**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**Form
      10-Q**





(Mark
      one)


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


For
      the
      quarterly period ended September 30, 2006.


OR





**o** **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.)*




**2831
                Dexter Drive, Elkhart, Indiana**
            
            **46514***(Address
                of principal executive offices)*
            
            *(Zip
                Code)*





Registrant's
                telephone number, including area code
            
            **(574)
                262-0123**




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 o





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





Large
                accelerated filero
            
            Accelerated
                filerx
            
            Non-accelerated
                filero





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





Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date:





Number
      of shares of Common Stock, without par value, outstanding as of the close
      of business on October 31, 2006:  15,655,345














**FORM
                10-Q****INDEX****Part
                I. Financial Information**
            **Page**Financial
                Statements:Consolidated
                Balance Sheets at September 30, 2006 and
                December 31, 2005
            3Consolidated
                Statements of Operations for the three and
                nine months ended September 30, 2006 and 2005
            4Consolidated
                Statements of Cash Flows for the nine
                months ended September 30, 2006 and 2005
            5Notes
                to Consolidated Financial
                Statements
            6-16Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            17-23Quantitative
                and Qualitative Disclosures About Market
                Risk
            24Controls
                and Procedures
            24**Part
                II. Other Information**Item
                6. Exhibits
            25Signatures
            26Index
                to Exhibits
            27







Index


**Coachmen
      Industries, Inc.**


**Consolidated
      Balance Sheets**


(in
      thousands)


(unaudited)


September
                30,
            
            December
                31,2006
            
            2005**Assets**CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            11,728
            
            $
            2,780Trade
                receivables, less allowance for doubtful receivables 2006 - $1,283
                and
                2005 - $1,240
            
            
            20,653
            
            
            47,174Other
                receivables
            
            
            1,806
            
            
            1,969Refundable
                income taxes
            
            
            12,506
            
            
            10,284Inventories
            
            
            103,611
            
            
            121,304Prepaid
                expenses and other
            
            
            5,319
            
            
            3,992Deferred
                income taxes
            
            
            11,146
            
            
            11,421Assets
                held for sale
            
            
            2,375
            
            
            291Total
                current assets
            
            
            169,144
            
            
            199,215Property,
                plant and equipment**,**net
            
            
            58,348
            
            
            67,581Notes
                receivable
            
            
            7,197
            
            
            2,493Goodwill
            
            
            16,865
            
            
            17,383Cash
                value of life insurance, net of loans
            
            
            30,651
            
            
            28,880Deferred
                income taxes
            
            
            2,913
            
            
            4,279Other
            
            
            2,183
            
            
            2,985TOTAL
                ASSETS
            
            $
            287,301
            
            $
            322,816**Liabilities
                and Shareholders' Equity**CURRENT
                LIABILITIESShort-term
                borrowings
            
            $
            10,814
            
            $
            12,276Accounts
                payable, trade
            
            
            26,116
            
            
            31,658Accrued
                income taxes
            
            
            -
            
            
            533Accrued
                expenses and other liabilities
            
            
            39,294
            
            
            54,856Floorplan
                notes payable
            
            
            4,273
            
            
            4,361Current
                maturities of long-term debt
            
            
            1,077
            
            
            2,223Total
                current liabilities
            
            
            81,574
            
            
            105,907Long-term
                debt
            
            
            5,744
            
            
            12,913Postretirement
                deferred compensation benefits
            
            
            8,427
            
            
            10,182Other
            
            
            -
            
            
            11Total
                liabilities
            
            
            95,745
            
            
            129,013COMMITMENTS
                AND CONTINGENCIES****(see
                Note 10)SHAREHOLDERS'
                EQUITYCommon
                shares, without par value: authorized 60,000 shares; issued 2006
                - 21,151
                shares and 2005 - 21,134 shares
            
            
            92,331
            
            
            92,164Additional
                paid-in capital
            
            
            7,313
            
            
            6,465Unearned
                compensation
            
            
            -
            
            
            (142
            )Accumulated
                other comprehensive loss
            
            
            (10)
            
            
            (6
            )Retained
                earnings
            
            
            151,598
            
            
            154,246Treasury
                shares, at cost, 2006 - 5,495 shares and 2005 - 5,375
                shares
            
            
            (59,676
            )
            
            (58,924
            )Total
                shareholders' equity
            
            
            191,556
            
            
            193,803TOTAL
                LIABILITIES AND SHAREHOLDERS' EQUITY
            
            $
            287,301
            
            $
            322,816


*See
      Notes to Consolidated Financial
      Statements.*


-
          3
          -
 Index


**Coachmen
      Industries, Inc. and
      Subsidiaries**


**Consolidated
      Statements of Operations**


(in
      thousands, except per share amounts)


(Unaudited)




Three
                Months Ended September 30,
            Nine
                Months Ended September 30,2006
            
            2005
            
            2006
            
            2005Net
                sales
            
            $
            130,715
            
            $
            180,168
            
            $
            448,590
            
            $
            562,448Cost
                of sales
            
            
            117,650
            
            
            166,453
            
            
            404,896
            
            
            509,826Gross
                profit
            
            
            13,065
            
            
            13,715
            
            
            43,694
            
            
            52,622Operating
                expenses:Delivery
            
            
            7,084
            
            
            8,683
            
            
            23,230
            
            
            25,262Selling
            
            
            6,520
            
            
            6,692
            
            
            16,946
            
            
            21,804General
                and administrative
            
            
            6,226
            
            
            9,814
            
            
            14,403
            
            
            22,591(Gain)
                loss on sale of assets, net
            
            
            (291
            )
            
            820
            
            
            (6,340
            )
            
            78019,539
            
            
            26,009
            
            
            48,239
            
            
            70,437Operating
                loss
            
            
            (6,474
            )
            
            (12,294
            )
            
            (4,545
            )
            
            (17,815
            )Nonoperating
                (income) expense:Interest
                expense
            
            
            916
            
            
            794
            
            
            2,616
            
            
            2,377Investment
                income
            
            
            (421
            )
            
            (354
            )
            
            (1,165
            )
            
            (1,612
            )Other
                income, net
            
            
            (678
            )
            
            (93
            )
            
            (897
            )
            
            (325
            )(183
            )
            
            347
            
            
            554
            
            
            440Loss
                from continuing operations before income taxes
            
            
            (6,291
            )
            
            (12,641
            )
            
            (5,099
            )
            
            (18,255
            )Income
                tax benefit
            
            
            (2,937
            )
            
            (6,466
            )
            
            (3,249
            )
            
            (9,466
            )Net
                loss from continuing operations
            
            
            (3,354
            )
            
            (6,175
            )
            
            (1,850
            )
            
            (8,789
            )Discontinued
                operationsLoss
                from operations of discontinued entities (net of tax benefits of
                $(100),$(2,203),
                $(423) and $(2,372), respectively)
            
            
            (162
            )
            
            (3,171
            )
            
            (657
            )
            
            (3,413
            )Gain
                on sale of assets of discontinued entities (net of taxes of $2,140
                in
                2006)
            
            
            -
            
            
            -
            
            
            2,205
            
            
            -Income
                (loss) from discontinued operations
            
            
            (162
            )
            
            (3,171
            )
            
            1,548
            
            
            (3,413
            )Net
                loss
            
            $
            (3,516
            )
            $
            (9,346
            )
            $
            (302
            )
            $
            (12,202
            )Earnings
                (loss) per share - BasicContinuing
                operations
            
            $
            (.21
            )
            $
            (.40
            )
            $
            (.12
            )
            $
            (.56
            )Discontinued
                operations
            
            
            (.01
            )
            
            (.20
            )
            
            .10
            
            
            (.22
            )Net
                loss per share
            
            
            (.22
            )
            
            (.60
            )
            
            (.02
            )
            
