UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549





**FORM
      10-Q**


(Mark
                One)**X**
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**For
                the quarterly period ended June 30, 2006Or**TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




For
                  the transition period from ____________________________ to
                  ____________________________Commission
                  File Number: 0-24804Featherlite,
                  Inc.
                (Exact
                  name of registrant as specified in its charter)Minnesota
                (State
                  or other jurisdiction of incorporation or organization)
              41-1621676
                (I.R.S.
                  Employer Identification No.)Highways
                  63 and 9, P.O. Box 320, Cresco, IA 52136
                (Address
                  of principal executive offices)563-547-6000
                (Registrant's
                  telephone number, including area code)__________________________________________________________________________________
                (Former
                  name, former address and former fiscal year, if changed since last
                  report)


Indicate
      by
      check mark whether the registrant (1) has filed all reports required to be
      filed
      by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.





Yes X  No
      ___




Indicate
      by
      check mark whether the registrant is a large accelerated filer, an accelerated
      filer or a non-accelerated filer. See definition of “accelerated filer and large
      accelerated filer” in Rule 12b-2 of the exchange act. (Check one):




Large
      accelerated filer [ ]  Accelerated filer [ ]  Non-accelerated filer [X]





Indicate
      by check mark whether the registrant is a shell company (as defined by Rule
      12b-2 of the Exchange Act).





Yes
      ___  No X





APPLICABLE
      ONLY TO CORPORATE ISSUERS:





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




11,060,160
      shares as of August 11, 2006







INDEX


**FEATHERLITE,
      INC.**


**INDEX**


**Form
      10-Q**


**Quarter
      ended June 30, 2006**







Page
                  No.Index
              2Part
                  1Financial
                  Information:Item
                  1Condensed
                  Consolidated Financial Statements (Unaudited)Condensed
                  Consolidated Balance Sheets June 20, 2006 and
                  December 31, 2005
              3Condensed
                  Consolidated Statements of Income
                  Three Month and Six Month Periods Ended June 30, 2006 and
                  2005
              4Condensed
                  Consolidated Statements of Cash
                  Flows Three Month and Six Month Periods Ended June 30, 2006 and
                  2005
              5Notes
                  to Condensed Consolidated
                  Financial Statements
              6Item
                  2Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              12Item
                  3Quantitative
                  & Qualitative Disclosures about Market Risk
              19Item
                  4Controls
                  and Procedures
              20Part
                  IIOther
                  Information:Item
                  1A
              21Item
                  6Exhibits
              22Signatures
              22Exhibit
                  Index
              23









-2-
 INDEX


**Part
      I: FINANCIAL INFORMATION**





**Item
      1:** **CONDENSED
      CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**





**Featherlite,
      Inc.**


**Condensed
      Consolidated Balance Sheets**


**(Unaudited)**


**(In
      thousands)**


**June
                30,**
            
            **December
                31,****ASSETS**
            
            **2006**
            
            **2005**Current
                assetsCash
            
            $
            140
            
            $
            91Receivables
            
            
            9,249
            
            
            7,178Refundable
                income taxes
            
            
            337
            
            
            337InventoriesRaw
                materials
            
            
            8,309
            
            
            7,438Work
                in process
            
            
            14,469
            
            
            13,886Finished
                trailers/motorcoaches
            
            
            26,935
            
            
            21,536Used
                trailers/motorcoaches
            
            
            9,982
            
            
            12,854Total
                inventories
            
            
            59,695
            
            
            55,714Leased
                promotional trailers
            
            
            1,496
            
            
            1,550Prepaid
                expenses
            
            
            1,083
            
            
            1,820Deferred
                tax asset
            
            
            1,329
            
            
            1,329Total
                current assets
            
            
            73,329
            
            
            68,019Property
                and equipment, net
            
            
            16,320
            
            
            16,583Other
                assets
            
            
            3,945
            
            
            3,199$
            93,594
            
            $
            87,801**LIABILITIES
                AND SHAREHOLDERS’ INVESTMENT**Current
                liabilitiesWholesale
                financing and other notes payable
            
