**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**(Mark One)**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe fiscal year ended December 31, 2006**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACTOF 1934

**Commissionfile number: 001-12085**

**NATIONAL R.V. HOLDINGS, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                      |   | **No. 33-0371079**               |
|---------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of                  |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)                   |   |                                  |
|                                              |   |                                  |
| **100  West Sinclair Street, Perris, California** |   | **92571**                             |
| (Address of  principal executive offices)         |   | (Zip Code)                            |

 

**(951) 436-3000**

(Registrant’s telephone number, including area code)

Securities registeredpursuant to Section 12(b) of the Act:

| **Common Stock, par value $.01 per share** |   | **New  York Stock Exchange - Arca**          |
|--------------------------------------------|--------|----------------------------------------------|
| (Title of class)                           |   | (Name of each  Exchange on which registered) |

 

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

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.

Yes  o     No  x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Exchange Act.

Yes  o     No  x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

Yes  x     No  o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to thisForm 10-K.

o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer. See definition of “accelerated filer” or “largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

| Large accelerated filer     o |   | Accelerated  filer     x |   | Non-accelerated  filer     o |
|--------------------------------------------------------|--------|---------------------------------------------------|--------|-------------------------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes  o     No  x

The aggregate marketvalue of voting and non-voting common equity held by non-affiliates of theregistrant (assuming for these purposes, but without conceding, that allexecutive officers and directors are “affiliates” of the registrant) wasapproximately  $52,250,537 as of the lastbusiness day of the registrant’s most recently completed second fiscal quarter,based on the closing sale price upon the New York Stock Exchange reported forsuch date.

There were 10,339,484shares of the registrant’s common stock issued and outstanding as of  March 19, 2007.

DOCUMENTS INCORPORATED BYREFERENCE

Part III incorporatesinformation by reference from the definitive proxy statement for the 2007Annual Meeting of Stockholders to be held with respect to the Company’s fiscalyear ended December 31, 2006 (unless such information is included in anamendment to this Form 10-K).

 

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**TABLEOF CONTENTS**
| **PART I**                                                                                                             |   |   |
|-----------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                        |   |   |
| Item 1. Business                                                                                                            |   |   |
| Item 1A. Risk Factors                                                                                                       |   |   |
| Item 1B.  Unresolved Staff Comments                                                                                         |   |   |
| Item 2. Properties                                                                                                          |   |   |
| Item 3. Legal Proceedings                                                                                                   |   |   |
| Item 4.  Submission of Matters to a Vote of Security Holders                                                                |   |   |
|                                                                                                                        |   |   |
| **PART II**                                                                                                            |   |   |
|                                                                                                                        |   |   |
| Item 5. Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |   |   |
| Item 6. Selected  Financial Data                                                                                            |   |   |
| Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                        |   |   |
| Item 7A.  Quantitative and Qualitative Disclosures About Market Risk                                                        |   |   |
| Item 8.  Consolidated Financial Statements and Supplementary Data                                                           |   |   |
| Item 9. Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure                               |   |   |
| Item 9A. Controls  and Procedures                                                                                           |   |   |
| Item 9B. Other  Information                                                                                                 |   |   |
|                                                                                                                        |   |   |
| **PART III**                                                                                                           |   |   |
|                                                                                                                        |   |   |
| Item 10.  Directors, Executive Officers and Corporate Governance                                                            |   |   |
| Item 11. Executive  Compensation                                                                                            |   |   |
| Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related  Stockholder Matters                   |   |   |
| Item 13.  Certain Relationships and Related Transactions, and Director Independence                                         |   |   |
| Item 14.  Principal Accountant Fees and Services                                                                            |   |   |
|                                                                                                                        |   |   |
| **PART IV**                                                                                                            |   |   |
|                                                                                                                        |   |   |
| Item 15.  Exhibits and Consolidated Financial Statement Schedules                                                           |   |   |
| SIGNATURES                                                                                                                  |   |   |
| Reports of  Independent Registered Public Accounting Firms                                                                  |   |   |
| CONSOLIDATED BALANCE  SHEETS                                                                                                |   |   |
| CONSOLIDATED  STATEMENTS OF OPERATIONS                                                                                      |   |   |
| CONSOLIDATED  STATEMENTS OF CASH FLOWS                                                                                      |   |   |
| CONSOLIDATED  STATEMENTS OF STOCKHOLDERS’ EQUITY                                                                       |   |   |
| NOTES TO  CONSOLIDATED FINANCIAL STATEMENTS                                                                                 |   |   |
| SCHEDULE II  — CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS                                                     |   |   |

 

**FORWARD-LOOKING STATEMENTS**

*This report contains information that may constitute “forward-lookingstatements.” Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,”“project,” “will” and similar expressions identify forward-looking statements,which generally are not historical in nature. All statements that addressoperating performance, events or developments that the Company expects oranticipates will occur in the future—including statements about the Company’s futureexpectations, performance, plans, and prospects, as well as assumptions aboutfuture events, and statements expressing general optimism about futureoperating results—are forward-looking statements. As and when made, managementbelieves that these forward-looking statements are reasonable. However, cautionshould be taken not to place undue reliance on any such forward-lookingstatements because such statements speak only as of the date when made. TheCompany undertakes no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise. In addition, forward-looking statements are subject tocertain risks and uncertainties that could cause actual results to differmaterially from the Company’s historical experience and its presentexpectations or projections. These risks and uncertainties include, but are notlimited to, those described in Part I, “Item 1A. Risk Factors” and elsewhere inthis report and those described from time to time in the Company’s futurereports filed with the Securities and Exchange Commission.*

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**PART I**

## **Item 1. Business**

### **General**

NationalR.V. Holdings, Inc. (the “Company”) through its wholly-owned subsidiary,National RV, Inc. (“NRV”), is one of the nation’s leading producers ofmotorized recreational vehicles, often referred to as RVs or motorhomes.   NRV began manufacturing RVs in 1964.  From its Perris, California facility, NRVdesigns, manufactures and markets Class A gas and diesel motorhomes undermodel names *Dolphin*, *Pacifica*,*Sea Breeze*, *Surf Side*,*Tradewinds* and *Tropi-Cal*.  Based upon retail registrations for the yearended December 31, 2006, NRV is the seventh largest domestic manufacturer ofClass A motorhomes.

Priorto February 20, 2007, high-end  (“Highline”)Class A diesel motorhomes were designed, manufactured and marketed throughanother wholly-owned subsidiary, Country Coach, Inc. (“CCI”) operating fromJunction City, Oregon.  As discussed inmore detail in Recent Developments, CCI was sold on February 20, 2007.

Asused herein, the term “Company” refers to National R.V. Holdings, Inc. andNRV unless the context otherwise requires. All data and other statisticalinformation concerning the Company in this Item 1 (Business) and in Item 1A(Risk Factors) give effect to the sale of CCI and, therefore, excludesCCI-related information. The Company was incorporated in Delaware in 1988.  Its headquarters are located at 100 WestSinclair Street, Perris, California 92571, and its telephone number is (951)436-3000.

### **Recent Developments**

On February 20, 2007, theCompany completed the sale of CCI to CountryCoach Holdings LLC (“CC Holdings”), an entity owned primarily by RileyInvestment Management, LLC (“Riley”). Mr. Bryant R. Riley, who owns approximately 1.2 million shares of theCompany’s common stock, is the sole equity owner of Riley.  The sale was conducted pursuant to a Mergerand Asset Purchase Agreement (the “Merger Agreement”) entered into on February16, 2007 by and among CC Holdings, Country Coach Merger LLC (“Merger Sub”) andRiley, on one hand, and the Company and CCI, on the other. Theacquisition took the form of a merger whereby CCI merged with and into MergerSub with Merger Sub surviving as a wholly-owned subsidiary of CC Holdings (the “Merger”).  In addition, in connection with thetransactions contemplated by the Merger Agreement, the Company also transferredcertain assets (the “Additional Assets”) to Merger Sub held by the Companyrelated to the business of CCI and Merger Sub assumed certain liabilities ofthe Company related to the business of CCI. At the closing of the Merger, MergerSub was renamed Country Coach LLC.  The Company received total consideration of$38.7 million  (the “Consideration”) forthe sale of CCI and the transfer of the Additional Assets.  In connection with the Merger, the Companyamended its existing credit facility with Wells Fargo Bank and UPS CapitalCorporation and used $24.5 million of the Consideration to reduce amounts owedby the Company under the credit facility. (See Note 17 in the accompanyingnotes to the consolidated financial statements for additional informationregarding the sale of CCI.)

In December 2006, theCompany and an unrelated party entered into an agreement for the possible saleand leaseback of NRV’s manufacturing facilities owned by the Company.  The Company has not committed to the sale andleaseback and is considering alternative options.  (See Note 10 in the accompanying notes to theconsolidated financial statements for further discussion and terms of sale andleaseback.)

### **Motorized Recreational Vehicle IndustryOverview**

#### **Motorhomes**

Motorhomesare self-powered RVs built on a motor vehicle chassis. The interior typicallyincludes a driver’s area, kitchen, bathroom, dining, living room and sleepingareas. Motorhomes are self-contained, with their own power generation, heating,cooking, refrigeration, sewage holding and water storage facilities, so thatthey can be lived in without being attached to utilities. Motorhomes aregenerally categorized into A, B and C classes based upon standards establishedby the Recreational Vehicle Industry Association (the “RVIA”). Class Amotorhomes are constructed on a medium-duty to heavy-duty truck chassis, whichincludes the engine, drive train and other operating components. Retail pricesfor Class A motorhomes range from $58,000 to $1,630,000, with the majorityin the $58,000 to $400,000 range. Class B motorhomes are van campers, which generally contain fewerfeatures than Class A or Class C motorhomes and generally range inretail price from $41,000 to $74,000. Class C motorhomes are built on avan or pick-up truck chassis, which includes an engine, drive train componentsand a finished cab section, and generally range in retail price from $48,000 to$140,000.

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#### **Trends and Demographics**

Accordingto the RVIA’s wholesale statistics, total Class A motorhome industry unitsales in 2006 decreased 13.7% to 32,700 from 37,900 in 2005. The aggregatewholesale value of the Class A motorhome industry’s shipments for the yearended December 31, 2006 is not yet available from the RVIA. The aggregatewholesale value of the Class A motorhome industry’s shipments for the yearended December 31, 2005 was approximately $4.9 billion. The average wholesaleprice of Class A motorhomes increased 4.2% in 2005 to $128,614 from$123,406 in 2004. Statistical information regarding the aggregate wholesalevalue of Class A industry shipments and average wholesale price of Class Amotorhomes were not available for the year ended December 31, 2006 as of thedate of this report.

Between1998 and 2006, the number of Class A motorhome manufacturers decreasedfrom 27 to 26. In addition, during this period, the aggregate retail marketshare of the ten largest Class A motorhome manufacturers increased from92.5% to 94.1%.

RVsare purchased for a variety of purposes, including camping, visiting family andfriends, sightseeing, vacationing and enjoying outdoor activities and sportingevents. According to a 2005 University of Michigan study (latest availablestudy), approximately 7.9 million households (or 8.0% of all vehicle owning households)in the United States owned RVs in 2005, up from 6.9 million in 2001, 6.4million in 1997, 5.8 million in 1993 and 5.8 million in 1988. In addition, thestudy indicated that 64% of all current RV owners and 34% of all former RVowners plan to purchase another RV in the future. This study further indicatedthat 67% of all future RV purchases will be used RVs (RVIA and market sharestatistics reflect new product sales only) with 13% of these used RVs olderthan 11 years.

Basedon the 2005 study done by the University of Michigan, ownership of RVs reachesits highest level among those Americans aged 55 to 64, with 10.0% of householdsin this category owning RVs. According to the study, the number of householdsin this group, which constitutes the Company’s primary target market, isprojected to grow by 3.6 million households, or 20%, from 2005 to 2010. BabyBoomers are defined as those born between the years 1947 and 1967, and thus theleading edge of the Baby Boomer generation began turning 55 in 2002. Thisgeneration is expected to be more affluent and retire earlier than pastgenerations. As Baby Boomers enter and travel through the important 55 to 64age group for RV sales, the Company believes that they represent the potentialfor a secular uptrend in the RV industry.

Asmotorhomes have increased in popularity due, in part, to the entry of the BabyBoomer generation into the target market, the purchasers of these products havegrown more sophisticated in their tastes. The Company believes that as a result,customers have demanded more value for their money, and brand recognition andloyalty have become increasingly important. These trends have favored companiesthat can deliver quality, value and reliability on a sustained basis.

### **Business Development and Strategy**

TheCompany’s business development and operating strategy is to deliver highquality, innovative products that offer superior value to enhance the Company’sposition as one of the nation’s leading manufacturers of RVs. This strategyfocuses on the following key elements: (i) building upon and promotingrecognition of the Company’s brand names; (ii) offering the highest valueproducts at multiple price points to appeal to first time and repeat buyers;(iii) utilizing vertically integrated manufacturing processes; and(iv) capitalizing on the Company’s historical reputation to expand itspresence in the market.

###### *Building upon and Promoting Recognition ofthe Company’s Brand Names*

TheCompany believes that its brand names and historical reputation formanufacturing quality products with excellent value have fostered strongconsumer awareness of the Company’s products and have contributed to itsoverall growth during the past decade. The Company intends to capitalize on itsbrand name recognition in order to increase its sales and market share,facilitate the introduction of new floorplans and enhance its dealer network.

###### *Offering the Highest Value Products atMultiple Price Points to Appeal to First Time and Repeat Buyers*

TheCompany currently offers six distinct models of RVs with 32 floor plans, whichare available in a variety of lengths, color schemes and interior designs andrange in suggested retail price from $91,000 to $268,000. Each model isintended to attract customers seeking an RV within their price range byoffering value superior to competitive products from other manufacturers. RVIAdata indicates that most new motorhome purchasers have previously owned arecreational vehicle, and the Company’s models are positioned to address thedemands of these repeat customers as well as first time buyers.

###### *Utilizing Vertically Integrated ManufacturingProcesses*

TheCompany designs and manufactures a significant number of the components used inthe assembly of its products, rather than purchasing them from third parties.The Company believes that its vertically integrated manufacturing processesallow it to achieve cost savings and better quality. The Company’s in-houseresearch and development staff and on-site component manufacturing departmentsenable the Company to ensure a timely supply of necessary products and torespond rapidly to market changes.

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###### *Capitalizing on the Company’s HistoricalReputation to Expand its Presence in the Market*

TheCompany’s NRV product offerings compete in the most common and competitiveprice points in the RV industry. Through continued product development, a focuson quality, and strategic pricing, NRV reintroduced the *Surf Side*,its entry-level model and expanded its product offerings with the *Pacifica,*a diesel product filing a price point between the*Tropi-Cal*and*Tradewinds*.  In 2007, NRV will continue to target theexpansion of its dealer body. The Company continues to seek to expand its shareof this market by capitalizing on its historical reputation, developing new productsof superior quality while reducing its costs, expanding its dealer network andsatisfying the desire of many current RV owners to purchase more upscalevehicles.

#### **Company’s Products**

TheCompany’s product strategy is to offer the highest value RVs across a widerange of retail prices in order to appeal to a broad range of potentialcustomers and to capture the business of brand-loyal repeat purchasers who tendto trade up with each new purchase. The Company’s motorhomes are designed tooffer all the comforts of home within a 235 to 399 square foot area.Accordingly, the interior of the recreational vehicle is designed to maximizeuse of available space. The Company’s products are designed with six generalareas, which are integrated to form comfortable and practical mobileaccommodations. The six areas are the driver’s compartment, living room,kitchen, dining room, bathroom and bedroom. In many models, the Company offersup to four “slide-outs”, which are compartments that can be expanded to createadditional living space when the motorhome is parked.

Foreach model, the Company offers a variety of interior layouts and designs, aswell as exterior graphic and paint schemes. The Company’s products are offered with a wide range of accessories andoptions and manufactured with high-quality materials and components. Eachvehicle is equipped with a wide range of kitchen and bathroom appliances, audioand video electronics, communication and systems monitoring devices, furniture,climate control systems and storage spaces.

TheCompany’s vehicles are built by integrating manufacturing and assembly lineprocesses. The Company generally operates one production shift for mostassembly activities. The Company believes that the vertically integratedmanufacturing systems and processes it has developed enable it to efficientlyand consistently produce high-quality products.

Amongother items, the Company fabricates, molds and finishes fiberglass to produceits front and rear-end caps, manufactures its own walls and roofs, assemblessub-floors and molds plastic components. In addition to assembling its vehiclesand installing various options and accessories, the Company manufactures manyof its installed amenities such as cabinetry, showers and bathtubs.  The Company believes that by manufacturingthese components on site, rather than purchasing them from third parties, itachieves cost savings, better quality and timely supply of necessarycomponents. Chassis, plumbing fixtures, hardware, furniture and appliances are purchasedin finished form from various suppliers.

TheCompany purchases the principal raw materials and certain other components usedin the production of its RVs from third parties. Other than the chassis, andsome chassis components, some sidewall materials, and some fabrics, thesecomponents and raw materials typically have short delivery lead times. Allmaterials are generally available from numerous sources, and the Company hasnot experienced any significant shortages of raw materials or components.

**Models**

##### ***Tradewinds***

The 40’*Tradewinds* is a bus-style diesel pusherbuilt on the Freightliner XC raised rail chassis, offering considerablestrength in addition to features like a 400 HP Cummins ISL diesel engine,Allison MH3000 transmission, and an 85-inch ceiling. The *Tradewinds*features large three and four slide rooms that add to the already spaciousliving space. This motorhome receives intricate full exterior paint designs, inaddition to interior appointments like OptimaLeatherTM, upgraded electronics andseveral interior upgrades. Suggested retail prices for the *Tradewinds*start at $268,000. The *Tradewinds*debuted in 1997, but was not built for model-year 2005. It was reintroduced in2005 for model-year 2006.

###### ***Pacifica***

The 36’ to 40’*Pacifica* is a bus-style diesel pusherbuilt on the Freightliner XC raised rail chassis, offering considerablestrength in addition to features like a 350 Caterpillar C7 diesel engine,Allison MH3000 transmission, and an 85-inch ceiling. The*Pacifica* features large three and fourslide rooms’ that add to the already spacious living area. This motorhomereceives intricate full exterior paint designs, in addition to interiorappointments like OptimaLeatherTM, upgraded electronics and several interiorupgrades. Suggested retail prices for the*Pacifica* start at $222,000. The*Pacifica* debuted in 2006.

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##### ***Tropi-Cal***

The *Tropi-Cal*is a competitively priced diesel pusher built on the FreightlinerXC-Series Chassis. The 33’, 34’, 35’, 37’, and 39’ *Tropi-Cal*floorplans feature two, three and four slide-outs and include expansivebasement storage, excellent cargo carrying capacities and comfortable,convenient layouts. The *Tropi-Cal*offers a distinctive vinyl graphics package and a partial and full paintoption.  The *Tropi-CalLX*is a modestly priced diesel motorhome with many luxuryappointments usually found on much more expensive Highline motorcoaches. Builton a raised rail Freightliner XC Series chassis with patented DuraFrame®technology, *Tropi-Cal LX*hasrichly appointed interiors with a choice of three fabulous decors.  The *Tropi-Cal*products seek to capitalize on brand loyalty earned since the originalnameplate introduction in the early 1990s. Suggested retail prices for the *Tropi-Cal* start at $169,000. The *Tropi-Cal*was originally introduced as a gasoline motorhome in 1994 and made its debut asa diesel pusher in 2002.

##### ***Dolphin***

The *Dolphin* was re-designed from the ground up for 2006,incorporating several innovative industry trends such as the “big box” houseand aggressive new front and rear caps. The *Dolphin* isavailable in four floorplans, and is built on either the Ford or Workhorsegas-powered chassis. These models are full-basement, bus-style motorhomes withup to three slides. The *Dolphin LX* isan upgraded *Dolphin*, offering certain distinctfeatures, exterior styling and floorplans often reserved for higher-priceddiesel motorhomes. Many optional *Dolphin*features become standard on the *Dolphin LX*, andthe LX features many items not available on the standard *Dolphin*.The *Dolphin* products are produced in 32’ to36’ lengths. Suggested retail prices for the*Dolphin* startat $130,000. The Class A *Dolphin*motorhome was first introduced in 1985. However, the *Dolphin*brand dates back to 1963.

##### ***Sea Breeze***

The *Sea Breeze* is a moderately priced, bus-style motorhome,offered on a Ford gas-powered chassis. A full-height motorhome, the *Sea Breeze* offers considerable basement storage. The *Sea Breeze* features Corian® countertops, power heatedside-view mirrors, deluxe trim and heated water and waste holding tanks. The *Sea Breeze* offers floorplans ranging from 31’ to 35’ inlength. Also offered under the *Sea Breeze* nameis the *Sea Breeze LX*built on either the Fordor Workhorse W-22 chassis. The *Sea Breeze* LXoffers many upgrades not available in the standard *Sea Breeze*.The *Sea Breeze LX*models are produced in 31’to 36’ lengths. Suggested retail prices for the *Sea Breeze*start at $107,000. The Class A *Sea Breeze*product was introduced in 1992.

##### ***Surf Side***

The *Surf Side* was originally offered from 1999 through the 2001model year and has returned for the 2006 model year as an entry-level pricedcoach. The *Surf Side* is offered ona Ford gas-powered chassis and offers floorplans produced in 29’ to 34’lengths. Each *Surf Side* offers competitivestyling, full-basement pass-through storage, insulated and heated waterand waste holding tanks and lightweight aluminum basement compartmentdoors. Suggested retail prices for *the Surf Side*start at $91,000.

OnSeptember 24, 2004, the Company sold its travel trailer business assets toWeekend Warrior, a privately owned, California-based ramp-trailer manufacturer.The sale was designed to allow the Company to further concentrate its effortsand resources on its growing motorhome business.  The sale was reported as a discontinuedoperation.

#### **Arrangements with Chassis Suppliers**

One ofthe principal components used in the manufacture of motorhomes is the chassis,which includes the engine, drive train and other operating components.  The Company obtains the required chassis forits NRV Class A motorhomes from a limited number of manufacturers. As isstandard in the industry, arrangements with such suppliers permit them toterminate their relationship with the Company at any time. Lead times for thedelivery of chassis frequently exceed two months and the RV industry as a wholehas from time to time experienced temporary shortages of chassis.  If any of the Company’s suppliers were todiscontinue the manufacture of chassis utilized by the Company in themanufacture of its Class A motorhomes, materially reduce theiravailability to the RV industry in general or limit or terminate theiravailability to the Company in particular, the business and financial conditionof the Company could be materially and adversely affected.

#### **Product Warranty**

TheCompany provides retail purchasers of its motorhomes with a limited warrantyagainst defects in materials and workmanship. Excluded from the Company’swarranties are chassis manufactured by third parties and other components,typically those that are warranted by the Company’s suppliers of these items.Service covered by warranty must be performed at either of the Company’sin-house service facilities or any of its dealers or other authorized servicecenters. The warranty terms for NRV motorhomes is one year basic and five yearsstructural.

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#### **Trademarks and Patents**

The Company has registered NRV’s **Dolphin, DuraFrame, DuraSlide, Islander, Marlin, National RV, Pacifica,Palisades, Sea Breeze, Sea View, Splash, Surf Side, Tradewinds, Tropi-Cal,Viper****and* Your Own Private Island*trademarks and believes they are material to the Company’s business. TheCompany has additional trademarks filed and pending registration. In addition,the Company has four patents covering RV sub-floors, exterior doors, stow-awaybeds and one design patent covering a ramp block.

#### **Product Development**

TheCompany utilizes research and development staff that concentrates on productdevelopment and enhancements. New ideas are presented to the staff from avariety of sources, including management, wholesale and retail salesrepresentatives, dealers, suppliers, trade shows and consumers. The staffutilizes computer-aided design equipment to assist in the development of newproducts and floor plans and to analyze suggested modifications of existingproducts and features. After the initial step of development, prototype modelsfor new products are constructed and refined. In the case of modifications tocertain features, new molds for various parts, such as front-end caps, storagedoors and dashes are produced and tested. New product prototypes are producedboth off-line as well as directly on the production line. The Company believesthat the maintenance of an in-house research and development staff enables theCompany to respond rapidly to ongoing shifts in consumer tastes and demands.Total research and development expenses, excluding the CCI expenses, were $0.4million, $0.6 million and $0.5 million, for the years ended December 31, 2006,2005 and 2004, respectively.

#### **Planned Product Introductions**

In2006, the Company introduced the *Pacifica*, anupper mid-range diesel pusher, expanding the number of price points at whichthe Company competes in the market place. The Company plans to redesign two existing models in 2007 as model-year2008 coaches.  The Company also plans tointroduce new floorplans in its existing products to target certain marketniches not previously represented. Throughout much of the Company’s productofferings, model change will herald new and updated interior and exterior colorschemes, and new floorplans will be debuted throughout the calendar year.

### **Distribution and Marketing**

TheCompany markets NRV products through a network of approximately 90 dealerlocations in 32 states and 5 Canadian provinces. These dealers generally carryall or a portion of NRV’s product lines along with competitors’ products.

TheCompany generally promotes its products through product support at dealerlocations, product brochures, live plant tours, product walk-throughs on DVD,attendance at trade and consumer shows, direct mail promotions, companyweb-sites, corporate newsletters, press releases, promotional appearances,trade and consumer magazine advertising, RV owner rallies that include limitedfree service and its in-house magazine publications. From time to time, theCompany also offers dealer incentives. In addition, to help promote customersatisfaction and brand loyalty, the Company sponsors NRV clubs for owners ofthe Company’s products. The clubs publish newsletters on a monthly or quarterlybasis and organize RV rallies and other activities. The Company continuallyseeks consumer preference input from several sources, including dealers, RVowners and the Company’s sales representatives, and, in response, the Companyimplements changes in the design, decor and features of its products. TheCompany’s website also offers an extensive listing of the Company’s models,floor plans and features, including “virtual tours” of some models.

Consistent with industrypractice, the Company enters into off-balance sheet agreements, calledrepurchase agreements, with lenders providing financing (flooring) arrangementsfor dealers purchasing the Company’s motorhome units. These units are used tocollateralize the loan between the dealers and their lenders.  The repurchase agreement provides the Company(manufacturer) to be paid directly by the lender upon delivery of the unit tothe dealer location on the condition that the Company is required to repurchasethe unit should the dealer default on the flooring agreement with itslender.  The Company’s loss exposurewould be the difference between the value of the lien held by the flooringinstitution and the price for which the Company is able to resell the unit,adjusted for shipping and refurbishing costs prior to ultimate sale. Lossesunder these agreements have not been material to the Company.  Management monitors these active agreementson units sold and will record a liability and reduction to sales and cost ofgoods sold in the event that the Company is required to perform under the termsof the repurchase agreement.  (See Note10 in the accompanying notes to the consolidated financial statements foradditional information on repurchase agreements.)

Manyfinance companies and banks provide retail financing to purchasers of RVs.Certain provisions of the U.S. tax laws applicable to second residences,including the deductibility of mortgage interest, currently apply to motorhomesused as qualifying residences.

