
earn-out note. In accordance with Statement of Financial Accounting Standard No.
144, the division qualified as a separate component of the Company’s business
and as a result, the operating results of the division have been accounted for
as a discontinued operation. Previously reported financial results for all
periods presented have been restated to reflect this business as a discontinued
operation. Net sales of Miller Building Systems, Inc. for the years ended
December 31, 2006 and 2005 were $7.5 million and $41.6 million, respectively,
and the pre-tax income (loss) for the years ended December 31, 2006 and 2005
were $1.5 million and $(8.2) million, respectively. In connection with the sale
of Miller Building Systems, $1.7 million of industrial revenue bonds were paid
off as of March 31, 2006. During April 2006, the Company terminated the $1.5
million and $235,000 interest rate swaps that had been associated with these
revenue bonds.





NET
LOSS





Net loss
from continuing operations for the year ended December 31, 2006 was $33.2
million (a loss of $2.12 per diluted share) compared to net loss from continuing
operations for the year ended December 31, 2005 of $19.4 million (a loss of
$1.24 per diluted shared). Net loss for the year ended December 31, 2006
was $31.8 million (a loss of $2.03 per diluted share) compared to net loss of
$26.4 million (loss of $1.69 per diluted share) for 2005.


- 30
-


Liquidity
and Capital Resources





The
Company generally relies on funds from operations as its primary source of
working capital and liquidity. In addition, the Company maintains a $55.0
million line of credit to meet its seasonal working capital needs that expires
in 2011 (see Note 5 of Notes to Consolidated Financial Statements).
At December 31, 2007, 2006 and 2005 there were $20.1 million, $9.3 million and
$12.3 million in outstanding borrowings, respectively. At December 31, 2007, the
Company has $26.1 million available for borrowing under the unsecured line of
credit. The Company also borrowed against the cash surrender value of the
Company's investment in life insurance contracts. As of December 31, 2007, 2006
and 2005, $17.6 million, $16.4 million and $15.0 million, respectively, had been
borrowed against the cash surrender value of Company-owned life insurance
contracts. The Company has paid the premiums on these contracts in 2007 and 2006
with borrowings against the cash surrender value of the contracts, resulting in
the increase in borrowings of $1.2 million at December 31, 2007 compared to
December 31, 2006 and an increase of $1.4 million at December 31, 2006 compared
to December 31, 2005. As of December 31, 2007, the cash surrender value of life
insurance is approximately $51.5 million, with $17.6 million borrowed, resulting
in a cash surrender value net of loans of $33.9 million.





During
2007 operations used cash of $6.8 million as reductions in accounts receivable
and refundable income taxes were offset by the net loss. Accounts receivable
decreased as a result of lower sales in 2007, and several refundable income tax
payments were received in early 2007. During 2006 operations used cash of $5.0
million as significant reductions in inventory and accounts receivable were
offset by the net loss, reduction in accounts payable, and a reduction in
accrued expenses. The 2006 decreases in accounts receivable and inventories
resulted from management’s continued focus on effectively managing these assets.
The 2006 reduction in accounts payable resulted from reduced production and
inventory levels and the reduced accrued expenses was largely due to warranty
repairs made during 2006. During 2005, operations generated cash of $7.6 million
as the net loss and increases in accrued expenses, deferred tax assets and
refundable taxes were offset by decreases in accounts receivable and inventories
and losses on sales of assets. The decreases in accounts receivable and
inventories were a result of management’s focus on the reduction of these
assets.





Investing
activities used cash of $3.2 million in 2007, provided cash of $20.4 million in
2006, and used cash of $4.4 million in 2005. In 2007, premiums on life insurance
policies of $1.7 million and purchases of property and equipment of $3.6 million
were partially offset by proceeds from sales of assets and properties of $1.8
million. In 2006, proceeds from sales of assets and properties of $28.1 million
offset purchases of property and equipment of $4.6 million and premiums on life
insurance policies of $2.6 million. In 2005, cash of $5.7 million was used to
acquire machinery and equipment for both operating segments while cash of $1.8
million was generated from the sale of assets. Purchases of investments, net of
sales, used cash flows of $0.6 million.





In 2007,
financing activities provided cash flows of $8.9 million. Proceeds from
borrowings on the line of credit offset payments on long-term debt, providing
cash of $9.7 million. Additionally, $0.9 million in dividends were paid in 2007.
In 2006, financing activities used cash flows of $15.5 million. Payments on
borrowings on the line of credit, and the long-term debt, net of borrowings,
used cash of $13.4 million. Additionally, $2.8 million in dividends were paid in
2006. In 2005, financing activities used cash flows of $15.4 million. Payments
on borrowings on the line of credit, including a short-term loan from 2004, and
the long-term debt, net of borrowings, used cash of $12.4 million. In addition,
dividends of $3.8 million were paid in 2005. For a more detailed analysis of the
Company's cash flows for each of the last three years, see the Consolidated Statements of Cash
Flows.





The
Company's cash and cash equivalents at December 31, 2007 were $1.5 million or a
decrease of $1.1 million from 2006. At December 31, 2007, the Company has $26.1
million available for borrowing under the unsecured line of credit. The Company
has another source of cash through the cash surrender value of life insurance
policies. As of December 31, 2007, the cash surrender value of life insurance is
approximately $51.5 million, with $17.6 million borrowed, resulting in a cash
surrender value net of loans of $33.9 million. The Company can borrow an
additional maximum amount of $31.3 million against the net cash surrender value
at December 31, 2007. The Company anticipates that available funds, together
with anticipated cash flows generated from future operations and amounts
available under its existing credit facility, will be sufficient to fund future
planned capital expenditures and other operating cash requirements through the
end of 2008.





Any
downturn in the U.S. economy, decline in consumer confidence and other factors
may adversely impact the RV and housing industries. This may have a negative
impact on the Company's sales and also increases the Company's risk of loss
under repurchase agreements with lenders to the Company's independent dealers
and builders (see Note 12 of Notes to Consolidated Financial
Statements). Increases in interest rates could also adversely affect the sale of
RV's and of single-family homes.





In 2007,
working capital decreased $37.5 million, to $25.3 million from $62.8 million.
The $30.3 million decrease in current assets at December 31, 2007 versus
December 31, 2006 was primarily due to decreases in trade receivables, and
refundable income taxes. Current liabilities at December 31, 2007 were $7.2
million higher than at December 31, 2006, primarily due to the increase in
short-term borrowings.





The
Company anticipates capital expenditures in 2008 of approximately $4.0 million.
The planned capital expenditures for 2008 will be for purchase or replacement of
machinery and equipment and transportation equipment to be used in the ordinary
course of business. The Company plans to finance these expenditures with funds
generated from operating cash flows.


- 31
-


Principal
Contractual Obligations and Commercial Commitments





The
Company's future contractual obligations are summarized as follows (in
thousands):




Payment Period2008
            
            2009
            
            2010
            
            2011
            
            2012
            
            Thereafter
            
            TotalCredit
      facility borrowings (1)
            $
            20,072.9
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            20,072.9Long-term
      debt
            
            852.2
            
            
            819.4
            
            
            819.9
            
            
            770.4
            
            
            150.0
            
            
            450.0
            
            
            3,861.9Floorplan
      note payable
            
            4,116.0
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            4,116.0Operating
      leases
            
            1,309.9
            
            
            1,086.0
            
            
            978.6
            
            
            747.9
            
            
            222.5
            
            
            -
            
            
            4,344.9Deferred
      compensation obligations
            
            889.6
            
            
            406.0
            
            
            659.1
            
            
            460.9
            
            
            482.4
            
            
            5,624.3
            
            
            8,522.3Open
      purchase orders and purchase obligations
            
            14,895.8
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            14,895.8Interest
      payments on long-term debt
            
            128.1
            
            
            96.4
            
            
            65.5
            
            
            35.9
            
            
            19.1
            
            
            24.5
            
            
            369.5Total
            $
            42,264.5
            
            $
            2,407.8
            
            $
            2,523.1
            
            $
            2,015.1
            
            $
            874.0
            
            $
            6,098.8
            
            $
            56,183.3


(1)
            Credit
      facility expires in 2011





Notes:


-
      Projected interest payments for variable-rate debt were calculated based
      on the outstanding principal amounts and prevailing market rates as of
      December 31, 2007.


-
      The open purchase orders and purchase obligations displayed in the table
      represent amounts the Company anticipates will become payable within the
      next year for goods and services it has negotiated for
      delivery.





The
Company's commercial commitments, along with the expected expiration period of
the commitment, are summarized as follows (in thousands):




Total
      Amounts
            
            Amount
      of Commitment
            
            Expiration
      Per PeriodCommitted
            
            Less
      Than One Year
            
            In
      Excess of One YearLetters
      of credit
            
            $
            4,745.4
            
            $
            4,745.4
            
            $
            -Guarantees
            
            
            3,978.9
            
            
            3,584.8
            
            
            394.1Standby
      repurchase obligations
            
            
            190,535.7
            
            
            175,985.0
            
            
            14,550.7Chassis
      pool obligations
            
            
            14,492.4
            
            
            14,492.4
            
            
            -Total
            
            $
            213,752.4
            
            $
            198,807.6
            
            $
            14,944.8





Critical
Accounting Policies and Estimates





The
following discussion of accounting policies is intended to supplement the
summary of significant accounting policies presented in Note
1 of Notes to Consolidated Financial Statements. These policies were
selected because they are broadly applicable within our operating units and they
involve additional management judgment due to the sensitivity of the methods,
assumptions and estimates necessary in determining the related income statement,
asset and/or liability amounts.




Long-Lived Assets -Long-lived assets held and used by the Company, including property, plant
and equipment and intangible assets are reviewed for impairment whenever events
or circumstances indicate that the carrying amount of an asset may not be
recoverable (see Note 11 of Notes to Consolidated Financial Statements
for asset impairments recorded in 2007 and 2005, including impairments of
intangible assets).




Goodwill
represents the excess of the purchase price over the fair value of net tangible
and identifiable intangible assets of acquired businesses. Goodwill assets
deemed to have indefinite lives are not amortized, but are subject to impairment
tests at least annually in accordance with SFAS No. 142, Goodwill and
Other Intangible
Assets. The Company reviews the carrying amounts of goodwill assets
annually by segment to determine if such assets may be impaired. If the carrying
amounts of these assets are not recoverable based upon a discounted cash flow
analysis, such assets are reduced by the estimated shortfall of fair value to
recorded value. SFAS No. 142 required the Company to perform an interim goodwill
impairment evaluation during the quarter ended June 30, 2007. Because the
carrying value of the RV reporting unit exceeded its fair value as calculated
using the expected present value of future cash flows, the Company concluded
that the goodwill was impaired as of June 30, 2007. Accordingly, the
Company recorded a non-cash goodwill impairment charge of $3.9 million in the
quarter ended June 30, 2007. The Company has performed the required annual
impairment tests and has determined that there was no impairment indicated for
the remaining Housing reporting unit goodwill at December 31, 2007. Our
estimates of fair value of the Housing reporting unit could change as a result
of our actual cash flows differing from our forecasted cash flows, which were
used in our estimate of fair value. Further, a variance in the discount rate
used could have an impact on the amount of goodwill impairment
recorded.


- 32
-


Revenue Recognition - For the
RV Segment, the shipping terms are free on board ("FOB") shipping point and
title and risk of ownership are transferred to the independent dealers at that
time. Accordingly, sales are recognized as revenue at the time the products are
shipped. For the Housing Segment, the shipping terms are either FOB shipping
point or FOB destination. For traditional home sales, shipping terms are
generally FOB destination and title and risk of ownership are generally
transferred when the Company completes installation of the product. For
traditional homes FOB destination shipping terms, the Company generally
recognizes the revenue at the time delivery and installation are completed.
Revenue from final set-up procedures, which are perfunctory, is deferred and
recognized when such set-up procedures are completed. Major projects shipping
terms are usually detailed in the contract, and title and risk of ownership are
transferred per the contract. In the case of these major projects, the Company
recognizes the revenue when title and risk of ownership are transferred
according to the terms of the contract.





Warranty Reserves - The
Company provides customers of its products with a warranty covering defects in
material or workmanship for periods generally ranging from one to two years in
length and up to ten years on certain structural components. The Company records
a liability based on its estimate of the amounts necessary to settle future and
existing claims on products sold as of the balance sheet date. Estimated costs
related to product warranty are accrued at the time of sale and included in cost
of sales. General warranty reserves are estimated based upon past warranty
claims and unit sales history and adjusted as required to reflect actual costs
incurred, as information becomes available. Specific warranty reserves are based
on specific identified issues with the amounts accrued based on the estimated
cost to correct the problem. While the Company believes this method to be
consistent and appropriate, changes in estimates could materially affect the
Company’s recorded liability for loss. Warranty expense from continuing
operations totaled $16.8 million, $21.6 million and $34.8 million in 2007, 2006
and 2005, respectively. Accrued liabilities for warranty expense at December 31,
2007 and 2006 were $8.1 million and $11.1 million, respectively.





The
decrease in warranty accrual for 2007 of $3.0 million to $8.1 million is the
result of specific reserves established in 2005 related to the recall of
defective camping trailer lift systems and the repair of defective material used
in laminated sidewalls of certain of the Company’s recreational vehicles, lower
sales levels and improvements in quality. Most of the claims against these
specific reserves were paid by the Company in 2006 and in the first quarter of
2007.




Litigation and Insurance Reserves
- At December 31, 2007 the Company had reserves for certain other loss
exposures, such as product liability, workers compensation and group health
insurance ($8.5 million) and litigation ($0.9 million) (see Note
12 of Notes to Consolidated Financial Statements). The Company's
litigation reserve is determined based on an individual case evaluation process.
The Company is self-insured for a portion of its product liability, workers
compensation and group health insurance and certain other liability exposures.
Depending on the nature of the claim and the date of occurrence, the Company's
maximum exposure ranges from $250,000 to $500,000 per claim. The Company accrues
an estimated liability based on historical losses, insurance coverage and the
amount of outstanding claims. Management believes the liability recorded
(see Note 7 of Notes to Consolidated Financial
Statements) is adequate to cover the Company's self-insured risk. The
Company's estimated loss reserves for product liability, workers compensation
and group health insurance are determined using loss triangles established by
the Company's management reflecting historical claims incurred by the Company.
While the Company believes this method to be consistent and appropriate, changes
in estimates based on historical trends could materially affect the Company's
recorded liabilities for loss.





Income Taxes - The Company
recognizes income tax expense in accordance with SFAS No. 109, Accounting for Income Taxes.
Deferred tax assets and liabilities are established for the expected future tax
consequences of events that have been included in the financial statements or
tax returns using enacted tax rates in effect for the years in which the
differences are expected to reverse and are subject to ongoing assessment of
realizability. Deferred income tax expense (benefit) represents the change in
net deferred tax assets and liabilities during the year. Deferred tax assets may
be recognized for temporary differences that will result in deductible amounts
in future periods and for loss carry forwards. A valuation allowance is
recognized if, based on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax asset will not be realized.
Primarily due to the Company’s losses from continuing operations over the last
three years, noncash charges from continuing operations of $13.3 million and
$24.4 million were recorded as a valuation allowance for the full value of its
deferred tax assets as of December 31, 2007 and 2006, respectively. Depending on
future operating results it is possible the valuation allowance could be
reversed which would increase deferred tax assets and the Company’s income tax
benefit.





On
January 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48 (“FIN 48”), Accounting for
Uncertainty in Income Taxes. The implementation of FIN 48 did not have a
significant impact on the Company’s financial position or results of
operations.





New
and Pending Accounting Policies





(See
New Accounting Pronouncements
in Note 1 of Notes to Consolidated Financial
Statements.)