            (.78
            )Earnings
                (loss) per share - DilutedContinuing
                operations
            
            
            (.21
            )
            
            (.40
            )
            
            (.12
            )
            
            (.56
            )Discontinued
                operations
            
            
            (.01
            )
            
            (.20
            )
            
            .10
            
            
            (.22
            )Net
                loss per share
            
            $
            (.22
            )
            $
            (.60
            )
            $
            (.02
            )
            $
            (.78
            )Number
                of common shares used in the computation of loss per
                share:Basic
            
            
            15,634
            
            
            15,556
            
            
            15,664
            
            
            15,545Diluted
            
            
            15,634
            
            
            15,556
            
            
            15,664
            
            
            15,545Cash
                dividends declared per common share
            
            $
            .03
            
            $
            .06
            
            $
            .15
            
            $
            .18


*See
      Notes to Consolidated Financial Statements.*


-
          4
          -
 Index


**Coachmen
      Industries, Inc. and
      Subsidiaries**


**Consolidated
      Statements of Cash Flows**


(in
      thousands)


(Unaudited)


Nine
                Months Ended September 30,2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            $
            (302
            )
            $
            (12,202
            )Adjustments
                to reconcile net loss to net cash provided by operating
                activities:Depreciation
            
            
            4,869
            
            
            6,638Provision
                for doubtful receivables, net of recoveries
            
            
            444
            
            
            574Provision
                for write-down of property to net realizable value
            
            
            -
            
            
            6,986Net
                realized and unrealized gains on marketable securities and derivatives
            
            
            (4
            )
            
            (325
            )Gain
                on sale of properties and other assets, net
            
            
            (10,830
            )
            
            (304
            )Increase
                in cash surrender value of life insurance policies
            
            
            (437
            )
            
            (923
            )Deferred
                income tax provision (benefit)
            
            
            1,641
            
            
            (6,395
            )Other
            
            
            234
            
            
            (871
            )Changes
                in certain assets and liabilities, net of effects of acquisitions
                and
                dispositions:Trade
                receivables
            
            
            21,489
            
            
            16,659Inventories
            
            
            5,527
            
            
            6,350Prepaid
                expenses and other
            
            
            (1,944
            )
            
            (199
            )Accounts
                payable, trade
            
            
            (4,502
            )
            
            14,720Income
                taxes - accrued and refundable
            
            
            (2,755
            )
            
            (8,981
            )Accrued
                expenses and other liabilities
            
            
            (11,735
            )
            
            9,600Net
                cash provided by operating activities
            
            
            1,695
            
            
            31,327CASH
                FLOWS FROM INVESTING ACTIVITIES:Proceeds
                from sales of marketable securities
            
            
            -
            
            
            1,933Proceeds
                from sale of properties and other assets
            
            
            24,680
            
            
            395Investments
                in marketable securities
            
            
            (1,334
            )
            
            (2,181
            )Purchases
                of property and equipment
            
            
            (4,139
            )
            
            (5,046
            )Other
            
            
            (276
            )
            
            140Net
                cash provided by (used in) investing activities
            
            
            18,931
            
            
            (4,759
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from short-term borrowings
            
            
            7,070
            
            
            232Payments
                of short-term borrowings
            
            
            (8,620
            )
            
            (23,042
            )Proceeds
                from long-term debt
            
            
            255
            
            
            241Payments
                of long-term debt
            
            
            (8,570
            )
            
            (1,279
            )Issuance
                of common shares under stock incentive plans
            
            
            192
            
            
            283Cash
                dividends paid
            
            
            (1,876
            )
            
            (1,887
            )Purchases
                of common shares for treasury
            
            
            (129
            )
            
            -Other
            
            
            -
            
            
            67Net
                cash used in financing activities
            
            
            (11,678
            )
            
            (25,385
            )Increase
                in cash and cash equivalents
            
            
            8,948
            
            
            1,183CASH
                AND CASH EQUIVALENTS:Beginning
                of period
            
            
            2,780
            
            
            14,992End
                of period
            
            $
            11,728
            
            $
            16,175Supplemental
                disclosures of cash flow information:Operating
                cash received during the period related to insurance
                settlement
            
            $
            2,875
            
            $
            2,213


*See
      Notes to Consolidated Financial Statements.*


-
          5
          -
 Index




**Coachmen
      Industries, Inc. and Subsidiaries**


**Notes
      to Consolidated Financial Statements**


(Unaudited)





**1.   
      BASIS OF PRESENTATION.**





The
      condensed consolidated financial statements have been prepared by Coachmen
      Industries, Inc. (“the Company”), without audit, in accordance with accounting
      principles generally accepted in the United States for interim financial
      information and with the instructions to Form 10-Q and Article 10 of Regulation
      S-X. Accordingly, they do not include all of the information and footnotes
      required by accounting principles generally accepted in the United States for
      complete financial statements. Management believes the disclosures made in
      this
      document are adequate so as not to make the information presented
      misleading.





In
      the
      opinion of management, the accompanying unaudited condensed consolidated
      financial statements, taken as a whole, contain all adjustments which are of
      a
      normal recurring nature necessary to present fairly the financial position
      of
      the Company as of September 30, 2006, and the results of its operations and
      cash
      flows for the interim periods presented. Operating results for the nine-month
      period ended September 30, 2006 are not necessarily indicative of the results
      that may be expected for the year ending December 31, 2006. It is suggested
      that
      these condensed financial statements be read in conjunction with the financial
      statements and notes thereto included in the Company’s Form 10-K for the year
      ended December 31, 2005.





**Statement
      of Operations Classification**





The
      Company calculates its gross profit as the difference between its net sales
      and
      the associated cost of sales. Cost of sales consists of direct product
      costs including inbound freight. The Company classifies the following operating
      expense categories separately on its statement of operations: delivery, which
      consists of outbound shipping and handling costs; selling; general and
      administrative; asset impairments and gains (losses) of sales of assets,
      net.





The
      Company’s gross profit may not be comparable to other entities within our
      industry whose shipping and handling expenses are presented as a component
      of
      cost of sales. Delivery expense was $7.1 million and $8.7 million for the three
      months ended September 30, 2006 and 2005, respectively, and $23.2 million and
      $25.3 million for the nine months ended September 30, 2006 and 2005,
      respectively.





**Reclassifications**





Certain
      reclassifications have been made in the fiscal 2005 consolidated financial
      statements and related footnotes to conform to the presentation used in
      2006.





**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 and Building. 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 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 9).  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, used by the chief operating decision
      maker of the Company for the three and nine-month periods ended September 30
      (in
      thousands):





Three
                Months Ended September 30,
            Nine
                Months Ended September 30,2006
            
            2005
            
            2006
            
            2005Net
                salesRecreational
                vehicles
            
            $
            90,490
            
            $
            129,875
            
            $
            321,454
            
            $
            425,007Housing
                and building
            
            
            40,225
            
            
            50,293
            
            
            127,136
            
            
            137,441Consolidated
                total
            
            $
            130,715
            
            $
            180,168
            
            $
            448,590
            
            $
            562,448




-
          6
          -
 Index




Three
                Months Ended September 30,
            Nine
                Months Ended September 30,2006
            
            2005
            
            2006
            
            2005Gross
                profitRecreational
                vehicles
            
            $
            3,708
            
            $
            1,410
            
            $
            13,770
            
            $
            20,114Housing
                and building
            
            
            9,357
            
            
            12,305
            
            
            29,924
            
            
            32,508Consolidated
                total
            
            $
            13,065
            
            $
            13,715
            
            $
            43,694
            
            $
            52,622Operating
                expensesRecreational
                vehicles
            
            $
            10,984
            
            $
            16,577
            
            $
            28,719
            
            $
            43,027Housing
                and building
            
            
            9,013
            
            
            11,321
            
            
            26,981
            
            
            32,861Other
                reconciling items
            
            
            (458
            )
            