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#### **Cyclicality, Seasonality and Economic Conditions**

The RVindustry has been characterized by cycles of growth and contraction in consumerdemand, and reflects prevailing economic conditions, which affect disposableincome for leisure-time activities. Declines in consumer confidence driven byconcerns about the availability and price of gasoline, inflation, increases ininterest rates, reductions in available financing, and political uncertaintyhas had, and may in the future have, an adverse impact on RV sales. Seasonalfactors, over which the Company has no control, also have an effect on thedemand for the Company’s products. Demand in the RV industry declines over thewinter season, while sales are generally highest during the spring and summermonths.

#### **Competition**

Themotorhome market is intensely competitive, with a number of other manufacturersselling products that compete with those of the Company. According toStatistical Surveys, Inc., a provider of industry information concerningretail sales, the three leading manufacturers accounted for approximately51.2%, 54.8% and 55.8% of total retail units sold in the Class A motorhomemarket during the years ended December 31, 2006, 2005 and 2004, respectively.These companies and certain other competitors have substantially greaterfinancial and other resources than the Company. Sales of used motorhomes alsocompete with the Company’s products. The Company competes on the basis ofvalue, quality, price and design. According to Statistical Surveys, Inc.,the Company’s Class A retail market share of new product unit sales,exclusive of CCI sales, was 5.0%, 5.0% and 4.8% for the years ended December31, 2006, 2005 and 2004, respectively.

#### **Dependence on Certain Dealers andConcentration of Dealers in Certain Regions**

Forthe year ended December 31, 2006, three dealers accounted for 17%, 11% and6% of the Company’s annual net sales, excluding CCI sales. Also, the Company’stop ten dealers accounted for approximately 58%, 58% and 70% of the Company’sannual net sales during the years ended December 31, 2006, 2005 and 2004,respectively. The loss by the Company of one or more of these dealers couldhave a material adverse effect on the Company’s financial condition and resultsof operations. In addition, a significant portion of the Company’s sales isfrom dealers located in states in the western part of the United States.Consequently, a general downturn in economic conditions or other materialevents in the western region could materially adversely affect the Company’ssales.

**GovernmentRegulation**

TheCompany is subject to federal, state and local regulations governing themanufacture and sale of their products, including the provisions of theNational Traffic and Motor Vehicle Safety Act (the “Motor Vehicle Act”), theTransportation Recall Enhancement, Accountability and Documentation Act (the “TREAD”Act) and the Federal Motor Vehicle Safety Standards (“FMVSS”). Certain statesrequire approval of coach designs and provide certification tags provingcompliance before coaches can be sold into that state. The Motor Vehicle Actauthorizes the National Highway Traffic Safety Administration (“NHTSA”) torequire a manufacturer to recall and repair vehicles that contain safetydefects or fail to comply with the FMVSS. In addition, the Company has, fromtime to time, instituted voluntary recalls of certain motorhome units.  The Company is also subject to some federaland state consumer protection and unfair trade practice laws and regulationsrelating to the sale, transportation and marketing of motor vehicles, includingso-called “Lemon Laws.”

Federaland state laws and regulations also impose upon vehicle operators variousrestrictions on the weight, length and width of motor vehicles, includingtrucks and motorhomes, that may be operated in certain jurisdictions or oncertain roadways.

Amendmentsand changes in enforcement with respect to these laws and regulations and theimplementation of new laws and regulations could significantly increase thecosts of manufacturing, purchasing, operating or selling the Company’s productsand could have a material adverse effect on the Company’s business, results ofoperations and financial condition. The failure of the Company to comply withthese present or future laws or regulations could result in fines imposed onthe Company, civil and criminal liability, or suspension of operations, any ofwhich could have a material adverse financial effect on the Company.

The Company’s manufacturing operations are subject to a variety offederal and state environmental regulations relating to the use, generation,storage, treatment, emissions and disposal of hazardous materials and wastesand noise pollution. Such laws and regulations are becoming more stringent, andit is likely that future amendments to these environmental statutes andadditional regulations promulgated there under will be applicable to theCompany, its manufacturing operations and its products in the future. Thefailure of the Company to comply with present or future regulations couldresult in fines being imposed on the Company, civil and criminal liability,suspension of operations, alterations to the manufacturing process, or costlycleanup or capital expenditures.

8

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#### **Employees**

As ofDecember 31, 2006 and excluding CCI employees, the Company employed atotal of 891 people (including temporary employees), of which 661 were involvedin manufacturing, 91 in service, 57 in engineering, 50 in administration, 29 insales and marketing and 3 in research and development.  None of the Company’s personnel arerepresented by labor unions. The Company considers its relations with itspersonnel to be good.

#### **Available Information**

NationalR.V. Holdings, Inc.’s Internet website address is www.nrvh.com. TheCompany’s annual reports on Form 10-K, quarterly reports onForm 10-Q, current reports on Form 8-K and amendments to thosereports filed or furnished pursuant to section 13(a) or 15(d) ofthe Securities Exchange Act of 1934 are available free of charge through theCompany’s website as soon as reasonably practicable after they areelectronically filed with, or furnished to, the Securities and ExchangeCommission.

#### **Item1A. Risk Factors**

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

Inaddition to the other information set forth in this report, you shouldcarefully consider the following factors that could materially affect ourbusiness, financial condition or future results. The risks described below arenot the only risks facing our Company. Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition and/or operatingresults.

#### **Risks Related to Our Operating Performanceand Our Industry**

**We have incurred significant losses in recentyears, and if our losses continue, and we are unable to achieve and maintainprofitability, our stock price will likely suffer**.

Including the results of operations of the Company’s former CCIbusiness, we have had net losses totaling $24.3 million, $19.8 million and $9.5million for the years ended December 31, 2006, 2005 and 2004,respectively. Continued losses could reduce our liquidity and cause us toreduce our expenditures on capital improvements, machinery and equipment andresearch and development. This could have a negative effect on our ability tomaintain production schedules, manufacture products of high quality and developand manufacture new products that will achieve market acceptance. This could inturn, have a negative impact on sales and earnings. If we continue to sufferlosses, we could be unable to implement our business and financial strategiesor meet our obligations when due. Our failure to achieve and sustain ourprofitability will negatively impact the market price of our common stock.

#### **Our operating results may fluctuate.**

Ournet sales, gross margin and operating results may fluctuate significantly fromperiod to period due to factors such as the mix of products sold, the level ofdiscounting employed on our products, the ability to utilize or expandmanufacturing resources efficiently, material shortages, the introduction andconsumer acceptance of new models offered by our competition, warranty expense,the addition or loss of dealers, the timing of trade shows and rallies andfactors affecting the recreational vehicle industry as a whole, such ascyclicality and seasonality. In addition, our overall gross margin will beaffected by shifts in the type of models sold.

#### **The RV industry has been characteristicallycyclical and seasonal, which can have a negative effect on our operatingresults and our stock price.**

The RVindustry has been characterized by cycles of growth and contraction in consumerdemand, reflecting prevailing economic conditions, which affect disposableincome for leisure-time activities. Declines in consumer confidence driven byconcerns about the availability and price of gasoline, inflation, increases ininterest rates, reductions in available financing, and political uncertaintyhave had, and may in the future have, an adverse impact on RV sales. Seasonalfactors, over which we have no control, also have an effect on the demand forour products. Demand in the RV industry generally declines over the winterseason, while sales are generally highest during the spring and summer months.We cannot assure that the factors currently adversely affecting our businesswill not continue, or have an adverse effect beyond their present scope.

#### **We depend on certain dealers andconcentration of dealers in certain regions.**

Forthe year ended December 31, 2006, three NRV dealers accounted for 17%, 11%and 6% of the annual net sales. Also, their top ten dealers accounted forapproximately 58%, 58% and 70% of our annual net sales during the years endedDecember 31, 2006, 2005 and 2004, respectively. The loss of one or more ofthese dealers could have a material adverse effect on our financial conditionand results of operations. In addition, a significant portion of our sales isfrom dealers located in states in the western part of the United States.Consequently, a general downturn in economic conditions or other materialevents in the western region could materially adversely affect our sales.

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**Reducedavailability of financing for our dealers or retail customers couldadversely affect revenues and margins.**

Our RVdealers, as well as retail buyers of RV products, generally secure financingfrom third party lenders. Any reduction in the availability of such financingor significant increase in the cost of such financing resulting from higherinterest rates may have an adverse effect on our business. Availability offinancing is dependent on the lending practices of financial institutions,financial markets, governmental policies and economic conditions, all of whichare largely beyond our control. For example, in the recent past, floorplanlenders have tightened credit availability, which has negatively affected thetiming and accomplishment of our sales to our RV dealers, resultingin higher levels of finished goods inventory and associated financing costs. Inresponse to lower demand, we offered retail-financing incentives toconsumers resulting in a reduction in net sales, which negatively affectedprofitability.

**Highinventories of recreational vehicles among dealers could continue to negativelyaffect our sales volume and profit margins.**

Thelevel of recreational vehicle inventories among dealers can have a significantimpact on manufacturing, shipments, inventory levels and operating results. Aswholesale shipments of recreational vehicles within the industry exceed retailsales of vehicles, inventories at the dealer level expand to a point wheredealers significantly cut orders from manufacturers. As manufacturers respondto reduced demand, many offer wholesale and retail discounts and incentives inan effort to maintain production volumes. As a result, dealer inventories mayexpand further resulting in an increasing need for discounts and salesincentives, or in the alternative, a need for dramatic reduction in overallproduction levels by manufacturers. Increased discounts and incentives, andreduced production levels negatively affect our revenues andprofitability.

**For someof our components, we depend on a small group of suppliers, and the loss orbusiness interruption of any of these suppliers could affect our ability toobtain components at competitive prices, which would decrease our margins.  Further, any defects in the third-partycomponents or raw materials we incorporate into our motorhomes could negativelyaffect our sales and financial results.**

Mostrecreation vehicle and bus components are readily available from a variety ofsources. However, a few components are produced by only a small group ofquality suppliers that have the capacity to supply large quantities on anational basis. Our NRV subsidiary purchases gasoline-powered chassis from FordMotor Company and Workhorse Custom Chassis and rear engine diesel-poweredchassis from Freightliner Custom Chassis Corporation.  We generally maintain a one to two monthproduction supply of a chassis in inventory. Historically, in the event of anindustry-wide restriction of supply, chassis manufacturers have allocatedchassis among our competitors and us based on the volume of chassis previouslypurchased. If Ford Motor Company, Workhorse Custom Chassis or FreightlinerCustom Chassis Corporation were to discontinue the manufacturing of motor homechassis, or if as a group all of our chassis suppliers significantly reducedthe availability of chassis to the industry, our business could be adverselyaffected. Similarly, shortages, production delays or work stoppages by theemployees of these chassis manufacturers or other chassis suppliers could havea material adverse effect on us. Finally, as is standard in the industry,arrangements with chassis suppliers are terminable at any time by either thechassis supplier or us. If we cannot obtain an adequate chassis supply, thiscould result in a material adverse effect on our financial condition andresults of operations.

Inaddition to the chassis, we incorporate a variety of components and rawmaterials from third parties into our recreational vehicles. Any defects inthese components or raw materials could cause us to incur significant expensein repairing, replacing or finding alternatives to the components or rawmaterials, could negatively impact the sales of affected motorhomes and couldcause a material adverse impact on our financial results and financialcondition.

**Fuelshortages, or higher prices for fuel, could have a negative effect on sales ofrecreational vehicles.**

The recreational vehicles produced by us require gasoline ordiesel fuel for their operation. Gasoline and diesel fuel have, at varioustimes in the past, been difficult to obtain, and there can be no assurance thatthe supply of gasoline and diesel fuel will continue uninterrupted, thatrationing will not be imposed or that the price of, or tax on, fuel will notsignificantly increase in the future. Shortages of gasoline and diesel fuel andrapid significant increases in fuel prices have had a significant adverseeffect on the demand for recreational vehicles in the past and could have amaterial adverse effect on demand in the future. Such a reduction in overalldemand for recreational vehicles could have a materially adverse impacton our revenues and profitability.

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**Theconsolidation of distribution channels within the RV industry could have amaterial negative effect on revenues and profitability.**

Overthe last several years, several large-scale recreational vehicle dealers havegrown to represent a significant presence in the industry. The expansion oflarge-scale dealers and the continued consolidation of dealerships among largeplayers may result in increased pricing pressures in the industry in general.Such pressure exerted by the distribution channel may have a material adverseeffect on our revenues and profitability.

**A rise inthe frequency or size of workers’ compensation, and other claimsagainst us, may result in a material adverse effect on our business,operating results and financial condition.**

In theordinary course of business, we are subject to litigation related to workers’compensation and other employee related claims. We substantiallyself-insure these claims with a self-insurance retention level for claims belowspecified limits. An increase in frequency in claims below the self-insuranceretention level may adversely affect our financial results. In addition,insurance is not available for some kinds of claims; an insurance carrier maydeny coverage resulting in potential litigation expenses and additionalexposure to losses. Workers’ compensation insurance costs are directlyattributable to experience in the workplace. Any increase in the frequency andsize of such claims, as compared to our experience in prior years, maycause the premiums required for insurance to rise significantly. Further,sizable claims may damage our reputation that may adverselyaffect our future operating and financial results.

**A rise inthe frequency or size of warranty claims against us may result in amaterial adverse effect on our business, operating results and financialcondition.**

We providecustomers of our products with a basic one-year warranty covering defectsin material or workmanship and a five-year warranty on certain structuralcomponents.  Although we maintain reserves for such claims, which to datehave been adequate, there can be no assurance that warranty expense levels willremain at current levels or that such reserves will continue to be adequate. Alarge number of warranty claims exceeding our current warranty expense levelscould have a material adverse effect on our results of operations, financialcondition, and cash flows. Further, some jurisdictions have laws providing fora multiple recovery on warranty claims in some circumstances. The possibilityfor class actions also exists. In addition to the warranty expenses incurredby us, sizable product warranty claims may damage our reputationamong dealers, builders and consumers that may adversely affect our futureoperating and financial results.

#### **Repurchase agreements with floorplan lenderscould result in increased costs.**

Mostdealers finance all, or substantially all, of the purchase price of theirinventory under floor plan arrangements with banks or finance companies underwhich the lender pays us directly. Dealers typically are not required tocommence loan repayments to such lenders for a period of at least six months.The loan is collateralized by a lien on the motorhome. Consistent with industrypractice, we have entered into repurchase agreements with these lenders. Ingeneral, the repurchase agreements require us to repurchase a unit if thedealer defaults on the financed unit. Upon a dealer default, the agreementsgenerally require us to repurchase RVs at the election of the lender providedcertain conditions are met, such as repossession of the RV by the lender, theRV being new and unused and the time elapsed between invoice date and demandfor repurchase being no longer than a specified period which is typically 18months or less. Increase in the significance or number of future losses undersuch agreements could have a material adverse effect on our consolidatedfinancial position, results of operations, or cash flows.

**A rise inthe frequency or size of “lemon law” and product liability claimsagainst us may result in a material adverse effect on our business,operating results and financial condition.**

We areinvolved in legal proceedings in the ordinary course of business, including avariety of warranty, “lemon law” and product liability claims typical in therecreation vehicle industry. With respect to product liability claims, ourinsurance policies cover, in whole or in part, defense costs and liabilitycosts for personal injury or property damage (excluding damage to ourmotorhomes). We cannot be certain that our insurance coverage will besufficient to cover all future claims against us. Any increase in the frequencyand size of these claims, as compared to our experience in prior years, maycause the premiums that we are required to pay for insurance to raisesignificantly. It may also increase the amounts we pay in punitive damages,which may not be covered by our insurance. These factors may have a materialadverse effect on our results of operations and financial condition. Inaddition, if these claims rise to a level of frequency or size that issignificantly higher than similar claims made against our competitors, ourreputation and business will be harmed.

**Changesin labor practices could adversely affect our labor costs andprofitability.**

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

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**Increasedcosts, including costs of component parts and labor may adverselyaffect our profitability if such costs cannot be offset because of marketforces.**

Our financialresults may be significantly adversely affected by the availability and pricingof manufacturing components (particularly those with substantial steel, copper,fiberglass or lumber content) and labor. We attempt to mitigate the effectof any cost inflation in raw materials, components and labor by negotiatingwith current or new suppliers, contract price escalators, increasing laborproductivity or increasing the sales prices of our products.However, we cannot assure that such actions will not have an adverseimpact on the competitiveness of our products and result in decliningrevenues. If we are unable to successfully offset increases inmanufacturing costs, this could have a material adverse impact on margins,operating income and cash flows. If we increase prices to offset highermanufacturing costs, the benefit of such increases may lag behind the rise inmanufacturing costs.

**The RVindustry is highly competitive and some of our competitors have significantlygreater resources than we have.**

Themarket for motorized products is highly concentrated. This concentration is duein part to the higher barriers to entry within the motorized market, includingthe significant capital required for fixed asset investment, higher level ofgovernment regulation and dependence on a limited number of chassis suppliers.Consolidation within the industry may also increase overall competitivepressure. A number of our competitors have made acquisitions over the last fiveyears that have increased their market share. Existing or new competitors couldadversely affect our revenues and profit margins. For example, thesecompetitors could develop products superior to our recreational vehicleofferings or that could achieve better consumer acceptance than our products.

Accordingto Statistical Surveys, Inc., the three leading manufacturers accountedfor approximately 51.2% of total retail units sold in the Class Amotorhome market during the year ended December 31, 2006. These companies andcertain other competitors have substantially greater financial and otherresources than we have. Sales of used motorhomes also compete with ourproducts. We compete on the basis of value, quality, price and design.According to Statistical Surveys, Inc., NRV Class A retail marketshare of new product unit sales, exclusive of CCI, was 5.0% for the year endedDecember 31, 2006.

Sustainedincreases in these competitive pressures could have a material adverse effecton our results of operations. There can be no assurance that existing or newcompetitors will not develop products that are superior to our recreationalvehicles or that achieve better consumer acceptance, thereby adverselyaffecting our market share, sales volume and profit margins.

**Changesin consumer preferences, and our ability to effectively adapt to thosepreferences, may adversely affect revenues and profitability.**

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

**Newproduct introductions may result in unanticipated expenses resulting in reducedearnings.**

Theintroduction of new products is critical to our future success. We incuradditional costs when new products are introduced, such as research anddevelopment costs, engineering costs, and initial labor or purchasinginefficiencies. Additionally, we may incur unexpected expenses, includingthose associated with unexpected engineering or design flaws that could force arecall of a new product. We may be prompted to offer additional incentives tostimulate the sales of products, not adequately accepted by the market, or tostimulate sales of older or obsolete products. These types of costs could besubstantial and could have a significant adverse effect on our financialresults.

**Changesin favorable tax laws could adversely affect our results of operations.**

CertainU.S. tax laws currently afford favorable tax treatment for the purchase andsale of recreational vehicles that are used as the equivalent of second homes.These laws and regulations have historically been amended frequently, and it islikely that additional amendments and additional regulations affecting ourproducts, or us, may be enacted in the future. Amendments to these laws andregulations and the implementation of new regulations could have a materialadverse effect on our results of operations.

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#### **Risks Related to Regulation and Compliance**

**Changesto, or increases in, the regulations governing our businesses could have amaterial impact on operating and financial results.**

We aresubject to numerous federal, state and local regulations governing the manufactureand sale of our products, including the provisions of the National Traffic andMotor Vehicle Safety Act (the “Motor Vehicle Act”), the Transportation RecallEnhancement, Accountability and Documentation Act (the “TREAD” Act) and theFederal Motor Vehicle Safety Standards (“FMVSS”). Certain states requireapproval of coach designs and provide certification tags proving compliancebefore coaches can be sold into that state. The Motor Vehicle Act authorizesthe National Highway Traffic Safety Administration (“NHTSA”) to require amanufacturer to recall and repair vehicles that contain safety defects or failto comply with the FMVSS. In addition, we have, from time to time, institutedvoluntary recalls of certain motorhome units. Future recalls of our products,if any, could have a material adverse effect on us and harm our reputation. Weare also subject to some federal and state consumer protection and unfair tradepractice laws and regulations relating to the sale, transportation andmarketing of motor vehicles, including so-called “Lemon Laws.”

Federaland state laws and regulations also impose upon vehicle operators variousrestrictions on the weight, length and width of motor vehicles, includingtrucks and motorhomes, that may be operated in certain jurisdictions or oncertain roadways

Amendmentsand changes in enforcement with respect to these laws and regulations and theimplementation of new laws and regulations could significantly increase thecosts of manufacturing, purchasing, operating or selling our products and couldhave a material adverse effect on our business, results of operations andfinancial condition. Our failure to comply with these present or future laws orregulations could result in fines imposed, civil and criminal liability, orsuspension of operations, any of which could have a material adverse financialeffect on us.

**We maybe unable to comply in the future with financial covenants in our creditfacility, which could restrict our ability to operate.**

AtDecember 31, 2006, we had a $40 million asset-based revolving credit facilitywith UPS Capital Corporation (“UPSC”) and Wells Fargo Bank, after exercisingtwo consecutive $5 million options to the line of credit in May and June 2006.The revolving credit facility expires in August 2008. Borrowing availability isbased on eligible accounts receivable and inventory. The credit facilitycontains, among other provisions, certain financial covenants, including fundeddebt to Earnings Before Interest, Taxes, Depreciation and Amortization(EBITDA), and a fixed charge coverage ratio. If these financial covenants are not met, our availability under thecredit facility will be reduced.   On February 21, 2007, we entered into a LoanModification Agreement to the credit facility with Wells Fargo Bank. Theagreement provides that Wells Fargo Bank replace UPSC and become the Agent andsole lender and reduces the credit facility from $40 million to $15 million.All existing covenant defaults are waived under the agreement and it furtherprovides that certain financial covenants be amended to establish new minimumEBITDA requirements in April 2007. While we do not anticipate any events ofdefault, in such an event, the lender could restrict our borrowings underthe line of credit which could restrict or limit our ability to react tochanges in market conditions and acquire properties or businesses and if wewere unable to obtain a waiver on the line of credit from Wells Fargo Bank, theunderlying assets could be called by Wells Fargo Bank. If our debt were to beaccelerated, there is no assurance that we would be able to repay it. There areno guarantees that we could obtain sufficient financing resources as analternative to the line of credit, which could have a material negative impacton our financial position, results of operations and cash flows.

**Failureto comply with environmental regulations could result in significantlyincreased costs and capital expenditures.**

Our manufacturing operations are subject to a variety of federal andstate environmental regulations relating to the use, generation, storage,treatment, emissions, and disposal of hazardous materials and wastes and noisepollution. Such laws and regulations are becoming more stringent, and it islikely that future amendments to these environmental statutes and additionalregulations promulgated there under will be applicable to us, our manufacturingoperations and our products in the future. Our failure to comply with presentor future regulations could result in fines being imposed on us, civil andcriminal liability, suspension of operations, alterations to the manufacturingprocess, costly cleanup or significant capital expenditures.

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#### **Other Risks**

#### **Provisions in our charter documents, and ofDelaware law, may make it difficult for a third party to acquire our companyand could depress the price of our common stock.**

Certainprovisions of our Certificate of Incorporation and By-laws, as well as Delawarecorporate law, may be deemed to have anti-takeover effects and may delay, deferor prevent a takeover attempt that a stockholder might consider in its bestinterest. Such provisions also may adversely affect prevailing market pricesfor the Common Stock. Certain of such provisions allow the Company’s Board ofDirectors to issue, without additional stockholder approval, preferred stockhaving rights senior to those of the Common Stock. In addition, we are subjectto the anti-takeover provisions of Section 203 of the Delaware GeneralCorporation Law, which prohibits us from engaging in a “business combination”with an “interested stockholder” for a period of three years after the date ofthe transaction in which the person became an interested stockholder, unlessthe business combination is approved in a prescribed manner.

#### **Item1B. Unresolved Staff Comments**

Thereare no material unresolved Securities and Exchange Commission (“SEC”) staffcomments as of the date of this report.

## **Item 2. Properties**

TheCompany currently owns and operates manufacturing facilities in Perris,California where NRV products are designed and manufactured.  The Perris properties include five buildingsencompassing approximately 607,000 square feet located on 49 acres.  The corporate offices are located on thePerris premises.  The Perris, Californiafacilities are subject to the Agreement referred to below.

In December 2006, theCompany and an unrelated party signed a Purchase and Sale Agreement (“Agreement”),for the possible sale and conveyance of property owned by the Company. “Property”in the agreement is defined as land, inclusive of five buildings, improvementsand related intangible assets and contracts. Terms of the agreement provide thecondition that a leaseback contract for property sold be entered into and takeeffect concurrently to the consummation of the closing of the Agreement withthe buyer acting as landlord, NRV as tenant, and the Company as guarantor.  The Company has not committed to the sale andleaseback and is considering alternative options.  (See Note 10 in the accompanying notes to theconsolidated financial statements for discussion and terms of sale andleaseback.)

## **Item 3. Legal Proceedings**

TheCompany is involved in legal proceedings in the ordinary course of business,including a variety of warranty, “lemon law,” product liability (all of whichare typical in the recreation vehicle industry) and employment claims. Withrespect to product liability claims, the Company’s insurance policies cover, inwhole or in part, defense costs and liability costs for personal injury orproperty damage (excluding damage to Company motorhomes). While it isimpossible to estimate with certainty the ultimate legal and financialliability with respect to this litigation, management is of the opinion thatthe final resolution of any such litigation could have a material adverseeffect on the Company’s financial position, results of operations or liquidityin a reporting period, and management has provided an estimated reserve forsuch contingencies in the consolidated financial statements.

On June 29, 2006, NRV filed a lawsuit against CraneComposites, Inc. and Crane Co., the manufacturer and parent company ofdefective sidewall fiberglass supplied to NRV for breach of contract, breach ofwarranty, misrepresentation and other causes of action.  The lawsuit, now pending in the U.S. DistrictCourt for the Central District of California, seeks compensatory and punitivedamages.

## **Item 4. Submission of Matters to a Vote ofSecurity Holders**

## None

**PART II**

As used herein, the term “Company”refers to National R.V. Holdings, Inc. including its two wholly-ownedsubsidiaries, NRV and CCI, unless the context otherwise requires.  All data and other statistical informationconcerning the Company in Part II represent the consolidated results of theCompany and do not give effect to the sale of CCI.

## **Item 5. Market for Registrant’s Common Equity, Related StockholderMatters and Issuer Purchases of Equity Securities**

TheCompany’s Common Stock, par value $0.01 per share (the “Common Stock”), hasbeen trading under the symbol “NVH” on NYSE Arca, Inc. since October 13, 2006and, prior to such date, on the New York Stock Exchange (“NYSE”) sinceDecember 14, 1998.  The Companymoved its listing to NYSE Arca because it no longer met the NYSE’s marketcapitalization and stockholders’ equity continued listing criteria.