- 33
-


Forward-Looking
Statements





This Form
10-K Report contains certain statements that are "forward-looking" statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, as amended. These forward-looking
statements are based on management’s expectations and beliefs concerning future
events. Forward-looking statements are subject to risks and uncertainties, and
are dependent on various factors, many of which are outside the control of the
Company. These uncertainties and other factors include, but are not limited
to:





•
            the
      ability of the management team to achieve desired
  results;•
            interest
      rates, which affect the affordability of the Company's
      products;•
            consumer
      confidence and the availability of credit;•
            the
      Company’s ability to utilize manufacturing resources
      efficiently;•
            the
      Company’s ability to introduce new models that achieve consumer
      acceptance;•
            the
      margins associated with the mix of products the Company sells in a
      particular period;•
            the
      availability of floorplan financing for the Company's recreational vehicle
      dealers and corresponding availability of cash to the
    Company;•
            oil
      supplies and the availability and price of gasoline and diesel fuel, which
      can impact the sale of recreational vehicles;•
            the
      Company's dependence on chassis and other suppliers;•
            potential
      liabilities under repurchase agreements and guarantees;•
            consolidation
      of distribution channels in the recreational vehicle
    industry;•
            legislation
      governing the relationships of the Company with its recreational vehicle
      dealers, which may affect the Company’s options and liabilities in the
      event of a general economic downturn;•
            the
      price volatility of materials used in production and the ability to pass
      on rapidly increasing costs of product components and raw materials to end
      buyers;•
            the
      availability and cost of real estate for residential
    housing;•
            the
      increased size and scope of work of military housing projects, and other
      major projects, as compared to the Company's traditional single-family
      homes business, with increased reliance on third parties for performance
      which could impact the Company;•
            the
      ability to perform in new market segments or geographic areas where it has
      limited experience;•
            the
      impact of performance on the valuation of intangible
    assets;•
            the
      supply of existing homes within the Company’s markets;•
            the
      impact of home values on housing demand;•
            uncertainties
      and timing with respect to sales resulting from recovery efforts in the
      Gulf Coast;•
            adverse
      weather conditions affecting home deliveries;•
            changing
      government regulations, including those covering accounting
      standards;•
            environmental
      matters or product warranties and recalls, which may affect costs of
      operations, revenues, product acceptance and
  profitability;•
            the
      state of the recreational vehicle and housing industries in the United
      States;•
            changes
      in property taxes and energy costs;•
            changes
      in federal income tax laws and federal mortgage financing
      programs;•
            competition
      in the industries in which the Company operates;•
            further
      developments in the war on terrorism and related international
      crises;•
            uncertainties
      of matters in litigation and other risks and
  uncertainties;•
            the
      ability of the Company to generate taxable income in future years to
      utilize deferred tax assets and net operating loss carryforwards that are
      available;•
            the
      availability of financing under the Company’s line of
    credit;•
            the
      Company’s ability to increase gross margins which are critical whether or
      not there are increased sales;•
            the
      Company’s use of incentives at either the wholesale or retail
      level;•
            the
      impact of sub-prime lending on the availability of credit for the broader
      housing market;•
            the
      dependence on key customers within certain product
  types;•
            the
      potential fluctuation in the Company’s operating
  results;•
            uncertainties
      regarding the impact of the disclosed restructuring steps in both the
      Recreational Vehicle and Housing
Segments.




In
addition, investors should be aware that generally accepted accounting
principles prescribe when a company must disclose or reserve for particular
risks, including litigation exposures. Accordingly, results for a given
reporting period could be significantly affected if and when a reserve is
established for a major contingency. Reported results may therefore appear to be
volatile in certain accounting periods. The foregoing lists are not exhaustive,
and the Company disclaims any obligation to subsequently revise any
forward-looking statements to reflect events or circumstances after the date of
such statements.


- 34
-


At times,
the Company's actual performance differs materially from its projections and
estimates regarding the economy, the recreational vehicle and building
industries and other key performance indicators. Readers of this Report are
cautioned that reliance on any forward-looking statements involves risks and
uncertainties. Although the Company believes that the assumptions on which the
forward-looking statements contained herein are reasonable, any of those
assumptions could prove to be inaccurate given the inherent uncertainties as to
the occurrence or nonoccurrence of future events. There can be no assurance that
the forward-looking statements contained in this Report will prove to be
accurate. The inclusion of a forward-looking statement herein should not be
regarded as a representation by the Company that the Company's objectives will
be achieved.





Item
      7A.
            Quantitative
      and Qualitative Disclosures about Market
Risk




In the
normal course of business, operations of the Company are exposed to fluctuations
in interest rates. These fluctuations can vary the costs of financing and
investing yields. Accordingly, changes in interest rates would impact both the
Company's short and long-term debt. During 2007, 2006 and 2005, the Company has
utilized its revolving credit facility to meet short-term working capital
needs. The Company had $20.1 million outstanding against the revolving
credit facility on December 31, 2007. The Company had $9.3 million outstanding
against the revolving credit facility on December 31, 2006 and $12.3 million
outstanding against the revolving credit facility on December 31, 2005. At
December 31, 2007, the Company had $3.9 million of long-term debt, including
current maturities. Long-term debt consists mainly of industrial development
revenue bonds of approximately $3.6 million.




Based
upon the amount of variable-rate debt outstanding at the end of the year, and
holding the variable-rate debt balance constant, each one percentage point
increase in interest rates occurring on the first day of an annual period would
result in an increase in interest expense of approximately $0.4
million.





At
December 31, 2007, the Company had one interest rate swap agreement with a
notional amount of $2.4 million that was used to convert the variable interest
rates on an industrial development revenue bond to a fixed rate. In
accordance with the terms of the swap agreement, the Company pays a 3.71%
interest rate, and receives the Bond Market Association Index (BMA), calculated
on the notional amount, with net receipts or payments being recognized as
adjustments to interest expense. This swap agreement, along with those
terminated in 2006 and 2005, is designated as a cash flow hedge for accounting
purposes and effectively converts a portion of the Company's variable-rate
borrowing to a fixed-rate basis through November of 2011, thus reducing the
impact of changes in interest rates on future interest expense. The fair value
of the Company's interest rate swap agreement represents the estimated receipts
or payments that would be made to terminate the agreements. A cumulative loss of
$39,000, net of taxes, attributable to changes in the fair value of interest
rate swap agreements was recorded as a component of accumulated other
comprehensive income (loss) for the year ended December 31, 2007. If in the
future the interest rate swap agreements were determined to be ineffective or
were terminated before the contractual termination dates, or if it became
probable that the hedged variable cash flows associated with the variable-rate
borrowings would stop, the Company would be required to reclassify into earnings
all or a portion of the unrealized losses on cash flow hedges included in
accumulated other comprehensive income (loss).


- 35
-


Item 8.
            Financial
      Statements and Supplementary Data




Index
      to Financial Statements
            PageFinancial
      Statements:Reports of Independent Registered Public Accounting
      Firm
            37-38Consolidated Balance Sheets at December 31, 2007 and
      2006
            39Consolidated Statements of Operations for
      the years ended December 31, 2007, 2006 and 2005
            40Consolidated Statements of Shareholders' Equity
      for the years ended December 31, 2007, 2006 and 2005
            41Consolidated Statements of Cash Flows for the
      years ended December 31, 2007, 2006 and 2005
            42Notes to Consolidated Financial
    Statements
            43-69Financial
      Statement Schedule:II - Valuation and Qualifying Accounts for the years
      ended December 31, 2007, 2006 and 2005
            70





All other
schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes
thereto.


- 36
-
 Index


Report of Independent Registered Public Accounting
Firm











The Board
of Directors and Shareholders


Coachmen
Industries, Inc.








We have
audited the accompanying consolidated balance sheets of Coachmen Industries,
Inc. and subsidiaries (the Company) as of December 31, 2007 and 2006, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2007. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a)2. These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Coachmen Industries,
Inc. and subsidiaries at December 31, 2007 and 2006, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2007, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.





As
discussed in Note 1 to the consolidated financial statements, effective January
1, 2007, the Company changed its method of accounting related to the
classification of delivery expenses.





As
discussed in Note 10 to the consolidated financial statements, effective January
1, 2007 the Company changed its method of accounting for uncertain tax positions
in connection with the required adoption of Financial Accounting Standards Board
Interpretation No. 48 Accounting for Uncertainty in Income
Taxes.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Coachmen Industries, Inc. and subsidiaries’
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 20, 2008 expressed an unqualified opinion thereon.











/s/ Ernst
& Young LLP





Grand
Rapids, Michigan


February
20, 2008


- 37
-
 Index


Report of Independent Registered Public
Accounting Firm










Board of
Directors and Shareholders


Coachmen
Industries, Inc.








We have
audited Coachmen Industries, Inc. and subsidiaries’ (the Company) internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). The
Company’s management is responsible for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying
Management’s Annual Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





In our
opinion, Coachmen Industries, Inc. and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2007, based onthe
COSO criteria.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Coachmen
Industries, Inc. and subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of operations, shareholders’ equity, and cash
flows for each of the three years in the period ended December 31, 2007 of
Coachmen Industries, Inc. and subsidiaries and our report dated February 20,
2008 expressed an unqualified opinion thereon.











/s/ Ernst
& Young LLP








Grand
Rapids, Michigan


February
20, 2008


- 38
-
 Index


Coachmen Industries, Inc. and Subsidiaries


Consolidated
Balance Sheets


as of
December 31


(in
thousands)




2007
            
            2006AssetsCURRENT
      ASSETSCash
      and cash equivalents
            
            $
            1,549
            
            $
            2,651Trade
      receivables, less allowance for doubtful receivables 2007 - $744 and 2006
      - $1,134
            
            
            9,122
            
            
            25,874Other
      receivables
            
            
            3,819
            
            
            2,332Refundable
      income taxes
            
            
            1,628
            
            
            10,820Inventories
            
            
            79,268
            
            
            83,511Prepaid
      expenses and other
            
            
            3,804
            
            
            3,957Assets
      held for sale
            
            
            -
            
            
            288Total
      current assets
            
            
            99,190
            
            
            129,433Property,
      plant and equipment,
    net
            
            
            52,932
            
            
            57,018Goodwill
            
            
            12,993
            
            
            16,865Cash
      value of life insurance, net of loans
            
            
            33,936
            
            
            31,119Other
            
            
            8,617
            
            
            8,699TOTAL
      ASSETS
            
            $
            207,668
            
            $
            243,134Liabilities
      and Shareholders' EquityCURRENT
      LIABILITIESShort-term
      borrowings
            
            $
            20,073
            
            $
            9,284Accounts
      payable, trade
            
            
            15,042
            
            
            16,998Accrued
      income taxes
            
            
            536
            
            
            18Accrued
      expenses and other liabilities
            
            
            33,235
            
            
            35,116Floorplan
      notes payable
            
            
            4,116
            
            
            4,156Current
      maturities of long-term debt
            
            
            852
            
            
            1,077Total
      current liabilities
            
            
            73,854
            
            
            66,649Long-term
      debt
            
            
            3,010
            
            
            3,862Deferred
      income taxes
            
            
            1,990
            
            
            4,524Postretirement
      deferred compensation benefits
            
            
            7,632
            
            
            7,768Other
            
            
            49
            
            
            -Total
      liabilities
            
            
            86,535
            
            
            82,803COMMITMENTS
      AND CONTINGENCIES(Note
      12)SHAREHOLDERS'
      EQUITYCommon
      shares, without par value: authorized 60,000 shares; issued 2007 - 21,180
      shares and 2006 - 21,156 shares
            
            
            92,552
            
            
            92,382Additional
      paid-in capital
            
            
            7,856
            
            
            7,648Accumulated
      other comprehensive loss
            
            
            (48
            )
            
            (10
            )Retained
      earnings
            
            
            79,927
            
            
            119,623Treasury
      shares, at cost, 2007 - 5,402 shares and 2006 - 5,433
      shares
            
            
            (59,154
            )
            
            (59,312
            )Total
      shareholders' equity
            
            
            121,133
            
            
            160,331TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
            
            $
            207,668
            
            $
            243,134


See Notes to
Consolidated Financial Statements.


- 39
-
 Index


Coachmen Industries, Inc. and
Subsidiaries


Consolidated
Statements of Operations


for the
years ended December 31


(in
thousands, except per share amounts)





2007
            
            2006
            
            2005Net
      sales
            
            $
            480,840
            
            $
            564,382
            
            $
            702,425Cost
      of sales
            
            
            468,123
            
            
            544,166
            
            
            679,227Gross
      profit
            
            
            12,717
            
            
            20,216
            
            
            23,198Operating
      expenses:Selling
            
            
            22,712
            
            
            23,230
            
            
            28,320General
      and administrative
            
            
            26,310
            
            
            21,328
            
            
            30,794Asset
      impairments
            
            
            3,872
            
            
            -
            
            
            1,076Gain
      on sale of assets, net
            
            
            (1,037
            )
            
            (8,689
            )
            
            (163
            )51,857
            
            
            35,869
            
            
            60,027Operating
      loss
            
            
            (39,140
            )
            
            (15,653
            )
            
            (36,829
            )Nonoperating
      (income) expense:Interest
      expense
            
            
            3,497
            
            
            3,829
            
            
            3,168Investment
      income
            
            
            (1,488
            )
            
            (1,617
            )
            
            (2,182
            )Other
      income, net
            
            
            (606
            )
            
            (1,165
            )
            
            (461
            )1,403
            
            
            1,047
            
            
            525Loss
      from continuing operations before income taxes
            
            
            (40,543
            )
            
            (16,700
            )
            
            (37,354
            )Income
      taxes (credit)
            
            
            (1,791
            )
            
            16,515
            
            
            (17,994
            )Net
      loss from continuing operations
            
            
            (38,752
            )
            
            (33,215
            )
            
            (19,360
            )Discontinued
      operationsLoss
      from operations of discontinued entities(net
      of tax credits of $0, $(546) and $(4,426),
    respectively)
            
            
            -
            
            
            (795
            )
            
            (6,370
            )Gain
      (loss) on sale of assets of discontinued entities(net
      of taxes (credits) of $0, $2,140 and $(431),
      respectively)
            
            
            -
            
            
            2,205
            
            
            (620
            )Income
      (loss) from discontinued operations
            
            
            
            
            
            1,410
            
            
            (6,990
            )Net
      loss
            
            $
            (38,752
            )
            $
            (31,805
            )
            $
            (26,350
            )Earnings
      (loss) per share - BasicContinuing
      operations
            
            $
            (2.46
            )
            $
            (2.12
            )
            $
            (1.24
            )Discontinued
      operations
            
            
            -
            
            
            .09
            
            
            (.45
            )Net
      loss per share
            
            
            (2.46
            )
            
            (2.03
            )
            
            (1.69
            )Earnings
      (loss) per share - DilutedContinuing
      operations
            
            
            (2.46
            )
            
            (2.12
            )
            
            (1.24
            )Discontinued
      operations
            
            
            -
            
            
            .09
            
            
            (.45
            )Net
      loss per share
            
            $
            (2.46
            )
            $
            (2.03
            )
            $
            (1.69
            )Number
      of common shares used in the computation of earnings (loss) per
      share:Basic
            
            
            15,727
            
            
            15,633
            
            
            15,551Diluted
            
            
            15,727
            
            
            15,633
            
            
            15,551





See Notes to
Consolidated Financial Statements.


- 40
-
 Index


Coachmen Industries, Inc. and
Subsidiaries


Consolidated
Statements of Shareholders' Equity


for the
years ended December 31, 2007, 2006 and 2005


(in
thousands, except per share amounts)




AccumulatedAdditional
            
            
            
            Other
            
            
            
            
            
            
            
            TotalComprehensive
            
            Common
            
            Shares
            
            Paid-In
            
            Unearned
            
            Comprehensive
            
            Retained
            
            Treasury
            
            Shares
            
            Shareholders'Income
      (Loss)
            
            Number
            
            Amount
            
            Capital
            
            Compensation
            
            Income(Loss)
            
            Earnings
            
            Number
            
            Amount
            
            EquityBalance
      at January 1, 2005
            
            
            
            
            
            21,108
            
            $
            91,850
            
            $
            8,894
            
            $
            (1,700
            )
            $
            92
            
            $
            184,284
            
            
            (5,384
            )
            $
            (59,002
            )
            $
            224,418Net
      loss
            
            $
            (26,350
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (26,350
            )
            
            -
            
            
            -
            
            
            (26,350
            )Reversal
      of unrealized gain on securities net of taxes of
      $116
            
            
            (188
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (188
            )
            
            -
            
            
            -
            
            
            -
            
            
            (188
            )Net
      unrealized gain on cash flow hedges
            
            
            90
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            90
            
            
            -
            
            
            -
            
            
            -
            
            
            90Total
      comprehensive loss
            
            $
            (26,448
            )Issuance
      of common shares upon the exercise of stock options net of tax benefit of
      $7
            
            
            
            
            
            -
            
            
            -
            
            
            164
            
            
            -
            
            
            -
            
            
            -
            
            
            28
            
            
            165
            
            
            329Issuance
      of common shares under employee stock purchase plan
            
            
            
            
            
            26
            
            
            314
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            314Issuance
      (cancellations) of common shares from treasury
            
            
            
            
            
            -
            
            
            -
            
            
            (2,593
            )
            
            1,558
            
            
            -
            
            
            -
            
            
            (19
            )
            
            (87
            )
            
            (1,122
            )Other
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            68
            
            
            -
            
            
            -
            
            
            68Cash
      dividends of $.24 per common share
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (3,756
            )
            
            -
            
            
            -
            
            
            (3,756
            )Balance
      at December 31, 2005
            
            
            
            
            
            21,134
            
            
            92,164
            
            
            6,465
            
            
            (142
            )
            
            (6
            )
            
            154,246
            
            
            (5,375
            )
            
            (58,924
            )
            
            193,803Comprehensive
      Income - 2006Net
      loss
            
            $
            (31,805
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (31,805
            )
            
            -
            
            
            -
            
            
            (31,805
            )Net
      unrealized (loss) on cash flow hedges
            
            
            (4
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (4
            )
            
            -
            
            
            -
            
            
            -
            
            
            (4
            )Total
      comprehensive loss
            
            $
            (31,809
            )Issuance
      of common shares upon the exercise of stock options net of tax benefit of
      $25
            
            
            
            
            
            -
            
            
            -
            
            
            284
            
            
            -
            
            
            -
            
            
            -
            
            
            64
            
            
            376
            
            
            660Issuance
      of common shares under employee stock purchase plan
            
            
            
            
            
            22
            
            
            218
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            218Issuance
      (cancellations) of common shares from treasury
            
            
            
            
            
            -
            
            
            -
            
            
            899
            
            
            142
            
            
            -
            
            
            -
            
            
            (122
            )
            
            (764
            )
            
            277Cash
      dividends of $.18 per common share
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,818
            )
            
            -
            
            
            -
            
            
            (2,818
            )Balance
      at December 31, 2006
            
            
            
            
            
            21,156
            
            
            92,382
            
            
            7,648
            
            
            -
            
            
            (10
            )
            
            119,623
            
            
            (5,433
            )
            
            (59,312
            )
            
            160,331Comprehensive
      Income - 2007Net
      loss
            
            $
            (38,752
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (38,752
            )
            
            -
            
            
            -
            
            
            (38,752
            )Net
      unrealized (loss) on cash flow hedges
            
            
            (38
            )
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (38
            )
            
            -
            
            
            -
            
            
            -
            
            
            (38
            )Total
      comprehensive loss
            
            $
            (38,790
            )Issuance
      of common shares under employee stock purchase plan
            
            
            
            
            
            24
            
            
            170
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            170Issuance
      (cancellations) of common shares from treasury
            
            
            
            
            
            -
            
            
            -
            
            
            208
            
            
            -
            
            
            -
            
            
            -
            
            
            31
            
            
            158
            
            
            366Cash
      dividends of $.06 per common share
            
            
            
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (944
            )
            
            -
            
            
            -
            
            
            (944
            )Balance
      at December 31, 2007
            
            
            
            
            
            21,180
            
            $
            92,552
            
            $
            7,856
            
            $
            -
            
            $
            (48
            )
            $
            79,927
            
            
            (5,402
            )
            $
            (59,154
            )
            $
            121,133


See Notes to
Consolidated Financial Statements.