            (1,889
            )
            
            (7,461
            )
            
            (5,451
            )Consolidated
                total
            
            $
            19,539
            
            $
            26,009
            
            $
            48,239
            
            $
            70,437Operating
                income (loss)Recreational
                vehicles
            
            $
            (7,276
            )
            $
            (15,167
            )
            $
            (14,950
            )
            $
            (22,913
            )Housing
                and building
            
            
            344
            
            
            984
            
            
            2,944
            
            
            (353
            )Other
                reconciling items
            
            
            458
            
            
            1,889
            
            
            7,461
            
            
            5,451Consolidated
                total
            
            $
            (6,474
            )
            $
            (12,294
            )
            $
            (4,545
            )
            $
            (17,815
            )Pre-tax
                income (loss) from continuing operationsRecreational
                vehicles
            
            $
            (6,959
            )
            $
            (15,480
            )
            $
            (15,028
            )
            $
            (23,541
            )Housing
                and building
            
            
            316
            
            
            1,073
            
            
            2,843
            
            
            (165
            )Other
                reconciling items
            
            
            352
            
            
            1,766
            
            
            7,086
            
            
            5,451Consolidated
                total
            
            $
            (6,291
            )
            $
            (12,641
            )
            $
            (5,099
            )
            $
            (18,255
            )






September
                30,
            
            December
                31,2006
            
            2005Total
                AssetsRecreational
                vehicles
            
            $
            125,323
            
            $
            152,501Housing
                and building
            
            
            64,205
            
            
            83,338Other
                reconciling items
            
            
            97,773
            
            
            86,977Total
            
            $
            287,301
            
            $
            322,816




-
          7
          -
 Index





**3.   
      INVENTORIES.**





Inventories
      consist of the following (in thousands):


September
                30,
            
            December
                31,2006
            
            2005Raw
                materialsRecreational
                vehicles
            
            $
            17,399
            
            $
            19,770Housing
                and building
            
            
            6,330
            
            
            13,643Total
            
            
            23,729
            
            
            33,413Work
                in processRecreational
                vehicles
            
            
            16,460
            
            
            15,515Housing
                and building
            
            
            3,567
            
            
            5,280Total
            
            
            20,027
            
            
            20,795Improved
                lotsHousing
                and building
            
            
            220
            
            
            261Total
            
            
            220
            
            
            261Finished
                goodsRecreational
                vehicles
            
            
            46,228
            
            
            48,935Housing
                and building
            
            
            13,407
            
            
            17,900Total
            
            
            59,635
            
            
            66,835Total
            
            $
            103,611
            
            $
            121,304





**4.   
      PROPERTY, PLANT AND EQUIPMENT.**





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





September
                30,
              2006
            
            December
                31,
              2005Land
                and improvements
            
            $
            11,598
            
            $
            13,255Buildings
                and improvements
            
            
            61,266
            
            
            68,007Machinery
                and equipment
            
            
            24,472
            
            
            31,468Transportation
                equipment
            
            
            14,583
            
            
            16,279Office
                furniture and fixtures
            
            
            17,829
            
            
            19,080Total
            
            
            129,748
            
            
            148,089Less,
                accumulated depreciation
            
            
            71,400
            
            
            80,508Property,
                plant and equipment, net
            
            $
            58,348
            
            $
            67,581




-
          8
          -
 Index





**5.   
      ACCRUED EXPENSES AND OTHER LIABILITIES.**





Accrued
      expenses and other liabilities consist of the following (in
      thousands):





September
                30,
              2006
            
            December
                31,
              2005Wages,
                salaries, bonuses and commissions
            
            $
            2,873
            
            $
            3,156Dealer
                incentives, including volume bonuses, dealer trips, interest
                reimbursement, co-op advertising and other rebates
            
            
            4,884
            
            
            4,284Warranty
            
            
            11,519
            
            
            20,005Insurance-products
                and general liability, workers compensation, group health and
                other
            
            
            8,179
            
            
            6,833Customer
                deposits and unearned revenues
            
            
            4,756
            
            
            10,029Litigation
            
            
            504
            
            
            3,740Interest
            
            
            630
            
            
            1,980Sales
                and property taxes
            
            
            1,754
            
            
            1,948Other
                current liabilities
            
            
            4,195
            
            
            2,881Total
            
            $
            39,294
            
            $
            54,856




Changes
      in the Company's warranty liability during the three and nine-month periods
      ended September 30 were as follows (in thousands):





Three
                Months Ended September 30,
            Nine
                Months Ended September 30,2006
            
            2005
            
            2006
            
            2005Balance
                of accrued warranty at beginning of period
            
            $
            13,359
            
            $
            10,780
            
            $
            20,005
            
            $
            10,140Warranties
                issued during the period and changes in liability for pre-existing
                warranties
            
            
            4,411
            
            
            12,114
            
            
            15,576
            
            
            23,657Cash
                settlements made during the period
            
            
            (6,251
            )
            
            (6,790
            )
            
            (24,062
            )
            
            (17,693
            )Balance
                of accrued warranty at September 30
            
            $
            11,519
            
            $
            16,104
            
            $
            11,519
            
            $
            16,104




**6.   
      COMPREHENSIVE INCOME (LOSS).**





The
      changes in the components of comprehensive income (loss) for the three and
      nine-month periods ended September 30 are as follows (in
      thousands):





Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,2006
            
            2005
            
            2006
            
            2005Net
                loss
            
            $
            (3,516
            )
            $
            (9,346
            )
            $
            (302)
            
            $
            (12,202
            )Unrealized
                losses on securities held for sale, net of taxes
            
            
            -
            
            
            -
            
            
            -
            
            
            (188
            )Unrealized
                gains (losses) on cash flow hedges, net of taxes
            
            
            (28)
            
            
            44
            
            
            (4)
            
            
            76Comprehensive
                loss
            
            $
            (3,544
            )
            $
            (9,302
            )
            $
            (306
            )
            $
            (12,314
            )





As
      of
      September 30, 2006 and 2005, the accumulated other comprehensive income, net
      of
      tax, relating to unrealized gains on securities available for sale was $0 for
      both periods, and relating to deferred losses on cash flow hedges
      was  $(10,000)  and
      $(20,000), respectively.


-
          9
          -
 Index




**7.   
      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 for the three and
      nine-month periods ended September 30 were calculated using the average shares
      as follows (in thousands):





Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,2006
            
            2005
            
            2006
            
            2005Numerator:Net
                loss available to common stockholders
            
            $
            (3,516
            )
            $
            (9,346
            )
            $
            (302
            )
            $
            (12,202
            )Denominator:Number
                of shares outstanding, end of period:Weighted
                average number of common shares used in basic EPS
            
            
            15,634
            
            
            15,556
            
            
            15,664
            
            
            15,545Effect
                of dilutive securities
            
            
            -
            
            
            -
            
            
            -
            
            
            -Weighted
                average number of common shares used in dilutive EPS
            
            
            15,634
            
            
            15,556
            
            
            15,664
            
            
            15,545




As
      the
      Company reported a net loss for the three and nine-month periods ended September
      30, 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.





**8.   INCOME
      TAXES.**





For
      the
      third quarter ended September 30, 2006, the effective tax rate was a credit
      of
      46.7% and the year-to-date effective tax rate was a credit of 63.7% compared
      with a 2005 third quarter effective tax credit of 51.1% and a year-to-date
      tax
      credit of 51.9%. The Company’s effective tax rate fluctuates based upon
      estimated annual pre-tax income amounts, the states where sales occur, the
      estimated annual amount of export sales, nontaxable increases in cash value
      of
      life insurance contracts, other permanent tax differences, increases or
      decreases in tax reserves and recognized federal and state tax credits.