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| 2006           | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| First Quarter  |       | $        | 7.05       |    | $          | 5.88 |   |
| Second Quarter |       | $        | 6.50       |    | $          | 5.18 |   |
| Third Quarter  |       | $        | 5.50       |    | $          | 2.94 |   |
| Fourth Quarter |       | $        | 4.27       |    | $          | 3.01 |   |

 

| 2005           | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| First Quarter  |       | $        | 12.05      |    | $          | 9.70 |   |
| Second Quarter |       | $        | 10.17      |    | $          | 7.80 |   |
| Third Quarter  |       | $        | 8.35       |    | $          | 5.06 |   |
| Fourth Quarter |       | $        | 6.89       |    | $          | 4.00 |   |

 

OnMarch 19, 2007, the last reported sales price for the Common Stock quoted onthe NYSE Arca exchange was $2.46 per share. At March 19, 2007, there wereapproximately 57 record holders of Common Stock. Such number does not includepersons whose shares are held of record by a bank, brokerage house or clearingagency, but does include such banks, brokerage houses and clearing agencies.

### **Dividends**

TheCompany has not paid any cash dividends or distributions on its Common Stockand has no intention to do so in the foreseeable future. The Company presentlyintends to retain any retained earnings for general corporate purposes,including business expansion, capital expenditures and possible acquisitions.The declaration and payment of future dividends will be at the sole discretionof the Board of Directors and will depend on the Company’s profitability,financial condition, capital needs, future prospects and other factors deemedrelevant by the Board of Directors. The Company’s current credit agreement withWells Fargo Bank restricts the declaration and payment of dividends.

**Item 6. Selected Financial Data**

Thefollowing selected consolidated financial data should be read in conjunctionwith the Company’s consolidated financial statements and the notes thereto, and“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” contained elsewhere herein. This historical selected financial data does not give effect to the saleof CCI on February 20, 2007. (See Note 17 in the accompanying notes to theconsolidated financial statements.)

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SELECTED CONSOLIDATED FINANCIAL INFORMATION

(In thousands, except per share and unit amounts)
| ** **                                                          | ** ** | **Years Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------|------------|
| **Consolidated Statements of Operations Data:** | ** ** | **2006**                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net sales                                                           |       | $                                           | 397,118    |   | $ | 463,610 |   | $ | 436,813 |   | $ | 312,548 |   | $ | 267,920 |   |
| Cost of goods  sold                                                 |       | 390,899                                     |       | 451,622 |   | 405,858 |   | 306,333 |   | 269,827 |   |
| Gross profit (loss)                                                 |       | 6,219                                       |       | 11,988 |   | 30,955 |   | 6,215 |   | (1,907 | ) |
| Selling expenses                                                    |       | 13,052                                      |       | 15,301 |   | 11,616 |   | 9,500 |   | 10,925 |   |
| General and  administrative expenses                                |       | 14,499                                      |       | 14,801 |   | 13,626 |   | 7,466 |   | 7,430 |   |
| Other expense                                                       |       | —                                      |       | — |   | 632 |   | — |   | — |   |
| Impairment of  goodwill (1)                                         |       | —                                      |       | — |   | — |   | — |   | 6,126 |   |
| Operating (loss) income                                             |       | (21,332                                     | )          | (18,114 | ) | 5,081 |   | (10,751 | ) | (26,388 | ) |
| Interest expense                                                    |       | 2,777                                       |       | 1,492 |   | 327 |   | 399 |   | 357 |   |
| Other income                                                        |       | (138                                        | )          | (78 | ) | (90 | ) | (6 | ) | (117 | ) |
| Loss (gain) on  disposal of land and equipment                      |       | 97                                          |       | 59 |   | — |   | (1 | ) | (355 | ) |
| (Loss) income  from continuing operations before income taxes       |       | (24,068                                     | )          | (19,587 | ) | 4,844 |   | (11,143 | ) | (26,273 | ) |
| Provision for  (benefit from) income taxes (2)                      |       | 265                                         |       | 181 |   | 13,161 |   | (4,116 | ) | (7,716 | ) |
| Loss from  continuing operations                                    |       | (24,333                                     | )          | (19,768 | ) | (8,317 | ) | (7,027 | ) | (18,557 | ) |
| Loss from discontinued  operations                                  |       | —                                      |       | — |   | 2,155 |   | 2,301 |   | 2,212 |   |
| Gain from sale  of discontinued operations                          |       | —                                      |       | — |   | (281 | ) | — |   | — |   |
| Benefit from  income taxes                                          |       | —                                      |       | — |   | (737 | ) | (853 | ) | (847 | ) |
| Loss from  discontinued operations, net of taxes                    |       | —                                      |       | — |   | (1,137 | ) | (1,448 | ) | (1,365 | ) |
| Net loss                                                            |       | $                                           | (24,333    | ) | $ | (19,768 | ) | $ | (9,454 | ) | $ | (8,475 | ) | $ | (19,922 | ) |
| Basic loss per  common share:                                       |       |                                        |       |   |   |   |   |   |   |   |   |
| Continuing operations                                               |       | $                                           | (2.35      | ) | $ | (1.91 | ) | $ | (0.81 | ) | $ | (0.71 | ) | $ | (1.90 | ) |
| Discontinued operations                                             |       | —                                      |       | — |   | (0.12 | ) | (0.15 | ) | (0.14 | ) |
| Net loss                                                            |       | $                                           | (2.35      | ) | $ | (1.91 | ) | $ | (0.93 | ) | $ | (0.86 | ) | $ | (2.04 | ) |
| Diluted loss per  common share:                                     |       |                                        |       |   |   |   |   |   |   |   |   |
| Continuing operations                                               |       | $                                           | (2.35      | ) | $ | (1.91 | ) | $ | (0.81 | ) | $ | (0.71 | ) | $ | (1.90 | ) |
| Discontinued operations                                             |       | —                                      |       | — |   | (0.12 | ) | (0.15 | ) | (0.14 | ) |
| Net loss                                                            |       | $                                           | (2.35      | ) | $ | (1.91 | ) | $ | (0.93 | ) | $ | (0.86 | ) | $ | (2.04 | ) |
| Weighted average  number of common shares outstanding:              |       |                                        |       |   |   |   |   |   |   |   |   |
| Basic                                                               |       | 10,339                                      |       | 10,338 |   | 10,217 |   | 9,900 |   | 9,788 |   |
| Diluted                                                             |       | 10,339                                      |       | 10,338 |   | 10,217 |   | 9,900 |   | 9,788 |   |
| **Other  Data:**                                                    |       |                                        |       |   |   |   |   |   |   |   |   |
| Class A units sold                                             |       | 2,324                                       |       | 2,792 |   | 2,968 |   | 2,417 |   | 1,919 |   |

 
| ** **                                          | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|
| **Consolidated Balance Sheet Data:** | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Total assets                                        |       | $                     | 135,524    |   | $ | 127,390 |   | $ | 140,233 |   | $ | 130,242 |   | $ | 142,067 |   |
| Working capital                                     |       | $                     | 2,303      |   | $ | 26,136 |   | $ | 49,094 |   | $ | 49,669 |   | $ | 55,941 |   |
| Long-term debt  (including capital leases)          |       | $                     | 124        |   | $ | 169 |   | $ | 185 |   | $ | — |   | $ | 19 |   |
| Stockholders’ equity                           |       | $                     | 36,119     |   | $ | 59,662 |   | $ | 79,290 |   | $ | 87,783 |   | $ | 94,093 |   |

----

(1)          Theimpairment of goodwill was attributable to the adoption of Statement ofFinancial Accounting Standards (SFAS) No. 142, effective January 1,2002.

(2)          The 2004provision for taxes established a full valuation reserve of $11.2 millionagainst the Company’s net deferred tax asset in accordance with SFAS No. 109.

16

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## **Item 7. Management’s Discussion and Analysisof Financial Condition and Results of Operations**

### **Executive Overview**

The Company is one of thenation’s leading producers of motorized recreational vehicles, often referredto as RVs or motorhomes.  During 2006,the Company’s financial position was severely affected by defective fiberglassmaterial supplied by Crane Composites requiring incremental costs to rework andresell more than 70 motorhomes manufactured by NRV and also by the continuingdecline of the Class A motorhome market. In response to these conditions, the Company implemented initiatives toincrease market share through new product and floorplan introductions and theaddition of new dealers, to reduce material and related obsolescence costs andto further reduce manufacturing and other overhead costs.  Additionally, in 2006, the Company began theprocess of exploring financing opportunities to raise new capital and explorestrategic alternatives.

On February 20, 2007, theCompany completed the sale of CCI to CCHoldings, an entity owned primarily by Riley. Mr. Bryant R. Riley isthe sole equity owner of Riley and is a related party. The sale was conductedpursuant to a Merger Agreement entered into on February 16, 2007 by and amongCC Holdings, Merger Sub, and Riley, on one hand, and the Company and CCI, onthe other. The acquisition took the form of a merger whereby CCI mergedwith and into Merger Sub with Merger Sub surviving as a wholly-owned subsidiaryof the Merger.  In addition, inconnection with the transactions contemplated by the Merger Agreement, theCompany also transferred Additional Assets to Merger Sub held by the Companyrelated to the business of CCI and Merger Sub assumed certain liabilities ofthe Company related to the business of CCI. At the closing of the Merger, MergerSub was renamed Country Coach LLC.  The Company received total consideration of$38.7 million for the sale of CCI and the transfer of the Additional Assets.

The Company undertookthis sale to raise capital to enable the Company to reduce its debt and providethe necessary funding and resources to support the turnaround of the NRVbusiness.  TheCompany used approximately $24.5 million of the proceeds from the sale of CCIto pay off its credit facility and the remainder of the proceeds will be usedfor working capital purposes.

In conjunction with thesale of CCI, the Company amended its credit agreement with a third amendment onFebruary 21, 2007, reducing its line of credit from $40 million to $15million.  The amendment replaced UPS Capitalwith Wells Fargo Bank as agent to the credit agreement.  It also provided for the consent to the saleof stock of CCI, a reduction in inventory sub-limit, a reduction in letter ofcredit sub-facility amount, an increase in the interest rate and a waiver forthe events of default for the months ending October, November and December2006.  The amendment added a priorwritten consent requirement for any sale and leaseback transaction involvingthe Perris, California real estate.  Afourth amendment dated March 13, 2007 provides for the setting of new financialcovenants in April 2007.  (See Note 17 inthe accompanying notes to the consolidated financial statements for moreinformation on the amendments to the Company’s credit agreement.)

In December 2006, theCompany and an unrelated party entered into an agreement for the possible saleand leaseback of NRV’s manufacturing facilities owned by the Company.  Terms of the agreement provide that aleaseback contract for property sold be entered into and take effect concurrentlyto the consummation of the closing of the purchase and sale agreement with theBuyer acting as landlord, NRV as tenant, and the Company as guarantor.  The Company has not committed to the sale andleaseback and is considering alternative options.  (See Note 10 in the accompanying notes to theconsolidated financial statements for discussion and terms of sale andleaseback.)

Forthe year ended December 31, 2006, the Company had a net loss of $24.3 millionor $2.35 per share.  At December 31,2004, the Company established a full valuation allowance against its deferredtax asset and recorded the corresponding non-cash charge in its December 31,2004 financial results. As a result of the full tax valuation allowanceestablished starting with the year ended December 31, 2004, subsequentfinancial losses do not include an income tax benefit.

TheCompany finished with a 7.3% retail market share for the year ended December31, 2006, a 4% increase in market share from 2005.  During 2006, only half of the top tenClass A manufacturers realized an increase in market share as reported byStatistical Surveys, Inc. The Company’s Class A motorhome retail unitshipments were down 10% in 2006 compared to 2005.  Industry wide, retail sales of Class Amotorhomes were down 13% in 2006 compared to 2005.  The Company expects its market share of ClassA motorhomes to decrease in 2007 as a result of the sale of CCI.

### **Product Development**

TheCompany has continuously re-designed and introduced new products.  During 2006, the Company’s NRV subsidiaryintroduced the Pacifica, a mid-range diesel product, and CCI introduced two newHighline products, the Tribute and Rhapsody. The Tribute is an entry-level highline product while the Rhapsody ispositioned at the upper end, just below the Prevost Conversion.

17

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Newmodel introductions and new floorplans, together with interior and exteriorproduct enhancements, have historically proven successful in the marketplace.Management believes that focusing on the customer and providing great productsthat support the customer’s lifestyle will drive future growth for the Company.

### **Operating Performance**

During2006, the RV industry experienced a 14% decline in wholesale Class A unitshipments while the Company experienced a decline of 17%.  The Company’s net sales decreased 14.3% from2005 to 2006. The operating results of the Company were significantly impactedby the industry-wide slump in demand for Class A motorhomes, as well as by theadverse affect on sales due to the Company’s liquidity challenges and theuncertainty caused by the strategic process itself.  A build-up in finished goods inventory at theCompany, and within the industry, led to the continuation of sales discountingto reduce the excess inventories.  TheCompany also experienced an unexpected, substantial cost increase resultingfrom the identification, rework and redistribution of units affected bydefective fiberglass material supplied to the Company.  Other factors leading to the decline in operatingperformance include significant investments in a new product introduction, theeffect of lower production rates resulting in lower fixed-cost absorption andthe costs of dealing with the liquidity issue much of which was caused by thedefective fiberglass material and the strategic process.

### **Looking Ahead**

Some of the objectives the Company addressed last year will continue tobe emphasized during the current year, including product development,consolidating facilities and increasing customer satisfaction. In addition, theCompany will continue to focus on increasing its dealer body in open marketsduring 2007.

TheCompany continues to invest heavily in the area of product development. Inaddition to launching the Pacifica diesel motorhome in 2006, the Company’s NRVsubsidiary also introduced a new full-length slide room and a slide-plus-one(telescoping slide) for use in its units. The latter innovation has a patentpending, as it is the first of its kind in the industry. Both of these latterinnovations will be implemented into several of the Company’s brands during2007. The Company also continues to pursue methods of construction for itsmotorhomes that will accomplish all of the following: reduce cost ofconstruction, reduce the weight of the motorhomes, and add strength. Severalprojects to this end are well under way.

Giventhe significant reduction in sales levels, the Company is also in the processof reducing its operating foot print in order to lower both fixed and variablecosts and increase its capacity utilization. At its Perris facilities, theCompany essentially has two operating facilities—one on each side of the streetcomprised of 607,000 square feet in five buildings. The Company is working onconsolidating its operations to one side of the street and either selling off orleasing out the remaining excess property. While such a strategy limits theCompany’s upside growth, it will not preclude the Company from addingadditional facilities in the future in other locations as demand dictates.

TheCompany is continually striving to increase its customer support by improvingclub support, telephone support for owners and dealers, and parts fulfillment.The Company utilizes various techniques such as surveys and focus groups toensure that it is improving in the area of customer satisfaction.

TheRecreation Vehicle Industry Association’s (RVIA) market expansion campaign, GORVing, now in its ninth year, is fostering greater awareness and garneringmedia attention. Though RVIA expects substantial growth for the industry in thelong-term or decade ahead, RVIA expects a continued, yet minimal, decline inthe industry during 2007.

TheCompany continues to pursue its strategy of adding new dealers. To this end, ithas divided the country into five geographic regions, and in each region hasidentified the specific markets where it needs to add a dealer, or in somecases, work with an existing dealer to enhance the Company’s market share.While the Company was handicapped during the latter part of 2006 in this effortby uncertainty in the market place, it is once again in a position toaggressively pursue this effort.

Thisanalysis of the Company’s financial condition and operating results should beread in conjunction with the accompanying consolidated financial statementsincluding the notes thereto.

#### **Critical Accounting Policies**

TheCompany’s discussion and analysis of its financial condition and results ofoperations are based upon its consolidated financial statements, including theoperating results of CCI, which have been prepared in accordance withaccounting principles generally accepted in the United States of America. TheCompany has performed an evaluation of its ability to continue as a goingconcern and believes it has sufficient financial resources to fund itsoperations through at least March 2008. Accordingly, the consolidated financialstatements have been prepared assuming the Company will continue as a goingconcern, which contemplates the realization of the assets and the satisfactionof liabilities in the normal course of business. The preparation of theseconsolidated financial statements requires the Company to make estimates andjudgments that affect the reported amount of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amount of revenues and expenses for eachperiod.

18

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Thefollowing represents a summary of the Company’s critical accounting policies,defined as those policies that the Company believes are: i) the most important tothe portrayal of the Company’s financial condition and results of operations,and ii) that require the Company’s most difficult, subjective or complexjudgments, often as a result of the need to make estimates about the effects ofmatters that are inherently uncertain.

#### **Valuation of Inventory**

Inventory is valued at the lower of cost (estimatedusing the first-in, first-out method) or market and takes into considerationabnormally low production levels.  TheCompany periodically evaluates the carrying value of inventories and maintainsa reserve for excess and obsolescence to adjust the carrying value as necessaryto the lower of cost or market or to amounts on hand to meet expected demand inthe near term. Specifically, service and slow-moving parts not being used inthe manufacture of current model year motorhomes are reviewed by the Company todetermine which can be used in production, which can be used for future serviceand warranty repairs of customer-owned motorhomes, and which can be returned tosuppliers for full or partial credit.  Inaddition, motorhomes held in finished goods or work-in-process are evaluated bythe Company and the value of those motorhomes are adjusted to an estimated netrealizable value based on a combination of the National Automobile DealersAssociation Guide and the Company’s general industry knowledge. The inventoryreserves are reviewed each fiscal quarter and revisions are made as necessary.Unfavorable changes in excess and obsolete inventory estimates as well asactual production levels following below normal capacity volumes would resultin a decrease in gross profit.

#### **Valuation of Long-Lived Assets**

In  2003, the Company adopted Statement ofFinancial Accounting Standards (“SFAS”) No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” In accordance with SFASNo. 144, the Company assesses the fair value and recoverability of itslong-lived assets whenever events and circumstances indicate the carrying valueof an asset may not be recoverable from estimated future cash flows expected toresult from its use and eventual disposition. In doing so, the Company makesassumptions and estimates regarding future cash flows and other factors. Thefair value of the long-lived assets is dependent upon the forecasted performanceof the Company’s business and the overall economic environment. When theCompany determines that the carrying value of the long-lived assets may not berecoverable, it measures impairment based upon a forecasted discounted cashflow method. The following table provides the estimated useful lives used foreach asset type:

| Land improvements                    |   | 5-40 years |   |
|--------------------------------------|--------|------------|--------|
| Buildings and  building improvements |   | 5-40 years |   |
| Machinery and  equipment             |   | 3-12 years |   |
| Office equipment                     |   | 3-15 years |   |

 

Leaseholdimprovements, which are included in buildings and building improvements, madeat the inception or during the term of the lease and assets under capitalleases are amortized over the shorter of the useful life of the assets or aterm that includes required lease periods and renewals that are deemed to bereasonably assured at the date the leasehold improvements are purchased or whenthe capital lease is entered into.

#### **Warranty Reserve**

TheCompany’s warranty reserve is established based on its best estimate of theamounts necessary to settle future and existing claims on products sold as ofthe balance sheet date. The Company records an estimate for futurewarranty-related costs based on recent actual warranty claims and historicalexperience. Also, the Company’s recall reserve is established, as necessary,based on management’s estimate of the cost per unit to remedy a recall problemand the estimated number of units that will ultimately be brought in for therepair. While the Company’s warranty costs have historically been within itsexpectations and the provisions established, the Company cannot guarantee thatit will continue to experience the same warranty costs that it has in the past.A significant increase in dealer shop rates, the cost of parts or the frequencyof claims could have a material adverse impact on the Company’s operatingresults for the period or periods in which such claims or additional costsmaterialize.

#### **Workers’ Compensation Self-Insurance Reserve**

TheCompany’s workers’ compensation reserve is established based on its bestestimate of the amounts necessary to settle future and existing employeeworkers’ compensation claims incurred as of the balance sheet date. The Companyrecords a reserve estimate for future workers’ compensation related costs basedon the Company’s historical workers’ compensation 

19

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claimspaid history using an actuarial incurred but not reported (IBNR) approach. TheCompany cannot provide assurance that these costs will continue at theselevels, increase or decrease, in the near term. A significant change inCalifornia workers’ compensation legislation, the cost of claims or thefrequency of claims could have a material adverse impact on the Company’soperating results for the period or periods in which such claims or additionalcosts materialize.

#### **Legal Proceedings**

TheCompany is involved in legal proceedings in the ordinary course of business,including a variety of warranty, “lemon law” and product liability claimstypical in the recreation vehicle industry. With respect to product liabilityclaims, the Company’s insurance policies cover, in whole or in part, defensecosts and liability costs for personal injury or property damage (excludingdamage to Company motorhomes). While it is impossible to estimate withcertainty the ultimate legal and financial liability with respect to thislitigation, management is of the opinion that while the final resolution of anysuch litigation may have an impact on the Company’s consolidated results for aparticular reporting period, the ultimate disposition of such litigation willnot have any material adverse effect on the Company’s financial position,results of operations or liquidity.

#### **Revenue Recognition**

TheCompany recognizes revenue in accordance with SEC Staff Accounting BulletinNo. 104, Revenue Recognition in Financial Statements (“SAB 104”). SAB 104requires that four basic criteria must be met before revenue can be recognized:i) persuasive evidence of an arrangement exists, ii) delivery has occurred andtitle and the risks and rewards of ownership have been transferred to thecustomer, iii) the price is fixed and determinable, and iv) collectibility isreasonably assured.

Themajority of sales are made to dealers who finance their purchases underflooring arrangements with banks and finance companies.   Certain shipments are sold to customersunder cash on delivery (“COD”) terms. The Company recognizes revenue on COD sales upon payment anddelivery.  Products are not sold onconsignment, dealers do not have the right to return products, and dealers aretypically responsible for the interest costs to floor plan lenders.

#### **Sales Incentives**

As iscommon throughout the RV industry, the Company offers incentives to its dealersin the form of discounts and floorplan interest reimbursement programs, rebateand holdback programs, and retail sales incentives given to its dealers’ retailsalespersons. The Company recognizes and records the costs of these incentivesin accordance with Emerging Issue Task Force (EITF) No. 01-09, “Accountingfor Consideration Given by a Vendor to a Customer (Including a Reseller of theVendor’s Products)”.

Discountsand floorplan interest reimbursement programs are offered to dealers onpurchases of certain units. The Company recognizes the cost of discounts andfloorplan interest reimbursement as a reduction of revenue and records the costof these programs at the later of the offer or when the associated revenue isrecognized.

Rebateand holdback programs involve payments by the Company to the dealer based oneither a percentage of the net invoice price or a predetermined amount based onthe model of the coach sold by the dealer. The dealer incentive program variesby dealer. Not all dealers participate. The purpose of the program is toprovide an additional incentive to the dealer to promote sales of the product. The dealers earn the incentive upon the wholesalepurchase of the unit from the Company. The Company recognizes theseincentives as a reduction of revenue and records the cost of these incentiveswhen the associated revenue is recognized.

The Company often pays retail sales incentives directlyto dealer retail salespersons to promote the sale of the product and the returnof sale and warranty information. This information assists in providing salesand marketing data to the Company. The Company recognizes the cost of suchretail sales incentives as a reduction of revenue and records the cost of suchretail sales incentives when the associated revenue is recognized.

Cooperativeadvertising arrangements exist through which dealers receive a certainallowance of the total purchases from the Company if certain qualitativeadvertising criteria are met and if specified amounts are spent on theadvertisements. A dealer must maintain documentation of all advertisingperformed that includes the Company’s products and provide that documentationto the Company upon request. Because the Company receives an identifiableadvertising benefit from the dealer, the Company recognizes the cost ofcooperative advertising as a selling expense and records the cost ofcooperative advertising when the units are sold to the dealers.

TheCompany uses a non-monetary incentive program that rewards RV dealer personnelby performance. Instead of cash, rewards are offered at tiered levels, based onthe number of the Company’s products by each dealership participant. Rewardsinclude items such as home electronics, exercise equipment, personal dataassistants, trips, and so on. The more a salesperson sells, the more they areeligible to redeem items at the various reward levels set for the program. TheCompany accrues the estimated costs of the non-monetary loyalty program uponretail sale of a unit in selling expenses.

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**Stock-Based Compensation**

TheCompany has stock option plans that enable it to offer equity participation toemployees, officers and directors, as well as certain non-employees. Stockoptions may be granted as incentive or nonqualified options. The Company hastwo fixed option plans that reserve shares of common stock for issuance toexecutives, key employees, consultants, and directors. The Company has alsoissued fixed options outside of such plans pursuant to individual stock optionagreements. Options granted to non-employee directors generally vestimmediately upon grant and expire five to ten years from the date of grant.Options granted to employees, including employee directors, generally vest inthree equal annual installments and expire five to ten years from the date ofgrant. The price of the options granted pursuant to these plans will not beless than 100 percent of the market value of the shares on the date of grant.There were145,000 options granted during the year ended December 31, 2006.

The benefits providedunder these plans are share-based payments subject to the provisions of revisedSFAS No. 123, “Share-BasedPayment” (“SFAS No. 123R”).  Effective January 1, 2006, the Companyadopted SFAS No. 123R, including the provisions of the SEC’s StaffAccounting Bulletin No. 107 (“SAB 107”), and use the fair valuemethod to account for share-based payments with a modified prospectiveapplication which provides for certain changes to the method for valuingshare-based compensation. The valuation provisions of SFAS No. 123R apply tonew awards and to awards that are outstanding on the effective date andsubsequently modified or cancelled. Under the modified prospective application,prior periods are not revised for comparative purposes. Total compensation costfor our share-based payments recognized in the year ending December 31, 2006was $0.8 million.

**Thefair value of each option award is estimated on the date of grant using aBlack-Scholes option pricing model (“Black-Scholes model”) that usesassumptions regarding a number of complex and subjective variables. Thesevariables include, but are not limited to, our expected stock price volatility,actual and projected employee stock option exercise behaviors, risk-freeinterest rate and expected dividends. Expected volatilities are based onhistorical volatility of our common stock and other factors. The expected termsof options granted are based on analyses of historical employee terminationrates and option exercises. The risk-free interest rates are based on theU.S. Treasury yield in effect at the time of the grant. Since the Companydoes not expect to pay dividends on our common stock in the foreseeable future,the estimated dividend yield was 0%. SFAS No. 123R requires forfeitures tobe estimated at the time of grant and revised, if necessary, in subsequentperiods if actual forfeitures differ from those estimates. The Companyestimated pre-vesting forfeitures based on our historical experience. **(SeeNote 2 in the accompanying notes to the consolidated financial statements fordiscussion of details of shared based compensation expense.)