- 41
-
 Index


Coachmen Industries, Inc. and
Subsidiaries


Consolidated
Statements of Cash Flows


for the
years ended December 31


(in
thousands)




CASH
      FLOWS FROM OPERATING ACTIVITIES:
            
            2007
            
            2006
            
            2005Net
      loss
            
            $
            (38,752
            )
            $
            (31,805
            )
            $
            (26,350
            )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
            
            
            5,790
            
            
            6,533
            
            
            8,554Provision
      for doubtful receivables
            
            
            512
            
            
            1,631
            
            
            988Provision
      for write-down of assets to net realizable value
            
            
            -
            
            
            -
            
            
            9,241Net
      realized and unrealized gains on marketable securities and
      derivatives
            
            
            (38
            )
            
            (4
            )
            
            (311
            )Goodwill
      impairment charge
            
            
            3,872
            
            
            -
            
            
            -(Gain)
      loss on sale of properties and other assets, net
            
            
            (1,037
            )
            
            (13,183
            )
            
            1,592Increase
      in cash surrender value of life insurance policies
            
            
            (1,129
            )
            
            (317
            )
            
            (1,142
            )Deferred
      income tax provision (benefit)
            
            
            (2,534
            )
            
            20,224
            
            
            (13,198
            )Tax
      benefit from stock options exercised
            
            
            -
            
            
            25
            
            
            7Other
            
            
            1,100
            
            
            127
            
            
            (848
            )Changes
      in certain assets and liabilities, net of effects of acquisitions and
      dispositions:Trade
      receivables
            
            
            15,977
            
            
            16,642
            
            
            12,883Inventories
            
            
            4,243
            
            
            25,627
            
            
            14,784Prepaid
      expenses and other
            
            
            153
            
            
            (582
            )
            
            152Accounts
      payable, trade
            
            
            (1,956
            )
            
            (13,150
            )
            
            (2,147
            )Income
      taxes - accrued and refundable
            
            
            9,710
            
            
            (1,051
            )
            
            (11,986
            )Accrued
      expenses and other liabilities
            
            
            (2,687
            )
            
            (15,750
            )
            
            15,390Net
      cash provided by (used in) operating activities
            
            
            (6,776
            )
            
            (5,033
            )
            
            7,609CASH
      FLOWS FROM INVESTING ACTIVITIES:Proceeds
      from sales of marketable securities
            
            
            -
            
            
            -
            
            
            1,933Proceeds
      from sale of properties and other assets
            
            
            1,787
            
            
            28,104
            
            
            1,846Investments
      in marketable securities and cash surrender value
            
            
            (1,688
            )
            
            (2,574
            )
            
            (2,549
            )Purchases
      of property and equipment
            
            
            (3,618
            )
            
            (4,622
            )
            
            (5,696
            )Other
            
            
            310
            
            
            (517
            )
            
            48Net
      cash provided by (used in) investing activities
            
            
            (3,209
            )
            
            20,391
            
            
            (4,418
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from short-term borrowings
            
            
            11,037
            
            
            11,713
            
            
            232Payments
      of short-term borrowings
            
            
            (288
            )
            
            (14,910
            )
            
            (10,581
            )Proceeds
      from long-term debt
            
            
            -
            
            
            255
            
            
            241Payments
      of long-term debt
            
            
            (1,077
            )
            
            (10,452
            )
            
            (2,243
            )Issuance
      of common shares under stock incentive plans
            
            
            170
            
            
            878
            
            
            643Tax
      benefit from stock options exercised
            
            
            -
            
            
            (25
            )
            
            (7
            )Cash
      dividends paid
            
            
            (944
            )
            
            (2,818
            )
            
            (3,756
            )Purchases
      of common shares for treasury
            
            
            (15
            )
            
            (129
            )
            
            -Other
            
            
            -
            
            
            1
            
            
            68Net
      cash provided by (used in) financing activities
            
            
            8,883
            
            
            (15,487
            )
            
            (15,403
            )Decrease
      in cash and cash equivalents
            
            
            (1,102
            )
            
            (129
            )
            
            (12,212
            )CASH
      AND CASH EQUIVALENTSBeginning
      of year
            
            
            2,651
            
            
            2,780
            
            
            14,992End
      of year
            
            $
            1,549
            
            $
            2,651
            
            $
            2,780Supplemental
      disclosures of cash flow information:Cash
      paid during the year for interest
            
            $
            663
            
            $
            1,383
            
            $
            2,314Cash
      paid (refunded) during the year for income taxes
            
            
            (9,032
            )
            
            (127
            )
            
            2,240Operating
      cash received related to insurance settlement
            
            
            -
            
            
            2,875
            
            
            2,213Gain
      on sale of assets - Continuing operations
            
            
            (1,037
            )
            
            (8,689
            )
            
            (163
            )(Gain)
      loss on sale of assets - Discontinued operations
            
            
            -
            
            
            (4,345
            )
            
            1,051Provision
      for write-down of assets to net realizable value - Continuing
      operations
            
            
            -
            
            
            -
            
            
            1,077Provision
      for write-down of assets to net realizable value - Discontinued
      operations
            
            $
            -
            
            $
            -
            
            $
            8,164





See Notes to
Consolidated Financial Statements.


- 42
-
 Index


Coachmen Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements







1.
            NATURE
      OF OPERATIONS AND ACCOUNTING
POLICIES.





Nature of Operations -Coachmen Industries, Inc. and its subsidiaries (the "Company")
manufacture a full array of recreational vehicles and system-built housing.
Recreational vehicles are sold through a nationwide dealer network. The
system-built products (single-family homes, multi-family dwellings, military
housing, motels/hotels, group living facilities, and residential subdivisions)
are sold to builders/dealers or directly to the end user for certain specialized
structures.





Principles of Consolidation -The accompanying consolidated financial statements include the accounts
of Coachmen Industries, Inc. and its subsidiaries, all of which are wholly or
majority-owned. All intercompany transactions have been eliminated in
consolidation.





Use of Estimates -The
preparation of financial statements in conformity with United States generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.





Revenue Recognition -For the
RV Segment, the shipping terms are free on board ("FOB") shipping point and
title and risk of ownership are transferred to the independent dealers at that
time. Accordingly, sales are recognized as revenue at the time the products are
shipped. For the Housing Segment, the shipping terms are either FOB shipping
point or FOB destination. For traditional home sales, shipping terms are
generally FOB destination and title and risk of ownership are generally
transferred when the Company completes installation of the product. For
traditional homes FOB destination shipping terms, the Company generally
recognizes the revenue at the time delivery and installation are completed.
Revenue from final set-up procedures, which are perfunctory, is deferred and
recognized when such set-up procedures are completed. Major projects shipping
terms are usually detailed in the contract, and title and risk of ownership are
transferred per the contract. In the case of these major projects, the Company
recognizes the revenue when title and risk of ownership are transferred
according to the terms of the contract.





Cash Flows and Non-cash Activities -For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash, cash investments and any highly liquid investments
purchased with original maturities of three months or less.





Non-cash
investing and financing activities are as follows (in thousands):


2007
            
            2006
            
            2005Issuance
      (cancellations) of common shares, at market value, in lieu of cash
      compensation
            
            $
            116
            
            $
            125
            
            $
            (1,122
            )Notes
      receivable received in connection with the sale of certain assets (see Note 11)
            
            $
            2,610
            
            $
            5,920
            
            $
            -





Concentrations of Credit Risk
- Financial instruments that potentially subject the Company to credit
risk consist primarily of cash and cash equivalents and trade
receivables.





At
December 31, 2007 and 2006, cash and cash equivalents invested in money market
accounts or certificates of deposit were $0 million and $0.6 million,
respectively.





The Company has a concentration of
credit risk in the recreational vehicle industry, although there is no
geographic concentration of credit risk. A single recreational vehicledealer network accounts for approximately 12% of the Company's 2007
consolidated net sales. No single customer accounted for more than 10% of
consolidated net sales in 2006 or 2005. The Company performs ongoing credit
evaluations of its customers' financial conditions and sales to its recreational
vehicle dealers are generally subject to pre-approved dealer floorplan financing
whereby the Company is paid upon delivery or shortly thereafter. The Company
generally requires no collateral from its customers. Future credit losses are
provided for currently through the allowance for doubtful receivables, and
actual credit losses are charged to the allowance when
incurred.


- 43
-
 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued







1.
            NATURE
      OF OPERATIONS AND ACCOUNTING POLICIES,
  Continued.





Investment
income from continuing operations consists of the following for the years ended
December 31 (in thousands):





2007
            
            2006
            
            2005Interest
      income
            
            $
            478
            
            $
            474
            
            $
            510Increase
      in cash value of life insurance policies
            
            
            1,003
            
            
            1,138
            
            
            1,116Dividend
      income on preferred stocks
            
            
            7
            
            
            5
            
            
            54Net
      realized gains on sale of preferred stocks and bond
      funds
            
            
            -
            
            
            -
            
            
            505Net
      realized losses on closed U.S. Treasury bond futures
      options
            
            
            -
            
            
            -
            
            
            (12
            )Unrealized
      gains on open U.S. Treasury bond futures options
            
            
            -
            
            
            -
            
            
            9Total
            
            $
            1,488
            
            $
            1,617
            
            $
            2,182





Fair Value of Financial Instruments -The carrying amounts of cash and cash equivalents, receivables and
accounts payable approximated fair value as of December 31, 2007 and 2006,
because of the relatively short maturities of these instruments. The carrying
amount of long-term debt, including current maturities, approximated fair value
as of December 31, 2007 and 2006, based upon terms and conditions
currently available to the Company in comparison to terms and conditions of
the existing long-term debt. The Company has investments in life insurance
contracts principally to fund obligations under deferred compensation agreements
(see Note 9). At December 31, 2007 and 2006, the carrying
amount of life insurance policies, which equaled their fair value, was $33.9
million ($51.5 million, net of $17.6 million of policy loans) and $31.1 million
($47.5 million, net of $16.4 million of policy loans),
respectively.





SFAS No.
133, Accounting for Derivative
Instruments and Hedging Activities, requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. The Company
has entered into various interest rate swap agreements to manage the economic
risks associated with fluctuations in interest rates by converting a portion of
the Company's variable rate debt to a fixed rate basis, thus reducing the impact
of changes in interest rates on future interest expense. These financial
instruments have been designated as cash flow hedges, with changes in fair value
being included as a component of other comprehensive income (loss) within
shareholders' equity. Hedge effectiveness is evaluated by the hypothetical
derivative method and any hedge ineffectiveness is reported as interest expense.
Hedge ineffectiveness was not material in 2007 or 2006.





Inventories -Inventories are
valued at the lower of cost (first-in, first-out method) or market.




Property, Plant and Equipment
- Property, plant and equipment are carried at cost less accumulated
depreciation. Amortization of assets held under capital leases is included in
depreciation and amortized over the estimated useful life of the asset.
Depreciation is computed using the straight-line method on the costs of the
assets, at rates based on their estimated useful lives as follows:





Land
      improvements
            
            
            3-15
      yearsBuildings
      and improvements
            
            
            10-30
      yearsMachinery
      and equipment
            
            
            3-10
      yearsTransportation
      equipment
            
            
            2-7
      yearsOffice
      furniture and fixtures, including capitalized computer
      software
            
            
            2-10
      years





Upon sale
or retirement of property, plant and equipment, including long-lived assets held
for sale and rental properties, the asset cost and related accumulated
depreciation is removed from the accounts and any resulting gain or loss is
included in earnings.




Long-Lived Assets -Long-lived
assets held and used by the Company, including property, plant and equipment and
intangible assets are reviewed for impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be recoverable (see Note
11 for asset impairments recorded in 2007 and 2005, including
impairments of intangible assets).


- 44
-
 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








1.
            NATURE
      OF OPERATIONS AND ACCOUNTING POLICIES,
  Continued.





Goodwill represents the excess of the
purchase price over the fair value of net tangible and identifiable intangible
assets of acquired businesses. Goodwill assets deemed to have indefinite lives
are not amortized, but are subject to impairment tests at least annually in
accordance with SFAS No. 142, Goodwill and
OtherIntangible
Assets. The Company
reviews the carrying amounts of goodwill assets annually by segment to determine
if such assets may be impaired. If the carrying amounts of these assets are not
recoverable based upon a discounted cash flow analysis, such assets are reduced
by the estimated shortfall of fair value to recorded value. At December 31,
2006, the Company had $16.9 million of goodwill, $13.0 million attributable to
the Housing reporting unit and $3.9 million attributable to the RV reporting
unit. The RV reporting unit goodwill originated from the Company’s purchase
of recreational vehicle assets. The Company conducted its annual goodwill
impairment test as required by FASB Statement No. 142,Goodwill and Other
Intangible Assets,during
the fourth quarter of 2006 and the results indicated that the estimated fair
value of each of the Company’s reporting units exceeded their carrying value. As
a result of the continued weakness in the RV market, combined with continuing
losses incurred by the RV reporting unit, SFAS No. 142 required the Company to
perform an interim goodwill impairment evaluation during the quarter ended June
30, 2007. Because the carrying value of the RV reporting unit exceeded its
fair value as calculated using the expected present value of future cash flows,
the Company concluded that the goodwill was impaired as of June 30,
2007. Accordingly, the Company recorded a non-cash goodwill impairment
charge of $3.9 million in the quarter ended June 30, 2007. The Company has
performed the required annual impairment tests and has determined that there was
no impairment indicated for the remaining Housing reporting unit goodwill at
December 31, 2007.





The
changes in the carrying amount of goodwill for the years ended December 31, 2007
and 2006 are as follows (in thousands):


Balance
      at January 1, 2006
            $
            17,383Allocation
      to discontinued operations
            
            (518
            )Balance
      at December 31, 2006
            
            16,865Impairment
      charge
            
            (3,872
            )Balance
      at December 31, 2007
            $
            12,993





Warranty Expense -The Company
provides to its customers a variety of warranties on its products ranging from 1
to 2 years in length and up to ten years on certain structural components.
Estimated costs related to product warranty are accrued at the time of sale and
included in cost of sales. General warranty reserves are based upon past
warranty claims and sales history and adjusted as required to reflect actual
costs incurred, as information becomes available. Specific warranty reserves are
based on specific identified issues with the amounts accrued based on the
estimated cost to correct the problem. Warranty expense from continuing
operations totaled $16.8 million, $21.6 million and $34.8 million in 2007, 2006
and 2005, respectively. The higher warranty expense for 2005 is primarily the
result of specific reserves established related to the recall of camping trailer
lift systems and the repair of laminated sidewalls of certain of the Company’s
recreational vehicles. The decrease in 2007 is primarily a result of decreased
sales and improvements in quality.





Changes
in the Company's warranty liability during the years ended December 31, 2007 and
2006 were as follows (in thousands):





2007
            
            2006Balance
      of accrued warranty at January 1
            
            $
            11,099
            
            $
            20,005Warranties
      issued during the period and changes in liability for pre-existing
      warranties
            
            
            16,787
            
            
            21,598Cash
      settlements made during the period
            
            
            (19,763
            )
            
            (30,504
            )Balance
      of accrued warranty at December 31
            
            $
            8,123
            
            $
            11,099





The
decrease in warranty accrual for 2007 of $3.0 million to $8.1 million is the
result of specific reserves established in 2005 related to the recall of
defective camping trailer lift systems and the repair of defective material used
in laminated sidewalls of certain of the Company’s recreational vehicles, lower
sales levels and improvements in quality. Most of the claims against the
specific reserves were paid by the Company in 2006 and in the first quarter of
2007.