The
      2006
      year-to-date effective tax rate was favorably impacted by the release of certain
      state tax reserves resulting from favorable outcomes of the Company’s
      participation in a number of state voluntary disclosure programs.




During
      the first quarter of 2006, the Company recorded a decrease in current deferred
      tax assets of $0.3 million and a decrease in long-term deferred tax assets
      of
      $1.4 million to recognize deferrals that will be utilized as a result of the
      sale of Miller Building Systems, Inc.




The
      Company’s effective tax rate credit for 2005 was favorably impacted by federal
      and state research and development (R&D) tax credits for 2005 and prior
      years, all of which were recognized in 2005. During the second quarter of 2005,
      the Company completed a project to identify eligible expenditures for the
      purposes of claiming R&D tax credits. As part of this project, the Company
      filed amended tax returns for 1999-2003 to claim federal and state R&D tax
      credits. In the 2005 second quarter, the Company recorded $1.5 million for
      prior
      years’ R&D tax credits which increased the Company’s effective tax benefit
      rate by 6.5% for the 2005 year-to-date period.




**9.****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 is intended to improve operating
      performance and ensure financial strength.




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


-
          10
          -
 Index




During
      the third quarter, 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
      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
      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
      has been paid during 2006.





**Housing
      and Building Segment**





The
      Company has ceased operations at the All American Homes operation in
      Springfield, Tennessee. 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 June 22, 2006, the Company entered into a Contract
      for
      Sale of Real Estate and Right of First Refusal for the sale of the Tennessee
      facility for $5.0 million, with a projected closing on or about August 22,
      2006.
      An addendum was subsequently entered into extending the closing to October
      31,
      2006 and requiring an additional earnest deposit. On September 26, 2006, the
      Company received a subsequent purchase offer from a cash buyer in the amount
      of
      $3.4 million, excluding machinery and equipment. The original buyer was notified
      of the subsequent offer and the Right of First Refusal period expired on October
      27, 2006. The sale of the Tennessee property is subject to certain customary
      conditions, and closing is now anticipated to occur with the second buyer late
      in 2006. The Tennessee facility has been classified as held for sale in the
      accompanying balance sheet as of September 30, 2006. The net book value of
      the
      Tennessee facility at December 31, 2005 was $2.4 million.





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 quarter
      ended
      September 30, 2005 were $2.2 million, and the pre-tax loss for the quarter
      ended
      September 30, 2005 was $(1.6) million. Net sales of the Kansas division for
      the
      nine-month period ended September 30, 2005 were $7.3 million and the pre-tax
      loss for the nine-month period ended September 30, 2005 was $(1.7)
      million.





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 and a
      $2.5
      million secured note. The note 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 accordance with Statement of Financial Accounting Standard
      No. 144, the division qualified as a separate component of the Company’s
      business in 2005 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
      quarter ended September 30, 2005 were $12.0 million, and the pre-tax income
      for
      the quarter ended September 30, 2005 was $0.4 million. Net sales of Miller
      Building Systems, Inc. for the nine-month period ended September 30, 2005 were
      $30.8 million and the pre-tax loss for the nine-month period ended September
      30,
      2005 was $(0.2) million. 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.





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 and Building Segment goodwill based on the relative fair value
      of the discontinued operations to the entire Housing and Building 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 and Building 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.


-
          11
          -
 Index




Assets
      and liabilities of the All American Homes of Kansas and Miller Building Systems
      disposal groups, 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




**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.
      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 Recreational Vehicle Segment goodwill based on the relative
      fair value of the discontinued operations to the Recreational Vehicle 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 quarter ended September 30, 2005 were $3.7 million and the
      pre-tax income for the quarter ended September 30, 2005 was $0.1 million. Net
      sales of Prodesign for the nine-month period ended September 30, 2005 were
      $11.6
      million and the pre-tax income for the nine-month period ended September 30,
      2005 was $0.4 million.




Assets
      and liabilities of the Prodesign disposal group, 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




-
          12
          -
 Index





**10. 
      COMMITMENTS AND CONTINGENCIES.**





**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 September
      30, 2006 and December 31, 2005 chassis inventory, accounted for as consigned
      inventory, approximated $13.4  million
      and $26.8 million, respectively.





**Repurchase
      Agreements**





The
      Company was contingently liable at September 30, 2006 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 at the time of repurchase. Although
      the
      estimated contingent liability approximates $209 million at September 30,
      2006 ($262 million at December 31, 2005), 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 September 30, 2006 and
      December 31, 2005, $0.3 million and $0.4 million, respectively, were recorded
      as
      an accrual for estimated losses under repurchase agreements.





The
      Company was also contingently liable at September 30, 2006 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 at the time of repurchase. Although the estimated
      contingent liability approximates $17.0  million
      at September 30, 2006 ($15.9 million at December 31, 2005), 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 September 30, 2006 and $0.3 million at December 31, 2005 for estimated losses
      under the repurchase agreement.





**Corporate
      Guarantees**





The
      Company was contingently liable under guarantees to a financial institution
      of
      their loans to independent dealers for amounts totaling
      approximately  $5.6  million
      at September 30, 2006 and $6.2 million at December 31, 2005. 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
      Recreational Vehicle 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, for 2006 the Company will be 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. After 2006, the Company will be liable
      up to a maximum of $2 million of aggregate losses. The Company has recorded
      a
      loss reserve of $0.1  million
      at September 30, 2006 and December 31, 2005 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 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.


-
          13
          -
 Index




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 and Building Segment. The amount outstanding under
      this agreement at September 30, 2006 is  $0.4  million
      ($0.6 million at December 31, 2005). 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
      September 30, 2006, no losses have been incurred by the Company under the model
      home financing program.





**Litigation**





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 construction loan may
      be
      converted to a term loan for a period of two years, subject to the terms and
      conditions of the agreement. The loans are collateralized by a first priority
      interest in all tangible and intangible property of the borrower. As of
      September 30, 2006, the Company provided $2.3 million in financing to the
      developer under these arrangements. The developer is now unable to obtain a
      building permit, so the Company is pursuing its legal remedies through
      litigation to recoup the financing extended to date. No additional funding
      will
      be provided.





In
      January 2004, the Company entered into a long-term exclusive licensing agreement
      with The Coleman Company, Inc. to design, produce and market a full line of
      new
      Coleman® brand recreational vehicles. In November 2004, the judge presiding over
      the legal dispute between Fleetwood Enterprises, Inc. and The Coleman Company,
      Inc. entered an order granting Fleetwood’s request for an injunction against
      Coleman, prohibiting their use of the trademark registration “Coleman” in the
      recreational vehicle industry. To protect its rights under its existing license
      agreement with Coleman, Consolidated Leisure Industries, LLC, doing business
      as
      the Coachmen RV Group, filed suit against The Coleman Company, Inc. in federal
      court in Kansas City, Kansas, to enforce its rights under the License
      Agreement.





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 $4,425,000 from The Coleman
      Company, Inc. in exchange for releasing all claims in the suit. The settlement
      of $4,425,000 was paid in two installments of $2,212,500, 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 $500,000 if certain provisions of the
      agreement are breached. The settlement of $4,425,000 was recorded in the first
      quarter of 2005 as a reduction of $1,721,000 to cost of sales and a reduction
      of
      $461,000 to operating expenses at the RV Segment plus a reduction of $2,243,000
      to the Company’s general and administrative expenses.





During
      2005, the Company settled a personal injury suit for $5,000,000, $1,000,000
      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 $1,500,000
      in
      addition to the amount paid by its primary carrier and recorded another current
      liability of $2,500,000 to recognize the remaining amount to be paid on the
      settlement and the $250,000 retention. During June 2006, the remaining liability
      of $2,500,000 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 $2,875,000, 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 $745,000, 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.