**IncomeTaxes**

Aspart of the process of preparing its consolidated financial statements, theCompany estimates its income taxes in each of the taxing jurisdictions in whichthe Company operates. This process involves estimating actual current taxexpense together with assessing any temporary differences resulting from thedifferent treatment of certain items, such as the timing for recognizingrevenues and expenses, for tax and financial reporting purposes. Thesedifferences may result in deferred tax assets and liabilities, which areincluded in the consolidated balance sheet. The Company is required to assessthe likelihood that its net deferred tax assets, which include net operatingloss carryforwards and temporary differences that are expected to be deductiblein future years, will be recoverable from future taxable income or other taxplanning strategies. SFAS No. 109, “Accounting for Income Taxes” (“SFASNo. 109”) requires that a valuation allowance be established when it is morelikely than not that its recorded net deferred tax assets will not be realized.In determining whether a valuation allowance is necessary, the Company isrequired to take into account all positive and negative evidence with regard tothe utilization of a deferred tax asset, including the Company’s past earningshistory, market conditions, management profitability forecasts, the characterand jurisdiction of such earnings, unsettled circumstances that, if unfavorablyresolved, would adversely affect utilization of a deferred tax asset, carrybackand carryforward periods, and tax strategies that could potentially enhance thelikelihood of realization of a net deferred tax asset. SFAS No. 109further states that it is difficult to conclude that a valuation allowance isnot needed when there is negative evidence such as cumulative losses in recentyears.

Theprovision for tax liabilities involves evaluations and judgments ofuncertainties in the interpretation of complex tax regulations by various taxingauthorities. In situations involving tax related uncertainties, the Companyprovides for tax liabilities when it determines it is probable and estimablethat additional taxes may be due. As additional information becomes available,or these uncertainties are resolved with the taxing authorities, revisions tothese liabilities may be required, resulting in additional provision for orbenefit from income taxes in the consolidated statement of operations in theperiod such determination is made.

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### **Results of Operations**

Thefollowing table sets forth, for the periods indicated, the percentage of netsales represented by certain items reflected in the Company’s ConsolidatedStatements of Operations for the years ended December 31, 2006, 2005 and 2004.

|                                                               | ** ** | **Percentage of Net Sales  Years Ended  December 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                          |       |                                                                            |       |   |   |   |   |
| Net sales                                                     |       | 100.0                                                                           | %          | 100.0 | % | 100.0 | % |
| Cost of goods  sold                                           |       | 98.4                                                                            |       | 97.4 |   | 92.9 |   |
| Gross profit                                                  |       | 1.6                                                                             |       | 2.6 |   | 7.1 |   |
| Selling expenses                                              |       | 3.3                                                                             |       | 3.3 |   | 2.7 |   |
| General and  administrative expenses                          |       | 3.7                                                                             |       | 3.2 |   | 3.1 |   |
| Other expense                                                 |       | 0.0                                                                             |       | 0.0 |   | 0.1 |   |
| Operating (loss)  income                                      |       | (5.4                                                                            | )          | (3.9 | ) | 1.2 |   |
| Interest expense                                              |       | 0.7                                                                             |       | 0.3 |   | 0.1 |   |
| Other income                                                  |       | (0.0                                                                            | )          | (0.0 | ) | (0.0 | ) |
| (Loss) income from continuing operations before income  taxes |       | (6.1                                                                            | )          | (4.2 | ) | 1.1 |   |
| Provision for  income taxes                                   |       | 0.1                                                                             |       | 0.1 |   | 3.0 |   |
| Loss from  continuing operations                              |       | (6.2                                                                            | )          | (4.3 | ) | (1.9 | ) |
| Loss from  discontinued operations                            |       | 0.0                                                                             |       | 0.0 |   | 0.5 |   |
| Income taxes  related to discontinued operations              |       | (0.0                                                                            | )          | (0.0 | ) | (0.2 | ) |
| Loss from  discontinued operations, net of taxes              |       | (0.0                                                                            | )          | (0.0 | ) | (0.3 | ) |
|                                                          |       |                                                                            |       |   |   |   |   |
| Net loss                                                      |       | (6.2                                                                            | )%         | (4.3 | )% | (2.2 | )% |

** **

### **Year Ended December 31, 2006 Compared toYear Ended December 31, 2005**

(amounts in thousands,except percentages)
| ** **                                                          | ** ** | **Years Ended December 31,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------|------------|------------|------------|-------------------|------------|
| **Consolidated Statements of Operations Data:** | ** ** | **2006**                                    | ** ** | **2005**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Net sales                                                           |       | $                                           | 397,118    |       | $          | 463,610           |       | $ | (66,492 | ) | (14.3 | )% |
| Cost of goods  sold                                                 |       | 390,899                                     |       | 451,622    |       | (60,723           | )          | (13.4 | ) |
| Gross profit                                                        |       | 6,219                                       |       | 11,988     |       | (5,769            | )          | (48.1 | ) |
| Selling expenses                                                    |       | 13,052                                      |       | 15,301     |       | (2,249            | )          | (14.7 | ) |
| General and  administrative expenses                                |       | 14,499                                      |       | 14,801     |       | (302              | )          | (2.0 | ) |
| Operating loss                                                      |       | (21,332                                     | )          | (18,114    | )          | (3,218            | )          | 17.8 |   |
| Interest expense                                                    |       | 2,777                                       |       | 1,492      |       | 1,285             |       | 86.1 |   |
| Other income                                                        |       | (138                                        | )          | (78        | )          | (60               | )          | 76.9 |   |
| Loss on disposal  of land and equipment                             |       | 97                                          |       | 59         |       | 38                |       | 64.4 |   |
| Loss from  continuing operations before income taxes                |       | (24,068                                     | )          | (19,587    | )          | (4,481            | )          | 22.9 |   |
| Provision for  income taxes                                         |       | 265                                         |       | 181        |       | 84                |       | 46.4 |   |
| Net loss                                                            |       | $                                           | (24,333    | )          | $          | (19,768           | )          | $ | (4,565 | ) | 23.1 | % |

 

Netsales for the year ended December 31, 2006 decreased $66.5 million, or 14.3%,from the year ended December 31, 2005, primarily as a result of a 16.8%decrease in total unit shipments. Wholesale diesel motorhome shipments for the year ended December 31,2006 were 1,187 units, down 15.9% from 1,411 units shipped during the yearended December 31, 2005. Wholesale gas motorhome shipments for the year endedDecember 31, 2006 were 1,137 units, down 17.7% from 1,381 units for the yearended December 31, 2005.

22

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Net sales declined at alower rate than shipments due to a 2.9% increase in the average selling priceof motorhomes during the fiscal year. While the decrease in unit shipments for diesel and gas motorhomes wassimilar, the average selling price for gas units decreased by 4.0% whereas theaverage selling price for diesel units increased by 4.6%.  The overall decrease in the average sellingprice for gas products was due to NRV’s introduction of its new entry-levelSurfside product in late 2005 and early 2006.

Market share gains earlyin the year helped partially mitigate continued industry declines in Class Amotorhome shipments; however, by mid-year, the Company’s early gains in marketshare were reversing on news of the supplier fiberglass problem and theresulting liquidity challenges and the uncertainties arising out of thestrategic process. By the fourth quarter, when industry volume actually leveledout, the Company’s downward spiral caused by these uncertainties resulted incontinued sales decline.

Gross profit of $6.2million for the year ended December 31, 2006 represents a decrease of $5.8million, or 48.1%, from the year ended December 31, 2005.  Gross profit margin for the year ended December31, 2006 was 1.6%, as compared to 2.6% for the year ended December 31,2005.  A primary factor that led to thedecrease in gross profit was the significant incremental costs to rework andsell those units affected by defective fiberglass materials supplied to theCompany.  Also contributing, to a lesserextent, to the reduced gross profit were higher fixed costs per unit ofproduction resulting from lower production volumes during 2006 as compared to2005 due to declining demand caused in part by the defective fiberglassproblem, incremental costs incurred with the introduction of three new productsinto the market, an increase in workers’ compensation due to a significantinjury, costs associated with a tire recall at CCI and higher steel and petroleumcosts.

Selling expensesdecreased $2.2 million or 14.7% for the year ended December 31, 2006 ascompared to the prior year as a result of cost containment initiatives focusedupon marketing programs and reduced sales compensation primarily due to thedecrease in sales.  As a percent of netsales, selling expenses were 3.3% for the years ended December 31, 2006 andDecember 31, 2005.

General andadministrative expenses decreased $0.3 million or 2.0% for the year endedDecember 31, 2006 as compared to the prior year.  Increases in expense included the recordingof stock option expense of $0.6 million as required by SFAS No. 123R thatbecame effective January 1, 2006, loan fees of $0.2 million associated with amendingour loan agreement and approximately $0.5 million in professional feesassociated with the strategic process. Offsetting the increases were reductions of $0.5 million in managementincentive compensation, $0.6 million in non-warranty related legal costs and$0.6 million in consulting expenses.

Interest expense for theyear ended December 31, 2006 increased $1.3 million or 86.1% compared to theyear ended December 31, 2005.  The higherinterest expense was due to increased borrowings and rising interest rates onthe Company’s line of credit during the year ended December 31, 2006.  The Company’s weighted average borrowing forthe year ended December 31, 2006 was $27.3 million, representing a 48% increaseover the weighted average borrowing for the year ended December 31, 2005.  The Company’s weighted average interest ratefor the year ended December 31, 2006 was 8.53% as compared to 6.97% for theyear ended December 31, 2005.

The overall effective tax rate for the year ended December 31, 2006 was1.1%, compared to an effective tax rate of 0.9% for the year ended December 31,2005.  For the year ended December 31,2006, the Company continued to recognize a full valuation allowance against itsfuture income tax benefits but has recorded a provision for various stateincome taxes of $0.3 million.

The Company plans to continue to provide a full valuation allowance onfuture tax benefits until it can sustain an appropriate level of profitabilityand, until such time, the Company would not expect to recognize any significanttax benefits in its future results of operations.

**Year Ended December 31, 2005Compared to Year Ended December 31, 2004**

(amounts in thousands,except percentages)

 
| ** **                                                          | ** ** | **Years Ended December 31,** | ** ** | ** ** | ** ** | ** **        | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------|------------|------------|------------|-------------------|------------|
| **Consolidated Statements of Operations Data:** | ** ** | **2005**                                    | ** ** | **2004**   | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Net sales                                                           |       | $                                           | 463,610    |       | $          | 436,813           |       | $ | 26,797 |   | 6.1 | % |
| Cost of goods  sold                                                 |       | 451,622                                     |       | 405,858    |       | 45,764            |       | 11.3 |   |
| Gross profit                                                        |       | 11,988                                      |       | 30,955     |       | (18,967           | )          | (61.3 | ) |
| Selling expenses                                                    |       | 15,301                                      |       | 11,616     |       | 3,685             |       | 31.7 |   |
| General and  administrative expenses                                |       | 14,801                                      |       | 13,626     |       | 1,175             |       | 8.6 |   |
| Other expense                                                       |       | —                                      |       | 632        |       | (632              | )          | (100.0 | ) |
| Operating (loss) income                                             |       | (18,114                                     | )          | 5,081      |       | (23,195           | )          | (456.5 | ) |
| Interest expense                                                    |       | 1,492                                       |       | 327        |       | 1,165             |       | 356.3 |   |
| Other income                                                        |       | (78                                         | )          | (90        | )          | 12                |       | (13.3 | ) |
| Loss on disposal  of land and equipment                             |       | 59                                          |       | —     |       | 59                |       | — |   |
| (Loss) income from  continuing operations before income taxes       |       | (19,587                                     | )          | 4,844      |       | (24,431           | )          | (504.4 | ) |
| Provision for  income taxes                                         |       | 181                                         |       | 13,161     |       | (12,980           | )          | (98.6 | ) |
| Loss from  continuing operations                                    |       | (19,768                                     | )          | (8,317     | )          | (11,451           | )          | 137.7 |   |
| Loss from  discontinued operations                                  |       | —                                      |       | 2,155      |       | (2,155            | )          | (100.0 | ) |
| Gain from sale  of discontinued operations                          |       | —                                      |       | (281       | )          | 281               |       | (100.0 | ) |
| Benefit from  income taxes                                          |       | —                                      |       | (737       | )          | 737               |       | (100.0 | ) |
| Loss from  discontinued operations, net of taxes                    |       | —                                      |       | (1,137     | )          | 1,137             |       | (100.0 | ) |
| Net loss                                                            |       | $                                           | (19,768    | )          | $          | (9,454            | )          | $ | (10,314 | ) | 109.1 | % |

23

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Netsales of $463.6 million for the year ended December 31, 2005 represent anincrease of $26.8 million, or 6.1%, from the year ended December 31, 2004.Wholesale diesel motorhome shipments for the year ended December 31, 2005 were1,411 units, up 2.2% from 1,380 units shipped during the year ended December31, 2004. Wholesale gas motorhome shipments were 1,381 units, down 13.0% from1,588 units for the year ended December 31, 2004.

TheCompany increased net sales for the year ended December 31, 2005, as comparedto the prior year, despite an 18.1% annual industry-wide decline in the Class Awholesale unit shipments, eroding consumer confidence levels throughout most of2005, higher gasoline prices and natural disasters in the Eastern part of theUnited States. In addition, according to Statistical Surveys, Inc., the Companyincreased its retail market share by 5.9% during 2005. These sales and marketshare gains were driven by initiatives to add new dealers and an aggressiveproduct development program in 2004 and 2005.

Thegross profit margin for the year ended December 31, 2005 was 2.6% (or a $12.0million gross profit) compared to a 7.1% gross margin (or a $31.0 million grossprofit) for the year ended December 31, 2004. The lower gross margin for theyear ended December 31, 2005 was caused by higher sales incentives resultingfrom a weakening Class A market and an industry-wide build-up in inventories,increased spending on engineering and product development at NRV, where severalnew product lines were introduced or placed into production, higher materialhandling costs, higher mid-year manufacturing costs as the Company’swork-in-process inventories increased, higher material costs associated withobsolescence as sales declined leading into model-year change, multiple weeksof shutdowns, and finally, higher warranty costs driven by a higher rates andhigher cost of settlement of claims on older highline coaches, partially offsetby a decreasing effect in the estimate of workers’ compensation costs as theCompany refines its estimates based on more mature experience rates.

Sellingexpenses increased $3.7 million, or 31.7%, for the year ended December 31, 2005as compared to the year ended December 31, 2004. Selling expenses for the yearended December 31, 2005 increased mainly due to higher sales, media andmarketing costs to support the Company’s marketing programs and dealerexpansion initiatives.

Generaland administrative expenses totaling $14.8 million for the year ended December31, 2005 were up $1.2 million, or 8.6%, compared to the year ended December 31,2004. The increase in general and administrative expenses is principally due tohigher staffing levels to support ongoing Sarbanes-Oxley compliance, partiallyoffset by lower audit and professional fees.

Otherexpense for the year ended December 31, 2004 was primarily the loss on the saleof the real property in Florida totaling $0.3 million and the impairment of anemissions control system totaling $0.3 million. There were no such chargesincurred during the year ended December 31, 2005.

Interestexpense for the year ended December 31, 2005 increased $1.2 million compared tothe year ended December 31, 2004. The higher interest expense was due toincreased average borrowings and rising interest rates on the Company’s line ofcredit during the year ended December 31, 2005. The Company’s weighted averageinterest rate for the year ended December 31, 2005 was 6.97% as compared to5.49% for the year ended December 31, 2004.

The overall effective tax rate for the year ended December 31, 2005 was0.9%, compared to an effective tax rate of 418.3% for the year ended December31, 2004. The effective tax rate for the year ended December 31, 2004 giveseffect to a charge to establish a full valuation allowance in the amount of$11.2 million against the Company’s net deferred tax asset as of December 31,2004. For the year ended December 31, 2005, the Company continued to recognizea full valuation allowance against its future income tax benefits but hadrecorded a provision for various state income taxes of $0.2 million.

OnSeptember 24, 2004, the Company sold its travel trailer business assets toWeekend Warrior, a privately owned, California-based ramp-trailer manufacturer.The loss from discontinued operations for the year ended December 31, 2004totaled $1.1 million and included a pre-tax gain on the sale of $0.3 million.

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### **Liquidity and Capital Resources**

TheCompany has incurred net losses of $24.3 million, $19.8 million and $9.5million for the years ended December 31, 2006, 2005 and 2004,respectively. The Company used cash from operating activities of $13.0 millionand $15.8 million for the years ended December 31, 2006 and 2004, respectively,and provided cash from operating activities of $1.4 million for the year endedDecember 31, 2005. The RV industry has been historically cyclical and subjectto downturns during periods of weak economic conditions. With a continueddownturn in the industry and a deterioration of the Company’s margin, which wascaused by multiple factors, the Company experienced a continuation of lossesduring the year ended December 31, 2006. These conditions led the Company tofurther assess its short-term liquidity needs and plans to achieve profitability.

Duringthe year ended December 31, 2006, the Company financed its operations primarilythrough its existing working capital and its line of credit with UPS CapitalCorporation and Wells Fargo Bank. At December 31, 2006, the Company had $0.02million in cash and cash equivalents (excluding restricted cash and cashequivalents totaling $0.7 million required to secure a letter of credit onsurety bonds in connection with certain obligations with several State Departmentsof Motor Vehicles, collateralize the Company’s credit cards and secure a legalcase appeals bond). The Company had working capital of $2.3 million and $26.1million at December 31, 2006 and 2005, respectively. The decrease inworking capital for the year ended December 31, 2006 from 2005 was mainlyattributable to an increase in accounts payable of $19.3 million, an increasein the line of credit of $17.0 million and a reduction in receivables of $2.4million, partially offset by an increase in inventories of $12.5 million and adecrease in current accrued expenses of $3.1 million.

Forthe year ended December 31, 2006, net cash used in operating activities was$13.0 million, which was primarily attributable to a $24.3 million loss, a$19.6 million increase in inventories and a $3.4 million decrease in accruedexpenses, partially offset by a $19.3 million increase in accounts payable, a$7.2 million reserve and write down of inventories, $4.2 million ofdepreciation and amortization and a $2.4 million decrease in receivables. Forthe year ended December 31, 2005, net cash provided by operating activities was$1.4 million, which was primarily attributable to a $10.7 million decrease ininventories, $3.9 million of depreciation and amortization, a $3.1 millionincrease in accounts payable and a $2.5 million increase in accrued expenses,mostly offset by a $19.8 million net loss. For the year ended December 31,2004, net cash used in operating activities totaled $15.8 million, which wassubstantially attributable to a $27.3 million increase in inventories ($2.8million of which was sold to Weekend Warrior as part of the travel trailerbusiness sale) and a $9.5 million net loss, partially offset by a non-cashcharge of $11.9 million deferred income tax provision, which is primarily dueto the Company recording an $11.2 million valuation allowance against itsdeferred tax assets, $3.9 million of depreciation and amortization, a $2.4million increase in accounts payable and a $1.3 million inventory valuation adjustment.

Forthe year ended December 31, 2006, the Company used $3.6 million of cash ininvesting activities, which primarily resulted from $3.4 million of purchasesof property, plant and equipment. For the year ended December 31, 2005, theCompany used $2.4 million of cash in investing activities, which primarilyresulted from $4.6 million of purchases of property, plant and equipment,partially offset by $2.2 million in repayments on the note receivable. For theyear ended December 31, 2004, the Company used $0.4 million of cash forinvesting activities, including $4.9 million for purchases of property, plantand equipment, with the single largest expenditure being the purchase of theFlorida service center totaling $0.8 million. These capital expenditures weremostly offset by the proceeds from the sale of assets totaling $3.6 million,with the largest single sale of assets being the sale of the Florida propertytotaling $1.9 million, by the proceeds from the sale of discontinued operationstotaling $0.5 million, and by the note receivable repayments of $0.5 million.

Forthe year ended December 31, 2006, the Company provided $16.6 million of cashfrom financing activities, which was primarily due to advances under the lineof credit of $17.0 million. For the year ended December 31, 2005, the Companyprovided $1.0 million of cash from financing activities, which was primarilydue to an increase in the book overdraft of $1.8 million, partially offset byrepayments on the line of credit of $0.6 million. Net cash provided byfinancing activities for the year ended December 31, 2004 was $14.2 million,mainly due to the advances on the line of credit totaling $12.7 million, anincrease in book overdraft of $0.8 million and $0.7 million in proceeds fromissuance of common stock through the exercise of stock options.

AtDecember 31, 2006, the Company had an asset-based revolving credit facilitywith UPS Capital Corporation and Wells Fargo Bank for $40 million, afterexercising two consecutive $5 million increases to the line of credit in Mayand June 2006. The credit facility is collateralized by all of the Company’sassets, with borrowing availability based on the Company’s eligible accountsreceivable and inventory.  Terms of thecredit facility require the Company to maintain a blocked account, wherebyremittances from the Company’s customers are applied directly against theoutstanding credit facility balance. The credit facility contains, among otherprovisions, certain financial covenants, including funded debt to EarningsBefore Interest, Taxes, Depreciation and Amortization (EBITDA), and a fixedcharge coverage ratio, that should the Company fail to comply, will result in areduction of the credit availability to the Company. At December 31, 2006, theCompany did not comply with the covenant provisions causing a reduction in the Company’s $40 million average monthlyborrowing 

25

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availability to an amountbetween $24 million and $32 million, depending on eligible inventory andaccounts receivable, until the Companyregained compliance with the covenants.  Initialamounts borrowed under the revolving credit facility bear interest at the primerate listed in the Wall Street Journal plus 0.50 percentage points and may besubsequently adjusted down based on a trailing twelve month funded debt toEBITDA calculation. At December 31, 2006, the interest rate on theoutstanding borrowings under the line of credit was 8.75%. The weighted averageinterest rate for the borrowings under the line of credit during the years endedDecember 31, 2006 and 2005 were 8.53% and 6.97%, respectively.

On February 20, 2007, theCompany completed the sale of CCI.   The Company received totalconsideration of $38.7 million for the sale of CCI and the transfer of theAdditional Assets.  The Company undertookthis sale to improve its working capital position, raise capital to enable theCompany to reduce its debt and provide the necessary funding and resources tosupport the turnaround of the NRV business. The Company used approximately $24.5 million of the proceeds from thesale of CCI to pay off its credit facility and the remainder of the proceedswill be used for working capital purposes.

In conjunction with the sale of CCI, the Company enteredinto an agreement to modify its credit agreement on February 21, 2007, thatamong other things reduced the credit facility to $15 million and waived theevents of default resulting from the failure to comply with financial covenantsfor the months ended October, November and December 2006.  The amendment provides for the setting of newfinancial covenants in April of 2007. The base interest rate was increased to the prime rate plus 1.50percentage points.  (See Note 17 in theaccompanying notes to the consolidated financial statements for additionalterms of Loan Modification Agreement No. 3)

Management’splan to achieve operational profitability includes continuing or starting avariety of initiatives to improve its earnings and working capital position,including: (i) new product and floor plan introductions in 2007, (ii) newdealer additions to fill open market areas or replace under-performing dealers,(iii) decreases in overall sales incentives by tailoring programs that providethe maximum value to the Company, (iv) reduction of material and relatedobsolescence costs, (v) improvement of manufacturing efficiencies, (vi) furtherreductions of manufacturing and other overhead costs, and (vii) decreases inthe costs of warranty.

Inorder to fund on-going operations through at least March 31, 2008, the Companyremains dependent upon its ability to utilize outside financing throughborrowings on its line of credit until it achieves sustained operationalprofitability through a combination of increased sales, cost reductions andimproved product margins. After consideration of the restrictions of theborrowing capacity noted above, the Company believes it has sufficientfinancial resources to fund its operations through at least March 31, 2008.However, the Company’s ability to meet its obligations beyond March 2008 isdependent on its ability to generate positive cash flows from operations and isdependent on continued borrowings under its line of credit.  If management is unable to achieve itsoperational profitability plan or unforeseen events occur and its existing lineof credit is insufficient to allow the Company to meet its obligations, theCompany may need to implement alternative plans that could include long-termfinancing collateralized by real estate, a possible sale and leasebacktransaction involving its Pervis California facilities, the pursuit of severalstrategic opportunities, obtaining additional debt financing, additionalreductions in operating costs, deferral of capital expenditures, deferring theintroduction of new products or otherwise scaling back its operations andfurther reducing its working capital. While the Company believes that it couldsuccessfully complete the alternative plans, if necessary, there can be noassurance that such alternatives would be available on acceptable terms andconditions or that the Company would be successful in its implementation ofsuch plans.

#### **Contractual Obligations and Commitments**

Thefollowing is a schedule of the Company’s known contractual obligations atDecember 31, 2006:

 
| **(in thousands)**          | ** ** | ** ** | ** ** | **Less than** | ** ** | **1 - 3** | ** ** | **4 - 5** | ** ** | **After**        | ** ** |
|----------------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|---------------------|------------|------------------|------------|
| **Contractual obligations** | ** ** | **Total**  | ** ** | **1 Year**    | ** ** | **Years**           | ** ** | **Years**           | ** ** | **5 Years** | ** ** |
| Operating leases                 |       | $          | 6,433      |               | $          | 1,802               |       | $                   | 4,631      |             | $          | — |   | $ | — |   |
| Capital leases                   |       | 215        |       | 72                 |       | 143                 |       | —              |       | —           |       |
|                             |       | $          | 6,648      |               | $          | 1,874               |       | $                   | 4,774      |             | $          | — |   | $ | — |   |

 
| **(in thousands)**         | ** ** | ** ** | ** ** | **Less than** | ** ** | **1 - 3** | ** ** | **4 - 5** | ** ** | **After**        | ** ** |
|---------------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|---------------------|------------|------------------|------------|
| **Commercial commitments** | ** ** | **Total**  | ** ** | **1 Year**    | ** ** | **Years**           | ** ** | **Years**           | ** ** | **5 Years** | ** ** |
| Revolving credit facility       |       | $          | 29,012     |               | $          | 29,012              |       | $                   | —     |             | $          | — |   | $ | — |   |
| Letter of credit                |       | 205        |       | 205                |       | —              |       | —              |       | —           |       |
|                            |       | $          | 29,217     |               | $          | 29,217              |       | $                   | —     |             | $          | — |   | $ | — |   |

 

26

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#### RepurchaseCommitments 

#### It is customary practice for companies in therecreational vehicle industry to enter into repurchase agreements withfinancing institutions to provide financing to their dealers.  Generally, these agreements provide for therepurchase of products from the financing institution in the event of a dealer’sdefault.  The risk of loss under theseagreements is spread over numerous dealers and further reduced by the resalevalue of the units, which the Company would be required to repurchase.  Losses under these agreements have not beensignificant in the periods presented in the consolidated financial statements,and management believes that any future losses under these agreements will nothave a significant effect on the Company’s consolidated financial position orresults of operations.  The Company’s undiscounted maximumpotential exposure under these agreements approximated $147 million atDecember 31, 2006.

#### Letter of Credit 

The Company had anoutstanding letter of credit in the amount of $0.2 million for the year endedDecember 31, 2006, which collateralizes obligations for which the Company isliable. The Company is required to maintain compensating cash balances with theissuing financial institution of this letter of credit.

### **Effects of Inflation**

Highersteel and petroleum prices during 2006, while partially passed along tocustomers in the form of surcharges, had an adverse effect on the Company’sprofit margins throughout the year. Such adverse effects have continued throughthe early months of 2007. For the year ended December 31, 2006, the effects ofincreasing interest rates became increasingly significant to the Company, asthe Company uses a variable rate line of credit, and the Company increased itsaverage borrowings under the line during the year ended December 31, 2006 ascompared to 2005.