- 45
-
 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








1.
            NATURE
      OF OPERATIONS AND ACCOUNTING POLICIES,
  Continued.





Stock-Based Compensation -Prior to January 1, 2006, the Company accounted for its stock-based
compensation plans under the recognition and measurement provision of APB
Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations, as permitted by
FASB Statement No. 123, Accounting for Stock-Based
Compensation. Effective January 1, 2006, the Company adopted the fair
value recognition provisions of FASB Statement No. 123(R), Share-Based Payment, using
the modified-prospective-transition method and accordingly, the Company has not
restated the consolidated results of income from prior interim periods and
fiscal years. Under SFAS 123R, the Company is required to measure compensation
cost for all stock-based awards at fair value on date of grant and recognize
compensation expense over the period that the awards are expected to vest.
Restricted stock and stock options issued under the Company’s equity plans, as
well as, stock purchases under the employee stock purchase plan are subject to
the provisions of SFAS 123R. Since the adoption of SFAS 123R, there have been no
modifications to outstanding stock-based awards.




Prior to
the adoption of Statement 123(R), the Company presented all tax benefits of
deductions resulting from the exercise of stock options as operating cash flows
in the Statement of Cash Flows. Statement 123(R) requires the cash flows
resulting from the tax benefits resulting from tax deductions in excess of the
compensation cost recognized for those options (excess tax benefits) to be
classified as financing cash flows. Excess tax benefit for the years ended
December 31, 2007 and 2006 was not significant.





Stock
options generally vest over a four-year service period. The Company has not
granted any stock option awards since 2003. The remaining unvested stock
options, net of forfeitures, at December 31, 2007 were not
significant.





Compensation
expense related to the Company's Employee Stock Purchase Plan was not
significant for the year ended December 31, 2007.





The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of SFAS No.
123, Accounting for
Stock-Based Compensation, to stock-based compensation for the year ended
December 31, 2005:




2005Net
      loss, as reported
            $
            (26,350
            )Add:
      Stock-based compensation credit under variable plan included in earnings,
      net of taxes
            
            (865
            )Deduct:
      Total stock-based employee compensation credit determined under fair
      value method for all awards, net of taxes
            
            761Pro
      forma net loss
            $
            (26,454
            )Loss
      per share:Basic
      - as reported
            
            (1.69
            )Basic
      - pro forma
            
            (1.70
            )Diluted
      - as reported
            
            (1.69
            )Diluted
      - pro forma
            
            (1.70
            )





The
Company did not grant any stock options in 2007, 2006 or 2005.


- 46
-
 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








1.
            NATURE
      OF OPERATIONS AND ACCOUNTING POLICIES,
  Continued.





New Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No.
157, Fair Value
Measurements (SFAS No. 157). SFAS No. 157 establishes a framework for
measuring the fair value of assets and liabilities. This framework is intended
to provide increased consistency in how fair value determinations are made under
various existing accounting standards which permit, or in some cases require,
estimates of fair market value. SFAS No. 157 also expands financial statement
disclosure requirements about a company’s use of fair value measurements,
including the effect of such measures on earnings. SFAS No. 157 is required to
be adopted at the beginning of the fiscal year ending December 31, 2008.
Management is currently evaluating the impact that SFAS No. 157 will have on the
consolidated financial statements.





In
February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159
permits entities to choose to measure many financial assets and financial
liabilities at fair value. Unrealized gains and losses on items for which the
fair value option has been elected are reported in earnings. 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. SFAS No. 159 will be effective for the Company at the beginning
of the fiscal year ending December 31, 2008. Management is currently evaluating
the impact that SFAS No. 159 will have on the consolidated financial
statements.





In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No.
141(revised 2007), Business
Combinations, (SFAS No. 141R). SFAS No. 141R provides revised guidance on
how acquirers recognize and measure the consideration transferred, identifiable
assets acquired, liabilities assumed, noncontrolling interests, and goodwill
acquired in a business combination. SFAS No. 141R also expands required
disclosures surrounding the nature and financial effects of business
combinations. SFAS No. 141R is effective, on a prospective basis, for fiscal
years beginning after December 15, 2008. Management is currently evaluating the
impact that SFAS No. 141R will have on the consolidated financial
statements.





In
December 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 160, Noncontrolling
Interests in Consolidated Financial Statements, (SFAS No. 160). SFAS
No. 160 changes the accounting and reporting for minority interests, which
will be characterized as noncontrolling interests and classified as a component
of equity. SFAS No. 160 is effective for fiscal years beginning after
December 15, 2008. Management is currently evaluating the impact that SFAS
No. 160 will have on the consolidated financial statements.





Research and Development Expenses -Research and development expenses charged to continuing operations were
$6.3 million, $6.7 million, and $7.2 million for the years ended December 31,
2007, 2006 and 2005, respectively.





Shipping and Handling Costs -The Company records freight billed to customers as sales.Effective January 1,
2007, the Company changed its classification of delivery expenses in the
statement of operations to include these expenses as a component of cost of
sales. Prior to January 1, 2007, the Company classified delivery expenses as an
operating expense. This change is considered a change in accounting principle
pursuant to the provisions of FASB Statement No. 154, Accounting Changes and Error
Corrections, and was reported by retrospective application to prior
periods' financial statements. This change in accounting principle is considered
preferable as it was made to conform the classification of these expenses on the
statement of operations to the classification of such expenses by other
companies in our industry.





The
effect of this change on the year ended December 31, 2007 was an increase of
cost of sales and a decrease of operating expenses by approximately
$27.8 million. The Company applied the change retrospectively by reclassifying
approximately $29.2 million and $32.8 million of delivery expenses from
operating expenses to cost of sales for the years ending December 31, 2006 and
December 31, 2005, respectively. This change has no effect on income from
continuing operations, net income or per share amounts for any period
presented.





Comprehensive Income (Loss) -
Comprehensive income (loss) represents net earnings and any revenues, expenses,
gains and losses that, under accounting principles generally accepted in the
United States, are excluded from net earnings and recognized directly as a
component of shareholders' equity.





Volume-Based Sales and Dealer
Incentives -The Company nets certain dealer incentives, including
volume-based bonuses, interest reimbursements and other rebates, against revenue
in accordance with EITF 00-22 and EITF 01-09.


- 47
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 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








1.
            NATURE
      OF OPERATIONS AND ACCOUNTING POLICIES,
  Continued.





Income Taxes - The Company
accounts for corporate income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes,” which requires the Company to evaluate the need to establish
a valuation allowance to reduce the carrying value of its deferred tax assets on
the balance sheet. Deferred tax assets arise as a result of tax loss
carryforwards and various differences between the book value of assets and the
values used for income tax purposes. SFAS No 109 states that a valuation
allowance is generally required if a company has cumulative losses in recent
years. Given the losses incurred by the Company over the last three years,
noncash charges from continuing operations of $13.3 million and $24.4 million
were recorded as a valuation allowance for the full value of its deferred tax
assets as of December 31, 2007 and 2006, respectively.




2.
            SEGMENT
      INFORMATION.





The
Company has determined that its reportable segments are those that are based on
the Company's method of internal reporting, which disaggregates its business by
product category. The Company's two reportable segments are Recreational
Vehicles and Housing. The Company evaluates the performance of its segments
based primarily on net sales and pre-tax income and allocates resources to them
based on performance. The accounting policies of the segments are the same as
those described in Note 1 and there are no inter-segment revenues. The
Company allocates certain corporate expenses to these segments based on three
dimensions: revenues, subsidiary structure and number of employees. In addition,
the data excludes the results of the discontinued operations (see Note
11). Differences between reported segment amounts and corresponding
consolidated totals represent corporate income or expenses for administrative
functions and income, costs or expenses relating to property and equipment that
are not allocated to segments.




The table
below presents information about segments, including product class information
within the Recreational Vehicle Segment, used by the chief operating decision
maker of the Company for the years ended December 31 (in
thousands):




2007
            
            2006
            
            2005Net
      sales:Recreational
      vehiclesMotorhomes
            
            $
            235,873
            
            $
            266,246
            
            $
            350,876Travel
      trailers and fifth wheels
            
            
            106,779
            
            
            118,375
            
            
            149,263Camping
      trailers
            
            
            13,667
            
            
            13,549
            
            
            15,152Parts
      and supplies
            
            
            5,335
            
            
            6,540
            
            
            6,903Total
      recreational vehicles
            
            
            361,654
            
            
            404,710
            
            
            522,194Housing
            
            
            119,186
            
            
            159,672
            
            
            180,231Total
            
            $
            480,840
            
            $
            564,382
            
            $
            702,425Gross
      profitRecreational
      vehicles
            
            $
            (130
            )
            $
            283
            
            $
            (972
            )Housing
            
            
            12,847
            
            
            19,933
            
            
            24,170Total
            
            $
            12,717
            
            $
            20,216
            
            $
            23,198Operating
      expensesRecreational
      vehicles
            
            $
            33,772
            
            $
            25,659
            
            $
            38,769Housing
            
            
            20,200
            
            
            17,284
            
            
            26,853Other
      reconciling items
            
            
            (2,115
            )
            
            (7,074
            )
            
            (5,595
            )Total
            
            $
            51,857
            
            $
            35,869
            
            $
            60,027


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 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








2.
            SEGMENT
      INFORMATION, Continued.




2007
            
            2006
            
            2005Operating
      income (loss)Recreational
      vehicles
            
            $
            (33,902
            )
            $
            (25,376
            )
            $
            (39,741
            )Housing
            
            
            (7,353
            )
            
            2,649
            
            
            (2,683
            )Other
      reconciling items
            
            
            2,115
            
            
            7,074
            
            
            5,595Total
            
            $
            (39,140
            )
            $
            (15,653
            )
            $
            (36,829
            )Pre-tax
      income (loss) from continuing operationsRecreational
      vehicles
            
            $
            (33,908
            )
            $
            (25,383
            )
            $
            (40,760
            )Housing
            
            
            (7,434
            )
            
            2,665
            
            
            (2,403
            )Other
      reconciling items
            
            
            799
            
            
            6,018
            
            
            5,809Total
            
            $
            (40,543
            )
            $
            (16,700
            )
            $
            (37,354
            )





Total
      assetsRecreational
      vehicles
            
            $
            86,816
            
            $
            113,627
            
            $
            152,501Housing
            
            
            54,601
            
            
            57,968
            
            
            83,338Other
      reconciling items
            
            
            66,251
            
            
            71,539
            
            
            86,977Total
            
            $
            207,668
            
            $
            243,134
            
            $
            322,816Total
      goodwillRecreational
      vehicles
            
            $
            -
            
            $
            3,872
            
            $
            4,132Housing
            
            
            12,993
            
            
            12,993
            
            
            13,251Total
            
            $
            12,993
            
            $
            16,865
            
            $
            17,383




The
following specified amounts from continuing operations are included in the
measure of segment pre-tax income or loss reviewed by the chief operating
decision maker (in thousands):





2007
            
            2006
            
            2005Interest
      expenseRecreational
      vehicles
            
            $
            532
            
            $
            840
            
            $
            1,171Housing
            
            
            341
            
            
            281
            
            
            339Other
      reconciling items
            
            
            2,624
            
            
            2,708
            
            
            1,658Total
            
            $
            3,497
            
            $
            3,829
            
            $
            3,168DepreciationRecreational
      vehicles
            
            $
            3,156
            
            $
            3,547
            
            $
            3,515Housing
            
            
            2,295
            
            
            2,522
            
            
            2,879Other
      reconciling items
            
            
            339
            
            
            453
            
            
            709Total
            
            $
            5,790
            
            $
            6,522
            
            $
            7,103




- 49
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 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








3.
            INVENTORIES.





Inventories
consist of the following (in thousands):





December
      31,
            
            December
      31,2007
            
            2006Raw
      materialsRecreational
      vehicles
            $
            11,789
            
            $
            13,874Housing
            
            5,989
            
            
            6,065Total
            
            17,778
            
            
            19,939Work
      in processRecreational
      vehicles
            
            12,913
            
            
            15,661Housing
            
            2,941
            
            
            3,466Total
            
            15,854
            
            
            19,127Improved
      lotsHousing
            
            645
            
            
            221Total
            
            645
            
            
            221Finished
      goodsRecreational
      vehicles
            
            34,038
            
            
            35,079Housing
            
            10,953
            
            
            9,145Total
            
            44,991
            
            
            44,224Total
            $
            79,268
            
            $
            83,511





4.
            PROPERTY,
      PLANT AND EQUIPMENT.





Property,
plant and equipment consist of the following (in thousands):





2007
            
            2006Land
      and improvements
            
            $
            11,452
            
            $
            11,562Buildings
      and improvements
            
            
            59,765
            
            
            61,043Machinery
      and equipment
            
            
            24,429
            
            
            24,798Transportation
      equipment
            
            
            14,654
            
            
            14,310Office
      furniture and fixtures
            
            
            17,274
            
            
            17,481Total
            
            
            127,574
            
            
            129,194Less,
      accumulated depreciation
            
            
            74,642
            
            
            72,176Property,
      plant and equipment, net
            
            $
            52,932
            
            $
            57,018




- 50
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 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








5.
            SHORT-TERM
      BORROWINGS.





On August
2, 2006, the Company executed a $55 million, five-year, secured Revolving Credit
Facility with Bank of America (formerly LaSalle Business Credit, LLC) to meet
its seasonal working capital needs. At December 31, 2007 there were short-term
borrowings of $20.1 million outstanding against this bank line of
credit, and outstanding letters of credit totaling $4.7 million. At December 31,
2006 there were short-term borrowings of $9.3 million outstanding
against this bank line of credit, and outstanding letters of credit totaling
$5.0 million. As of December 31, 2007 and, 2006, $17.6 million and $16.4
million, respectively, had been borrowed against the cash surrender value of
company-owned life insurance contracts.





The
five-year credit facility executed August 2, 2006 replaced the previous $35
million facility that was due to expire on August 31, 2006. Under the new
facility, available borrowings are based on 85% of eligible accounts receivable
plus the lesser of 60% of eligible inventory or 85% liquidation value of
inventory, 70% of appraised value of mortgaged real estate. The new agreement
expires August 2, 2011. Outstanding borrowings under the new agreement bear
interest at rates based on the prime or LIBOR rates as outlined in the
agreement. The new credit facility is secured by substantially all of the assets
of the Company except the cash surrender value of life insurance contracts.
Financial covenant ratios are required to be calculated only in the event a
Funds Control Event occurs, as defined in the agreement. No Funds Control Events
occurred during the years ended December 31, 2007 or December 31,
2006.





At
December 31, 2007, the new and used recreational vehicle inventory of the
Company-owned dealership was pledged as collateral on floorplan notes
aggregating $4.1 million. The interest rate on these floorplan notes is tiered
based on the outstanding note balance. The effective rate at December 31, 2007
was 7.08%.





6.
            LONG-TERM
      DEBT.





Long-term
debt consists of the following (in thousands):




2007
            
            2006Obligations
      under industrial development revenue bonds, variable rates (effective
      weighted-average interest rates of 3.6% and 4.1% at December 31, 2007 and
      2006, respectively), with various maturities through
      2015
            
            $
            3,600
            
            $
            4,350Obligations
      under capital leases, interest imputed at rates ranging from 4.7% to 5.4%,
      with maturities through 2008
            
            
            332
            
            
            292Other
            
            
            228
            
            
            297Subtotal
            
            
            3,861
            
            
            4,939Less,
      current maturities of long-term debt
            
            
            852
            
            
            1,077Long-term
      debt
            
            $
            3,010
            
            $
            3,862





Principal
maturities of long-term debt during the four fiscal years succeeding 2008 are as
follows: 2009 - $820,000; 2010 - $820,000; 2011 - $770,000 and 2012 -
$150,000.





In
connection with the industrial development revenue bond obligations, the Company
obtained, as a credit enhancement for the bondholders, irrevocable letters of
credit in favor of the bond trustees. Under the industrial revenue bond for the
Mod-U-Kraf Homes manufacturing facility in Virginia, the issuer of the letter of
credit holds a first lien and security interest on that
facility.


- 51
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 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








6.
            LONG-TERM
      DEBT, Continued.





In
January of 2003, the Company entered into various interest rate swap agreements
that became effective beginning in October of 2003. These swap agreements are
designated as cash flow hedges under the provisions of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and are used to manage the economic
risks associated with fluctuations in interest rates by converting a portion of
the Company's variable-rate debt to a fixed-rate basis through November of 2011,
thus reducing the impact of changes in interest rates on future interest
expense. Hedge effectiveness is evaluated by the hypothetical derivative method.
Any hedge ineffectiveness is reported within the interest expense caption of the
statements of income. Hedge ineffectiveness was not material in 2007, 2006 or
2005. The fair value of the Company's interest rate swap agreements represents
the estimated receipts or payments that would be made to terminate the
agreements. If, in the future, the interest rate swap agreements are determined
to be ineffective hedges or are terminated before the contractual termination
dates, or if it became probable that the hedged variable cash flowsassociated with the
variable-rate borrowings would stop, the Company would be required to reclassify
into earnings all or a portion of the unrealized amounts on cash flow hedges
included in accumulated other comprehensive income (loss) within shareholders'
equity.