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.





**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. At September 30, 2006, there are 988,300
      shares remaining authorized for repurchase by the Board of Directors.


-
          14
          -
 Index




**11. 
      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* .
      No
      stock option employee compensation cost was recognized in the Statement of
      Operations for the three or nine-month periods ended September 30, 2005, as
      all
      options granted under the stock-based compensation plans had an exercise price
      equal to the market value of the underlying common stock on the date of grant.
      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 benefits for the three and
      nine-month periods ended September 30, 2006 were 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 January 1, 2006 were not significant.
      Compensation expense related to the Company's Employee Stock Purchase Plan
      was
      not significant for the three or nine-month periods ended September 30,
      2006.





On
      March 31, 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. 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 2006. If the Company meets 50%, 75% or 100% of the performance
      goal established, the participants will earn the corresponding percentage of
      their restricted shares. 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,
      2007, one-third on January 1, 2008 and one-third on January 1, 2009.
      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 110,000 shares, assuming 100% of the performance goal is
      achieved, were granted with a weighted average grant-date fair value of $11.05
      per share. At September 30, 2006, the Company determined that it was not yet
      probable that 50% of the performance goal would be achieved; therefore, no
      compensation expense has been recorded related to this plan for the three or
      nine-month periods ended September 30, 2006. Either 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.





During
      the first quarter of 2005, the Company had determined that it was probable
      that
      the performance requirements of the 2003 Performance Based Restricted Stock
      Plan
      would not be achieved and as a result, reversed the expenses that had been
      recorded related to this plan.  During
      the third quarter of 2005, the Company determined that it was probable that
      the
      performance requirements of the 2004 and 2005 Plans would not be achieved and
      as
      a result, reversed the expenses that had been previously recorded related to
      these two plans . For
      the
      three months ended September 30, 2005, the Company reduced compensation expense,
      which is a component of general and administrative expenses, by $690,000 related
      to these programs.  For
      the
      nine months ended September 30, 2005, the Company reduced compensation expense
      by $1.4 million related to these three programs.





-
          15
          -
 Index


For
      the
      three and nine-month periods ended September 30, 2005, had the Company accounted
      for all employee stock-based compensation based on the estimated grant date
      fair
      values, as defined by SFAS 123, the Company’s net income and net income per
      share would have been adjusted to the following pro forma amounts (in thousands,
      except per share data):




Three
                Months
              Ended
            
            Nine
                Months
              EndedSeptember
                30, 2005
            
            September
                30, 2005Net
                loss, as reported
            
            $
            (9,346
            )
            $
            (12,202
            )Add:
                stock-based compensation expense (credit) under variable plan included
                in
                reporting net income, net of taxes
            
            
            (353
            )
            
            (865
            )Deduct:
                total stock-based compensation expense determined under fair value
                based
                method for all awards, net of taxes
            
            
            505
            
            
            795Pro
                forma net loss
            
            $
            (9,194
            )
            $
            (12,272
            )Loss
                per share:Basic
                - as reported
            
            $
            (.60
            )
            $
            (.78
            )Basic
                - pro forma
            
            $
            (.59
            )
            $
            (.79
            )Diluted
                - as reported
            
            $
            (.60
            )
            $
            (.78
            )Diluted
                - pro forma
            
            $
            (.59
            )
            $
            (.79
            )




**12. 
      SHORT-TERM BORROWINGS.**





On
      August
      2, 2006, the Company executed a $55 million, five-year, secured revolving credit
      facility with LaSalle Business Credit, LLC. This new five-year facility replaces
      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
      and 80% liquidation value of equipment. The new agreement, which expires August
      2, 2011, also has an accordion feature enabling the credit facility to be
      increased by an additional $25 million, subject to customary conditions.
      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 certain assets of the Company, including cash, trade accounts
      and
      other receivables, inventory, fixed assets and notes receivable, which total
      approximately $257 million.  Financial
      covenant ratios are required to be calculated only in the event a Funds Control
      Event occurs, as defined in the agreement.





On
      August
      2, 2006, the Company paid off the remaining $6.1 million of a term loan that
      had
      been a component of the prior credit facility. On August 2, 2006, the Company
      utilized the new revolving credit facility to provide $9.3 million of cash
      collateral to support a number of outstanding letters of credit issued from
      the
      prior credit facility until they can be replaced under the new facility. This
      cash collateral remained outstanding as of September 30, 2006. Total outstanding
      borrowings on the revolving credit facility were $10.8 million as of September
      30, 2006.





Borrowings
      under the revolving credit facility have been classified as current liabilities
      in the consolidated balance sheets based upon the expected timing of
      repayment.




**13. 
      NEW ACCOUNTING PRONOUNCEMENTS.**





In
      July
      2006, the Financial Accounting Standards Boards (FASB) issued FASB
      Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* -an
      interpretation of FASB Statement No. 109, which clarifies the accounting for
      uncertainty in tax positions. This interpretation requires that the Company
      recognize in the financial statements, the impact of a tax position, if that
      position is more likely than not of being sustained on audit, based on the
      technical merits of the position. This interpretation is effective for fiscal
      years beginning after December 15, 2006, with the cumulative effect of the
      change in accounting principle recorded as an adjustment to opening retained
      earnings. The Company has not yet determined the impact this interpretation
      will
      have on the financial statements.





-
          16
          -
 Index


**Coachmen
      Industries, Inc. and Subsidiaries**


**Management’s
      Discussion and Analysis of**


**Financial
      Condition and Results of Operations**





The
      following is management’s discussion and analysis of certain significant
      factors, which have affected the Company’s financial condition, results of
      operations and cash flows during the periods included in the accompanying
      consolidated financial statements.





A
      summary
      of the changes in the principal items included in the consolidated statements
      of
      operations is shown below (dollar amounts in thousands).





Comparison
                ofThree
                Months
            
            Nine
                MonthsEnded
                September 30, 2006 and 2005Increases
                (Decreases)Amount
            
            Percentage
            
            Amount
            
            PercentageNet
                sales
            
            $
            (49,453
            )
            
            (27.4
            )
            %
            
            $
            (113,858
            )
            
            (20.2
            )
            %Cost
                of sales
            
            
            (48,803
            )
            
            (29.3
            )
            
            
            
            (104,930
            )
            
            (20.6
            )Delivery
                expenses
            
            
            (1,599
            )
            
            (18.4
            )
            
            
            
            (2,032
            )
            
            (8.0
            )Selling
                expenses
            
            
            (172
            )
            
            (2.6
            )
            
            
            
            (4,858
            )
            
            (22.3
            )General
                and administrative expenses
            
            
            (3,588
            )
            
            (36.6
            )
            
            
            
            (8,188
            )
            
            (36.2
            )Gain
                on sale of assets, net
            
            
            1,111
            
            
            n/m
            
            
            
            
            7,120
            
            
            n/mInterest
                expense
            
            
            122
            
            
            15.4
            
            
            
            
            239
            
            
            10.1Investment
                income
            
            
            67
            
            
            18.9
            
            
            
            
            (447
            )
            
            (27.7
            )Other
                income, net
            
            
            585
            
            
            n/m
            
            
            
            
            572
            
            
            n/mLoss
                from continuing operations before income taxes
            
            
            (6,350
            )
            
            (50.2
            )
            
            
            
            (13,156
            )
            
            (72.1
            )Income
                tax benefit
            
            
            (3,529
            )
            
            (54.6
            )
            
            
            
            (6,217
            )
            
            (65.7
            )Net
                loss from continuing operations
            
            
            (2,821
            )
            
            (45.7
            )
            
            
            
            (6,939
            )
            
            (80.0
            )Income
                (loss) from operations of discontinued operations, net of
                taxes
            
            
            3,009
            
            
            94.9
            
            
            