### **Recent Accounting Pronouncements**

In June 2006, the Emerging Issue Task Force EITF reached a consensus onissue EITF 06-2 “Accounting for Sabbatical Leave and Other Similar BenefitsPursuant to FASB Statement No. 43” (“EITF 06-2”). Accordingly, an employee’sright to a compensated absence under a sabbatical or other similar benefitarrangement (a) that requires the completion of a minimum service period and(b) in which the benefit does not increase with additional years of serviceaccumulates pursuant to paragraph 6(b) of EITF 06-2 for arrangements in whichthe individual continues to be a compensated employee and is not required toperform duties for the entity during the absence. Therefore, assuming all ofthe other conditions of paragraph 6 of EITF 06-2 are met, the compensation costassociated with a sabbatical or other similar benefit arrangement should beaccrued over the requisite service period. The provisions of this consensus should be applied in financial reportsfor fiscal years beginning after the date the consensus is ratified by theBoard. Entities should recognize the effects of applying the consensus as achange in accounting principle through retrospective application to all priorperiods unless it is impracticable to do so. The Company had been accountingfor benefits similar to sabbatical leave in accordance with the provisions ofthis consensus. Consequently, the adoption of the provisions of this consensuswill not have a material impact on the consolidated financial position, resultsof operations and cash flows of the Company.

In June 2006, the Financial Accounting Standards Board (“FASB’) issuedFASB Interpretation No. 48*,* “Accountingfor Uncertainty in Income Taxes”  (“FIN48”). This Interpretation clarifies the accounting for uncertainty in incometaxes recognized in companies’ financial statements in accordance with SFAS No.109, “Accounting for Income Taxes.” This Interpretation prescribes arecognition threshold and measurement of a tax position taken or expected to betaken in a tax return. This Interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. The provisions of FIN 48 are effective forfiscal years beginning after December 15, 2006. The Company is currentlyevaluating the impact, if any, of FIN 48 on its consolidated financialstatements.

In September 2006, the FASB issued SFAS No. 157,**“FairValue Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuringfair value in generally accepted accounting principals and expands disclosuresabout fair value measurements.  Thestatement does not require new fair value measurements, but is applied to theextent that other accounting pronouncements require or permit fair valuemeasurements.  The statement emphasizesthat fair value is a market-based measurement that should be determined basedon the assumptions that market participants would use in pricing an asset orliability.  Companies that have assetsand liabilities measured at fair value will be required to disclose informationthat enables the users of its financial statements to access the inputs used todevelop those measurements.  Thereporting entity is encouraged, but not required, to combine the fair valueinformation disclosed under this statement with the fair value informationdisclosed under other accounting pronouncements.  SFAS No. 157 is effective for fiscal yearsbeginning after November 15, 2007.  TheCompany is in the process of evaluating the provisions of the statement, butdoes not anticipate that the adoption of SFAS No. 157 will have a materialimpact on the Company’s consolidated financial statements.

27

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In September 2006, theSEC released Staff Accounting Bulletin No. 108, “Considering the Effects of PriorYear Misstatements when Quantifying Misstatements in Current Year FinancialStatements”(“SAB 108”). SAB 108 provides guidance on how the effects of prior-yearuncorrected financial statement misstatements should be considered inquantifying a current year misstatement. SAB 108 requires registrants to quantifymisstatements using both an income statement (rollover) and balance sheet (ironcurtain) approach and evaluate whether either approach results in amisstatement that, when all relevant quantitative and qualitative factors areconsidered, is material. If prior year errors that had been previouslyconsidered immaterial are now considered material based on either approach, norestatement is required as long as management properly applied its previousapproach and all relevant facts and circumstances were considered. If prioryears are not restated, the cumulative effect adjustment is recorded in openingretained earnings as of the beginning of the fiscal year of adoption. SAB 108is effective for fiscal years ending on or after November 15, 2006. The applicationof the guidance of SAB 108 did not have an impact on our consolidatedfinancial condition or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities - including an amendment of FASBStatement No. 115” (“SFAS No. 159”). SFAS No. 159 permits an entity to elect fair value as the initial andsubsequent measurement attribute for many financial assets and liabilities.Entities electing the fair value option would be required to recognize changesin fair value in earnings.  Entitieselecting the fair value option are required to distinguish, on the face of thestatement of financial position, the fair value of assets and liabilities forwhich the fair value option has been elected and similar assets and liabilitiesmeasured using another measurement attribute. SFAS No. 159 is effective for fiscal years beginning after November 15,2007.  The adjustment to reflect the differencebetween the fair value and the carrying amount would be accounted for as acumulative-effect adjustment to retained earnings as of the date of initialadoption. The Company is currently evaluating the impact, if any, of SFAS No.159 on its consolidated financial statements.

**Item 7A. Quantitative and Qualitative DisclosuresAbout Market Risk**

TheCompany has no significant financial instruments. The Company has not enteredinto any derivative financial instruments. The Company does not have any significantforeign currency exposure because it does not transact business in foreigncurrencies. However, the Company is exposed to interest rate changes relatedprimarily to cash borrowings on the Company’s credit facility. The weightedaverage interest rate for the borrowings on the credit facility during the yearended December 31, 2006 was 8.53%. For every 0.25% increase in interestrates, the Company would expect an annual increase in interest expense ofapproximately $2,500 for every $1.0 million borrowed.

## **Item 8. Consolidated Financial Statements andSupplementary Data**

Theinformation required by this item is contained in the consolidated financialstatements listed in Item 15(a) 1 under the caption “ConsolidatedFinancial Statements.”

#### **Item 9. Changes in andDisagreements With Accountants on Accounting and Financial Disclosure**

None

## **Item 9A. Controls and Procedures**

### Evaluation of Disclosure Controls andProcedures

The Company’smanagement, with the participation of the Company’s Chief Executive Officer andChief Financial Officer, has conducted an evaluation, as of December 31, 2006,of the Company’s disclosure controls and procedures; as such term is definedunder Exchange Act Rule 13a-15(e). Based on this evaluation, the Company’sChief Executive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective as of the end of the periodcovered by this annual report.

**Management’sReport on Internal Control over Financial Reporting**

Management of theCompany is responsible for establishing and maintaining adequate internalcontrol over financial reporting as defined under Exchange Act Rule13a-15(e).  The Company’s internalcontrol over financial reporting is designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles.

28

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The Company’s internalcontrol over financial reporting includes those policies and procedures that a)pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of theCompany; b) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that our receipts andexpenditures are being made only in accordance with authorizations ofmanagement and directors; and c) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof our assets that could have a material effect on the financial statements.

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree orcompliance with the policies or procedures may deteriorate.

Managementassessed the effectiveness of the Company’s internal control over financialreporting as of December 31, 2006. In making this assessment, management usedthe criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) in Internal Control Integrated Framework. Based onour assessment and those criteria, management believes that the Companymaintained effective internal control over financial reporting as of December31, 2006.

TheCompany’s independent registered public accounting firm, Swenson Advisors, LLP,has audited management’s assessment of the effectiveness of the Company’sinternal control over financial reporting as stated in their report that isincluded herein.

#### **Changes in Internal Control over FinancialReporting**

#### There were no change in the Company’sinternal control over financial reporting (as such term is defined in ExchangeAct Rule 13a-15(f)) occurred during the fiscal quarter ended December 31,2006 that materially affected, or is reasonably likely to materially affect,the Company’s internal control over financial reporting.

#### **Item9B. Other Information**

None

# **PART III**

## **Item 10. Directors, Executive Officers andCorporate Governance**

Theinformation required for this Item will be set forth in the Company’sdefinitive Proxy Statement for its 2007 Annual Meeting of Stockholders to beheld with respect to the Company’s fiscal year ended December 31, 2006 or by anamendment to this Form 10-K to be filed with the Securities and Exchange Commissionno later than 120 days after December 31, 2006, which information isincorporated herein by reference.

#### **Code of Business Conduct and Ethics**

TheCompany has adopted a written code of conduct and ethics (the “Code”), which isapplicable to all of the Company’s officers, directors and employees, includingthe Company’s Chief Executive Officer and Chief Financial Officer(collectively, the “Senior Officers”). In accordance with the rules andregulations of the Securities and Exchange Commission and the rules of the NewYork Stock Exchange, a copy of the Code has been posted on the Company’swebsite at http://www.nrvh.com. The Company intends to disclose any changes inor waivers from the Code applicable to any Senior Officers on its website or byfiling a Form 8-K.

## **Item 11. Executive Compensation**

Theinformation required for this Item will be set forth in the Company’sdefinitive Proxy Statement for its 2007 Annual Meeting of Stockholders to beheld with respect to the Company’s fiscal year ended December 31, 2006 or by anamendment to this Form 10-K to be filed with the Securities and ExchangeCommission no later than 120 days after December 31, 2006, which information isincorporated herein by reference.

## **Item 12. Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

Theinformation required for this Item will be set forth in the Company’sdefinitive Proxy Statement for its 2007 Annual Meeting of Stockholders to beheld with respect to the Company’s fiscal year ended December 31, 2006 or by anamendment to this Form 10-K to be filed with the Securities and ExchangeCommission no later than 120 days after December 31, 2006, which information isincorporated herein by reference.

29

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## **Item 13. Certain Relationships and RelatedTransactions, and Director Independence**

Theinformation required for this Item will be set forth in the Company’sdefinitive Proxy Statement for its 2007 Annual Meeting of Stockholders to beheld with respect to the Company’s fiscal year ended December 31, 2006 or by anamendment to this Form 10-K to be filed with the Securities and ExchangeCommission no later than 120 days after December 31, 2006, which information isincorporated herein by reference.

## **Item 14. Principal Accountant Fees andServices**

Theinformation required for this Item will be set forth in the Company’sdefinitive Proxy Statement for its 2007 Annual Meeting of Stockholders to beheld with respect to the Company’s fiscal year ended December 31, 2006 or by anamendment to this Form 10-K to be filed with the Securities and ExchangeCommission no later than 120 days after December 31, 2006, which information isincorporated herein by reference.

# **PART IV**

## **Item 15. Exhibits and Consolidated FinancialStatement Schedules**

##  

| (a)    | List of Documents filed as part of this Report                     |
|--------|--------------------------------------------------------------------|
|   |                                                               |
| 1.     | Consolidated financial statements:                                 |
|   | REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING  FIRMS         |
|   | CONSOLIDATED  BALANCE SHEETS                                       |
|   | CONSOLIDATED STATEMENTS OF OPERATIONS                              |
|   | CONSOLIDATED STATEMENTS OF CASH FLOWS                              |
|   | CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY               |
|   | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                         |
|   |                                                               |
| 2.     | Consolidated financial statement schedule                          |
|   | SCHEDULE II - CONSOLIDATED VALUATION AND  QUALIFYING ACCOUNTS |

 

All otherschedules are omitted because they are not applicable or the requiredinformation is shown in the consolidated financial statements or notes thereto.

3.               Exhibits
| 2.1   |   | Merger and Asset Purchase Agreement dated as of  February 16, 2007 by and among Country Coach Holdings LLC, Country  Coach Merger LLC, Riley Investment Management, LLC, the Company and CCI. |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1   |   | The Company’s Restated Certificate of Incorporation.  (2)                                                                                                                                          |
| 3.2   |   | Amended and Restated Bylaws of National R.V.  Holdings, Inc. (8)                                                                                                                                        |
| 4.1   |   | Specimen-Certificate of Common Stock. (1)                                                                                                                                                               |
| 10.1  |   | 1996 Stock Option Plan. (3)                                                                                                                                                                             |
| 10.2  |   | 1997 Stock Option Plan. (4)                                                                                                                                                                             |
| 10.3  |   | 1999 Stock Option Plan. (5)                                                                                                                                                                             |
| 10.4  |   | Form of the Company’s Stock Option Grant  Agreement. (6)                                                                                                                                      |
| 10.5  |   | CCI Bus Facility Lease Agreement between Sterling  Pacific and CCI dated as of November 6, 2003. (6)                                                                                               |
| 10.6  |   | Lee Joint Venture Real Property Lease Agreement between  CCI and the Lee Joint Venture dated as of October 12, 1995. (6)                                                                           |
| 10.7  |   | Lee Joint Venture Real Property Lease Agreement  Amendment between the Company and the Lee Joint Venture dated as of  November 2, 1999. (6)                                                        |
| 10.8  |   | Lee Joint Venture Real Property Lease Renewal  Agreement between CCI and the Lee Joint Venture dated as of January 2,  2001. (6)                                                                   |
| 10.9  |   | Credit Agreement, dated as of August 12, 2005,  between the Company, NRV, CCI and UPS Capital Corporation and Wells Fargo  Bank, as lenders. (7)                                                        |
| 10.10 |   | Loan Modification Agreement, dated October 4, 2005,  between the Company, NRV, CCI and UPS Capital Corporation and Wells Fargo  Bank, as lenders. (7)                                                   |
| 10.11 |   | Loan Modification Agreement No. 2, dated August 10,  2006, between the Company, NRV, CCI and UPS Capital Corporation and Wells  Fargo Bank, as lenders. (9)                                             |

 

30

----

 
| 10.12 |   | Loan Modification Agreement No. 3, dated February  21, 2007, between the Company, NRV, CCI and UPS Capital Corporation and Wells  Fargo Bank, as lenders. |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.13 |   | Loan Modification Agreement No. 4, dated March 13,  2007, between the Company, NRV, and Wells Fargo Bank, as lenders.                                     |
| 10.14 |   | Purchase and Sale Agreement dated as of December 27,  2006 between the Company and First Industrial Acquisitions, Inc.                                    |
| 10.15 |   | Amendments 1 through 4 to Purchase and Sale  Agreement dated as of December 27, 2006 between the Company and First  Industrial Acquisitions, Inc.         |
| 21.1  |   | List of Subsidiaries                                                                                                                                      |
| 23.1  |   | Consent of Independent Registered Public Accounting  Firm.                                                                                                |
| 23.2  |   | Consent of Independent Registered Public Accounting  Firm.                                                                                                |
| 31.1  |   | Rule 13a-14(a) Certification of Principal  Executive Officer.                                                                                   |
| 31.2  |   | Rule 13a-14(a) Certification of Principal  Financial Officer.                                                                                   |
| 32.1  |   | Certifications Pursuant to 18 U.S.C.  Section 1350, As Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                      |

----

(1)             Previously filed asan exhibit to the Company’s Registration Statement on Form S-1 filed onAugust 16, 1993 (File No. 33-67414) as amended by AmendmentNo. 1 thereto filed on September 22, 1993 and Amendment No. 2thereto filed on September 29, 1993.

(2)             Previously filed asan exhibit to the Company’s Registration Statement on Form S-1 filed onDecember 15, 1993 (File No. 33-72954).

(3)             Incorporated byreference from the Company’s Form 10-K for the year ended December 31,1996.

(4)             Incorporated byreference from the Company’s Form 10-K for the year endedDecember 31, 1997.

(5)             Incorporated byreference from the Company’s Form 10-K for the year endedDecember 31, 2001.

(6)             Incorporated byreference from the Company’s 2004 Form 10-K, filed with the SEC on October 11,2005.

(7)             Incorporated byreference from the Company’s quarterly report on Form 10-Q for the quarterended August 31, 2005.

(8)             Incorporated byreference from the Company’s Form 8-K dated November 22, 2005 filed with theSEC on November 28, 2005.

(9)             Incorporatedby reference from the Company’s quarterly report on Form 10-Q for the quarterended August 31, 2006.

31

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## SIGNATURES

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|                        | NATIONAL R.V. HOLDINGS, INC. |
|------------------------|------------------------------|
|                   |                         |   |
| Dated: March 23,  2007 | By                           | /s/ Thomas J. Martini |
|                   |                         | Thomas J.  Martini, |
|                   |                         | Chief Financial  Officer |
|                   |                         | (Principal  Accounting and Finance Officer) |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.
| Signature                   | ** ** | **Capacity in Which Signed**  | ** ** | **Date**       |
|-----------------------------|------------|----------------------------------------------|------------|----------------|
|                        |       |                                         |       |           |
| /s/ Doy B.  Henley          |       | Chairman of the Board                        |       | March 23, 2007 |
| Doy B. Henley               |       |                                         |       |           |
|                        |       |                                         |       |           |
| /s/ Bradley C.  Albrechtsen |       | Director, Chief Executive Officer            |       | March 23, 2007 |
| Bradley C. Albrechtsen      |       | and President (Principal Executive Officer)  |       |           |
|                        |       |                                         |       |           |
| /s/ Thomas J.  Martini      |       | Chief Financial Officer                      |       | March 23, 2007 |
| Thomas J. Martini           |       | (Principal Accounting and Financial Officer) |       |           |
|                        |       |                                         |       |           |
| /s/ Greg  McCaffery         |       | Director                                     |       | March 23, 2007 |
| Greg McCaffery              |       |                                         |       |           |
|                        |       |                                         |       |           |
| /s/ James B.  Roszak        |       | Director                                     |       | March 23, 2007 |
| James B. Roszak             |       |                                         |       |           |
|                        |       |                                         |       |           |
| /s/ David J.  Humphreys     |       | Director                                     |       | March 23, 2007 |
| David J. Humphreys          |       |                                         |       |           |

 

 

32

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## **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To theBoard of Directors and Stockholders of National R.V. Holdings, Inc.:

Wehave completed integrated audits of National R.V. Holdings, Inc.’sconsolidated financial statements and of its internal control over financialreporting as of December 31, 2006 in accordance with the standards of thePublic Company Accounting Oversight Board (United States). Our opinions, basedon our audits, are presented below.

Consolidated financial statements and financial statementschedule

In ouropinion, the consolidated financial statements listed in the index appearingunder Item 15(a)(1) present fairly, in all material respects, thefinancial position of National R.V. Holdings, Inc. and its subsidiaries(the Company) at December 31, 2006 and December 31, 2005, and the resultsof their operations and their cash flows for each of the two years in theperiod ended December 31, 2006 in conformity with accounting principlesgenerally accepted in the United States of America. In addition, in ouropinion, the financial statement schedule listed in the index appearingunder Item 15(a)(2) presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedconsolidated financial statements. These financial statements and financialstatement schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits. We conducted our auditsof these statements in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit of financialstatements includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

Asdiscussed in Note 2 to the consolidated financial statements, the Companychanged the manner in which it accounts for share-based compensation in yearended December 31, 2006.

Internal control over financial reporting

Also,in our opinion, management’s assessment, included in Management’s Report onInternal Control Over Financial Reporting appearing under item 9A, that theCompany maintained effective internal control over financial reporting as ofDecember 31, 2006 based on criteria established in **Internal Control - Integrated Framework** issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO), isfairly stated, in all material respects, based on those criteria. Furthermore,in our opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2006, based oncriteria established in **InternalControl - Integrated Framework** issued by the COSO. The Company’smanagement is responsible for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting. Our responsibility is to express opinions onmanagement’s assessment and on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.   We conducted our audit of internal controlover financial reporting in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. An audit of internal control over financial reportingincludes obtaining an understanding of internal control over financialreporting, evaluating management’s assessment, testing and evaluating thedesign and operating effectiveness of internal control, and performing suchother procedures as we consider necessary in the circumstances. We believe thatour audit provides a reasonable basis for our opinions.

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that(i) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assetsof the company; (ii) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with general accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and(iii) provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use, or disposition of the company’sassets that could have a material effect on the financial statements.

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

Thefinancial statements of National R.V. Holdings, Inc. as of December 31, 2004were audited by other auditors whose 

33

----

reportdated October 6, 2005, except for the restatement discussed in the second andsixth paragraphs of Note 2 (not presented herein) to the consolidated financialstatements appearing under Item 8 of the Company’s 2004 Annual Report on Form10-K/A, as to which the date is March 21, 2006, stated the financial statementspresented fairly, in all material respects, the financial position of NationalR.V. Holdings, Inc. as of December 31, 2004 and for the year then ended.
| /s/ Swenson Advisors, LLP |   |
|---------------------------|--------|
| San Diego,  California    |
| March 29, 2007            |

 

## **REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

To TheBoard of Directors and Stockholders ofNational R.V. Holdings, Inc.

In ouropinion, the consolidated statements of operations, of stockholders’ equity andof cash flows for the year ended December 31, 2004 present fairly, in allmaterial respects, the results of operations of National R.V. Holdings, Inc.and its subsidiaries and their cash flows for the year ended December 31, 2004,in conformity with accounting principles generally accepted in the UnitedStates of America.  In addition, in ouropinion, the financial statement schedule for the year ended December 31, 2004presents fairly, in all material respects, the information set forth thereinwhen read in conjunction with the related consolidated financial statements.These financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements and financial statement schedule based on our audit.  We conducted our audit of these statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.
| /s/ PricewaterhouseCoopers  LLP |   |
|---------------------------------|--------|

OrangeCounty, CaliforniaOctober 6, 2005, except for the restatement discussed in the second and sixthparagraphs of Note 2 (not presented herein) to the consolidated financialstatements appearing under Item 8 of the Company’s 2004 Annual Report on Form10-K/A, as to which the date is March 21, 2006

34

----

**NATIONAL R.V. HOLDINGS, INC**.CONSOLIDATED BALANCE SHEETS

(inthousands, except share and per share amounts)
| ** **                                                                                     | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                     | ** ** | **2006**              | ** ** | **2005** | ** ** |
| ASSETS                                                                                         |       |                  |       |   |   |
| Current assets:                                                                                |       |                  |       |   |   |
| Cash and cash equivalents                                                                      |       | $                     | 16         |   | $ | 11 |   |
| Restricted cash and cash equivalents                                                           |       | 387                   |       | 201 |   |
| Receivables, less allowance for doubtful accounts  ($299 and $392, respectively)               |       | 18,995                |       | 21,533 |   |
| Inventories                                                                                    |       | 74,417                |       | 61,940 |   |
| Deferred income taxes                                                                          |       | 475                   |       | 1,281 |   |
| Prepaid expenses                                                                               |       | 2,108                 |       | 2,359 |   |
| Total current assets                                                                           |       | 96,398                |       | 87,325 |   |
| Long-term  restricted cash and cash equivalents                                                |       | 341                   |       | — |   |
| Property, plant  and equipment, net                                                            |       | 37,430                |       | 38,457 |   |
| Other assets                                                                                   |       | 1,355                 |       | 1,608 |   |
| Total assets                                                                                   |       | $                     | 135,524    |   | $ | 127,390 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                      |       |                  |       |   |   |
| Current  liabilities:                                                                          |       |                  |       |   |   |
| Book overdraft                                                                                 |       | $                     | 2,227      |   | $ | 2,582 |   |
| Accounts payable                                                                               |       | 39,552                |       | 20,218 |   |
| Accrued expenses                                                                               |       | 23,150                |       | 26,273 |   |
| Line of credit                                                                                 |       | 29,012                |       | 12,059 |   |
| Current portion of capital leases                                                              |       | 63                    |       | 57 |   |
| Total current liabilities                                                                      |       | 94,004                |       | 61,189 |   |
| Long-term  accrued expenses                                                                    |       | 4,802                 |       | 5,089 |   |
| Deferred income  taxes                                                                         |       | 475                   |       | 1,281 |   |
| Long-term  portion of capital leases                                                           |       | 124                   |       | 169 |   |
| Total liabilities                                                                              |       | 99,405                |       | 67,728 |   |
| Commitments and  contingencies (Note 10)                                                       |       | —                |       | — |   |
| Stockholders’  equity:                                                                    |       |                  |       |   |   |
| Preferred Stock, $0.01 par value, 5,000 shares  authorized, 4,000 issued and outstanding       |       | —                |       | — |   |
| Common Stock, $0.01 par value, 25,000,000 shares  authorized 10,339,484 issued and outstanding |       | 103                   |       | 103 |   |
| Additional paid-in capital                                                                     |       | 38,353                |       | 37,563 |   |
| Retained (deficit) earnings                                                                    |       | (2,337                | )          | 21,996 |   |
| Total stockholders’ equity                                                                |       | 36,119                |       | 59,662 |   |
| Total  liabilities and stockholders’ equity                                               |       | $                     | 135,524    |   | $ | 127,390 |   |

 

The accompanying notes are an integral part of theconsolidated financial statements.

35

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### **NATIONAL R.V. HOLDINGS, INC.**CONSOLIDATED STATEMENTS OF OPERATIONS

(inthousands, except per share amounts)
| ** **                                                    | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net sales                                                     |       | $                                          | 397,118    |   | $ | 463,610 |   | $ | 436,813 |   |
| Cost of goods  sold                                           |       | 390,899                                    |       | 451,622 |   | 405,858 |   |
| Gross profit                                                  |       | 6,219                                      |       | 11,988 |   | 30,955 |   |
| Selling expenses                                              |       | 13,052                                     |       | 15,301 |   | 11,616 |   |
| General and  administrative expenses                          |       | 14,499                                     |       | 14,801 |   | 13,626 |   |
| Other expense                                                 |       | —                                     |       | — |   | 632 |   |
| Total operating expenses                                      |       | 27,551                                     |       | 30,102 |   | 25,874 |   |
| Operating (loss) income                                       |       | (21,332                                    | )          | (18,114 | ) | 5,081 |   |
| Other (income)  expense:                                      |       |                                       |       |   |   |   |   |
| Interest expense                                              |       | 2,777                                      |       | 1,492 |   | 327 |   |
| Other income                                                  |       | (41                                        | )          | (19 | ) | (90 | ) |
| Total other expense                                           |       | 2,736                                      |       | 1,473 |   | 237 |   |
| (Loss) income from continuing operations before  income taxes |       | (24,068                                    | )          | (19,587 | ) | 4,844 |   |
| Provision for  income taxes                                   |       | 265                                        |       | 181 |   | 13,161 |   |
| Loss from  continuing operations                              |       | (24,333                                    | )          | (19,768 | ) | (8,317 | ) |
| Discontinued  operations:                                     |       |                                       |       |   |   |   |   |
| Loss from discontinued operations                             |       | —                                     |       | — |   | 2,155 |   |
| Gain from sale of discontinued operations                     |       | —                                     |       | — |   | (281 | ) |
| Income taxes related to discontinued operations               |       | —                                     |       | — |   | (737 | ) |
| Loss from discontinued operations, net of taxes  (Note 15)    |       |                                       |       | — |   | (1,137 | ) |
| Net loss                                                      |       | $                                          | (24,333    | ) | $ | (19,768 | ) | $ | (9,454 | ) |
|                                                          |       |                                       |       |   |   |   |   |
| Basic and  diluted loss per common share:                     |       |                                       |       |   |   |   |   |
| Continuing operations                                         |       | $                                          | (2.35      | ) | $ | (1.91 | ) | $ | (0.81 | ) |
| Discontinued operations                                       |       | —                                     |       | — |   | (0.12 | ) |
| Total                                                         |       | $                                          | (2.35      | ) | $ | (1.91 | ) | $ | (0.93 | ) |
| Weighted average  number of common shares outstanding:        |       |                                       |       |   |   |   |   |
| Basic and Diluted                                             |       | 10,339                                     |       | 10,338 |   | 10,217 |   |

 

The accompanying notes are an integral part of theconsolidated financial statements.