At
December 31, 2007, the Company had one remaining interest rate swap agreement
with a notional amount of $2.4 million that was used to convert the variable
interest rates on certain industrial development revenue bonds to fixed
rates. In accordance with the terms of the swap agreement, the Company pays
a 3.71% interest rate, and receives the Bond Market Association Index (BMA),
calculated on the notional amount, with net receipts or payments being
recognized as adjustments to interest expense. The Company recorded a liability
for the potential early settlements of these swap agreements in the amount of
$49,000 at December 31, 2007 and $17,000 at December 31, 2006. This exposure
represents the fair value of the swap instruments and has been recorded in the
balance sheets in accordance with SFAS No. 133 as a noncurrent liability. The
effective portion of the cash flow hedge has been recorded, net of taxes, as a
reduction of shareholders' equity as a component of accumulated other
comprehensive loss.





7.
            ACCRUED
      EXPENSES AND OTHER LIABILITIES.





Accrued
expenses and other liabilities at year-end consist of the following (in
thousands):





2007
            
            2006Wages,
      salaries, bonuses and commissions
            
            $
            2,432
            
            $
            3,135Dealer
      incentives, including volume bonuses, dealer trips, interest
      reimbursement, co-op advertising and other rebates
            
            
            1,577
            
            
            4,140Warranty
            
            
            8,123
            
            
            11,099Insurance-products
      and general liability, workers compensation, group health and
      other
            
            
            8,519
            
            
            7,593Customer
      deposits and unearned revenues
            
            
            4,208
            
            
            3,865Litigation
            
            
            930
            
            
            345Interest
            
            
            751
            
            
            955Sales
      and property taxes
            
            
            1,837
            
            
            1,226Deferred
      gain on sale of real estate
            
            
            1,145
            
            
            -Other
      current liabilities
            
            
            3,713
            
            
            2,758Total
            
            $
            33,235
            
            $
            35,116




- 52
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 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








8.
            COMMON
      STOCK MATTERS AND EARNINGS PER
SHARE.





Stock
Option Plan





The
Company has stock option plans, including the 2000 Omnibus Stock Incentive
Program (the "2000 Plan"), which was approved by the shareholders on May 4,
2000. The 2000 Plan provides for 1.0 million common shares to be reserved for
grants under the Company's stock option and award plans. The Company's stock
option plan provides for the granting of options to directors, officers and
eligible key employees to purchase common shares. The 2000 Plan permits the
issuance of either incentive stock options or nonqualified stock options. Stock
Appreciation Rights ("SAR's") may be granted in tandem with stock options or
independently of and without relation to options. There were no SAR's
outstanding at December 31, 2007 or 2006. The option price for incentive stock
options shall be an amount of not less than 100% of the fair market value per
share on the date of grant and the option price for nonqualified stock options
shall be an amount of not less than 90% of the fair market value per share on
the date the option is granted. No such options may be exercised during the
first year after grant, and are exercisable cumulatively in four installments of
25% each year thereafter. Outstanding options have terms of ten
years.





The
following table summarizes stock option activity (number of shares in
thousands):


Number
              of
      Shares
            
            Weighted-Average
              Exercise
              PriceOutstanding,
      January 1, 2005
            
            
            327
            
            $
            12.26Granted
            
            
            -
            
            
            -Canceled
            
            
            (15
            )
            
            14.69Exercised
            
            
            (28
            )
            
            11.66Outstanding,
      December 31, 2005
            
            
            284
            
            
            12.19Granted
            
            
            -
            
            
            -Canceled
            
            
            (71
            )
            
            13.60Exercised
            
            
            (64
            )
            
            9.95Outstanding,
      December 31, 2006
            
            
            149
            
            
            12.48Granted
            
            
            -
            
            
            -Canceled
            
            
            (15
            )
            
            14.80Exercised
            
            
            -
            
            
            -Outstanding,
      December 31, 2007
            
            
            134
            
            $
            12.20





Options
outstanding at December 31, 2007 are exercisable at prices ranging from $10.00
to $18.68 per share and have a weighted-average remaining contractual life of
3.5 years. The following table summarizes information about stock options
outstanding and exercisable at December 31, 2007 (in thousands):




Options
      Outstanding
            
            Options
      ExercisableRange
      of Exercise
            
            Number
      Outstanding at
            
            Weighted-Average
              Remaining
            
            Weighted-Average
            
            Number
      Exercisable at
            
            Weighted-AveragePrice
            
            December
      31, 2007
            
            Contractual
      Life
            
            Exercise
      Price
            
            December
      31, 2007
            
            Exercise
      Price$10.00
      - $12.00
            
            90
            
            3.1
            
            $10.17
            
            90
            
            $10.1712.01
      -   17.00
            
            39
            
            4.3
            
            16.01
            
            39
            
            16.01$17.01
      - $18.68
            
            5
            
            4.3
            
            $18.68
            
            5
            
            $18.68134
            
            
            
            
            
            134




- 53
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Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








8.
            COMMON STOCK MATTERS AND
      EARNINGS PER SHARE,
Continued.





At
December 31, 2005 there were exercisable options to purchase 252,000 shares, at
weighted-average exercise prices of $11.85. There were no options granted during
2007 or 2006. As of December 31, 2007 and 2006, 1.4 million shares were
reserved for the granting of future stock options and awards.




Stock
Award Programs





The 2000
Plan also permits the granting of restricted and unrestricted stock awards to
the Company's key employees and non-employee directors. In accordance with the
provisions of the 2000 Plan, the Board of Directors may grant shares of stock to
eligible participants for services to the Company. Restricted shares vest over a
period of time as determined by the Board of Directors and are granted at no
cost to the recipient. For restricted shares that are not subject to
pre-established Company performance objectives, compensation expense is
recognized over the vesting period at an amount equal to the fair market value
of the shares on the grant date. Compensation expense for discretionary
unrestricted stock awards is recognized at date of grant. There were 22,517,
21,728, and 22,490 restricted non-contingent stock awards granted at a
weighted-average per share grant-date fair value of $10.51, $11.03, and $11.80,
in 2007, 2006 and 2005, respectively. Compensation expense of $269,306,
$238,000, and $259,000 was recognized in the years ended December 31, 2007, 2006
and 2005, respectively.





On March
1, 2003, the Company adopted the Performance Based Restricted Stock Plan
covering 115,000 shares of common stock per performance period for officers and
other key employees. During 2005, the Company determined that it was probable
that the requirements for the 2003, 2004 and 2005 plans would not be achieved
and as a result, reversed the expenses that had been previously recorded related
to these three plans. For the year 2005, the Company reduced compensation
expense, which is a component of general and administrative expenses, by $1.4
million related to these three plans.





On
March 28, 2006, the Company granted Restricted Stock Awards to certain key
employees as a means of retaining and rewarding them for performance and to
increase their ownership in the Company. Participants earn the restricted shares
awarded to them based on attainment of certain performance goals for the
calendar year 2006. A total of 110,000 shares, assuming 100% of the performance
goal was achieved, were granted with a weighted-average grant-date fair value of
$11.05 per share. At December 31, 2006, the Company determined that the
performance goal was not achieved; therefore, no compensation expense has been
recorded related to this plan for the year ended December 31, 2006. Due to
termination of employment or as a condition to receiving the 2006 Restricted
Stock Awards, the participants forfeited all rights to the 99,600 shares and
75,600 shares awarded in 2004 and 2005, respectively, under the Performance
Based Restricted Stock Plan. Shares awarded under this plan in 2003 were
forfeited as of December 31, 2005 due to failure to meet the performance
goals.





On
January 10, 2007, the Company granted Restricted Stock Awards to certain key
employees as a means of retaining and rewarding them for performance and to
increase their ownership in the Company. The awards are governed by the
Company’s 2000 Omnibus Stock Plan. Participants will earn the restricted shares
awarded to them based on attainment of certain performance goals for the
calendar year 2007. If the Company meets the minimum threshold and maximum
target levels of pre-tax profits, the participants will earn corresponding
levels of awards. To the extent the Company meets the performance goals for the
year, and the participant remains employed by the Company during the vesting
period, the earned restricted shares will vest and be delivered to the
participants over a three-year vesting period: one-third on January 1,
2009, one-third on January 1, 2010 and one-third on January 1, 2011.
Compensation expense is recognized on a straight-line basis over the requisite
service period as the awards contingently vest over the performance and service
periods. A total of 139,500 shares, assuming 100% of the performance goal is
achieved, were granted with a weighted-average grant-date fair value of $10.80
per share. At December 31, 2007, the Company determined that the performance
goal was not achieved; therefore, no compensation expense has been recorded
related to this plan for the year ended December 31, 2007. Due to termination of
employment or due to failure to meet the performance goals condition to
receiving the 2007 Restricted Stock Awards, the participants forfeited all
rights to the 139,500 shares.


- 54
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 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








8.
            COMMON
      STOCK MATTERS AND EARNINGS PER SHARE,
Continued.





The
following table summarizes the activity of the Performance Based Restricted
Stock Awards program (in thousands):





Number
              of
      SharesOutstanding,
      January 1, 2005
            
            
            169,110Granted
            
            
            75,600Forfeited
            
            
            (102,410
            )Outstanding,
      December 31, 2005
            
            
            142,300Granted
            
            
            110,000Forfeited
            
            
            (252,300
            )Outstanding,
      December 31, 2006
            
            
            -Granted
            
            
            139,500Forfeited
            
            
            139,500Outstanding,
      December 31, 2007
            
            
            -





The
following table summarizes, by plan year, the number of contingent shares
awarded, forfeited and the remaining contingent shares outstanding as of
December 31, 2007:




Plan
      Year2007
            
            2006
            
            2005Contingent
      shares awarded
            
            
            139,500
            
            
            110,000
            
            
            75,600Shares
      forfeited
            
            
            139,500
            
            
            110,000
            
            
            75,600Contingent
      shares outstanding as of December 31, 2007
            
            
            -
            
            
            -
            
            
            -





Stock
Purchase Plan





The
Company has an employee stock purchase plan under which a total of 800,000
shares of the Company's common stock are reserved for purchase by full-time
employees through weekly payroll deductions. Shares of the Company's common
stock are purchased quarterly by the employees at a price equal to 90% of the
market price. The market price was based on the lower of the beginning or the
ending day of the quarter until June 30, 2006, and subsequently is based on the
market price at the end of the quarter. As of December 31, 2007, there were 149
employees actively participating in the plan. Since its inception, a total of
462,000 shares have been purchased by employees under the plan. The Company sold
to employees 24,000, 21,830 and 25,700 shares at weighted average fair values of
$7.62, $10.02 and $11.07 in 2007, 2006 and 2005, respectively. Certain
restrictions in the plan limit the amount of payroll deductions an employee may
make in any one quarter. There are also limitations as to the amount of
ownership in the Company an employee may acquire under the
plan.


- 55
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 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








8.
            COMMON
      STOCK MATTERS AND EARNINGS PER SHARE,
Continued.





Earnings
Per Share





Basic
earnings per share is based on the weighted-average number of shares outstanding
during the period. Diluted earnings per common share is based on the
weighted-average number of shares outstanding during the period, after
consideration of the dilutive effect of stock options and awards and shares held
in deferred compensation plans. Basic and diluted earnings per share were
calculated using the average shares as follows (in thousands):




2007
            
            2006
            
            2005Numerator:Net loss
      available to common stockholders
            
            $
            (38,752
            )
            $
            (31,805
            )
            $
            (26,350
            )Denominator:Number
      of shares outstanding, end of period:Weighted-average
      number of common shares used in Basic EPS
            
            
            15,727
            
            
            15,633
            
            
            15,551Stock
      options and awards
            
            
            -
            
            
            -
            
            
            -Weighted-average
      number of common shares used in Diluted EPS
            
            
            15,727
            
            
            15,633
            
            
            15,551





As the
Company reported a net loss for the years ended December 31, 2007, 2006 and
2005, the dilutive effect of stock options and awards did not enter into the
computation of diluted earnings per share because their inclusion would have
been antidilutive.





The sum
of quarterly earnings per share may not equal year-to-date earnings per share
due to rounding and changes in diluted potential common shares.





Shareholder
Rights Plan





On
October 21, 1999, the Company's Board of Directors adopted a new shareholder
rights plan which became effective January 12, 2000 (the "Record Date"),
provides for a dividend distribution of one common share purchase right (the
"Rights") for each outstanding common share to each shareholder of record on the
Record Date. The Rights will be represented by common share certificates and
will not be exercisable or transferable apart from the common shares until the
earlier to occur of (i) ten (10) business days following a public announcement
that a person or group of persons (an "Acquiring Person") has acquired, or
obtained the right to acquire, beneficial ownership of 20% or more of the
outstanding common shares or (ii) ten (10) business days following the
commencement of (or announcement of an intention to make) a tender offer or
exchange offer if, upon consummation thereof, such an Acquiring Person would be
the beneficial owner of 20% or more of the outstanding common shares. Upon the
occurrence of the certain events and after the Rights become exercisable, each
right would entitle the rightholder (other than the Acquiring Person) to
purchase one fully paid and nonassessable common share of the Company at a
purchase price of $75 per share, subject to anti-dilutive adjustments. The
Rights are nonvoting and expire February 1, 2010. At any time prior to a person
or a group of persons becoming an Acquiring Person, the Company's Board of
Directors may redeem the Rights in whole, but not in part, at a purchase price
$.01 per Right.





Share
Repurchase Programs





Periodically,
the Company has repurchased its common stock as authorized by the Board of
Directors. Under the repurchase program, common shares are purchased from time
to time, depending on market conditions and other factors, on the open market or
through privately negotiated transactions. There were no shares repurchased in
2005. During August 2006, the Company announced that the Board of Directors had
authorized a share repurchase of up to one million shares. During the third
quarter of 2006, the Company repurchased 11,700 shares for a total cost,
including commissions, of $128,516. During the second quarter of 2007, the
Company repurchased 1,500 shares for a total cost, including commissions, of
$15,050. At December 31, 2007, there are 986,800 shares remaining authorized for
repurchase by the Board of Directors.


- 56
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 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








9.
            COMPENSATION
      AND BENEFIT PLANS.





Incentive
Compensation





The
Company has incentive compensation plans for its officers and other key
personnel. The amounts charged to expense for the years ended December 31, 2007,
2006 and 2005 aggregated $753,000, $363,000, and $920,000,
respectively.





Deferred
Compensation





The
Company has established a deferred compensation plan for executives and other
key employees. The plan provides for benefit payments upon termination of
employment, retirement, disability, or death. The Company recognizes the cost of
this plan over the projected service lives of the participating employees based
on the present value of the estimated future payment to be made. The plan is
funded by insurance contracts on the lives of the participants. At December 31,
2007 and December 31, 2006, the carrying amount of these policies, which equaled
their fair value, was $26.9 million ($44.5 million, net of $16.0 million of
policy loans and $1.6 million interest on policy loans) and $25.9 million ($42.3
million, net of $15.0 million of policy loans and $1.4 million interest on
policy loans), respectively. The deferred compensation obligations, which
aggregated $5.3 million and $5.9 million at December 31, 2007 and 2006,
respectively, are included in other non-current liabilities, with the current
portion ($889,000 and $731,000 at December 31, 2007 and 2006, respectively)
included in other current liabilities.




In
connection with the acquisition of Mod-U-Kraf Homes in 2000, the Company assumed
obligations under existing deferred compensation agreements. The remaining
liability recognized in the consolidated balance sheet aggregated $37,000 and
$38,000 at December 31, 2007 and 2006, respectively. As part of the Mod-U-Kraf
acquisition, the Company assumed ownership of life insurance contracts and trust
accounts established for the benefit of participating executives. Such assets,
which are valued at fair value, aggregated $65,000 and $63,000 at December 31,
2007 and 2006, respectively.





Supplemental
Deferred Compensation





The
Company has established a supplemental deferred compensation plan (Mirror Plan)
for key employees as determined by the Board of Directors. The plan allows
participants to defer compensation only after they have deferred the maximum
allowable amount under the Company's 401(k) Plan. The participants select
certain mutual fund investments and Company stock whose performance is tracked
by the Company. The Company matches a certain level of participant contributions
that vests over a five-year period. Under the plan, the investments are not
funded directly, including the matching contributions and investments in Company
stock. Instead, the plan administrator tracks the performance of investments in
mutual funds and Company stock as directed by the participant and a liability to
the participants is recorded by the Corporation based on the performance of the
phantom investments. Participant benefits are limited to the value of the vested
benefits recorded on their behalf.





The
Company has also established a supplemental deferred compensation plan
(Executive Savings Plan) for certain key executive management as determined by
the Board of Directors. This plan allows participants to defer compensation
without regard to participation in the Company's 401(k) plan. The participants
select certain mutual funds investments and Company stock whose performance is
tracked by the Company. In addition, the Company matches a certain level of
participant contributions that vests after a five-year period. Under the plan,
the investments are not funded directly, including the matching contributions
and investments in Company stock. Instead, the plan administrator tracks the
performance of investments in mutual funds and Company stock as directed by the
participant and a liability to the participants is recorded by the Corporation
based on the performance of the phantom investments. Participant benefits are
limited to the value of the vested benefits recorded on their behalf. The plan
is funded by insurance contracts on the lives of the participants. At December
31, 2007 and 2006, the carrying amount of these policies, which equaled their
fair value, was $6.8 million and $5.0 million, respectively. Liabilities
recorded on the consolidated balance sheets related to these plans as of
December 31, 2007 and 2006 are $2.3 million and $1.8 million,
respectively.