            
            4,961
            
            
            145.4Net
                loss
            
            
            (5,830
            )
            
            (62.4
            )
            
            
            
            (11,900
            )
            
            (97.5
            )





n/m - not meaningful




-
          17
          -
 Index





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




Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,2006
            
            2005
            
            2006
            
            2005(Gain)
                loss on sale of assets, net
            
            $
            (291
            )
            $
            820
            
            $
            (6,340
            )
            $
            780Legal
                settlements
            
            
            -
            
            
            -
            
            
            3,620
            
            
            4,425




**NET
      SALES**





Consolidated
      net sales from continuing operations for the quarter ended September 30, 2006
      were $130.7 million, a decrease of $49.5 million, or 27.4%, from the $180.2
      million reported for the corresponding quarter last year. Net sales for the
      nine months ended September 30, 2006 were $448.6 million, representing a
      decrease of $113.9 million, or 20.2%, reported for the same period in 2005.
      The
      Company’s Recreational Vehicles Segment experienced a net sales decrease of
      30.3% for the quarter and a decrease of 24.4% for the nine-month
      period. The net sales decline in the RV Segment was primarily due to the
      continued industry-wide weakness in the motorized products market, together
      with
      a  more
      challenging non-motorized product market than the previous year, as well as,
      a
      decline in hurricane influenced sales in 2006. Sales were also negatively
      affected by lingering market effects of the warranty matters stemming from
      sidewalls of most product types and camping trailer lift system issues
      encountered in 2005.





RV
      Segment wholesale unit shipments of all product types decreased by 27.3% to
      2,887 units for the quarter and decreased by 16.0% to 11,589 units for the
      nine-month period. For the quarter, shipments of motorized products
      fell  31.8%
      to
      784 units, while shipments of non-motorized products decreased by 25.5% to
      2,103
      units. For the nine-month period, shipments of motorized products
      fell  29.0%
      to
      2,996 units,  while
      shipments of non-motorized products decreased by 10.2% to 8,593
      units. Backlogs in units fell to 744 from 4,965 at the end of the third
      quarter of 2005. However, comparisons to the prior year reflect not only the
      current weakness in the motorized and towable markets, but also the hurricane
      influenced orders in 2005.





The
      Company’s Housing and Building Segment experienced a net sales decrease for the
      quarter ended September 30, 2006 of 20.0%, from $50.3 million during the third
      quarter of 2005 to $40.2 million for the third quarter of 2006. Net sales
      for the nine months ended September 30, 2006 were $127.1 million, representing
      a
      decrease of $10.3 million from the $137.4 reported for the same period in
      2005. Wholesale unit shipments of residential units were down 21.2% for the
      quarter and 13.6% for the nine-month period ended September 30, 2006.
      Despite  the
      decline in unit shipments for the three-month period, the decline in the
      Segment’s revenues for the period was mitigated by a 9.9% increase in average
      revenues per unit due to a  shift
      in
      product mix.  Backlog
      for the Housing and Building Segment as of September 30, 2006
      decreased  35.6%
      to
      $28.4  million,
      compared with $44.1 million at September 30, 2005.





In
      order
      to supplement the Company’s single-family residential housing business, the
      Housing and Building Segment continues to pursue opportunities for larger
      projects in multi-family residential and commercial markets for 2007 and beyond.
      The prospects of the Company’s All American Building Systems (AABS) special
      projects branch continue to improve, but it did not contribute to earnings
      in
      the third quarter due to the long incubation periods for new projects. During
      the third quarter, AABS was a member of a consortium that was awarded a contract
      for the second phase of barracks construction at Fort Bliss in Texas. In
      addition, a number of bids involving large military construction projects are
      in
      the various stages of review and management anticipates being awarded several
      of
      these new projects which may have a significant positive impact on operating
      results beginning in 2007 and beyond. Another opportunity for the Housing and
      Building Group involves the reconstruction of the Gulf Coast regions damaged
      by
      the 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. The first such contract was signed during the third quarter with
      the Housing and Building Group agreeing to provide two dozen systems-built
      homes
      for a neighborhood near New Orleans.





**COST
      OF SALES**





Cost
      of
      sales decreased 29.3%, or $48.8 million, for the three months ended September
      30, 2006. For the nine-month period, cost of sales decreased $104.9 million
      or
      20.6%. As a percentage of net sales, cost of sales was 90.0% and 92.4% for
      the
      three-month periods ended September 30, 2006 and 2005, respectively, and 90.3%
      and 90.6% for the nine-month periods ended September 30, 2006 and 2005,
      respectively. The change in the dollar amount of cost of sales in the current
      quarter and nine-month periods is attributable to the decrease in sales dollars
      and a decrease in warranty costs partially  offset
      by
      higher contract and quality control labor and workers compensation costs.


-
          18
          -
 Index





**OPERATING
      EXPENSES**





As
      a
      percentage of net sales, operating expenses, which include delivery, selling,
      general and administrative expenses,  were 15.2%
      and 14.0% for the three months ended September 30, 2006 and 2005, respectively.
      For the nine-month period, operating expenses were 12.2% and 12.4% for 2006
      and
      2005, respectively. As a percentage of sales, delivery expenses
      increased by 0.6 and 0.7 percentage points for the three and nine-month periods
      ended September 30, 2006 as compared to the prior year three and nine-month
      periods. In dollars, delivery expense  declined
      $1.6 million and $2.0 million for the three and nine-month periods ended
      September 30, 2006 as compared to the prior year periods. The increase in
      delivery expense as a percent of net sales during the quarter and nine-month
      periods was a result of the significant decline in net sales as compared to
      the
      decline in delivery expense dollars.  Decrease
      in freight costs, as a result of the lower sales volume, was partially offset
      by
      higher fuel costs.





Selling
      expenses were 5.0% of net sales for the 2006 quarter compared to 3.7% of net
      sales for the three-month period ended September 30, 2005. For the
      nine-month periods, selling expenses were 3.8% of net sales for 2006 compared
      to
      3.9% of net sales for 2005. The increase in selling expense as a percentage
      of net sales during the quarter is a result of the significant decline in net
      sales and a minimal decline in selling expense during the period. The decrease
      in selling expense as a percentage of net sales during the nine-month period
      is
      related to  decreased
      payroll expenses, due to the reduction in force which occurred in 2005, as
      well
      as, due to decreased expenses related to product shows, literature, and other
      promotional expenses.





General
      and administrative expenses were 4.8% of net sales for the quarter compared
      to
      5.4% for the 2005 corresponding quarter. General and administrative expenses
      were 3.2% of net sales for the nine-month period ended September 30, 2006
      compared to 4.0% for the 2005 corresponding period.  The
      decrease in expenses for the nine-month period was primarily the result of
      two
      legal settlements received during the first quarter which totaled $3.6 million,
      but that were partially offset by other legal fees and the reduction of a legal
      accrual during the third quarter based on the results of binding arbitration.
      In
      addition, payroll costs decreased during the three and nine-month periods of
      2006 as compared to the comparable periods of 2005 due to the reduction of
      force
      that occurred in 2005.  Employee
      relocation expenses also decreased during the three and nine-month periods
      of
      2006 as compared to the comparable periods of 2005.





**GAIN
      ON THE SALE OF ASSETS, NET**





For
      the
      three months ended September 30, 2006, the gain on the sale of assets was $0.3
      million. There was no individually significant property transactions during
      the
      three-month period ended September 30, 2006. For the nine months ended September
      30, 2006, the gain on the sale of assets was $6.3 million.  On
      June
      8, 2006, the Company completed the sale of its Cessna Jet 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 March 31, 2006 the Company
      completed the sale of a property located in Grapevine, Texas for $2.0 million,
      which resulted in a gain of $1.8 million. Also during the first quarter, the
      Company completed the sale of vacant farmland in Middlebury, Indiana for $1.0
      million, which resulted in a gain of $0.8 million.