36

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### **NATIONAL R.V. HOLDINGS, INC.**CONSOLIDATED STATEMENTS OF CASH FLOWS

(inthousands)
| ** **                                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                       |       |                                       |       |   |   |   |   |
| Cash flows from  operating activities:                                                     |       |                                       |       |   |   |   |   |
| Net loss                                                                                   |       | $                                          | (24,333    | ) | $ | (19,768 | ) | $ | (9,454 | ) |
| Adjustments to reconcile net loss to net cash (used  in) provided by operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                              |       | 4,238                                      |       | 3,890 |   | 3,905 |   |
| Bad debt expense                                                                           |       | 174                                        |       | 270 |   | 32 |   |
| Reserve and write down of inventories                                                      |       | 7,171                                      |       | 1,767 |   | 1,280 |   |
| Loss on asset disposal                                                                     |       | 97                                         |       | 59 |   | 391 |   |
| Tax benefit related to exercise of stock options                                           |       | —                                     |       | — |   | 254 |   |
| Deferred income tax provision                                                              |       | —                                     |       | — |   | 11,894 |   |
| Share-based compensation                                                                   |       | 790                                        |       | — |   | — |   |
| Changes in assets and liabilities:                                                         |       |                                       |       |   |   |   |   |
| Decrease (increase) in receivables                                                         |       | 2,364                                      |       | (1,827 | ) | 970 |   |
| (Increase) decrease in inventories                                                         |       | (19,648                                    | )          | 10,725 |   | (27,279 | ) |
| Decrease (increase) in prepaid expenses                                                    |       | 251                                        |       | 645 |   | (1,266 | ) |
| Increase in accounts payable                                                               |       | 19,334                                     |       | 3,130 |   | 2,366 |   |
| (Decrease) increase in accrued expenses                                                    |       | (3,410                                     | )          | 2,527 |   | 1,117 |   |
| Net cash provided by (used in) operating activities                                        |       | (12,972                                    | )          | 1,418 |   | (15,790 | ) |
| Cash flows from  investing activities:                                                     |       |                                       |       |   |   |   |   |
| (Increase) decrease in restricted cash and cash  equivalents                               |       | (527                                       | )          | 50 |   | (1 | ) |
| Decrease (increase) in other assets                                                        |       | 136                                        |       | (177 | ) | (86 | ) |
| Proceeds from sale of property, plant and equipment  and other assets                      |       | 211                                        |       | 84 |   | 3,601 |   |
| Proceeds from sale of discontinued operations                                              |       | —                                     |       | — |   | 500 |   |
| Note receivable repayments                                                                 |       | —                                     |       | 2,213 |   | 469 |   |
| Purchase of property, plant and equipment                                                  |       | (3,402                                     | )          | (4,603 | ) | (4,914 | ) |
| Net cash used in investing activities                                                      |       | (3,582                                     | )          | (2,433 | ) | (431 | ) |
| Cash flows from  financing activities:                                                     |       |                                       |       |   |   |   |   |
| Net advances under (payments on) line of credit                                            |       | 16,953                                     |       | (631 | ) | 12,690 |   |
| Deferred financing costs                                                                   |       | —                                     |       | (236 | ) | — |   |
| (Decrease) increase in book overdraft                                                      |       | (355                                       | )          | 1,779 |   | 803 |   |
| Principal payments on long-term debt                                                       |       | —                                     |       | — |   | (19 | ) |
| Principal payments on capital leases                                                       |       | (39                                        | )          | (37 | ) | (8 | ) |
| Proceeds from issuance of common stock                                                     |       | —                                     |       | 140 |   | 707 |   |
| Net cash provided by financing activities                                                  |       | 16,559                                     |       | 1,015 |   | 14,173 |   |
| Net increase (decrease) in cash and cash equivalents                                       |       | 5                                          |       | — |   | (2,048 | ) |
| Cash and cash equivalents, beginning of year                                               |       | 11                                         |       | 11 |   | 2,059 |   |
| Cash and cash equivalents, end of year                                                     |       | $                                          | 16         |   | $ | 11 |   | $ | 11 |   |
|                                                                                       |       |                                       |       |   |   |   |   |
| Supplemental  cash flow information:                                                       |       |                                       |       |   |   |   |   |
| Income taxes paid                                                                          |       | $                                          | 285        |   | $ | 290 |   | $ | 554 |   |
| Interest paid                                                                              |       | $                                          | 2,646      |   | $ | 1,430 |   | $ | 324 |   |
|                                                                                       |       |                                       |       |   |   |   |   |
| Supplemental  schedule of non-cash investing and financing activities:                     |       |                                       |       |   |   |   |   |
| Note received in sale of travel trailer business                                           |       | $                                          | —     |   | $ | — |   | $ | 2,682 |   |
| Capital lease acquisitions of property and equipment                                       |       | $                                          | —     |   | $ | 27 |   | $ | 245 |   |
| Reclassification  of leased inventory                                                      |       | $                                          | —     |   | $ | 394 |   | $ | — |   |

 

The accompanying notes are an integral part of theconsolidated financial statements.

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### **NATIONAL R.V. HOLDINGS, INC.**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(inthousands)
| ** **                                       | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Retained  Earnings** | ** ** | ** **    | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|------------------------|------------|---------------|------------|
| ** **                                       | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**            | ** ** | **(Deficit)** | ** ** | **Total** | ** ** |
| Balance,  December 31, 2003                 |       | 10,190                |       | $                       | 102        |                   | $          | 36,463        |       | $ | 51,218 |   | $ | 87,783 |   |
| Common stock issued under option plans           |       | 112                   |       | 1                       |       | 706                    |       | —        |       | 707 |   |
| Tax benefit related to exercise of stock options |       | —                |       | —                  |       | 254                    |       | —        |       | 254 |   |
| Net loss                                         |       | —                |       | —                  |       | —                 |       | (9,454        | )          | (9,454 | ) |
| Balance, December 31,  2004                 |       | 10,302                |       | 103                     |       | 37,423                 |       | 41,764        |       | 79,290 |   |
| Common stock issued under option plans           |       | 37                    |       | —                  |       | 140                    |       | —        |       | 140 |   |
| Net loss                                         |       | —                |       | —                  |       | —                 |       | (19,768       | )          | (19,768 | ) |
| Balance,  December 31, 2005                 |       | 10,339                |       | 103                     |       | 37,563                 |       | 21,996        |       | 59,662 |   |
| Share-based compensation                         |       | —                |       | —                  |       | 790                    |       | —        |       | 790 |   |
| Net loss                                         |       | —                |       | —                  |       | —                 |       | (24,333       | )          | (24,333 | ) |
| Balance,  December 31, 2006                 |       | 10,339                |       | $                       | 103        |                   | $          | 38,353        |       | $ | (2,337 | ) | $ | 36,119 |   |

 

The accompanying notes are an integral part of theconsolidated financial statements.

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### **NATIONAL R.V. HOLDINGS, INC.**

## NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

#### **1. Description of Business**

NationalR.V. Holdings, Inc. (the “Company”) operates in one business segment thatdesigns, manufactures and markets Class A motorhomes through its wholly-ownedsubsidiaries, National RV Inc. (“NRV”) and Country Coach, Inc. (“CCI”).The RVs are marketed primarily to dealers in the United States by NRV under the*Dolphin*, *Pacifica*,*Sea Breeze*, *Surf Side*,*Tradewinds* and *Tropi-Cal*brand names and by CCI under brand names including *Affinity*,*Allure*, *Inspire*,*Intrigue*, *Magna, Tribute*and bus conversions under the*Country Coach Prevost*brand.

OnFebruary 20, 2007, the Company completed the sale of CCI and receivedtotal consideration of $38.7 million. The Company used approximately$24.5 million of the proceeds to pay off its credit facility and theremainder will be used for working capital purposes. In connection with thesale of CCI, the Company amended its credit agreement reducing its line ofcredit from $40 million to $15 million. (See Note 17 foradditional information regarding the sale of CCI.)

Additionally,on December 27, 2006, the Company entered into an agreement for thepossible sale and leaseback of NRV’s manufacturing facilities that can provide$31.7 in additional working capital. (See Note 10 for further discussionsand terms of the sale and leaseback.)

### **2. Summary of Significant Accounting Policies**

#### **BASIS OF PRESENTATION**

TheCompany amended and restated its 2004 Form 10-K as filed with the Securitiesand Exchange Commission (“SEC”) on March 21, 2006. The consolidated financialstatements include the financial statements of the Company and its wholly-ownedsubsidiaries NRV and CCI, which are presented in accordance with accountingprinciples generally accepted in the United States of America. All significantintercompany transactions have been eliminated in consolidation.  As further discussed in Note 15, theoperating results of the travel trailer business have been reclassified asdiscontinued operations for all periods presented.

#### **RECLASSIFICATIONS**

Certainreclassifications, none of which affected net loss or retained earnings, havebeen made to prior year amounts to conform to the current year presentation.

#### **USE OF ESTIMATES**

Managementis required to make certain estimates and assumptions in order to prepareconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America. Such estimates andassumptions affect the reported amounts of assets, liabilities, revenues andexpenses and disclosure of contingent assets and liabilities in theconsolidated financial statements and accompanying notes. The Company’s mostsignificant estimates relate to valuation of inventories, realization of deferredtax assets, recoverability of long-lived assets, workers’ compensationaccruals, warranty accruals and accrued losses for contingentliabilities. The estimation process required to prepare the Company’sconsolidated financial statements requires assumptions to be made about futureevents and conditions, and as such, is inherently subjective and uncertain.Actual results may differ from estimates, and it is at least reasonablypossible that the effect of the estimates on the consolidated financial statementswill materially change within one year of the date of the consolidatedfinancial statements.

#### **FAIR VALUE OF FINANCIAL INSTRUMENTS**

TheCompany’s financial instruments consist primarily of cash and cash equivalents,restricted cash and cash equivalents, receivables, prepaid expenses, accountspayable, accrued expenses, book overdraft, line of credit and capital leaseobligations. The carrying amounts of the Company’s financial instrumentsapproximate their respective fair values due to their relatively shortmaturities. The Company also had an outstanding letter of credit in the amountof $0.2 million for the years ended December 31, 2006 and 2005, whichcollateralizes obligations the Company is liable for. The Company is requiredto maintain compensating cash balances with the issuing financial institutionsof this letter of credit. (See Note 4 for further discussion on restricted cashand cash equivalents.)

#### **CONCENTRATIONS**

Financialinstruments that subject the Company to credit risk consist primarily of tradereceivables from dealerships, which are approved by the dealers’ lenders priorto shipment. The Company generally does not require collateral from itscustomers. Such credit risk is considered by management to be limited due tothe Company’s broad customer base, and terms requiring most of the dealers’lenders to pay the Company directly in fifteen business days or less after thedealers’ receipt of a unit. For the year ended December 31, 2006, threedealers accounted for 15%, 11% and 10% of the Company’s net sales. In addition,the Company’s top ten dealers accounted for approximately 67%, 66% and 72% ofnet sales for the years ended December 31, 2006, 2005 and 2004,respectively. At December 31, 2006, three dealers accounted for 10%, 9%and 7% of the Company’s trade receivables.

TheCompany currently buys certain key components of its products from limitedsuppliers. Although there are a limited number of manufacturers of these keycomponents, management believes that other suppliers could provide similar key 

39

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componentson comparable terms. A change in suppliers, however, could cause a delay inmanufacturing and a possible loss of sales, which would adversely affectoperating results.

TheCompany’s NRV subsidiary purchases gasoline-powered chassis that aremanufactured by Ford Motor Company and Workhorse Custom Chassis, and rearengine diesel-powered chassis from Freightliner Custom ChassisCorporation.  The Company’s CCIsubsidiary manufactures its own chassis, the DynoMax, which is used as the baseupon which all CCI motorhomes are built, except for the Prevost busconversions, which utilize a Prevost bus shell. The Company generally maintainsa one to two month production supply of chassis in inventory. If any of theCompany’s present chassis manufacturers were to cease manufacturing orotherwise reduce the availability of their chassis, the business of the Companycould be materially and adversely affected.

#### **CASH AND CASH EQUIVALENTS**

Cashand cash equivalents include deposits in banks and short-term investments withoriginal maturities of three months or less.

**RESTRICTED CASH**

TheCompany is required to hold in trust certain deposits to guarantee the Companyto perform under certain legal obligations, and to secure credit availability.Total restricted cash and cash equivalents were collateral reserves of $0.7million and $0.2 million at December 31, 2006 and 2005, respectively. (See Note4 for further discussion on restricted cash and cash equivalents.)

#### **RECEIVABLES**

The Company’s accounts receivables are recorded at netrealizable value based on the amount invoiced and bear no interest. Themajority of the Company’s accounts receivables are related to motorhome sales,with parts receivables representing a minimal portion. The allowance fordoubtful accounts is management’s best estimate of the amount of probablecredit losses in the existing accounts receivable based upon management’scurrent knowledge of customers, customer compliance with original terms of saleor dealer financing (“flooring”) arrangements, historical collectability andrecognition of bad debts, and current economical and industry conditions.Adjustments to the allowance for doubtful accounts are charged against generaland administrative expenses. Uncollectible balances are charged off against theallowance when management has determinedthat all reasonable collection efforts have been exhausted.

Consistentwith industry practice, the Company enters into off-balance sheet agreements,called repurchase agreements, with lenders providing flooring arrangements fordealers purchasing the Company’s motorhome units. These units are used tocollateralize the loan between the dealers and their lenders.  The repurchase agreement provides the Company(manufacturer) to be paid directly by the lender upon delivery of the unit tothe dealer location on the condition that the Company is required to repurchasethe unit should the dealer default on the flooring agreement with its lender.  The Company’s loss exposure would be thedifference between the value of the lien held by the flooring institution andthe price for which the Company is able to resell the unit, adjusted forshipping and refurbishing costs prior to ultimate sale. Losses under theseagreements have not been material to the Company.  Management monitors these active agreementson units sold and will record a liability and reduction to sales and cost ofgoods sold in the event that the Company is required to perform under the termsof the repurchase agreement. (See Note 10 for further discussion on recourse ondealer financing.)

Thevalue of the Company’s eligible accounts receivable along with its inventoryprovides the basis for the Company’s borrowing availability under its creditfacility. (See Note 9 for more information on the Company’s credit facilityagreement.)

#### **INVENTORIES**

Inventoriesare valued at the lower of cost or market. Cost is estimated using thefirst-in, first-out (“FIFO”) method, and includes the cost of materials, laborand manufacturing overhead.  The Companyperiodically evaluates the carrying value of inventories and maintains anallowance for excess and obsolescence to adjust the carrying value as necessaryto the lower of cost or market.  TheCompany recognizes abnormal amounts of idle facility expense, freight, handlingcosts and wasted material as expenses in the period incurred. The Companyallocates fixed production overhead to the cost of conversion based upon thenormal capacity of its production facilities.

#### **PROPERTY, PLANT AND EQUIPMENT**

Property,plant and equipment are stated at cost, less accumulated depreciation andamortization. Major renewals and improvements are capitalized, while routinemaintenance and repairs are expensed as incurred. The Company also capitalizescomputer software costs that meet both the definition of internal-use softwareand defined criteria for capitalization in 

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accordancewith Statement of Position No. 98-1, “Accounting for the Cost of ComputerSoftware Developed or Obtained for Internal Use.” At the time properties areretired from service, the cost and accumulated depreciation are removed fromthe respective accounts.

Depreciationexpense is computed principally on the straight-line method, over the estimateduseful lives of the related assets. In addition, the Company does not estimatea salvage value for any of its property, plant and equipment. The followingtable provides the estimated useful lives used for each asset type:

 

| Land improvements           |   | 5-40 years |   |
|-----------------------------|--------|------------|--------|
| Buildings and  improvements |   | 5-40 years |   |
| Machinery and  equipment    |   | 3-12 years |   |
| Office equipment            |   | 3-15 years |   |

 

Leaseholdimprovements, which are included in buildings and building improvements, madeat the inception or during the term of the lease, and assets under capitalleases are amortized over the shorter of the useful life of the assets or aterm that includes required lease periods and renewals that are deemed to bereasonably assured at the date the leasehold improvements are purchased or whenthe capital lease is entered into.

#### **IMPAIRMENT OF LONG-LIVED ASSETS**

Inaccordance with Statement of Financial Accounting Standards No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” the Company assesses the fairvalue and recoverability of its long-lived assets whenever events andcircumstances indicate the carrying value of an asset may not be recoverablefrom estimated future cash flows expected to result from its use and eventualdisposition. In doing so, the Company makes assumptions and estimates regardingfuture cash flows and other factors. The fair value of the long-lived assets isdependent upon the forecasted performance of the Company’s business and theoverall economic environment. When the Company determines that the carryingvalue of its long-lived assets may not be recoverable, it measures impairmentbased upon a forecasted discounted cash flow method.

#### **WORKERS’ COMPENSATION SELF-INSURANCE RESERVE**

TheCompany’s workers’ compensation self-insurance reserve is established based onits best estimate of the amounts necessary to settle future and existingemployee workers’ compensation claims incurred as of the balance sheet date.The Company records an undiscounted reserve estimate for future workers’ compensationrelated costs based on the Company’s historical workers’ compensation claimspaid history using an actuarial incurred but not reported (“IBNR”) approach.

### **PRODUCT WARRANTIES**

TheCompany’s warranty reserve is established based on its best estimate of theamounts necessary to settle future and existing claims on products sold as ofthe balance sheet date. The Company records a reserve for estimated futurewarranty-related costs based on recent actual warranty claims and historicalexperience. Also, the Company’s recall reserve is established, as necessary,based on management’s best estimate of the cost per unit to remedy a recallproblem and the estimated number of units that will ultimately be brought infor the repair. In addition, from time to time, the Company is involved inwarranty or “lemon law” litigation arising out of its operations in the normalcourse of business. The number of such matters as a percentage of sales is lowand the aggregate cost to the Company for these actions have not been material.While the Company’s warranty costs have historically been within itsexpectations and the provisions established, a significant increase in dealershop rates, the cost of parts or the frequency of claims could have a materialadverse impact on the Company’s operating results for the period or periods inwhich such claims or additional costs materialize and result in a change inestimate of warranty reserves in that period.

### **CONTINGENT LIABILITIES**

In accordance withStatement of Financial Accounting Standards No. 5, “Accounting forContingencies” (“SFAS No. 5”), the Company periodically reviews the status of significantcontingencies to assess the potential financial exposure and to determinewhether a loss should be recognized in the consolidated statements ofoperations or disclosed only in the notes to the consolidated financialstatements. In accordance with SFAS No. 5, the Company recognizes and recordsan estimated loss contingency when (i) it is probable that an asset hasbeen impaired or a liability has been incurred and (ii) the amount of theloss can be reasonably estimated.  Forloss contingencies that do not meet both of these conditions, if there is a reasonablepossibility that a loss may have been incurred, such losses are disclosed inthe notes to the consolidated financial statements. Significant judgment isrequired to determine the probability that a liability has been incurred andwhether such liability is reasonably estimable. The Company estimates accrualsbased on the best information available at that time, which 

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can be highly subjective.The final outcome of these matters could vary significantly from the amountsincluded in the accompanying consolidated financial statements.

#### **SHARE-BASED COMPENSATION**

The Company adopted theprovisions of revised SFAS No. 123 (“SFAS No. 123R”), *“*Share-Based Payment*,”* including the provisions of the SEC’sStaff Accounting Bulletin No. 107 (“SAB 107”), on January 1,2006, using the modified prospective transition method to account for employeeshare-based awards. The valuation provisions of SFAS No. 123R apply to newawards and to awards that were outstanding at the effective date andsubsequently modified or cancelled. Estimated compensation expense for awardsoutstanding at the effective date were recognized over the remaining serviceperiod using the compensation cost calculated for pro forma disclosure purposesunder SFAS No. 123, *“*Accountingfor Stock-Based Compensation*”* (“SFASNo. 123”). The consolidated financial statements for the year endedDecember 31, 2006 reflect the adoption of SFAS No. 123R. In accordancewith the modified prospective transition method, the consolidated financialstatements for prior periods were not restated to reflect, and do not include,the impact of SFAS No. 123R.

Share-based compensationexpense recognized during a period is based on the value of the portion ofshare-based payment awards that is ultimately expected to vest during theperiod. Share-based compensation expense recognized in the Company’sconsolidated statement of operations for fiscal 2006 includes compensationexpense for share-based payment awards granted prior to, but not yet vested asof December 31, 2005, based on the grant date fair value estimated inaccordance with the pro forma provisions of SFAS No. 123, adjusted forestimated forfeitures, and share-based payment awards granted subsequent toJanuary 1, 2006 based on the grant date fair value estimated in accordance withSFAS No. 123R.  For share awardsgranted in 2006, expenses are amortized under the straight-line attributionmethod.  For share awards granted priorto 2006, expenses are amortized under the straight-line single option methodprescribed by SFAS No. 123.  Asshare-based compensation expense recognized in the consolidated statement ofoperations for 2006 is based on awards ultimately expected to vest, it has beenreduced for estimated forfeitures.  SFASNo. 123R requires forfeitures to be estimated at the time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. Pre-vesting forfeitures were estimated to be approximately 1%for both officers and directors and 10% for other employees in fiscal 2006based on our historical experience.

For purposes ofestimating the fair value of stock options granted during 2006 using theBlack-Scholes option pricing model, the Company estimated its stock pricevolatility to be 45.0%.  The volatilitypercentage was based on the historical prices of the Company’s commonstock.  The expected term of optionsgranted, which was based on historical employee terminations and optionexercises, was estimated at an average of 5.0 years.  A risk-free interest rate of 4.69% was usedbased on the U.S. Treasury yield for a period consistent with the expectedterm of the option in effect at the time of grant.

Theadoption of SFAS No. 123R resulted in incremental share-based compensationexpense of $0.8 million for the year ended December 31, 2006. The incrementalshare-based compensation caused the loss from continuing operations and netloss to increase by the same amount and the basic and diluted loss per share toincrease by $0.08 per share.

Priorto January 1, 2006, the Company accounted for shared-based awards using theintrinsic value method in accordance with Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” and related interpretationsand provided the required pro forma disclosures of SFAS No. 123.

Thefollowing table illustrates the pro forma effect on net loss and loss per sharefor the years ended December 31, 2005 and 2004, as if the Company had appliedthe fair value recognition provisions to stock-based employee compensation (inthousands, except per share amounts):

 
| ** **                                                                                                                            | ** ** | **For the year ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **December 31,**                 | ** ** |
| ** **                                                                                                                            | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Loss from  continuing operations                                                                                                      |       | $                                     | (19,768    | ) | $ | (8,317 | ) |
| Loss from  discontinued operations                                                                                                    |       | —                                |       | (1,137 | ) |
| Net loss — as  reported                                                                                                          |       | (19,768                               | )          | (9,454 | ) |
| Total stock-based employee compensation expense determined  under fair value based method for all awards, net of related tax effects  |       | 263                                   |       | 569 |   |
| Pro forma net  loss                                                                                                                   |       | $                                     | (20,031    | ) | $ | (10,023 | ) |
|                                                                                                                                  |       |                                  |       |   |   |
| Basic and  diluted net loss per share, as reported                                                                                    |       |                                  |       |   |   |
| Continuing operations                                                                                                                 |       | $                                     | (1.91      | ) | $ | (0.81 | ) |
| Discontinued operations                                                                                                               |       | —                                |       | (0.12 | ) |
| Total basic and diluted net loss per share                                                                                            |       | (1.91                                 | )          | (0.93 | ) |
| Total stock-based employee compensation expense  determined under fair value based method for all awards, net of related tax  effects |       | 0.03                                  |       | 0.05 |   |
| Basic and diluted net  loss per share pro forma                                                                                       |       | $                                     | (1.94      | ) | $ | (0.98 | ) |

 

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Theweighted-average fair value of the stock options has been estimated on the dateof grant using the Black-Scholes option-pricing model. The weighted-averagefair value of stock options and the assumptions used to calculateweighted-average fair value are listed below for grants issued during the yearsended December 31, 2005 and 2004.
| ** **                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Dividend yield                                   |       | 0.0      | %          | 0.0      | %          |
| Expected  volatility                             |       | 42.7     | %          | 41.0     | %          |
| Risk-free  interest rate                         |       | 4.42     | %          | 3.45     | %          |
| Expected lives  (in years)                       |       | 5.3      |       | 4.2      |       |
| Weighted average value  of stock options granted |       | $        | 2.83       |     | $          | 3.72 |   |
|                                                  |            |          |            |          |            |  |  |

 

AtDecember 31, 2006, the Company had approximately 1.5 million shares reservedfor stock option plans and financing arrangements. The price of the optionsgranted pursuant to these plans will not be less than 100 percent of the marketvalue of the shares on the date of grant. There were no exercises of stock options for the year ended December 31,2006.  During the year ended December 31,2005, the exercise of certain of the stock options represented a tax benefit of$0.1 million. In accordance with SFAS No. 109 “Accounting for Income Taxes”,the Company recorded a full valuation allowance on all of the Company’s netdeferred tax assets. (See Note 12 for further information regarding deferredincome taxes.)

Informationregarding these option plans and option agreements for fiscal years 2006, 2005and 2004 is as follows (shares in thousands):

 
| ** **                             | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise Price  Per Share** | ** ** |
|----------------------------------------|------------|------------|------------|-------------------------------------------------------------|------------|
| Outstanding at  December 31, 2003 |       | 1,287      |       | $                                                           | 12.58      |   |
| Granted                                |       | 261        |       | $                                                           | 9.79       |   |
| Expired or forfeited                   |       | (302       | )          | $                                                           | 21.91      |   |
| Exercised                              |       | (112       | )          | $                                                           | 6.32       |   |
| Outstanding at  December 31, 2004 |       | 1,134      |       | $                                                           | 10.08      |   |
|                                   |       |       |       |                                                        |       |
| Granted                                |       | 162        |       | $                                                           | 6.31       |   |
| Expired or forfeited                   |       | (179       | )          | $                                                           | 8.72       |   |
| Exercised                              |       | (37        | )          | $                                                           | 3.75       |   |
| Outstanding at  December 31, 2005 |       | 1,080      |       | $                                                           | 9.94       |   |
|                                   |       |       |       |                                                        |       |
| Granted                                |       | 145        |       | $                                                           | 6.09       |   |
| Expired or forfeited                   |       | (407       | )          | $                                                           | 10.67      |   |
| Exercised                              |       | —     |       | $                                                           | —     |   |
| Outstanding at  December 31, 2006 |       | 818        |       | $                                                           | 8.89       |   |

 

Thefollowing table summarizes information for those options that are outstandingand exercisable as of December 31, 2006:

 
| ** **               | ** ** | **Options Outstanding**                    | ** ** | **Options Exercisable**                        | ** ** |
|--------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Exercise Prices** | ** ** | **Number of  Shares (in  thousands)** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Shares (in  thousands)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| $6.09                    |       | 145                                             |       | 9.22                                                |       | $ | 6.09 |   | 145 |   | $ | 6.09 |   |
| $6.31                    |       | 136                                             |       | 8.94                                                |       | $ | 6.31 |   | 45 |   | $ | 6.31 |   |
| $8.50                    |       | 8                                               |       | 3.59                                                |       | $ | 8.50 |   | 8 |   | $ | 8.50 |   |
| $9.50                    |       | 179                                             |       | 7.10                                                |       | $ | 9.50 |   | 120 |   | $ | 9.50 |   |
| $10.05                   |       | 3                                               |       | 7.15                                                |       | $ | 10.05 |   | 2 |   | $ | 10.05 |   |
| $10.08                   |       | 319                                             |       | 0.42                                                |       | $ | 10.08 |   | 319 |   | $ | 10.08 |   |
| $10.43                   |       | 3                                               |       | 7.16                                                |       | $ | 10.43 |   | 2 |   | $ | 10.43 |   |
| $12.50                   |       | 5                                               |       | 7.38                                                |       | $ | 12.50 |   | 3 |   | $ | 12.50 |   |
| $12.83                   |       | 8                                               |       | 4.57                                                |       | $ | 12.83 |   | 8 |   | $ | 12.83 |   |
| $26.81                   |       | 12                                              |       | 2.39                                                |       | $ | 26.81 |   | 12 |   | $ | 26.81 |   |
|                     |       | 818                                             |       | 5.05                                                |       | $ | 8.89 |   | 664 |   | $ | 9.18 |   |

 

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Thenumber of exercisable options outstanding under these plans atDecember 31, 2006, 2005 and 2004 were 663,943, 770,684 and 877,129 shares,respectively, at weighted average prices of $9.18, $9.94 and $10.16 per share,respectively.