Employee
Benefit Plans





The
Company sponsors a retirement plan (the "Plan"), under Section 401(k) of the
Internal Revenue Code (IRS) that covers all eligible employees. The Plan is a
defined contribution plan and allows employees to make voluntary contributions
up to 20% of annual compensation. Effective January 1, 2005, the Plan was
amended to allow for voluntary contributions of up to 50% of annual
compensation, not to exceed IRS limits. Under the Plan, the Company may make
discretionary matching contributions on up to 6% of participants' compensation.
Expenses under the Plan aggregated $1.0 million, $1.0 million, and $1.3 million
for the years ended December 31, 2007, 2006 and 2005,
respectively.


- 57
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 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








10.
            INCOME
      TAXES.





Income
taxes (benefit) attributable to continuing operations are summarized as follows
for the years ended December 31 (in thousands):




2007
            
            2006
            
            2005Federal:Current
            
            $
            656
            
            $
            (2,119
            )
            $
            (8,673
            )Deferred
            
            
            (2,296
            )
            
            15,255
            
            
            (5,888
            )(1,640
            )
            
            13,136
            
            
            (14,561
            )State:Current
            
            
            21
            
            
            448
            
            
            (2,964
            )Deferred
            
            
            (171
            )
            
            2,931
            
            
            (469
            )(150
            )
            
            3,379
            
            
            (3,433
            )Total
            
            $
            (1,790
            )
            $
            16,515
            
            $
            (17,994
            )




The
following is a reconciliation of the provision for income taxes attributable to
continuing operations computed at the federal statutory rate (35% for all years
presented) to the reported provision for income taxes (in
thousands):




2007
            
            2006
            
            2005Computed
      federal income tax at federal statutory rate
            
            $
            (14,190
            )
            $
            (5,845
            )
            $
            (13,074
            )Changes
      resulting from:Increase
      in cash surrender value of life insurance contracts
            
            
            (449
            )
            
            (370
            )
            
            (397
            )Loss
      on sale of stock of Miller Building Systems, Inc.
            
            
            -
            
            
            (1,690
            )
            
            -Current
      year state income taxes, net of federal income tax
      benefit
            
            
            (1,407
            )
            
            (652
            )
            
            (1,942
            )Preferred
      stock dividend exclusion
            
            
            -
            
            
            -
            
            
            (9
            )Extraterritorial
      income exclusion
            
            
            -
            
            
            -
            
            
            (71
            )Tax
      benefit on prior years' federal and state research and development
      (R&D) credits
            
            
            -
            
            
            -
            
            
            (2,378
            )Tax
      benefit of current years' federal R&D tax credit carryforward, AMT
      credit carryforward and other credits
            
            
            -
            
            
            -
            
            
            (454
            )Decrease
      in federal tax reserves, net of additional state tax
      reserves
            
            
            -
            
            
            325
            
            
            53Valuation
      allowance for NOL, AMT, deferred tax assets and general business
      credits
            
            
            13,292
            
            
            24,360
            
            
            -Other,
      net
            
            
            964
            
            
            387
            
            
            278Total
            
            $
            (1,790
            )
            $
            16,515
            
            $
            (17,994
            )




The
Company accounts for corporate income taxes in accordance with SFAS No. 109,
“Accounting for Income Taxes,” which requires the Company to evaluate the need
to establish a valuation allowance to reduce the carrying value of its deferred
tax assets on the balance sheet. Deferred tax assets arise as a result of tax
loss carryforwards and various differences between the book value of assets and
the values used for income tax purposes. SFAS No 109 states that a valuation
allowance is generally required if a company has cumulative losses in recent
years. Given the losses incurred by the Company over the last three years,
noncash charges from continuing operations of $13.2 million and $24.4 million
were recorded as a valuation allowance for the full value of its deferred tax
assets as of December 31, 2007 and 2006, respectively. At December 31, 2007 the
Company had a tax benefit of $20.9 million related to Federal net operating loss
carryforwards which may be utilized to offset future taxable income, and if not
utilized, $7.5 million will expire in 2026 and $13.4 million will expire in
2027. Further, at December 31, the Company had state tax benefits of certain
state net operating loss carryforwards in states that do not permit carrybacks
of net operating losses. These state net operating loss carryforwards begin to
expire in certain states after 5 years. At December 31, 2007, the cumulative
benefit of certain state net operating loss carryforwards approximated $4.2
million, which have been included as part of the valuation allowance referred to
above.


- 58
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 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








10.
            INCOME
      TAXES, Continued.




The
components of the net deferred tax assets (liabilities) are as follows (in
thousands):




2007
            
            2006Current
      deferred tax asset (liability):Accrued
      warranty expense
            
            $
            2,623
            
            $
            3,484Accrued
      self-insurance
            
            
            2,172
            
            
            2,137Inventories
            
            
            826
            
            
            959Receivables
            
            
            283
            
            
            431Prepaid
      insurance
            
            
            (533
            )
            
            (564
            )Litigation
      reserve
            
            
            353
            
            
            131Other
            
            
            392
            
            
            278Valuation
      allowance
            
            
            (6,116
            )
            
            (6,856
            )Net
      current deferred tax asset
            
            $
            -
            
            $
            -Noncurrent
      deferred tax asset (liability):Deferred
      compensation
            
            $
            3,225
            
            $
            3,548Property
      and equipment and other real estate
            
            
            (948
            )
            
            (1,823
            )Intangible
      assets
            
            
            (702
            )
            
            (2,557
            )Notes
      receivable
            
            
            348
            
            
            348Federal
      net operating loss carryforward credits
            
            
            20,883
            
            
            8,597Alternative
      minimum tax credit carryover
            
            
            623
            
            
            623Federal
      & state research and development credit
carryover
            
            
            1,738
            
            
            1,102State
      net operating loss carryforward credits
            
            
            4,152
            
            
            3,378Other
            
            
            598
            
            
            135Valuation
      allowance
            
            
            (31,907
            )
            
            (17,875
            )Net
      noncurrent deferred tax liability
            
            $
            (1,990
            )
            $
            (4,524
            )





The
Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction and various states jurisdictions. With few exceptions, the Company
is no longer subject to U.S. federal or state income tax examinations by tax
authorities for years before 2004. In 2006, the Internal Revenue Service (IRS)
commenced an examination of the Company’s U.S. income tax returns specifically
for the purpose of reviewing claims for Research and Expenditure credits for the
years 1999 through 2004. The audit of these claims is nearing its conclusion and
the Company anticipates that a settlement can be concluded within the next year.
The Company does not anticipate that any adjustments associated with the
settlement of this audit will result in a material change to its financial
position.





The
Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income
Taxes, on January 1, 2007.The implementation of FIN
48 did not have a significant impact on the Company’s financial position or
results of operations. A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows:





(in
      thousands)Balance
      at January 1, 2007
            $
            2,416Additions
      based on tax positions related to the current year
            
            -Additions
      for tax positions of prior years
            
            -Reductions
      for tax positions of prior years
            
            -Settlements
            
            -Balance
      at December 31, 2007
            $
            2,416





Recognition
of unrecognized tax benefits that if recognized would affect the effective tax
rate by approximately $1.6 million at December 31, 2007. The Company recognizes
interest and penalties related to unrecognized tax benefits through interest and
operating expenses, respectively. The amounts accrued for interest and penalties
as of December 31, 2007 were not considered to be significant.


- 59
-
 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








11.
            RESTRUCTURING
      CHARGES AND DISCONTINUED
OPERATIONS.





During
2005, the Company’s Board of Directors approved a comprehensive operational and
cost structure realignment and restructuring plan (the Intensive Recovery Plan),
which was largely implemented during 2006 and is intended to improve operating
performance and ensure financial strength. Additional plans and actions to
reduce the Company’s cost structure were implemented and completed during
2007.





When
describing the impact of this restructuring plan, determinations of the fair
value of long-lived assets were based upon comparable market values for similar
assets.





On
December 5, 2007 the company sold property and the equipment of a paint facility
located in Elkhart, Indiana for $2,900,000 consisting of cash of $0.3 million
and a $2.6 million secured note due in full December 2008. The sale resulted in
pre-tax gain of $0.4 million on the equipment and a deferred gain of $1.1
million on the property which is included in the accrued expenses and other
liabilities on the Consolidated Balance Sheet.





During
July 2007, the Company announced plans to reduce overhead costs by consolidating
Class A production into a single facility, relocating the paint facility located
in Elkhart, Indiana to the main complex in Middlebury, Indiana and consolidating
two towable assembly plants into a single facility in order to reduce expenses
and improve profitability through improved capacity utilization of fewer
facilities. The consolidation of the Class A assembly plants was substantially
completed in the third quarter of 2007. The consolidation and subsequent
mothballing of a towable plant was completed in the fourth quarter of
2007. The paint facility was relocated to the main complex in the fourth
quarter of 2007.





The
Company announced on September 21, 2007 that it would consolidate its All
American Homes production facility located in Zanesville, Ohio with its larger
facility located in Decatur, Indiana. This will increase production backlogs and
capacity utilization at the Indiana plant as all builders previously served by
the Ohio plant will now be served from Indiana. This consolidation occurred
during the fourth quarter. The closure of the Ohio facility had minimal impact
on revenues, as all existing builders in that region have continued to be served
by the Company’s housing operations in Indiana and North Carolina. There was no
impairment of fixed assets in conjunction with this action.





During
the third quarter of 2007, two smaller properties were sold for a net pre-tax
gain of approximately $0.1 million.




During
the first three months of 2007, the Company completed the sale of two parcels of
the former Georgie Boy Manufacturing complex for approximately $0.6 million,
resulting in a pre-tax gain of approximately $0.3 million. Also during the
first three months, the Company completed the sale of vacant farmland in
Middlebury, Indiana for cash of approximately $0.1 million, resulting in a
pre-tax gain of approximately $0.1 million.





On March
31, 2006, the Company completed the sale of a property located in Grapevine,
Texas for approximately $2.0 million, consisting of cash of $1.7 million and a
note receivable of $0.3 million and resulting in a pre-tax gain of approximately
$1.8 million. Also during the first quarter, the Company completed the sale of
vacant farmland in Middlebury, Indiana for cash of approximately $1.0 million,
resulting in a pre-tax gain of approximately $0.8 million.





During
the third quarter of 2006, a number of smaller properties were sold for a net
pre-tax gain of approximately $0.3 million. On June 8, 2006, the Company
completed the sale of its corporate aircraft for approximately $2.3 million,
which resulted in a pre-tax gain of approximately $1.7 million. On June 30,
2006, the Company sold property located in Palm Shores, Florida for $2.5
million, which resulted in a pre-tax gain of approximately $1.2 million. During
June 2006, the Company also sold two parcels of the former Georgie Boy
Manufacturing complex for total proceeds of $0.7 million, which resulted in a
pre-tax gain of approximately $0.4 million.





On
December 28, 2006 the Company contracted for the sale of a property located
in Roanoke, Virginia for approximately $1.3 million, consisting of cash of $0.1
million and a note receivable of $1.2 million, which resulted in pre-tax gain of
approximately $1.2 million.





During
2005, approximately 140 salaried positions were eliminated throughout the
Company. Severance costs related to the eliminations were approximately $0.7
million, of which $0.5 million was paid by December 31, 2005 and $0.2 million
was paid in 2006.


- 60
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 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








11.
            RESTRUCTURING
      CHARGES AND DISCONTINUED OPERATIONS,
Continued.





Housing
Segment





On
December 31, 2005, the Company sold all operating assets of the All American
Homes Kansas division. In accordance with Statement of Financial Accounting
Standard No. 144, the division qualified as a separate component of the
Company’s business and as a result, the operating results of the division have
been accounted for as a discontinued operation. Previously reported financial
results for all periods presented have been restated to reflect this business as
a discontinued operation. Net sales of the Kansas division for the years ended
December 31, 2006 and 2005 were $0.0 million and $9.7 million, respectively, and
the pre-tax income (loss) for the years ended December 31, 2006 and 2005 were
$(0.4) million and $(2.9) million, respectively.





On March
31, 2006, the Company sold 100% of its interest in the capital stock of Miller
Building Systems, Inc. for $11.5 million, consisting of cash of $9.0 million and
a $2.5 million secured note. The note, which is included in other long-term
assets on the Consolidated Balance Sheet, is to be repaid over 5 years and bears
interest at the 1 year LIBOR rate plus 2.75% per annum with quarterly interest
payments beginning September 30, 2006. Principal payments of $125,000 per
quarter commence on June 30, 2009 and continue through the maturity date of
March 31, 2011. In addition, the Company accepted a $2.0 million contingent
earn-out note, which will be paid to the Company if certain income metrics are
achieved by the acquiring entity. In October 2007, a subsequent agreement with
Miller Building Systems waived the interest on the secured $2.5 million note for
two years; hence no interest will be earned from March 31, 2007 to March 31,
2009. The subsequent agreement with Miller Building Systems also canceled
the $2.0 million contingent earn-out note. There is no financial impact as a
result of this cancellation. In accordance with Statement of Financial
Accounting Standard No. 144, the division qualified as a separate component of
the Company’s business and as a result, the operating results of the division
have been accounted for as a discontinued operation. Previously reported
financial results for all periods presented have been restated to reflect this
business as a discontinued operation. Net sales of Miller Building Systems, Inc.
for the years ended December 31, 2006 and 2005 were $7.5 million and $41.6
million, respectively, and the pre-tax income (loss) for the years ended
December 31, 2006 and 2005 were $1.5 million and $(8.2) million, respectively.
In connection with this sale, $1.7 million of industrial revenue bonds were paid
off as of March 31, 2006. During April 2006, the Company terminated the $1.5
million and $235,000 interest rate swaps that had been associated with these
revenue bonds.





In
conjunction with the actions noted above, during the fourth quarter of 2005
management allocated goodwill of $0.7 million to the discontinued operations
from the Housing Segment goodwill based on the relative fair value of the
discontinued operations to the entire Housing Segment. The $0.7 million of
allocated goodwill consisted of $0.6 million allocated to Miller Building
Systems, which was written off as part of the 2005 loss from operations of
discontinued operations and $0.1 million allocated to All American Homes of
Kansas, which was included in the 2005 loss on sale of assets of discontinued
operations. During the first quarter of 2006, an additional $0.3 million of
goodwill was allocated to Miller Building Systems based on the final sales
price relative to the fair value of the entire Housing Segment. The additional
$0.3 million of allocated goodwill was written off as part of the 2006 gain on
sale of assets of discontinued operations.





Assets
and liabilities of All American Homes of Kansas and Miller Building Systems,
which are included in the consolidated balance sheet, were as follows at
December 31, 2005 (in thousands):




2005Cash
            
            $
            242Accounts
      and other receivables
            
            
            4,401Prepaid
      Expenses
            
            
            510Inventories
            
            
            10,423Other
      long-term assets
            
            
            124Fixed
      assets
            
            
            34Accounts
      payable
            
            
            (1,777
            )Other
      current liabilities
            
            
            (5,341
            )Net
      assets held for sale
            
            $
            8,616




- 61
-
 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








11.
            RESTRUCTURING
      CHARGES AND DISCONTINUED OPERATIONS,
Continued.





Recreational
Vehicle Segment





On
January 13, 2006, the Company sold all operating assets of Prodesign, LLC. The
total sales price was $8.2 million, of which the Company received $5.7 million
in cash, a $2.0 million promissory note and $0.5 million to be held in escrow to
cover potential warranty claims and uncollectible accounts receivable, as
defined in the sale agreement. The promissory note is to be repaid over a period
of 10 years, using an amortization period of 15 years, and bears interest at 6%
per annum with interest only payments being required in the first three years.
The funds remaining in the escrow account of $0.4 million reverted to the
Company in February 2007 per the sales agreement. In accordance with Statement
of Financial Accounting Standard No. 144, Prodesign qualified as a separate
component of the Company’s business and as a result, the operating results of
Prodesign have been accounted for as a discontinued operation. Previously
reported financial results for all periods presented have been adjusted to
reflect this business as a discontinued operation. In conjunction with the
classification of Prodesign as a discontinued operation, management allocated
goodwill of $0.3 million to the discontinued operations from the RV Segment
goodwill based on the relative fair value of the discontinued operations to the
RV Segment. The $0.3 million of allocated goodwill has been included in the
calculation of the final gain on sale of assets in the first quarter of 2006.
Net sales of Prodesign for the years ended December 31, 2006 and 2005 were $0.4
million and $14.2 million, respectively, and the pre-tax income (loss) for the
years ended December 31, 2006 and 2005 were $2.0 million and $(0.7) million,
respectively.