For
      the
      three months ended September 30, 2005, the loss on the sale of assets was $0.8
      million. For the nine months ended September 30, 2005, the loss on the sale
      of
      assets was also $0.8 million. There was no individually significant property
      transactions during either the three or nine-month periods ended September
      30,
      2005.





**INTEREST
      EXPENSE**





Interest
      expense was $0.9 million for the three-month period ended September 30, 2006
      and
      $0.8 million for the three-month period ended September 30, 2005. Interest
      expense was $2.6 million and $2.4 million for the nine-month periods ended
      September 30, 2006 and 2005, respectively. On August 2, 2006, the Company
      utilized the new revolving credit facility to provide $9.3 million of cash
      collateral to support a number of outstanding letters of credit issued from
      the
      prior credit facility until they can be replaced under the new facility. As
      a
      result of these borrowings on the new credit facility, combined with higher
      applicable interest rates as compared to the 2005 period, interest expense
      for
      2006 has increased over the comparable periods in 2005.





**INVESTMENT
      INCOME**





There
      was
      a net investment income of $0.4 million for both quarters ended September 30,
      2006 and 2005. Net investment income for the nine-month period ended September
      30, 2006 was $1.2 million compared to $1.6 million in the same period of 2005.
      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.


-
          19
          -
 Index




**OTHER
      INCOME, NET**





Other
      income, net, represents income of $0.7 million for the third quarter of 2006
      and
      income of $0.1 million for the same quarter of the previous year. For the
      nine-month period, other income, net, for 2006 and 2005 was $0.9 million and
      $0.3 million, respectively.





**INCOME
      TAXES**





For
      the
      third quarter ended September 30, 2006, the effective tax rate was a credit
      of
      46.7% and the year-to-date effective tax rate was a credit of 63.7% compared
      with a 2005 third quarter effective tax credit of 51.1% and a year-to-date
      tax
      credit of 51.9%. The Company’s effective tax rate fluctuates based upon
      estimated annual pre-tax income amounts, the states where sales occur, the
      estimated annual amount of export sales, nontaxable increases in cash value
      of
      life insurance contracts, other permanent tax differences, increases or
      decreases in tax reserves and recognized federal and state tax credits.




The
      2006
      year-to-date effective tax rate was favorably impacted by the release of certain
      state tax reserves resulting from favorable outcomes of the Company’s
      participation in a number of state voluntary disclosure programs.




During
      the first quarter of 2006, the Company recorded a decrease in current deferred
      tax assets of $0.3 million and a decrease in long-term deferred tax assets
      of
      $1.4 million to recognize deferrals that will be utilized as a result of the
      sale of Miller Building Systems, Inc.




The
      Company’s effective tax rate credit for 2005 was favorably impacted by federal
      and state research and development (R&D) tax credits for 2005 and prior
      years, all of which were recognized in 2005. During the second quarter of 2005,
      the Company completed a project to identify eligible expenditures for the
      purposes of claiming R&D tax credits. As part of this project, the Company
      filed amended tax returns for 1999-2003 to claim federal and state R&D tax
      credits. In the 2005 second quarter, the Company recorded $1.5 million for
      prior
      years’ R&D tax credits which increased the Company’s effective tax benefit
      rate by 6.5% for the 2005 year-to-date period.





**DISCONTINUED
      OPERATIONS**





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 Recreational Vehicle Segment goodwill based on the relative
      fair value of the discontinued operations to the Recreational Vehicle 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 quarter ended September 30, 2005, were $3.7 million and the
      pre-tax income for the quarter ended September 30, 2005, was $0.1 million.
      Net
      sales of Prodesign for the nine-month period ended September 30, 2005, were
      $11.6 million and the pre-tax income for the nine-month period ended September
      30, 2005, was $0.4 million.





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 and a
      $2.5
      million secured note. The note 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 accordance with Statement of Financial Accounting Standard
      No. 144, the division qualified as a separate component of the Company’s
      business in 2005 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
      quarter ended September 30, 2005 were $12.0 million, and the pre-tax income
      for
      the quarter ended September 30, 2005, was $0.4 million. Net sales of Miller
      Building Systems, Inc. for the nine-month period ended September 30, 2005,
      were
      $30.8 million and the pre-tax loss for the nine-month period ended September
      30,
      2005, was $(0.2) million. 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.


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          20
          -
 Index




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 and Building Segment goodwill based on the relative fair value
      of the discontinued operations to the entire Housing and Building 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 and Building 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
      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 quarter
      ended
      September 30, 2005, were $2.2 million, and the pre-tax loss for the quarter
      ended September 30, 2005 was $(1.6) million. Net sales of the Kansas division
      for the nine-month period ended September 30, 2005, were $7.3 million and the
      pre-tax loss for the nine-month period ended September 30, 2005, was $(1.7)
      million.





**NET
      INCOME (LOSS)**





Net
      loss
      from continuing operations for the quarter ended September 30, 2006 was $3.4
      million (loss of $0.21 per diluted share) compared to a net loss from continuing
      operations for the quarter ended September 30, 2005 of $6.2 million (a loss
      of
      $0.40 per diluted shared). Net loss from continuing operations for the
      nine-month period ended September 30, 2006 was $1.9 million (loss of $0.12
      per
      diluted share) compared to a net loss from continuing operations for the
      nine-month period ended September 30, 2005 of $8.8 million (a loss of $0.56
      per
      diluted share).





Net
      loss
      for the quarter ended September 30, 2006 was $3.5 million (loss of $0.22 per
      diluted share) compared to a net loss of $9.3 million (a loss of $0.60 per
      diluted share) for 2005. Net loss for the nine-month period ended September
      30,
      2006 was $0.3 million (loss of $0.02 per diluted share) compared to a net loss
      of $12.2 million (a loss of $0.78 per diluted share) for 2005.





**LIQUIDITY,
      CAPITAL RESOURCES AND FINANCIAL CONDITION**





The
      Company generally relies on funds from operations and borrowings under its
      revolving credit facility as its primary sources of liquidity.





On
      August
      2, 2006, the Company executed a $55 million, five-year, secured Revolving Credit
      Facility with LaSalle Business Credit, LLC to meet its seasonal working capital
      needs. At September 30, 2006 there were short-term borrowings of
      $10.8  million outstanding
      against this bank line of credit. At December 31, 2005 there were short-term
      borrowings of $12.3 million outstanding. As of September 30, 2006 and December
      31, 2005, $15 million had been borrowed against the cash surrender value of
      Company-owned life insurance contracts.





The
      new
      five-year credit facility replaces 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 and 80% liquidation value of equipment. The new
      agreement, which expires July 31, 2011, also has an accordion feature enabling
      the credit facility to be increased by an additional $25 million, subject to
      customary conditions. 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 certain assets of the Company,
      including cash, trade accounts and other receivables, inventory, fixed assets
      and notes receivable, which total approximately  $257
      million. 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 quarter ended September 30,
      2006.





On
      August
      2, 2006, the Company paid off the remaining $6.1 million of a term loan that
      had
      been a component of the prior credit facility. On August 2, 2006, the Company
      utilized the new revolving credit facility to provide $9.3 million of cash
      collateral to support a number of outstanding letters of credit issued from
      the
      prior credit facility until they can be replaced under the new facility. This
      cash collateral remained outstanding as of September 30, 2006.