#### **LOSS PER SHARE**

Basicloss per share is computed by dividing net loss by the weighted average numberof common shares outstanding for the period. Diluted loss per share reflectsthe potential dilution that could occur if securities to issue common stockwere exercised or converted into common stock. Shares attributable to theexercise of outstanding options that are anti-dilutive are excluded from thecalculation of diluted loss per share. No adjustments were made to reported netloss in the computation of loss per share for the years ended December 31,2006, 2005 and 2004.

 

|                                                                                         | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------|------------|
| **(shares in thousands)**                                                     | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Weighted average  shares outstanding — basic                                       |       | 10,339                |       | 10,338 |   | 10,217 |   |
| Weighted average  shares outstanding — diluted                                     |       | 10,339                |       | 10,338 |   | 10,217 |   |
| Outstanding  “in-the-money” options excluded as impact would be anti-dilutive |       | —                |       | 162 |   | 166 |   |

 

#### **REVENUE RECOGNITION**

TheCompany recognizes revenue in accordance with the SEC Staff Accounting BulletinNo. 104, “Revenue Recognition in Financial Statements,” (or “SAB 104”).SAB 104 requires that four basic criteria must be met before revenue can berecognized: i) persuasive evidence of an arrangement exists, ii) delivery hasoccurred and title and the risks and rewards of ownership have been transferredto the customer, iii) the price is fixed and determinable, and iv)collectibility is reasonably assured.

Duringthe fourth quarter of 2004, NRV began delivering motorhomes to its customersthrough independent third party carriers. Title and risks of rewards of ownershipare transferred to a customer upon delivery of a motorhome to a third partycarrier, and a sale is recognized by NRV at the time of shipment.

Forthe year ended December 31, 2005, CCI began delivering motorhomes to itscustomers through a combination of independent third party carriers andCompany-employed delivery drivers. Similar to NRV, title and risks of rewardsof ownership are transferred to a customer upon delivery of a motorhome to athird party carrier. In cases in which CCI uses an independent third partycarrier, sales are recognized at the time the motorhomes are delivered to theindependent third party carrier. In cases in which CCI uses Company-employeddelivery drivers, sales are recognized upon acceptance of the motorhome by thedealer.

#### **SALES INCENTIVES**

As iscommon throughout the RV industry, the Company offers incentives to its dealersin the form of discounts and floorplan interest reimbursement programs, rebateand holdback programs, and retail sales incentives given to its dealers’ retailsalespersons. The Company recognizes and records the costs of these incentivesin accordance with Emerging Issue Task Force (“EITF”) No. 01-09, “Accountingfor Consideration Given by a Vendor to a Customer (Including a Reseller of theVendor’s Products).”

Discountsand floorplan interest reimbursement programs are offered to dealers onpurchases of certain units. The Company recognizes the cost of discounts andfloorplan interest reimbursement as a reduction of revenue and records the costof these programs at the later of the offer or when the associated revenue isrecognized.

Rebateand holdback programs involve payments by the Company to the dealer based oneither a percentage of the net invoice price or a predetermined amount based onthe model of the coach sold by the dealer. The dealer incentive program variesby dealer. Not all dealers participate. The purpose of the program is toprovide an additional incentive to the dealer to promote sales of certainmotorhomes. The dealers earn the incentive uponthe purchase of the unit from the Company. The Company recognizes theseincentives as a reduction of revenue and records the cost of these incentiveswhen the associated revenue is recognized.

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The Company often pays retail sales incentives directlyto dealer retail salespersons to promote the sale of the product and the returnof sale and warranty information. This information assists in providing salesand marketing data to the Company. The Company recognizes the cost of suchretail sales incentives as a reduction of revenue and records the cost of suchretail sales incentives when the associated revenue is recognized.

Cooperativeadvertising arrangements exist through which dealers receive a certainallowance of the total purchases from the Company if certain qualitativeadvertising criteria are met and if specified amounts are spent on theadvertisements. A dealer must maintain documentation of all advertisingperformed that includes the Company’s products and provide that documentationto the Company upon request. Because the Company receives an identifiableadvertising benefit from the dealer, the Company recognizes the cost ofcooperative advertising as a selling expense and records the cost ofcooperative advertising when the units are sold to the dealers.

TheCompany uses a non-monetary incentive program that rewards RV dealer personnelby performance. Instead of cash, rewards are offered at tiered levels, based onthe number of the Company’s products sold by each dealership participant.Rewards include items such as home electronics, exercise equipment, personaldata assistants, trips, and so on. The more a salesperson sells, the more itemsthey are eligible to redeem at the various reward levels set for the program.The Company accrues the estimated costs of the non-monetary incentive programin selling expenses upon retail sale of a unit.

#### **COST OF GOODS SOLD**

Cost of goods soldassociated with the sale of inventory produced by the Company is recognized inaccordance to the Company’s revenue recognition policy and includes directmaterial, direct labor and manufacturing overhead. Other components of cost ofgoods sold include indirect production costs, indirect production support,warranty costs, shipping and handling.

#### **RESEARCH AND DEVELOPMENT EXPENSES**

Research and developmentexpenses are expensed as incurred and charged to product development, which isincluded in cost of goods sold.  Totalproduct development expenses were $1.8 million, $1.6 million and $1.5 millionfor the years ended December 31, 2006, 2005 and 2004, respectively. Anycustomer-sponsored research and development activities that the Company mayhave conducted are not material.

#### **SHIPPING AND HANDLING COSTS**

Shippingand handling related to customer sales are included as a component of cost ofgoods sold. Shipping and handling costs charged to cost of goods sold amountedto $4.0 million, $4.1 million and $4.3 million for the years ended December 31,2006, 2005 and 2004, respectively.

#### **ADVERTISING AND SALES PROMOTION COSTS**

TheCompany expenses advertising costs as incurred. For the years endedDecember 31, 2006, 2005 and 2004, advertising and sales promotion costs,including cooperative advertising, were approximately $6.1 million, $6.9million and $4.1 million, respectively.

#### **INCOME TAXES**

Aspart of the process of preparing its consolidated financial statements, theCompany estimates its income taxes in each of the taxing jurisdictions in whichit operates. This process involves estimating the Company’s actual current taxexpense together with assessing any temporary differences resulting from thedifferent treatment of certain items, such as the timing for recognizingrevenues and expenses, for tax and financial reporting purposes. Thesedifferences may result in deferred tax assets and liabilities.

Theprovision for tax liabilities involves evaluations and judgments ofuncertainties in the interpretation of complex tax regulations by varioustaxing authorities. In situations involving tax related uncertainties theCompany provides for tax liabilities unless the Company considers it probableand estimable that additional taxes would not be due. As additional informationbecomes available, or these uncertainties are resolved with the taxingauthorities, revisions to these liabilities may be required, resulting inadditional provision for or benefit from income taxes in the Company’sconsolidated statements of operations.

The Company evaluates the net realizable value of temporary deferredtax differences in accordance with SFAS No. 109, which requires that avaluation allowance be established when it is more likely than not that itsrecorded net deferred tax asset will not be realized. In determining whether avaluation allowance is required, the Company takes into account all positiveand negative evidence with regard to the utilization of a deferred tax asset.

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#### **3. Recently Issued Accounting Pronouncements**

In June 2006, the Emerging Issue Task Force EITF reached a consensus onissue EITF 06-2 “Accounting for Sabbatical Leave and Other Similar BenefitsPursuant to FASB Statement No. 43” (“EITF 06-2”). Accordingly, an employee’sright to a compensated absence under a sabbatical or other similar benefitarrangement (a) that requires the completion of a minimum service period and(b) in which the benefit does not increase with additional years of serviceaccumulates pursuant to paragraph 6(b) of EITF 06-2 for arrangements in whichthe individual continues to be a compensated employee and is not required toperform duties for the entity during the absence. Therefore, assuming all ofthe other conditions of paragraph 6 of EITF 06-2 are met, the compensation costassociated with a sabbatical or other similar benefit arrangement should beaccrued over the requisite service period. The provisions of this consensus should be applied in financial reportsfor fiscal years beginning after the date the consensus is ratified by theBoard. Entities should recognize the effects of applying the consensus as achange in accounting principle through retrospective application to all priorperiods unless it is impracticable to do so. The Company had been accountingfor benefits similar to sabbatical leave in accordance with the provisions ofthis consensus. Consequently, the adoption of the provisions of this consensuswill not have a material impact on the consolidated financial position, resultsof operations and cash flows of the Company.

In June 2006, the Financial Accounting Standards Board (“FASB”) issuedFASB Interpretation No. 48*,* “Accountingfor Uncertainty in Income Taxes”  (“FIN48”). This Interpretation clarifies the accounting for uncertainty in incometaxes recognized in companies’ financial statements in accordance with SFAS No.109, “Accounting for Income Taxes.” This Interpretation prescribes arecognition threshold and measurement of a tax position taken or expected to betaken in a tax return. This Interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. The provisions of FIN 48 are effective forfiscal years beginning after December 15, 2006. The Company is currentlyevaluating the impact, if any, of FIN 48 on its consolidated financialstatements.

In September 2006, the FASB issued SFAS No. 157,**“FairValue Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuringfair value in generally accepted accounting principals and expands disclosuresabout fair value measurements.  Thestatement does not require new fair value measurements, but is applied to theextent that other accounting pronouncements require or permit fair valuemeasurements.  The statement emphasizesthat fair value is a market-based measurement that should be determined basedon the assumptions that market participants would use in pricing an asset orliability.  Companies that have assetsand liabilities measured at fair value will be required to disclose informationthat enables the users of its financial statements to access the inputs used todevelop those measurements.  Thereporting entity is encouraged, but not required, to combine the fair valueinformation disclosed under this statement with the fair value informationdisclosed under other accounting pronouncements.  SFAS No. 157 is effective for fiscal yearsbeginning after November 15, 2007.  TheCompany is in the process of evaluating the provisions of the statement, butdoes not anticipate that the adoption of SFAS No. 157 will have a material impacton the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accountingfor Defined Benefit Pension and Other Postretirement Plans - an amendment ofFASB Statements No. 87, 88, 106 and 132(R*)*” (“SFAS No.158”) which requires an employer to recognize the over-funded or under-fundedstatus of a defined benefit postretirement plan (other than a multiemployerplan) as an asset or liability in its statement of financial position and torecognize changes in that funded status in the year in which the changes occurthrough comprehensive income of a business entity or changes in unrestrictednet assets of a not-for-profit organization. SFAS No. 158 also requires an employer to measure the funded status of aplan as of the date of its year-end statement of financial position, withlimited exceptions.  This statement iseffective for fiscal years ending after December 15, 2006.  The Company does not currently provide definedbenefit pension or other postretirement plans, therefore the Company has determinedthat the adoption of this statement will not have an impact on the Company’sconsolidated financial statements.

In September 2006, theSEC released Staff Accounting Bulletin No. 108, “Considering the Effects of PriorYear Misstatements when Quantifying Misstatements in Current Year FinancialStatements”(“SAB 108”). SAB 108 provides guidance on how the effects of prior-yearuncorrected financial statement misstatements should be considered inquantifying a current year misstatement. SAB 108 requires registrants toquantify misstatements using both an income statement (rollover) and balancesheet (iron curtain) approach and evaluate whether either approach results in amisstatement that, when all relevant quantitative and qualitative factors areconsidered, is material. If prior year errors that had been previouslyconsidered immaterial are now considered material based on either approach, norestatement is required as long as management properly applied its previousapproach and all relevant facts and circumstances were considered. If prioryears are not restated, the cumulative effect adjustment is recorded in openingretained earnings as of the beginning of the fiscal year of adoption. SAB 108is effective for fiscal years ending on or after November 15, 2006. The applicationof the guidance of SAB 108 did not have an impact on our consolidatedfinancial condition or results of operations.

 

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 In February 2007, the FASB issued SFAS No.159, “The Fair Value Option for Financial Assets and Financial Liabilities -including an amendment of FASB Statement No. 115” (SFAS No. 159).  SFAS No. 159 permits an entity to elect fairvalue as the initial and subsequent measurement attribute for many financialassets and liabilities. Entities electing the fair value option would berequired to recognize changes in fair value in earnings.  Entities electing the fair value option arerequired to distinguish, on the face of the statement of financial position,the fair value of assets and liabilities for which the fair value option hasbeen elected and similar assets and liabilities measured using anothermeasurement attribute.  SFAS No. 159 iseffective for fiscal years beginning after November 15, 2007.  The adjustment to reflect the differencebetween the fair value and the carrying amount would be accounted for as acumulative-effect adjustment to retained earnings as of the date of initialadoption. The Company is currently evaluating the impact, if any, of SFAS No.159 on its consolidated financial statements.

**4. Restricted Cash AndCash Equivalents**

The Company is required by some states toprovide surety bonds through a third party (surety) to guarantee that theCompany will perform its contractual obligations with several State Departmentsof Motor Vehicles. The surety (issuer) of the surety bonds requires that theCompany hold in trust as collateral deposits, which accrue interest, equal tothe value of the surety bond.  Suretybond terms typically extend to no more than 12 months and are renewedannually.  At December 31, 2006 and 2005,the Company’s collateralizing deposits held in trust on surety bonds were $0.2million.

On May 18, 2006, the Company entered into asecurities account control agreement with a financial institution (securedparty) and an intermediary in order to collateralize and secure its creditavailability on company credit cards. The Company is required to hold asecurities account with the intermediary, which consists of all financialassets or investment properties maintained or credited to the account, tosecure the interest of the financial institution issuing the collateralizedcredit cards. The cumulative credit availability under the agreement is equalto the value held in the securities account. Termination of the agreement maybe exercised upon written notice and subsequent settlement of companyobligations against the securities account held by the intermediary. Thebalance of the Company’s securities account with the intermediary at December31, 2006 was $0.2 million.

During 2006 the Company obtained an appeal bondfor $0.3 million securing payment from a November 2005 Judgment awardingplaintiff attorney fees and tax costs associated with the case until theoutcome of the appeal is determined. Legal counsel estimates the appeal toextend beyond twelve months. The appeal bond with accrued interest is $0.3million at December 31, 2006.

A summary and classification of restricted cashand cash equivalents is as follows (in thousands):

|                                                | ** ** | **December 31,** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|
| ** **                                     | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **Current:**                                   | ** ** | ** **            | ** ** | ** ** | ** ** |
| Irrevocable letter of  credit on surety bonds  |       | $                     | 205        |   | $ | 201 |   |
| Deposits  collateralizing company credit cards |       | 182                   |       | — |   |
|                                           |       |                  |       |   |   |
| Total                                          |       | $                     | 387        |   | $ | 201 |   |

 

|                            | ** ** | **December 31,** | ** ** |
|----------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **Long-term:**             | ** ** | ** **            | ** ** | ** ** | ** ** |
| Cash held on appeals  bond |       | $                     | 341        |   | $ | — |   |
|                       |       |                  |       |   |   |
| Total                      |       | $                     | 341        |   | $ | — |   |

 

### **5. Inventories**

Inventoriesconsist of the following (in thousands):

|                 | ** ** | **December 31,** | ** ** |
|-----------------|------------|-----------------------|------------|
| ** **      | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Finished goods  |       | $                     | 17,736     |   | $ | 8,545 |   |
| Work-in-process |       | 29,992                |       | 30,870 |   |
| Raw materials   |       | 20,998                |       | 19,289 |   |
| Chassis         |       | 5,691                 |       | 3,236 |   |
|            |       | $                     | 74,417     |   | $ | 61,940 |   |

 

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Duringthe years ended December 31, 2006 and 2005, the Company charged againstoperations $7.2 million and $1.2 million, respectively, of write-downs relatedto stating inventory at the lower of cost or market.

### **6. Property, Plant and Equipment**

Majorclasses of property, plant and equipment consist of the following (inthousands):

|                                     | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Land and improvements               |       | $                     | 8,578      |   | $ | 8,429 |   |
| Buildings and  improvements         |       | 26,858                |       | 25,861 |   |
| Machinery and equipment             |       | 21,915                |       | 20,431 |   |
| Office equipment                    |       | 8,208                 |       | 8,004 |   |
| Assets under capital  lease         |       | 270                   |       | 270 |   |
| Construction in  progress           |       | 945                   |       | 1,868 |   |
|                                |       | 66,774                |       | 64,863 |   |
| Less accumulated  depreciation      |       | (29,344               | )          | (26,406 | ) |
| Property, plant and  equipment, net |       | $                     | 37,430     |   | $ | 38,457 |   |

 

Depreciationexpense (including amortization of assets under capital lease) was $4.2million, $3.9 million and $3.9 million for the years ended December 31, 2006,2005 and 2004, respectively. The Company sold real property in Florida during2004 totaling $3.9 million and recorded impairments of an emissions control systemand a paint booth due to obsolescence totaling $0.3 million and $0.1 million,respectively, which have been included in other expense.  In December 2006, the Company entered into anagreement with an unrelated party for the potential sale and concurrent leasebackof real estate and certain other tangible and intangible property to NRV. (SeeNote 17 for additional information on the sale-leaseback agreement.)

### **7. Accrued Expenses**

Accruedexpenses consist of the following (in thousands):

|                                                    | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Current accrued  expenses:                         |       |                  |       |   |   |
| Workers’ compensation  self-insurance reserve |       | $                     | 1,777      |   | $ | 2,209 |   |
| Warranty reserve                                   |       | 10,936                |       | 11,705 |   |
| Accrued sales  incentives                          |       | 3,270                 |       | 2,385 |   |
| Payroll and related  accrued expenses              |       | 4,714                 |       | 6,188 |   |
| Other accrued expenses                             |       | 2,453                 |       | 3,786 |   |
| Total current  accrued expenses                    |       | $                     | 23,150     |   | $ | 26,273 |   |
|                                               |       |                  |       |   |   |
| Long-term accrued  expenses:                       |       |                  |       |   |   |
| Workers’ compensation  self-insurance reserve |       | $                     | 4,041      |   | $ | 4,280 |   |
| Warranty reserve                                   |       | 143                   |       | 130 |   |
| Deferred compensation                              |       | 618                   |       | 679 |   |
| Total long-term accrued  expenses                  |       | $                     | 4,802      |   | $ | 5,089 |   |

 

### **8. Product Warranties**

Thechanges in the carrying amount of the Company’s total product warrantyliability for the years ended December 31, 2006 and 2005 were as follows(in thousands):

|                               | ** ** | **Beginning** | ** ** | ** **            | ** ** | ** **     | ** ** | **Ending**  | ** ** |
|-------------------------------|------------|---------------|------------|-----------------------|------------|----------------|------------|-------------|------------|
| ** **                    | ** ** | **Balance**   | ** ** | **Accruals (1)** | ** ** | **Reductions** | ** ** | **Balance** | ** ** |
| Warranty Reserve fiscal  2006 |       | $             | 11,835     |                  | $          | 15,631         |       | $           | 16,387     |   | $ | 11,079 |   |
| Warranty Reserve fiscal 2005  |       | $             | 9,270      |                  | $          | 18,437         |       | $           | 15,872     |   | $ | 11,835 |   |

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(1) The aggregate changes in the liability related tothe preexisting warranties were not significant for all years presented andhave been included with aggregate changes in the liability for accruals relatedto the current periods under the title “Accruals.”

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### **9. Debt and Credit Agreements**(inthousands):

|                                    | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2006**              | ** ** | **2005** | ** ** |
| Current:                           |       |                  |       |   |   |
| Revolving line of  credit          |       | $                     | 29,012     |   | $ | 12,059 |   |
|                               |       |                  |       |   |   |
| Long-term debt:                    |       |                  |       |   |   |
| Capital lease  obligations         |       | 187                   |       | 226 |   |
| Less payments  due within one year |       | (63                   | )          | (57 | ) |
| Long-term debt                     |       | 124                   |       | 169 |   |
| Total debt                         |       | $                     | 29,136     |   | $ | 12,228 |   |

 

AtDecember 31,2006, the Company had an asset-based revolving credit facility withUPS Capital Corporation (“UPSC”) and Wells Fargo Bank for $40 million, afterexercising two consecutive $5 million increases to the line of credit in Mayand June 2006. Initial amounts borrowed under the revolving credit facilitybear interest at the prime rate listed in the Wall Street Journal, plus 0.50percentage points, allowing for subsequent downward adjustments based on atrailing twelve month funded debt to EBITDA calculation. The credit facility iscollateralized by all of the Company’s assets, with borrowing availabilitybased on the Company’s eligible accounts receivable and inventory.  Terms of the credit facility require theCompany to maintain a blocked account whereby remittances from the Company’scustomers are applied directly against the outstanding credit facility balance.The Company’s current credit agreement restricts the declaration and payment ofdividends.  The credit facility contains,among other provisions, certain financial covenants, including funded debt toEarnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), and afixed charge coverage ratio, that should the Company fail to comply, willresult in a reduction of the credit availability to the Company.

AtDecember 31, 2006, the Company did not comply with the covenant provisionscausing a reduction in the Company’s$40 million average monthly borrowing availability to an amount between $24million and $32 million, depending on eligible inventory and accountsreceivable, until the Company regainedcompliance with the covenants.   AtDecember 31, 2006, the interest rate on the outstanding borrowings underthe line of credit was 8.75%. The weighted average interest rate for theborrowings under the line of credit during the years ended December 31,2006 and 2005 were 8.53% and 6.97%, respectively.

On February 21, 2007, the Company entered into a loanmodification, “Loan Modification Agreement No. 3, in conjunction with the saleof CCI, that among other things waived the events of default resulting fromfailure to comply with financial covenants for the months ended October,November and December 2006.  Theamendment provides for the setting of new financial covenants in April of2007.  The base interest rate wasincreased to the prime rate plus 1.50 percentage points. (See Note 17for additional information regarding theamendments to the Company’s revolving credit facility.)

**10. Commitments and Contingencies**

Litigation:

TheCompany is involved in legal proceedings in the ordinary course of business,including a variety of warranty, “lemon law,” product liability (all of whichare typical in the recreation vehicle industry) and employment claims. Withrespect to product liability claims, the Company’s insurance policies cover, inwhole or in part, defense costs and liability costs for personal injury orproperty damage (excluding damage to Company motorhomes). While it isimpossible to estimate with certainty the ultimate legal and financialliability with respect to this litigation, management is of the opinion thatthe final resolution of any such litigation could have a material adverse effecton the Company’s financial position, results of operations or liquidity in areporting period, and has provided an estimated reserve at December 31, 2006and 2005 of approximately $1.2 million and $1.8 million, respectively, for suchcontingencies in the consolidated financial statements.

Recourse on Dealer Financing:

Most of the Company’s motorhome sales are made on terms requiringpayment within 15 business days or less of the dealer’s 

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receipt of the unit. Most dealers finance all, or substantially all, ofthe purchase price of their inventory under floor plan arrangements with banksor finance companies under which the lender pays the Company directly. Dealerstypically are not required to commence loan repayments to such lenders for aperiod of at least six months. The loan is collateralized by a lien on themotorhome. Consistent with industry practice, the Company has entered intorepurchase agreements with these lenders. In general, the repurchase agreementsrequire the Company to repurchase a unit if the dealer defaults on the financedunit. Upon a dealer default, the agreements generally require the Company torepurchase RVs at the election of the lender provided certain conditions aremet, such as repossession of the RV by the lender, the RV being new and unusedand the time elapsed between invoice date and demand for repurchase being nolonger than a specified period which is typically 18 months or less. TheCompany’s undiscounted maximum potential exposure under these agreementsapproximated $147 million at December 31, 2006. As with receivables, therisk of loss under the repurchase agreements was spread over a number ofdealers and lenders and was reduced by the resale value of the RVs, which theCompany would be required to repurchase. Losses under these agreements have notbeen material in the past and management does not believe that any futurelosses under such agreements will have a material adverse effect on the Company’sconsolidated financial position, results of operations or cash flows. Consequently,no liability has been recognized in the consolidated financial statements.

Leases:

TheCompany leases some of its copy machines under capital lease agreements. TheCompany has no other capital lease agreements. In addition, the Company leases amajority of its CCI manufacturing facilities under two non-cancelable operatinglease agreements which agreements, expiring by the end of October 2010,represent most of the operating lease payment commitments. The remainingoperating lease agreements are for machinery and equipment.

TheCompany has commitments under certain capital and non-cancelable operatinglease agreements. The future minimum capital and operating lease payments, asof December 31, 2006, are as follows (in thousands):

|                                    | ** ** | **Capital  Leases** | ** ** | **Non-cancelable  Operating  Leases** | ** ** |
|------------------------------------|------------|---------------------|------------|---------------------------------------|------------|
| 2007                               |       | $                   | 72         |                                  | $          | 1,802 |   |
| 2008                               |       | 72                  |       | 1,670                                 |       |
| 2009                               |       | 63                  |       | 1,640                                 |       |
| 2010                               |       | 8                   |       | 1,321                                 |       |
| Total minimum lease  payments      |       | 215                 |       | $                                     | 6,433      |   |
| Less amount  representing interest |       | 28                  |       |                                  |       |
| Capital lease obligations          |       | $                   | 187        |                                  |       |   |

 

Rent expense from non-cancelable operatinglease obligations for the years ended December 31, 2006, 2005 and 2004 wasapproximately $1.8 million, $1.6 million and $1.4 million, respectively.