Assets
and liabilities of Prodesign, which are included in the consolidated balance
sheet, were as follows at December 31, 2005 (in thousands):




2005Accounts
      and other receivables
            
            $
            781Prepaid
      expenses
            
            
            51Inventories
            
            
            909Other
      long-term assets
            
            
            437Fixed
      assets
            
            
            4,144Accounts
      payable
            
            
            (116
            )Other
      current liabilities
            
            
            (495
            )Net
      assets held for sale
            
            $
            5,711





Goodwill
Impairment





Goodwill represents the excess of the
purchase price over the fair value of net tangible and identifiable intangible
assets of acquired businesses. Goodwill assets deemed to have indefinite lives
are not amortized, but are subject to impairment tests at least annually in
accordance with SFAS No. 142, Goodwill and
OtherIntangible
Assets. The Company
reviews the carrying amounts of goodwill assets annually by segment to determine
if such assets may be impaired. If the carrying amounts of these assets are not
recoverable based upon a discounted cash flow analysis, such assets are reduced
by the estimated shortfall of fair value to recorded value. At December 31,
2006, the Company had $16.9 million of goodwill, $13.0 million attributable to
the Housing reporting unit and $3.9 million attributable to the RV reporting
unit. The RV reporting unit goodwill originated from the Company’s purchase
of recreational vehicle assets. The Company conducted its annual goodwill
impairment test as required by FASB Statement No. 142,Goodwill and Other
Intangible Assets,during
the fourth quarter of 2006 and the results indicated that the estimated fair
value of each of the Company’s reporting units exceeded their carrying value. As
a result of the continued weakness in the RV market, combined with continuing
losses incurred by the RV reporting unit, SFAS No. 142 required the Company to
perform an interim goodwill impairment evaluation during the quarter ended June
30, 2007. Because the carrying value of the RV reporting unit exceeded its
fair value as calculated using the expected present value of future cash flows,
the Company concluded that the goodwill was impaired as of June 30,
2007. Accordingly, the Company recorded a non-cash goodwill impairment
charge of $3.9 million in the quarter ended June 30, 2007. The Company has
performed the required annual impairment tests and has determined that there was
no impairment indicated for remaining Housing reporting unit goodwill at
December 31, 2007.


- 62
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 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








12.
            COMMITMENTS
      AND CONTINGENCIES.





Lease
Commitments





The
Company leases various manufacturing and office facilities under non-cancelable
agreements that expire at various dates through November 2011. Several of the
leases contain renewal options and options to purchase and require the payment
of property taxes, normal maintenance and insurance on the properties. Certain
office and delivery equipment is also leased under non-cancelable agreements
that expire at various dates through October 2012. The above-described leases
are accounted for as operating leases.





Future
minimum annual operating lease commitments at December 31, 2007 aggregated $4.3
million and are payable during the next 5 years as follows: 2008 - $1.3 million,
2009 - $1.1 million, 2010 - $1.0 million, 2011 - $0.7 million, and 2012 - $0.2
million. Total rental expense for the years ended December 31, 2007, 2006 and
2005 aggregated $1.5 million, $1.6 million and $1.6 million,
respectively.





Obligation
to Purchase Consigned Inventories





The
Company obtains vehicle chassis for its recreational vehicle products directly
from automobile manufacturers under converter pool agreements. The agreements
generally provide that the manufacturer will provide a supply of chassis at the
Company's various production facilities under the terms and conditions as set
forth in the agreement. Chassis are accounted for as consigned inventory until
assigned to a unit in the production process. At that point, the Company is
obligated to purchase the chassis and it is recorded as inventory. At December
31, 2007 and 2006, chassis inventory, accounted for as consigned inventory,
approximated $14.5 million and $11.4 million, respectively.





Repurchase
Agreements





The
Company was contingently liable at December 31, 2007 to banks and other
financial institutions on repurchase agreements in connection with financing
provided by such institutions to most of the Company's independent dealers in
connection with their purchase of the Company's recreational vehicle products.
These agreements provide for the Company to repurchase its products from the
financing institution in the event that they have repossessed them upon a
dealer's default. Products repurchased from dealers under these agreements are
accounted for as a reduction in revenue and cost of sales at the time of
repurchase. Although the estimated contingent liability approximates $176
million at December 31, 2007 ($187 million at December 31, 2006), the risk
of loss resulting from these agreements is spread over the Company's numerous
dealers and is further reduced by the resale value of the products repurchased.
Based on losses previously experienced under these obligations, the Company has
established a reserve for estimated losses under repurchase agreements. At
December 31, 2007 and 2006, $0.7 million and $0.3 million, respectively, was
recorded as an accrual for estimated losses under repurchase
agreements.





The
Company was also contingently liable at December 31, 2007 to a financial
institution on repurchase agreements in connection with financing provided by
the institution to certain of the Company's independent home builders in
connection with their purchase of the Company's housing products. This agreement
provides for the Company to repurchase its products from the financing
institution in the event that they have repossessed them upon a builder's
default. Products repurchased from builders under this agreement are accounted
for as a reduction in revenue and cost of sales at the time of repurchase.
Although the estimated contingent liability approximates $14.6 million at
December 31, 2007 ($16.2 million at December 31, 2006), the risk of loss
resulting from these agreements is spread over the Company's numerous builders
and is further reduced by the resale value of the products repurchased. The
Company has evaluated the potential for losses under this agreement and has
recorded an accrual of $0.2 million at December 31, 2007 and $0.2 million at
December 31, 2006 for estimated losses under the repurchase
agreement.


- 63
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 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








12.
            COMMITMENTS
      AND CONTINGENCIES, Continued.





Corporate
Guarantees





The
Company was contingently liable under guarantees to financial institutions of
their loans to independent dealers for amounts totaling approximately $2.6
million at December 31, 2007 and $3.9 million at December 31, 2006. The Company
has an agreement with a financial institution to form a private-label financing
program to provide wholesale inventory financing to the Company's dealers in the
RV Segment. The agreement provides for a preferred program that provides
financing that is subject to the standard repurchase agreement described above.
In addition, the agreement provides for a reserve pool whereby the financial
institution makes available an aggregate line of credit not to exceed $40
million that will provide financing for dealers that may not otherwise qualify
for credit approval under the preferred program. No dealer being provided
financing from the reserve pool can receive an aggregate line of credit
exceeding $5 million. In addition to the standard repurchase agreement described
above, as of December 31, 2007 the Company was contingently liable to the
financial institutions up to a maximum of $2.0 million of aggregate losses, as
defined by the agreement, incurred by the financial institutions on designated
dealers with higher credit risks that are accepted into the reserve pool
financing program. The Company has recorded a loss reserve of $0.1 million at
December 31, 2007 and $0.1 million at December 31, 2006 associated with these
guarantees.





The
Company is liable under an agreement to guarantee the indebtedness incurred by a
recreational vehicle dealer towards the purchase of a dealership facility. The
guarantee is in the principal amount of $1 million for a period of five years or
until all indebtedness has been fully paid, whichever occurs first. The
guarantee period expires in March 2009. The Company has evaluated the potential
for losses under this agreement and has determined that the resolution of any
claims that may arise in the future would not materially affect the Company's
financial statements.





In
addition, the Company is liable under a guarantee to a financial institution for
model home financing provided to certain independent builders doing business
with the Company's Housing Segment. The amount outstanding under this agreement
at December 31, 2007 is $0.4 million ($0.4 million at December 31, 2006). Any
losses incurred under this guarantee would be offset by the proceeds from the
resale of the model home and losses are limited to 20% of the original contract
price, and cannot exceed a total of $2.0 million. As of December 31, 2007, no
losses have been incurred by the Company under the model home financing
program.





Financing
Obligation





During
the second quarter of 2004, the Company entered into an agreement to provide
financing of up to $4.9 million to a developer for the construction of a hotel
for which the Company was to provide modular units. As of December 31, 2007, the
Company provided $2.3 million in financing to the developer under this
arrangement. No funding has been provided since December 2005. The loans are
collateralized by a first priority interest in all tangible and intangible
property of the borrower. The developer was unable to obtain a building permit,
so the Company is pursuing its legal remedies through litigation to recoup the
financing extended to date. During the fourth quarter of 2006, the Company
obtained title to the real estate that was partial collateral for this note. In
the event the sale of the property does not generate proceeds sufficient to
cover the financing previously provided, the Company will continue pursuing its
legal remedies to recover any shortfall. As of December 31, 2007, the Company
has reserved an amount that Management believes the Company may not recover;
however, there is a potential for exposure in excess of the amount
reserved.





Change
of Control Agreements





On
February 3, 2000, the Company entered into Change of Control Agreements with key
executives. Under the terms of these agreements, in the event of a change in
control of the Company, as defined, the Company would be obligated to pay these
key executives for severance and other benefits. These agreements had aggregated
obligations of approximately $6.2 million and $8.3 million based on salaries and
benefits at December 31, 2007 and 2006, respectively. In addition, in the event
of a change of control of the Company, all outstanding stock options and SAR's
shall become immediately exercisable, restrictions are removed from restricted
stock, and all stock awards shall immediately be deemed fully
achieved.





Also on
February 3, 2000, the Company established a rabbi trust, which in the event of a
change of control, as defined, will be funded to cover the Company's obligations
under its Change of Control Agreements and its deferred compensation
plan.


- 64
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 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








12.
            COMMITMENTS
      AND CONTINGENCIES, Continued.





Self-Insurance





The
Company is self-insured for a portion of its product liability and certain other
liability exposures. Depending on the nature of the claim and the date of
occurrence, the Company's maximum exposure ranges from $250,000 to $500,000 per
claim. The Company accrues an estimated liability based on various factors,
including sales levels, insurance coverage and the amount of outstanding claims.
Management believes the liability recorded (see Note
7) is adequate to cover the Company's self-insured risk.





Litigation





On March
21, 2005, the Company entered into a settlement agreement with The Coleman
Company, Inc. to resolve the licensing agreement suit. Pursuant to the
settlement agreement, the Company has received $4.4 million from The Coleman
Company, Inc. in exchange for releasing all claims in the suit. The settlement
of $4.4 million was paid in two installments of $2.2 million, one of which was
received by the Company on March 23, 2005 and the second of which was received
on April 20, 2005, plus interest. In addition, the agreement provides for the
potential of an additional payment of $0.5 million if certain provisions of the
agreement are breached. The settlement of $4.4 million was recorded in the first
quarter of 2005 as a reduction of $1.7 million to cost of sales and a reduction
of $0.5 million to operating expenses at the RV Segment plus a reduction of $2.2
million to the Company’s general and administrative expenses.





During
2005, the Company settled a personal injury suit for $5.0 million, $1.0 million
of which was paid by the Company’s primary insurance carrier. The Company’s
self-insured retention is $250,000. During 2005, the Company paid $1.5 million
in addition to the amount paid by its primary carrier and recorded another
current liability of $2.5 million to recognize the remaining amount to be paid
on the settlement and the $250,000 retention. During June 2006, the remaining
liability of $2.5 million was paid. Since the excess carrier initially denied
coverage, the Company filed suit against the excess carrier to enforce coverage.
During the first quarter of 2006, the matter was settled for $2.875 million,
which the Company received on March 15, 2006 and was recorded as a reduction to
the RV Segment’s general and administrative expenses. There remains ongoing
litigation against other parties to recover the balance over the
retention.





During
the first quarter of 2006, the Company also entered into a partial settlement of
another insurance matter for $0.75 million, net of a contingency
fee. This amount was recorded as a reduction to the Company's general and
administrative expenses in the first quarter. The settlement was received during
the second quarter of 2006.





The
Company finalized arbitration with a housing customer over damages resulting
from a construction project during the third quarter of 2006 and the final
settlement did not exceed the amount the Company had previously accrued for this
matter.





On
November 21, 2006 the Company received a summons from the Internal Revenue
Service which requires the Company to produce various documents relating to its
research and development claims filed with the Internal Revenue Service for the
tax years 1999 through 2004. On March 6, 2007 the Company received an additional
summons from the Internal Revenue Service related to this matter regarding tax
years 1984 through 1988.





The
Company was named as a defendant in McGuire v. Gulf Stream Coach, Inc., which
was filed as a class action on April 9, 2007 in the United States District Court
for the Eastern District of Louisiana. The factual basis alleged is that the
plaintiffs were exposed to formaldehyde in FEMA travel trailers, which exposure
constitutes a manifest injury requiring medical monitoring to thwart development
of disease. Plaintiffs sought the following relief: class certification,
which was denied; payment into a court-supervised medical monitoring fund;
removal of all formaldehyde-existing materials from all trailers and
modification to provide adequate ventilation; repair and testing to prevent
further exposure; attorney’s fees and costs; and other appropriate
relief. Company filed a motion to dismiss on the basis that none of named
plaintiffs received a Coachmen trailer. The case and motion are currently
pending before the U.S. Judicial Panel on Multidistrict Litigation. Other
litigation has also been filed, in which the Company may become a
party.





The
Company is involved in various other legal proceedings, most of which are
ordinary disputes incidental to the industry and most of which are covered in
whole or in part by insurance. Management believes that the ultimate outcome of
these matters and any liabilities in excess of insurance coverage and
self-insurance accruals will not have a material adverse impact on the Company's
consolidated financial position, future business operations or cash
flows.


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 Index


Coachmen
Industries, Inc. and Subsidiaries





Notes
to Consolidated Financial Statements, Continued








13.
            UNAUDITED
      INTERIM FINANCIAL INFORMATION.





Certain
selected unaudited quarterly financial information for the years ended December
31, 2007 and 2006 is as follows (in thousands):




2007Quarter
      EndedMarch
      31
            
            June
      30
            
            September
      30
            
            December
      31Net
      sales
            
            $
            130,244
            
            $
            149,763
            
            $
            123,854
            
            $
            76,979Gross
      profit
            
            
            1,427
            
            
            5,994
            
            
            7,758
            
            
            (2,462
            )Net loss
      from continuing operations
            
            
            (10,448
            )
            
            (10,123
            )
            
            (4,344
            )
            
            (13,837
            )Net loss
            
            
            (10,448
            )
            
            (10,123
            )
            
            (4,344
            )
            
            (13,837
            )Net loss per
      common share - BasicContinuing
      operations
            
            
            (.67
            )
            
            (.64
            )
            
            (.28
            )
            
            (.87
            )Discontinuing
      operations
            
            
            -
            
            
            -
            
            
            -
            
            
            -(.67
            )
            
            (.64
            )
            
            (.28
            )
            
            (.87
            )Net
      loss per common share - DilutedContinuing
      operations
            
            
            (.67
            )
            
            (.64
            )
            
            (.28
            )
            
            (.87
            )Discontinuing
      operations
            
            
            -
            
            
            -
            
            
            -
            
            
            -$
            (.67
            )
            $
            (.64
            )
            $
            (.28
            )
            $
            (.87
            )2006Quarter
      EndedMarch
      31
            
            June
      30
            
            September
      30
            
            December
      31Net
      sales
            
            $
            162,554
            
            $
            155,321
            
            $
            130,715
            
            $
            115,792Gross
      profit
            
            
            6,413
            
            
            8,070
            
            
            5,981
            
            
            (248
            )Net income
      (loss) from continuing operations
            
            
            404
            
            
            480
            
            
            (2,733
            )
            
            (31,366
            )Net
      profit (loss)
            
            
            2,910
            
            
            304
            
            
            (3,516
            )
            
            (31,503
            )Net
      profit (loss) per common share - BasicContinuing
      operations
            
            
            .03
            
            
            .03
            
            
            (.17
            )
            
            (2.01
            )Discontinuing
      operations
            
            
            .16
            
            
            (.01
            )
            
            (.05
            )
            
            (0.01
            ).19
            
            
            .02
            
            
            (.22
            )
            
            (2.02
            )Net
      profit (loss) per common share - DilutedContinuing
      operations
            
            
            .03
            
            
            .03
            
            
            (.17
            )
            
            (2.01
            )Discontinuing
      operations
            
            
            .16
            
            
            (.01
            )
            
            (.05
            )
            
            (0.01
            )$
            .19
            
            $
            .02
            
            $
            (.22
            )
            $
            (2.02
            )





Note: The
Unaudited Interim Financial Information above has shipping and handling costs
reclassified for years prior to 2007, and should be read in conjunction with
Note
1, Nature of
Operations and Accounting Policies.


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 Index


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





Not
Applicable in 2007.





Item
      9A.
            Controls
      and Procedures





Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures





The
Company's management, with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, has conducted an evaluation, as of December
31, 2007, of the Company's disclosure controls and procedures; as such term is
defined under Exchange Act Rule 13a-15(e). Based on this evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective as of the end of the
period covered by this annual report.





Management's
Annual Report on Internal Control Over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. The Company's internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.





Our
internal control over financial reporting includes those policies and procedures
that:





•
            Pertain
      to the maintenance of records that, in reasonable detail, accurately and
      fairly reflect the transactions and dispositions of the assets of the
      Company;





•
            Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being
      made only in accordance with authorizations of management and directors;
      and





•
            Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree or compliance
with the policies or procedures may deteriorate.





Management
assessed the effectiveness of the Company's internal control over financial
reporting as of December 31, 2007. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on
our assessment and those criteria, management believes that the Company
maintained effective internal control over financial reporting as of December
31, 2007.





The
effectiveness of the Company’s internal control over financial reporting has
been audited by Ernst & Young LLP, an independent registered public
accounting firm as stated in their report, which appears on page 38.





Changes
in Internal Control Over Financial Reporting





No change
in the Company's internal control over financial reporting (as such term is
defined in Exchange Act Rule 13a-15(f)) occurred during the fiscal quarter ended
December 31, 2007 that materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting.