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          21
          -
 Index




At
      September 30, 2006, working capital, defined as current assets less current
      liabilities,  decreased
      to $87.6 million from $93.3 million at December 31, 2005. The $30.1 million
      decrease in current assets at September 30, 2006 versus December 31, 2005 was
      primarily due to the sale of Miller Building Systems, Inc. and Prodesign,
      LLC,  as
      well
      as, a decrease in accounts receivable and inventories at the remaining
      subsidiaries, partially offset by an increase in cash and cash
      equivalents.  Likewise,
      the $24.3 million decrease in current liabilities at September 30, 2006 versus
      December 31, 2005 was also due to the sale of Miller Building
      Systems  and
      decreases in accounts payable, warranty and litigation accruals at the remaining
      subsidiaries.





Management
      believes that the Company’s existing cash and cash equivalents as of September
      30, 2006, together with its available revolving credit facility under
      the August 2006 facility and cash expected to be generated from future
      operations, will be sufficient to fund future planned capital expenditures
      and
      other operating cash requirements for the foreseeable future.




**CRITICAL
      ACCOUNTING POLICIES**




The
      preparation of the Company's consolidated financial statements, which have
      been
      prepared in accordance with accounting principles generally accepted in the
      United States, requires management to make estimates and assumptions that affect
      the amounts reported in the financial statements and accompanying notes. On
      an
      ongoing basis, management evaluates these estimates. Estimates are based on
      historical experience and on various other assumptions that are believed to
      be
      reasonable under the circumstances, the results of which form the basis for
      making judgments about the carrying values of assets and liabilities that are
      not readily apparent from other sources. Historically, actual results have
      not
      been materially different from the Company's estimates. However, actual results
      may differ from these estimates under different assumptions or conditions.
      A
      summary of the Company’s more significant accounting policies that require the
      use of estimates and judgments in preparing the financial statements is provided
      in the Company’s 10-K report for the year ended December 31, 2005. During the
      first nine months of fiscal 2006, there was no material change in the accounting
      policies and assumptions previously disclosed.





**Statement
      of Operations Classification**





The
      Company calculates its gross profit as the difference between its net sales
      and
      the associated cost of sales. Cost of sales consists of direct product
      costs including inbound freight. The Company classifies the following operating
      expense categories separately on its statement of operations: delivery, which
      consists of outbound shipping and handling costs; selling; general and
      administrative; asset impairments and gains (losses) of sales of assets,
      net.





The
      Company’s gross profit may not be comparable to other entities within our
      industry whose shipping and handling expenses are presented as a component
      of
      cost of sales. Delivery expense was $7.1 million and $8.7 million for the three
      months ended September 30, 2006 and 2005, respectively, and $23.2 million and
      $25.3 million for the nine months ended September 30, 2006 and 2005,
      respectively.




**FORWARD-LOOKING
      STATEMENTS**





This
      Form
      10-Q 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 necessarily 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
                potential fluctuations in the Company's operating
                results;


§
            the
                availability for floorplan financing for the Company's recreational
                vehicle dealers and corresponding availability of cash to the
                Company;


§
            uncertainties
                regarding the impact on sales of the disclosed restructuring steps
                in both
                the Recreational Vehicle and Housing and Building
                Segments;


§
            the
                ability to sell and close the operations for sale as
                described;


§
            the
                accuracy of the estimates of the costs to remedy the disclosed
                recreational vehicle warranty
                issues;


§
            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;


§
            uncertainties
                and timing with respect to sales resulting from recovery efforts
                in the
                Gulf Coast;


§
            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;


§
            interest
                rates, which affect the affordability of the Company's
                products;






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          22
          -
 Index




§
            the
              impact of performance on the valuation of intangible
              assets; §
            the
                availability and cost of real estate for residential housing; §
            the
                supply of existing homes within the Company's markets;


§
            the
              impact of home values on housing demand; §
            the
                increased size and scope of work of commercial and military housing
                projects as compared to the Company's traditional single-family homes
                business;


§
            the
                ability of the Housing and Building Segment to perform in new market
                segments where it has limited experience;


§
            adverse
                weather conditions affecting home
                deliveries;


§
            potential
                liabilities under repurchase agreements and guarantees;


§
            changing
                government regulations, such as those covering accounting standards;


§
            environmental
                matters or product warranties and recalls, which may affect costs
                of
                operations, revenues, product acceptance and profitability;


§
            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;


§
            consolidation
                of distribution channels in the recreational vehicle industry;


§
            the
                impact of consumer confidence and economic uncertainty on high-cost
                discretionary product purchases, which can hinder the sales of
                recreational vehicles; and


§
            the
                state of the recreational vehicle and housing industries in the United
                States.





Other
      factors affecting forward-looking statements include:





§
            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;


§
            consumer
                confidence;


§
            oil
                supplies;


§
            the
                Company’s ability to increase gross margins which are critical to
                profitability whether there are or are not increased sales;


§
            the
                Company’s use of incentives at either the wholesale or retail level;


§
            further
                developments in the war on terrorism and related international crises;
                and


§
            uncertainties
                of matters in litigation and other risks and uncertainties.




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.





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.




-
          23
          -
 Index





**ITEM
      3. 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. During the first nine months of 2006, the Company has utilized
      its revolving credit facility to meet short-term working capital
      needs.  The
      Company had $10.8 million outstanding against the revolving credit facility
      on
      September 30, 2006.





In
      January of 2003, the Company entered into various interest rate swap agreements
      that became effective beginning in October of 2003. These swap agreements,
      which
      are designated as cash flow hedges for accounting purposes, effectively convert
      a portion of the Company's variable-rate borrowings 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
      agreements represents the estimated receipts or payments that would be made
      to
      terminate the agreements . A
      cumulative loss of $28,000, 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) during the third quarter of 2006.
      Total accumulated loss on the swap agreements for the nine-month period ended
      September 30, 2006 was $4,000. 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). At September 30, 2006, the Company had two remaining interest rate
      swap agreements with notional amounts of $3.2 million and $1.6 million,
      respectively, that were used to convert the variable interest rates on certain
      industrial development revenue bonds to fixed rates. In accordance with the
      terms of the swap agreements, the Company pays 3.71% and 3.36% interest rates,
      respectively, and receives the Bond Market Association Index (BMA), calculated
      on the notional amounts, with net receipts or payments being recognized as
      adjustments to interest expense.





**ITEM
      4. CONTROLS AND PROCEDURES**





The
      Company’s management, with the participation of the Company’s Chief Executive
      Officer and Chief Financial Officer, has evaluated the effectiveness of the
      Company’s disclosure controls and procedures as of September 30, 2006. Based on
      that evaluation, the Company’s Chief Executive Officer and Chief Financial
      Officer concluded that the Company’s disclosure controls and procedures were
      effective as of September 30, 2006.





During
      the first quarter of 2006, the Company outsourced the processing of payroll
      to a
      third-party provider. Other than this outsourcing of payroll processing, there
      have been no changes during the three or nine-month periods ended September
      30,
      2006 that have materially affected, or are reasonably likely to materially
      affect, the Company's internal control over financial
      reporting.




-
          24
          -
 Index





**PART
      II. OTHER INFORMATION**








Item
      6. Exhibits





See
      Index
      to Exhibits incorporated by reference herein.




-
          25
          -
 Index




**SIGNATURES**





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














**COACHMEN
      INDUSTRIES, INC.**


(Registrant)














Date:
                November2,
                2006
            By:
            /s/
                Richard M. LaversRichard
                M. Lavers, Chief Executive OfficerDate:
                November2,
                2006
            By:
            /s/
                Colleen A. ZuhlColleen
                A. Zuhl, Chief Financial Officer




-
          26
          -
 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 September 9, 2005 (incorporated by reference
                to the
                Company's Form 8-K filed September 15, 2005).*(10)(a)
            Severance
              and Early Retirement Agreement and General Release of All Claims dated
              October 23, 2006 among Coachmen Industries, Inc. and Claire C.
              Skinner.*(10)(b)
            Form
                of Restricted Stock Award Agreement under the Coachmen Industries,
                Inc.
                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).(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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        27 -