Saleand Leaseback:

In December 2006,National RV Holdings (Seller-Guarantor) and an unrelated party (Buyer-Lessor)signed a Purchase and Sale Agreement (“Agreement”) for the sale and conveyanceof property owned by National RV Holdings. “Property” in the agreement isdefined as land, inclusive of five buildings, improvements, intangible assetsand contracts. The total purchase price to be paid to the Seller-Guarantor is$31.7 million. Terms of the agreement provide the condition that aleaseback contract for property sold be entered into and take effect concurrentlyto the consummation of the closing of the purchase & sale agreement withthe Buyer acting as landlord, National RV Inc. a subsidiary of National RVHoldings, as tenant, and National RV Holdings as guarantor.  Escrow on the purchase and sale agreement isscheduled to close in early April 2007. Should the parties choose to consummatethe agreement the terms of the sales-type lease would be for an initial term of10 years with two 5-year, non-automated lease renewal options. This wouldresult in an annual straight-line effected non-cancelable operating leaseobligation of approximately $3 million per year with an offset of deferred gainon the sale of assets until certain conditions are met whereby the buyer-lessorsubstantiates its interest in the property. In addition, the guarantor-parentwould be required to issue a letter of credit securing the performance of itssubsidiary under the sales-type lease. Due to the many unknown factors in thesales-type lease the commitments under the potential operating lease obligationare not reflected in the 5-year lease commitment schedule above.  (See Note 17 for additional information onsale and leaseback agreement.)

OtherCommitments:

TheCompany (“Buyer”), in August 2004, entered into an agreement to acquire, for $3million, approximately 73 acres of land adjacent to its CCI facility inJunction City, Oregon.  The SalesAgreement and Receipt for Earnest Money (“Sale 

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Agreement”)required the Company to pay a deposit of $0.1 million.  The Company has executed four addendums tothe Sale Agreement to extend the closing date in lieu of a monthly extensionfee.  At December 31, 2006 the Companyhad entered into the Fourth Addendum extending the closing date to August 1,2007.  The Company has the option toadvance the closing date upon reasonable notice to Seller, provided that therewill be no refund by Seller to Buyer for all or any portion of any extensionfee previously paid by Buyer pursuant to the fourth addendum.  This Sale Agreement was included in the transferof assets associated with the sale of CCI.

### **11. Stockholders’ Equity**

#### **Preferred Stock**

TheBoard of Directors has authority to issue 5,000 shares of $0.01 par valuePreferred Stock. Currently there are 4,000 Preferred Shares issued andoutstanding with the following terms: i) the Preferred Shares are not entitledto receive any dividends, ii) the Preferred Stock has no voting rights, iii)upon liquidation, either voluntary or involuntary, the preferred stockholdersare entitled to receive out of the assets of the corporation that are availablefor distribution, $0.01 per share, and iv) the Preferred Stock is redeemable atthe sole discretion of the Company.

### **12. Income Taxes**

Thecomponents of the provision for income taxes were as follows (in thousands):

|                                  | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current (refundable)  payable:   |       |                  |       |   |   |   |   |
| Federal                          |       | $                     | —     |   | $ | (23 | ) | $ | 28 |   |
| State                            |       | 265                   |       | 204 |   | 249 |   |
|                             |       | 265                   |       | 181 |   | 277 |   |
| Deferred:                        |       |                  |       |   |   |   |   |
| Federal                          |       | —                |       | — |   | 8,702 |   |
| State                            |       | —                |       | — |   | 3,445 |   |
|                             |       | —                |       | — |   | 12,147 |   |
| Total provision for income taxes |       | $                     | 265        |   | $ | 181 |   | $ | 12,424 |   |

 

Deferredincome taxes are recorded based upon differences between the consolidatedfinancial statement and tax basis of assets and liabilities. Temporarydifferences that give rise to deferred income tax assets and liabilities atDecember 31, 2006 and 2005 were as follows (in thousands):

|                                  | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **Current:**                     | ** ** |                  |       |   |   |   |
| Accrued expenses                 |       | $                     | 5,349      |   | $ | 7,076 |   |
| NOL carryforward                 |       | —                |       | 89 |   |
| Valuation allowance              |       | (4,874                | )          | (5,884 | ) |
| Deferred income  tax assets      |       | $                     | 475        |   | $ | 1,281 |   |
|                             |       |                  |       |   |   |
| **Long-term:**                   | ** ** |                  |       |   |   |   |
| Accrued expenses                 |       | $                     | (803       | ) | $ | (746 | ) |
| Fixed assets                     |       | 2,891                 |       | 2,912 |   |
| NOL carryforward                 |       | (25,407               | )          | (13,388 | ) |
| Valuation allowance              |       | 23,794                |       | 12,503 |   |
| Deferred income tax  liabilities |       | $                     | 475        |   | $ | 1,281 |   |
|                                  |            |                       |            |  |  |  |  |  |  |

 

SFAS No. 109 requires that a valuation allowance be establishedwhen it is more likely than not that its recorded net deferred tax asset willnot be realized. In determining whether a valuation allowance is required, theCompany must take into account all positive and negative evidence with regardto the utilization of a deferred tax asset. SFAS No. 109 further statesthat it is difficult to conclude that a valuation allowance is not needed whenthere is negative evidence such as cumulative losses in recent years. TheCompany recorded $9.4 million and $7.2 million of charges for the years endedDecember 31, 2006 and 2005, respectively, to a net valuation allowance againstthe deferred tax assets.  For the yearended December 31, 2006, the net current deferred tax asset and long-termdeferred tax liability were $0.5 million and $0.5 million, respectively.  The federal operating loss carryforward of$55.0 million will expire in the year 2026. Pursuant to Internal Revenue CodeSection 

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382 and 383, use of the Company’s net operating loss carryforwards maybe limited if a cumulative change in ownership of more than 50% occurs within athree-year period. No assessment has been made as to whether such a change inownership has occurred.

The Company plans to continue to provide a full valuation allowance onfuture tax benefits until it can sustain an appropriate level of profitabilityand until such time, the Company would not expect to recognize any significanttax benefits in its future results of operations.

Areconciliation of the statutory U.S. federal income tax rate to the Company’seffective income tax rate is as follows:

|                                      | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2006**              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Statutory rate                       |       | (35.0                 | )%         | (34.0 | )% | 34.0 | % |
| State taxes, net of  federal taxes   |       | (4.0                  | )          | (4.0 | ) | 5.6 |   |
| Disallowed state loss  carryforwards |       | 0.0                   |       | 0.0 |   | 0.0 |   |
| Other                                |       | (2.6                  | )          | 0.7 |   | 1.2 |   |
| Valuation allowance                  |       | 42.7                  |       | 38.2 |   | 377.5 |   |
|                                 |       | 1.1                   | %          | 0.9 | % | 418.3 | % |

 

### **13. Defined Contribution Plans**

TheCompany maintains two 401(k) plans serving the Company and the NRV and CCIsubsidiaries. Substantially all of the Company’s full-time employees arecovered under the plans, which allow for contributions by the employee as wellas contributions by the Company. For years prior to 2005, the Companycontributed a match of between 20% and 50% of the first 4% to 5% of an employee’swages, plus other discretionary amounts as approved by the Board of Directorsand may be in the form of cash or the Company’s common stock. For the yearsended December 31, 2005 and thereafter, the Company contributed a match of 50%of the first 4% to 5% of an employee’s wages, plus other discretionary amountsas approved by the Board of Directors and may be in the form of cash or theCompany’s common stock. Company contributions in 2006, 2005 and 2004 were $0.6million, $0.5 million and $0.4 million, respectively.

### **14. Related Party Transactions**

Mr. RobertB. Lee, a director of the Company from November 1996 to August 2006, is apartner in a joint venture that leases property constituting a majority ofCountry Coach Inc.’s manufacturing facilities property to the Company. Duringthe years ended December 31, 2006, 2005 and 2004, the Company paid $1.41million, $1.37 million and $1.35 million, respectively, in lease payments tothe joint venture and there were no amounts due to Lee Joint Ventures atDecember 31, 2006 and 2005. In November 2005, the Company exercised its secondand final 5-year renewal option with the lease set to expire in November 2010.The lease agreements call for future payments totaling approximately $5.5million through the term of the lease. Lease payments are adjusted inaccordance with the Consumer Price Index.

HellerEhrman LLP, a law firm in which Mr. Stephen M. Davis, the currentSecretary of the Company and a Company director until June 2004, is apartner, performed legal services for the Company. Fees paid to the law firmwere $0.3 million, $0.6 million and $0.2 million during the years endedDecember 31, 2006, 2005 and 2004, respectively. Amounts due to HellerEhrman LLP were $0.17 million and $0.03 million at December 31, 2006 and 2005,respectively.

OnFebruary 20, 2007, the Company completedthe sale of CCI to Country Coach Holdings LLC (“CC Holdings”), an entity ownedprimarily by Riley Investment Management, LLC (“Riley”). Mr. Bryant R. Riley,who owns approximately 1.2 million shares of the Company’s common stock, is thesole equity owner of Riley.

### **15. Discontinued Operations**

OnSeptember 24, 2004, the Company sold its travel trailer business assets toWeekend Warrior, a privately owned, California-based ramp-trailer manufacturer.The sale was designed to allow the Company to further concentrate its effortsand resources on its growing motorhome business. The total selling price of thebusiness was $3.2 million. The sale included inventory totaling $2.8 millionand equipment totaling $0.1 million. Weekend Warrior paid $0.5 million atclosing with the balance paid in ten equal monthly payments. The notereceivable was recorded in the accompanying 2004 consolidated balance sheet,net of $0.04 million of an unamortized discount for imputed interest.Furthermore, a payment of 1% of monthly sales for other assets and trademarkswere made on a monthly basis over a twelve-month period ending October 10,2005 with a minimum due of $0.3 million which was previously recorded in thenote receivable in the accompanying consolidated balance sheets. The Companyentered into a sublease agreement, as of February 2006, which allowed Weekend 

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Warriorto lease a portion of the Company’s facilities for up to eight months, throughSeptember 2006. The sublease was modified in September 2006 to extend the termto March 31, 2007.  For the year endedDecember 31, 2004, the Company’s net sales from discontinued operationswere $14.7.  In addition, for the yearended December 31, 2004, the Company recorded net losses from discontinuedoperations of $1.1 million.  The 2004 netloss from discontinued operations included a pre-tax gain on the sale of thediscontinued operations of $0.3 million.

### **16. Quarterly Consolidated Financial Data(unaudited)**

The following table summarizes the quarterly data forfiscal 2006:

(inthousands, except per share amounts)

|                                                     | ** ** | **2006 Quarter Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                          | ** ** | **March 31,**               | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| Net sales                                           |       | $                                | 112,895    |   | $ | 110,214 |   | $ | 91,999 |   | $ | 82,010 |   |
| Gross profit (loss)                                 |       | $                                | 5,327      |   | $ | (58 | ) | $ | 808 |   | $ | 142 |   |
| Net loss                                            |       | $                                | (2,054     | ) | $ | (7,129 | ) | $ | (7,077 | ) | $ | (8,073 | ) |
|                                                |       |                             |       |   |   |   |   |   |   |
| Basic and diluted loss  per common share            |       | $                                | (0.20      | ) | $ | (0.69 | ) | $ | (0.68 | ) | $ | (0.78 | ) |
|                                                |       |                             |       |   |   |   |   |   |   |
| Basic and diluted weighted average number of shares |       | 10,339                           |       | 10,339 |   | 10,339 |   | 10,339 |   |

 

The following tablesummarizes the quarterly data for fiscal 2005:

(inthousands, except per share amounts)

|                                                     | ** ** | **2005 Quarter Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                          | ** ** | **March 31,**               | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
| Net sales                                           |       | $                                | 125,625    |   | $ | 123,225 |   | $ | 108,232 |   | $ | 106,528 |   |
| Gross profit                                        |       | $                                | 5,615      |   | $ | 2,101 |   | $ | 2,165 |   | $ | 2,107 |   |
| Net loss                                            |       | $                                | (1,444     | ) | $ | (5,434 | ) | $ | (5,930 | ) | $ | (6,960 | ) |
|                                                |       |                             |       |   |   |   |   |   |   |
| Basic and diluted loss  per common share            |       | $                                | (0.14      | ) | $ | (0.53 | ) | $ | (0.57 | ) | $ | (0.67 | ) |
|                                                |       |                             |       |   |   |   |   |   |   |
| Basic and diluted weighted average number of shares |       | 10,335                           |       | 10,339 |   | 10,339 |   | 10,339 |   |

 

### **17. Subsequent Events**

**Sale of Country Coach Business**

On February 20, 2007, theCompany completed the sale of CCI toCountry Coach Holdings LLC (“CC Holdings”), an entity owned primarily by RileyInvestment Management, LLC (“Riley”). Mr. Bryant R. Riley, who ownsapproximately 1.2 million shares of the Company’s common stock, is thesole equity owner of Riley. The sale was conducted pursuant to a Merger andAsset Purchase Agreement (the “Merger Agreement”) entered into on February 16,2007 by and among CC Holdings, Country Coach Merger LLC (“Merger Sub”), and Riley,on one hand, and the Company and CCI, on the other. The acquisition tookthe form of a merger whereby CCI merged with and into Merger Sub with MergerSub surviving as a wholly-owned subsidiary of CC Holdings (the “Merger”).  In addition, in connection with thetransactions contemplated by the Merger Agreement, the Company also transferredcertain assets (the “Additional Assets”) to Merger Sub held by the Companyrelated to the business of CCI and Merger Sub assumed certain liabilities ofthe Company related to the business of CCI. At the closing of the Merger, MergerSub was renamed Country Coach LLC.  The Company received total consideration of$38.7 million (the “Consideration”) for the sale of CCI and the transfer of theAdditional Assets.  In connection withthe Merger, the Company amended its existing credit facility with Wells FargoBank and UPS Capital Corporation and used $24.5 million of the Consideration toreduce amounts owed by the Company under the credit facility.

Theunaudited pro forma condensed consolidated balance sheet presents the financialposition of the Company as of December 31, 2006, assuming the sale of CCIoccurred on that date.

Theunaudited pro forma condensed consolidated statements of operations present thefinancial results from continuing operations of the Company for the twelvemonths ended December 31, 2006, assuming the sale had occurred at the beginningof the period.

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Theunaudited pro forma condensed consolidated financial statements are based onestimates and assumptions. The Company believes that the assumptions andestimates used in the preparation of the unaudited pro forma condensedconsolidated financial statements are reasonable. These estimates andassumptions have been made solely for the purposes of developing theseunaudited pro forma condensed consolidated financial statements. The unauditedpro forma condensed consolidated financial statements are presented forillustrative purposes only and are not necessarily indicative of the financialposition or results of operations that actually would have been realized hadCCI been sold or on the dates indicated above, nor is it necessarily indicativeof the Company’s future financial position or results of operations.

Theunaudited pro forma condensed financial information should be read inconjunction with the historical consolidated financial statements of theCompany, including the notes thereto.

**National R.V. Holdings, Inc.**Pro Forma Condensed Consolidated Balance Sheet - UnauditedAs of December 31, 2006
| **(in thousands)**                                 | ** ** | **As Reported** | ** ** | **Pro Forma  Adjustments (a)** | ** ** | **Pro Forma** | ** ** |
|---------------------------------------------------------|------------|----------------------|------------|------------------------------------------|------------|--------------------|------------|
| ASSETS                                                  |       |                 |       |                                     |       |               |       |
| Current assets:                                         |       |                 |       |                                     |       |               |       |
| Cash and cash  equivalents                              |       | $                    | 16         |                                     | $          | 2                  |       | $ | 14 |   |
| Restricted cash  and cash equivalents                   |       | 387                  |       | —                                   |       | 387                |       |
| Receivables,  less $299 allowance for doubtful accounts |       | 18,995               |       | 9,195                                    |       | 9,800              |       |
| Inventories                                             |       | 74,417               |       | 45,521                                   |       | 28,896             |       |
| Deferred income  taxes                                  |       | 475                  |       | 327                                      | (g)        | 148                |       |
| Prepaid expenses                                        |       | 2,108                |       | 1,282                                    |       | 826                |       |
| Total current  assets                                   |       | 96,398               |       | 56,327                                   |       | 40,071             |       |
| Long-term restricted  cash and cash equivalents         |       | 341                  |       | —                                   |       | 341                |       |
| Property, plant and  equipment, net                     |       | 37,430               |       | 11,768                                   |       | 25,662             |       |
| Other assets                                            |       | 1,355                |       | —                                   |       | 1,355              |       |
| Total assets                                            |       | $                    | 135,524    |                                     | $          | 68,095             |       | $ | 67,429 |   |
|                                                    |       |                 |       |                                     |       |               |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY              |       |                 |       |                                     |       |               |       |
| Current liabilities:                                    |       |                 |       |                                     |       |               |       |
| Book overdraft                                          |       | $                    | 2,227      |                                     | $          | 507                |       | $ | — |   |
|                                                    |       |                 |       | 1,720                                    | (b)        |               |       |
| Accounts payable                                        |       | 39,552               |       | 21,724                                   |       | 9,810              |       |
|                                                    |       |                 |       | 8,018                                    | (b)        |               |       |
| Accrued expenses                                        |       | 23,150               |       | 13,555                                   |       | 10,265             |       |
|                                                    |       |                 |       | (670                                     | )(c)       |               |       |
| Line of credit                                          |       | 29,012               |       | 29,012                                   | (b)        | —             |       |
| Current portion  of capital leases                      |       | 63                   |       | —                                   |       | 63                 |       |
| Total current  liabilities                              |       | 94,004               |       | 73,866                                   |       | 20,138             |       |
| Long-term accrued  expenses                             |       | 4,802                |       | 142                                      |       | 4,660              |       |
| Deferred income taxes                                   |       | 475                  |       | 327                                      | (g)        | 148                |       |
| Long-term portion of  capital leases                    |       | 124                  |       | —                                   |       | 124                |       |
| Total  liabilities                                      |       | 99,405               |       | 74,335                                   |       | 25,070             |       |
| Stockholders’ Equity:                              |       |                 |       |                                     |       |               |       |
| Common Stock                                            |       | 103                  |       | —                                   |       | 103                |       |
| Additional  paid-in capital                             |       | 38,353               |       | —                                   |       | 38,353             |       |
| Retained (deficit)  earnings                            |       | (2,337               | )          | (6,910                                   | )(d)       | 3,903              |       |
|                                                    |       |                 |       | 670                                      | (c)        |               |       |
| Total  stockholders’ equity                        |       | 36,119               |       | (6,240                                   | )          | 42,359             |       |
| Total liabilities and  stockholders’ equity        |       | $                    | 135,524    |                                     | $          | 68,095             |       | $ | 67,429 |   |

 

The accompanyingexplanations of the pro forma adjustments are an integral part of the unauditedpro forma condensed consolidated financial statements.

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**NationalR.V. Holdings, Inc.**

Pro Forma Condensed Consolidated Statement ofOperations - Unaudited

For the Year Ended December 31, 2006

| (in thousands, except share data) | ** ** | **As Reported** | ** ** | **Pro Forma  Adjustments** (b) | ** ** | **Pro Forma** | ** ** |
|-------------------------------------------------------|------------|----------------------|------------|------------------------------------------|------------|--------------------|------------|
| Net Sales                                             |       | $                    | 397,118    |                                     | $          | 236,470            |       | $ | 160,648 |   |
| Cost of goods  sold                                   |       | 390,899              |       | 220,477                                  |       | 170,422            |       |
| Gross profit  (loss)                                  |       | 6,219                |       | 15,993                                   |       | (9,774             | )          |
| Operating  expenses                                   |       | 27,551               |       | 12,056                                   |       | 15,495             |       |
| Operating (loss)  income                              |       | (21,332              | )          | 3,937                                    |       | (25,269            | )          |
| Interest expense  and other income, net               |       | 2,736                |       | 202                                      |       | 1,371              |       |
|                                                  |       |                 |       | 1,163                                    | (e)        |               |       |
| (Loss) income  before income taxes                    |       | (24,068              | )          | 2,572                                    |       | (26,640            | )          |
| Provision for  income taxes                           |       | 265                  |       | 62                                       | (f)        | 203                |       |
| (Loss) income from continuing operations              |       | $                    | (24,333    | )                                        | $          | 2,510              |       | $ | (26,843 | ) |
|                                                  |       |                 |       |                                     |       |               |       |
| Basic and  diluted loss per common share:             |       | $                    | (2.35      | )                                        |       |               | $          | (2.60 | ) |
|                                                  |       |                 |       |                                     |       |               |       |
| Weighted average  number of shares:                   |       |                 |       |                                     |       |               |       |
| Basic                                                 |       | 10,339               |       |                                     |       | 10,339             |       |
| Diluted                                               |       | 10,339               |       |                                     |       | 10,339             |       |

 

The accompanying explanations of the pro formaadjustments are an integral part of the unaudited pro forma condensedconsolidated financial statements.

**Explanation of the Pro FormaAdjustments**

The historical condensedconsolidated financial statements have been adjusted to give effect to proforma events that are (1) directly attributable to the sale of CCI; (2)factually supportable; and (3) as they relate to the statement of operations,expected to have a continuing impact on the consolidated results. The followingpro forma adjustments are included:

(a)          To eliminate thefinancial results, assets, liabilities and retained earnings related to thesale of CCI.

(b)         To record the use ofproceeds from the sale of CCI.

(c)          To record estimatedadministrative and other costs incurred by the Company related to the sale ofCCI.

(d)         To record the estimatedgain on disposition.

(e)          To record the adjustmentof interest costs resulting from the paydown of the line of credit with theproceeds received from the sale of CCI.

(f)            To record theadjustment to income tax provision, net of a full tax valuation reserve.

(g)         To record elimination ofCCI deferred income taxes.

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**RevolvingCredit Facility - As Amended**

In conjunction with thesale of the Country Coach Inc. business the Company amended its CreditAgreement with a third amendment on February 21, 2007, reducing its line ofcredit from $40 million to $15 million. The amendment replaced UPS Capital with Wells Fargo Bank as agent to theCredit Agreement.  The amendment providedfor the consent to the sale of stock of Country Coach Inc., a reduction ininventory sub-limit, a reduction in letter of credit sub-facility amount, anincrease in interest rate, a waiver for the events of default for the months endedOctober, November and December 2006 and the addition of a prior written consentrequirement by the lender to the Company entering into a sale and leaseback ofthe Perris, California, real estate.  Thebase interest rate was increased to the prime rate plus 1.50 percentage points.

A fourth amendment datedMarch 13, 2007 amended the early termination fee and provided an extension intime for the completion of financial projections to be used to establishfinancial covenants for April through December 2007. This amendment also extendedthe deadline for the delivery of the financial statements and compliancecertificate required for the calendar months of January and February 2007.

**Sale-leasebackAgreement - As Amended**

On February 9, 14 and 21,2007, National R.V. Holdings Inc. (Seller-Guarantor) and an unrelated party(Buyer-Lessor) amended the December 27, 2006 Purchase and Sale Agreementrelated to the possible sale and conveyance of property owned by National RVHoldings.  The Review Period ExpirationDate and Closing Date were the only terms and conditions that were modifiedwithin these three amendments.  The firsttwo amendments extended the Review Period Expiration Date and Closing Date byone week while the February 21, 2007, amendment extended the Review PeriodExpiration Date and Closing Date to March 20 and March 23, 2007, respectively.

A fourth Amendment to theDecember 27, 2006 Purchase and Sale Agreement was entered into on March 19,2007.  This amendment extended the ReviewPeriod Expiration Date to April 5, 2007 and the Closing Date to April 12,2007.  In addition, the expiration datefor the Condition Precedent regarding approval by the board of directors ofSeller was extended until April 4, 2007. This amendment also increased the amount due to Buyer for Buyer’sactual-out-of-pocket expenses incurred in connection with the negotiation ofthis Agreement to $100,000 in event the Seller terminates this agreement.

SCHEDULE II —CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS

Forthe years ended December 31, 2006, 2005 and 2004
| ** **                                        | ** ** | ** **          | ** ** | **Additions**       | ** ** | ** **     | ** ** | ** **          | ** ** |
|---------------------------------------------------|------------|---------------------|------------|---------------------|------------|----------------|------------|---------------------|------------|
| ** **                                        | ** ** | **Balance at** | ** ** | **charged to** | ** ** | ** **     | ** ** | **Balance at** | ** ** |
| ** **                                        | ** ** | **Beginning**       | ** ** | **costs and**  | ** ** | ** **     | ** ** | **end of**     | ** ** |
| ** **                                        | ** ** | **of period**  | ** ** | **expenses**        | ** ** | **Deductions** | ** ** | **Period**          | ** ** |
| Year ended  December 31, 2006                |       |                |       |                |       |           |       |                |       |
| Allowance for doubtful accounts                   |       | $                   | 392,000    |                | $          | 174,000        |       | $                   | 267,000    |   | $ | 299,000 |   |
| Inventory reserve                                 |       | $                   | 2,153,000  |                | $          | 431,000        |       | $                   | 684,000    |   | $ | 1,900,000 |   |
| Income tax valuation allowance                    |       | $                   | 18,387,000 |                | $          | 9,444,000      |       | $                   | —     |   | $ | 27,831,000 |   |
| Workers’ compensation self-insurance reserve |       | $                   | 6,489,000  |                | $          | 2,936,000      |       | $                   | 3,607,000  |   | $ | 5,818,000 |   |
| Warranty reserve                                  |       | $                   | 11,835,000 |                | $          | 15,631,000     |       | $                   | 16,387,000 |   | $ | 11,079,000 |   |
|                                              |       |                |       |                |       |           |       |                |       |
| Year ended  December 31, 2005                |       |                |       |                |       |           |       |                |       |
| Allowance for doubtful accounts                   |       | $                   | 137,000    |                | $          | 270,000        |       | $                   | 15,000     |   | $ | 392,000 |   |
| Inventory reserve                                 |       | $                   | 1,793,000  |                | $          | 812,000        |       | $                   | 452,000    |   | $ | 2,153,000 |   |
| Income tax valuation allowance                    |       | $                   | 11,232,000 |                | $          | 7,155,000      |       | $                   | —     |   | $ | 18,387,000 |   |
| Workers’ compensation self-insurance reserve |       | $                   | 8,871,000  |                | $          | 6,665,000      |       | $                   | 9,047,000  |   | $ | 6,489,000 |   |
| Warranty reserve                                  |       | $                   | 8,505,000  |                | $          | 18,437,000     |       | $                   | 15,107,000 |   | $ | 11,835,000 |   |
|                                              |       |                |       |                |       |           |       |                |       |
| Year ended  December 31, 2004                |       |                |       |                |       |           |       |                |       |
| Allowance for doubtful accounts                   |       | $                   | 132,000    |                | $          | 32,000         |       | $                   | 27,000     |   | $ | 137,000 |   |
| Inventory reserve                                 |       | $                   | 673,000    |                | $          | 1,280,000      |       | $                   | 160,000    |   | $ | 1,793,000 |   |
| Income tax valuation allowance                    |       | $                   | —     |                | $          | 11,232,000     |       | $                   | —     |   | $ | 11,232,000 |   |
| Workers’ compensation self-insurance reserve |       | $                   | 10,060,000 |                | $          | 2,893,000      |       | $                   | 4,082,000  |   | $ | 8,871,000 |   |
| Warranty reserve                                  |       | $                   | 8,660,000  |                | $          | 12,899,000     |       | $                   | 13,054,000 |   | $ | 8,505,000 |   |

 

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