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 Index


Part
III.





Item
      10.
            Directors
      and Executive Officers of the
Registrant





(a)
Identification of Directors





Information
regarding the Registrant's directors is contained under the caption "Election of
Directors" in the Company's Proxy Statement dated March 27, 2008 and is
incorporated herein by reference.





(b)
Executive Officers of the Company





See
"Executive Officers of the Registrant"
contained herein.





(c)
Beneficial Ownership Reporting Compliance





Information
for "Section 16(a) Beneficial Ownership Reporting Compliance" is contained under
that caption in the Company's Proxy Statement dated March 27, 2008 and is
incorporated herein by reference.





(d)
Code of Ethics





The
Company has adopted a code of ethics that applies to all of its directors,
officers (including its chief executive officer, chief operating officer, chief
financial officer, chief accounting officer and any person performing similar
functions) and employees. The Company has made the Code of Ethics available on
its website at http://www.coachmen.com.





(e)
Audit Committee and Financial Expert of the Audit Committee





Information
regarding the Registrant's Audit Committee, including the committee members
designated as Financial Experts is contained under the caption "Audit Committee"
in the Company's Proxy Statement dated March 27, 2008 and is incorporated herein
by reference.





(f)
Nominations for Director





Information
regarding the Registrant's procedures for nominations for director is contained
under the caption "Nomination for Director" in the Company's Proxy Statement
dated March 27, 2008 and is incorporated herein by reference.





Item
      11.
            Executive
      Compensation





Information
for Item 11 is contained under the headings "Management Development/Compensation
Committee," “Compensation Discussion and Analysis,” and "Outside Director
Compensation" in the Company's Proxy Statement dated March 27, 2008 and is
incorporated herein by reference.





Item 12.
            Security
      Ownership of Certain Beneficial Owners and
  Management





Information
for Item 12 is contained under the captions "Directors' and Officers' Stock
Ownership" and "Stock Ownership Information" in the Company's Proxy Statement
dated March 27, 2008 and is incorporated herein by
reference.


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 Index


The
following table summarizes share and exercise price information about the
Company's equity compensation plans as of December 31, 2007:





Equity
Compensation Plan Information





Plan
      Category
            
            #
      of securities
              to
      be issued
              upon
      exercise of
              outstanding
      options,
              warrants
      and rights
            
            Weighted-average
              exercise
      price of
              outstanding
      options,
              warrants
      and rights
            
            #
      of securities remaining available for future issuance under equity
      compensation plansEquity
      compensation plans approved by shareholders
            
            
            133,650
            
            $
            12.20
            
            
            1,386,157Equity
      compensation plans not approved by shareholders
            
            
            -
            
            
            -
            
            
            -Total
            
            
            133,650
            
            $
            12.20
            
            
            1,386,157





Item
      13.
            Certain
      Relationships and Related
Transactions





Information
for Item 13 is contained under the heading “Determination of Independence of
Directors” in the Company’s Proxy Statement dated March 27, 2008 and is
incorporated herein by reference.





Item
      14.
            Principal
      Accountant Fees and Services





Information
regarding the Principal Accountant Fees and Services is contained under the
caption "Independent Registered Public Accounting Firm" in the Company's Proxy
Statement dated March 27, 2008 and is incorporated herein by
reference.




Part
IV.





Item
      15.
            Exhibits
      and Financial Statement Schedule




(a)
            The
      following Financial Statements and Financial Statement Schedule are
      included in Item 8
herein.





1. Financial
Statements





Reports
of Independent Registered Public Accounting Firm


Consolidated Balance Sheets at December 31, 2007 and
2006


Consolidated Statements of Operations for the
years ended December 31, 2007, 2006 and 2005


Consolidated Statements of Shareholders' Equity for
the years ended December 31, 2007, 2006 and 2005


Consolidated Statements of Cash Flows for the years
ended December 31, 2007, 2006 and 2005


Notes to
Consolidated Financial Statements





2.Financial Statement
Schedule





Schedule II - Valuation and Qualifying
Accounts





All other
schedules required by Form 10-K Annual Report have been omitted because they
were inapplicable, included in the Notes to
the Consolidated Financial Statements, or otherwise not required
under instructions contained in Regulation SX.





3. Exhibits




See Index to Exhibits.


- 69
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 Index


SCHEDULE II




VALUATION
AND QUALIFYING ACCOUNTS


(in
thousands)





Description
            
            Balance
      at
              Beginning
              of
      Period
            
            Additions
      Charged
              to
      Costs
              and
      Expenses
            
            Payment
      or
              Utilization
            
            Balance
      at End
              of
      PeriodFiscal
      year ended December 31, 2007:Allowance
      for doubtful accounts:
            
            $
            1,134
            
            $
            512
            
            $
            902
            (A)
            $
            744Product
      warranty reserves:
            
            $
            11,099
            
            $
            16,787
            
            $
            19,763
            (B)
            $
            8,123Repurchase
      agreement and Corporate guarantee loss reserves:
            
            $
            635
            
            $
            618
            
            $
            327
            
            $
            926Valuation
      allowance against deferred tax assets:
            
            $
            24,731
            
            $
            13,292
            
            $
            -
            
            $
            38,023Fiscal
      year ended December 31, 2006:Allowance
      for doubtful accounts:
            
            $
            1,240
            
            $
            1,631
            
            $
            (1,737
            )
      (A)
            $
            1,134Product
      warranty reserves:
            
            $
            20,005
            
            $
            21,598
            
            $
            (30,504
            (B)
                )
      (C)
            $
            11,099Repurchase
      agreement and Corporate guarantee loss reserves:
            
            $
            775
            
            $
            356
            
            $
            (496
            )
            $
            635Valuation
      allowance against deferred tax assets:
            
            $
            -
            
            $
            24,731
            (D)
            $
            -
            
            $
            24,731Fiscal
      year ended December 31, 2005:Allowance
      for doubtful accounts:
            
            $
            919
            
            $
            988
            
            $
            (667
            )
      (A)
            $
            1,240Product
      warranty reserves:
            
            $
            10,140
            
            $
            34,771
            (C)
            $
            (24,906
            )
      (B)
            $
            20,005Repurchase
      agreement and Corporate guarantee loss reserves:
            
            $
            726
            
            $
            225
            
            $
            (176
            )
            $
            775








(A)
            Write-off
      of bad debts, less recoveries.


(B)
            Claims
      paid, less recoveries.


(C)
            Reflects
      increase due to specific warranty issues which occurred in 2005, primarily
      camping trailer lift systems and sidewall lamination issues within
      the RV Segment.


(D)
            Allowance
      charged to Continuing Operations $24,360, Discontinued Operations
      $371.




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 Index


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





COACHMEN
      INDUSTRIES, INC.Date:
      February 28, 2008/s/
      R. M. LaversR.
      M. Lavers(Chief
      Executive Officer)/s/
      C. A. ZuhlC.
      A. Zuhl(Chief
      Financial Officer)/s/
      M. L. MirandaM.
      L. Miranda(Vice
      President, Treasurer and Corporate
Controller)










Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities as of February 28, 2008.











/s/
      G. B. Bloom
            
            /s/
      D. W. HudlerG.
      B. Bloom
            
            D.
      W. Hudler(Director)
            
            (Director)/s/
      R. J. Deputy
            
            /s/
      W. P. JohnsonR.
      J. Deputy
            
            W.
      P. Johnson(Director)
            
            (Director,
      Chairman of the Board)/s/
      J. A. Goebel
            
            /s/
      E. W. MillerJ.
      A. Goebel
            
            E.
      W. Miller(Director)
            
            (Director)




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 Index


INDEX TO EXHIBITS




Number
      Assigned
              In
      Regulation
              S-K, Item
      601
            Description of
      Exhibit(3)(a)(i)
            Articles
      of Incorporation of the Company as amended on May 30, 1995 (incorporated
      by reference to Exhibit 3(i) to the Company's Annual Report on Form 10-K
      for the fiscal year ended December 31, 1995).(3)(a)(ii)
            Articles
      of Amendment to Articles of Incorporation (incorporated by reference to
      Exhibit 4.2 to the Company's Form S-3 Registration Statement, File No.
      333-14579).(3)(b)
            By-Laws
      as modified through August 6, 2007 (incorporated by reference to Exhibit
      3(b) to the Company's Quarterly Report on Form 10-Q for the quarter
      ended September 30, 2007).(4)(a)
            Credit
      Agreement dated as of June 30, 2003 among Coachmen Industries, Inc., the
      Lenders named therein, and Bank One, Indiana, N.A. (incorporated by
      reference to Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q
      for the quarter ended June 30, 2003).(4)(b)
            Stockholder
      Rights Agreement (incorporated by reference to Exhibit 1 to Form 8-A dated
      January 5, 2000).(4)(c)
            Loan
      and Security Agreement dated as of August 2, 2006 among Coachmen
      Industries, Inc., the Lenders named therein and LaSalle Business Credit,
      LLC (incorporated by reference to Exhibit 4 to the Company’s Form 8-K
      filed August 3, 2006).(4)(d)
            Amendment
      No. 1 to Loan and Security Agreement dated as of August 2, 2006 among
      Coachmen Industries, Inc., the Lenders named therein and LaSalle Business
      Credit, LLC (incorporated by reference to Exhibit 4(d) to the Company’s
      Annual Report on Form 10-K for the fiscal year ended December 31,
      2006).(4)(e)
            Amendment
      No. 2 to Loan and Security Agreement dated as of August 2, 2006 among
      Coachmen Industries, Inc., the Lenders named therein and LaSalle Business
      Credit, LLC (incorporated by reference to Exhibit 4(e) to the Company’s
      Annual Report on Form 10-K for the fiscal year ended December 31,
      2006).





*(10)(a)
            Executive
      Benefit and Estate Accumulation Plan, as amended and restated effective as
      of September 30, 2000 (incorporated by reference to Exhibit 10(a) to the
      Company's Annual Report on Form 10-K for the fiscal year ended December
      31, 2001).*(10)(b)
            2000
      Omnibus Stock Incentive Program (incorporated by reference to Exhibit A to
      the Company's Proxy Statement dated March 27, 2000 for its Annual Meeting
      in 2000).*(10)(b)(i)
            Resolution
      regarding Amendment of 2000 Omnibus Stock Incentive Program adopted by the
      Company's Board of Directors on July 27, 2000 (incorporated by reference
      to Exhibit 10(b)(i) to the Company's Annual Report on Form 10-K for the
      fiscal year ended December 31, 2001).*(10)(c)
            Form
      of Change in Control Agreements for certain executive officers (Tier 1)
      (incorporated by reference to Exhibit 10(c) to the Company's Annual Report
      on Form 10-K for the fiscal year ended December 31,
  2000).*(10)(d)
            Form
      of Change in Control Agreements for certain executive officers (Tier 2)
      (incorporated by reference to Exhibit 10(d) to the Company's Annual Report
      on Form 10-K for the fiscal year ended December 31,
  2000).*(10)(e)
            Coachmen
      Industries, Inc. Supplemental Deferred Compensation Plan (Amended and
      Restated as of January 1, 2003) (incorporated by reference to Exhibit
      10(e) to the Company's Annual Report on Form 10-K for the fiscal year
      ended December 31, 2004).*(10)(f)
            Executive
      Annual Performance Incentive Plan effective January 1, 2002 (incorporated
      by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K
      for the fiscal year ended December 31,
2002).




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 Index


*(10)(g)
            Long
      Term Incentives Performance Based Restricted Stock Plan effective January
      1, 2003 (incorporated by reference to Exhibit 10(g) to the Company's
      Annual Report on Form 10-K for the fiscal year ended December 31,
      2002).*(10)(h)
            Form
      of Restricted Stock Agreement under the Coachmen Industries, Inc. Long
      Term Incentives Performance Based Restricted Stock Plan (incorporated by
      reference to Exhibit 10(h) to the Company's Annual Report on Form 10-K for
      the fiscal year ended December 31, 2004).(10)(i)
            Loan
      and Security Agreement dated as of August 2, 2006 among Coachmen
      Industries, Inc., the Lenders named therein and LaSalle Business Credit,
      LLC (included in Exhibit 4(c)).(10)(j)
            Amendment
      No. 1 to Loan and Security Agreement dated as of August 2, 2006 among
      Coachmen Industries, Inc., the Lenders named therein and LaSalle Business
      Credit, LLC (included in Exhibit 4(d)).(10)(k)
            Amendment
      No. 2 to Loan and Security Agreement dated as of August 2, 2006 among
      Coachmen Industries, Inc., the Lenders named therein and LaSalle Business
      Credit, LLC (included in Exhibit
4(e)).





(10)(l)
            Closing
      Documents and Contract on Sale of Real Estate in Tennessee (incorporated
      by reference to Exhibit 4(d) to the Company’s Annual Report on Form 10-K
      for the fiscal year ended December 31, 2006).(10)(m)
            Form
      of the 2006 Restricted Stock Award Agreement and listing of the maximum
      number of shares each Executive Officer may earn under the Agreements
      (incorporated by reference to Exhibit 10(a) to the Company's Quarterly
      Report on Form 10-Q for the quarter ended March 31,
  2006).(10)(n)
            Entry
      into a Material Definitive Stock Purchase Agreement for the Sale of Miller
      Building Systems, Inc. (incorporated by reference to Exhibit 10 to the
      Company’s Form 8-K filed April 4, 2006).(10)(o)
            Entry
      into a Material Definitive Stock Purchase Agreement for the Sale of Cessna
      1994 Citation Jet (incorporated by reference to Exhibit 10 to the
      Company's Form 8-K filed June 2, 2006).(10)(p)
            Program
      Agreement and related Repurchase Agreement dated as of May 10, 2004
      between Textron Financial Corporation and certain subsidiaries of Coachmen
      Industries, Inc. (incorporated by reference to Exhibit 10.2 to the
      Company's Quarterly Report on Form 10-Q for the quarter ended September
      30, 2004).*(10)(q)
            Summary
      of Life Insurance and Long Term Disability Benefits for Executives
      (incorporated by reference to Exhibit 10(q) to the Company's Annual Report
      on Form 10-K for the fiscal year ended December 31,
  2004).*(10)(r)
            Description
      of Non-management Director Compensation (incorporated by reference to
      Exhibit 10(r) to the Company's Annual Report on Form 10-K for the fiscal
      year ended December 31, 2004).(10)(s)
            Mentor
      Protégé Agreement between Coachmen Industries, Inc. and The Warrior Group,
      Inc. (incorporated by reference to Exhibit 10.1 to the Company's Current
      Report on Form 8-K filed August 19, 2005).(10)(t)
            Entry
      into a Material Definitive Stock Purchase Agreement for the Sale of Palm
      Shores, Brevard County, Florida property(incorporated
      by reference to Exhibit 10 to the Company's Form 8-K filed June 30,
      2006).(10)(u)
            Severance
      and Early Retirement Agreement and General Release of All Claims dated
      October 23, 2006 among Coachmen Industries, Inc. and Claire C. Skinner
      (incorporated by reference to Exhibit 10(a) to the Company's Quarterly
      Report on Form 10-Q for the quarter ended September 30,
    2006).(10)(v)
            Form
      of the 2006 Restricted Stock Award Agreement and listing of the maximum
      number of shares each Executive Officer may earn under the Agreements
      (incorporated by reference to Exhibit 10(a) to the Company's Quarterly
      Report on Form 10-Q for the quarter ended September 30,
    2006).(10)(w)
            2007
      Restricted Stock Award Agreement under the 2007 Long-Term Incentive Plan
      (incorporated by reference to Exhibit 10(a) to the Company’s Quarterly
      Report on Form 10-Q for the quarter ended March 31,
  2007).




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 Index


(10)(x)
            Standard
      Purchase Agreement dated October 26, 2006, between All American Building
      Systems and the Warrior Group, Inc. (incorporated by reference to Exhibit
      10(b) to the Company’s Quarterly Report on Form 10-Q for the quarter ended
      March 31, 2007).(10)(y)
            Standard
      Purchase Agreement dated December 20, 2007 between All American Building
      Systems and the Warrior Group, Inc. (incorporated by reference to Exhibit
      10.1 to the Company’s Current Report on Form 8-K filed January 25,
      2008).(10)(z)
            Standard
      Purchase Agreement dated December 20, 2007 between All American Building
      Systems and the Warrior Group, Inc. (incorporated by reference to Exhibit
      10.2 to the Company’s Current Report on Form 8-K filed January 25,
      2008).(11)
            No
      Exhibit - See Consolidated Statements of
      Operations and Note 8 of Notes to Consolidated Financial
      Statements, contained herein.(14)
            Code
      of Ethics (incorporated by reference to Exhibit 14 to the Company's Annual
      Report on Form 10-K for the fiscal year ended December 31,
      2003).(21)
            Registrant and Subsidiaries of the
      Registrant.(23)
            Consent of Ernst & Young
  LLP.(31.1)
            Rule 13a-14(a) Certification of Chief Executive
      Officer.(31.2)
            Rule 13a-14(a) Certification of Chief Financial
      Officer.(32.1)
            Section 1350 Certification of Chief Executive
      Officer.(32.2)
            Section 1350 Certification of Chief Financial
      Officer.





*
Management Contract or Compensatory Plan.




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