            $
            19,569
            
            $
            18,923Current
                maturities of long-term debt
            
            
            1,868
            
            
            1,791Checks
                issued, not yet presented
            
            
            4,399
            
            
            4,419Motorcoach
                shell costs payable
            
            
            6,436
            
            
            3,142Accounts
                payable
            
            
            5,613
            
            
            4,384Accrued
                liabilities
            
            
            9,980
            
            
            8,194Customer
                deposits
            
            
            1,536
            
            
            2,832Total
                current liabilities
            
            
            49,401
            
            
            43,685Long-term
                debtBank
                line of credit
            
            
            183
            
            
            2,418Other
                long-term debt, net of current maturities
            
            
            9,531
            
            
            10,168Total
                long-term debt
            
            
            9,714
            
            
            12,586Deferred
                income taxes
            
            
            1,259
            
            
            1,259Deferred
                grant income
            
            
            23
            
            
            30Minority
                interest in subsidiary
            
            
            5
            
            
            5Commitments
                and contingencies (Note 4)Shareholders’
                investment
            
            
            33,192
            
            
            30,236$
            93,594
            
            $
            87,801


See
      notes
      to unaudited condensed consolidated financial statements


-3-
 INDEX


**Featherlite,
      Inc.**


**Condensed
      Consolidated Statements of
      Income**


**(Unaudited)**


**(In
      thousands, except for per share data)**








**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Net
                sales
            
            $
            54,096
            
            $
            52,084
            
            $
            114,529
            
            $
            110,671Cost
                of sales
            
            
            44,581
            
            
            44,159
            
            
            95,736
            
            
            92,994Gross
                profit
            
            
            9,515
            
            
            7,925
            
            
            18,793
            
            
            17,677Selling
                and administrative expenses
            
            
            6,366
            
            
            5,510
            
            
            12,783
            
            
            12,291Income
                from operations
            
            
            3,149
            
            
            2,415
            
            
            6,010
            
            
            5,386Other
                income (expense)Interest
            
            
            (662
            )
            
            (704
            )
            
            (1,307
            )
            
            (1,335
            )Other,
                net
            
            
            36
            
            
            13
            
            
            71
            
            
            41Total
                other expense
            
            
            (626
            )
            
            (691
            )
            
            (1,236
            )
            
            (1,294
            )Income
                before income taxes
            
            
            2,523
            
            
            1,724
            
            
            4,774
            
            
            4,092Minority
                interest in subsidiary loss
            
            
            -
            
            
            11
            
            
            -
            
            
            (1
            )(Provision)
                for income taxes
            
            
            (984
            )
            
            (660
            )
            
            (1,862
            )
            
            (1,555
            )Net
                income
            
            $
            1,539
            
            $
            1,075
            
            $
            2,912
            
            $
            2,536Net
                income per share -Basic
            
            $
            0.14
            
            $
            0.10
            
            $
            0.26
            
            $
            0.23Diluted
            
            $
            0.13
            
            $
            0.09
            
            $
            0.25
            
            $
            0.22Average
                common shares outstanding-Basic
            
            
            11,060
            
            
            10,930
            
            
            11,050
            
            
            10,909Diluted
            
            
            11,697
            
            
            11,627
            
            
            11,681
            
            
            11,532







See
      notes
      to unaudited condensed consolidated financial statements











-4-
 INDEX





**Featherlite,
      Inc.**


**Condensed
      Consolidated Statements of Cash
      Flows**


**(Unaudited)**


**(In
      thousands)**








**Six
                Months Ended****June
                30,****2006**
            
            **2005**Cash
                provided by (used for) operating activitiesNet
                income
            
            $
            2,912
            
            $
            2,536Depreciation
                and amortization
            
            
            1,024
            
            
            1,215Other
                non cash adjustments, net
            
            
            (125
            )
            
            85Changes
                in other working capital items, net
            
            
            (996
            )
            
            (6,498
            )Net
                cash provided by (used for) operating activities
            
            
            2,815
            
            
            (2,662
            )Cash
                provided by (used for) investing activitiesPurchase
                of Sanford, Florida facility
            
            
            -
            
            
            (1,006
            )Purchases
                of other property and equipment
            
            
            (698
            )
            
            (873
            )Proceeds
                from equipment sales
            
            
            137
            
            
            71Net
                cash used for investing activities
            
            
            (561
            )
            
            (1,808
            )Cash
                provided by (used for) financing activitiesProceeds
                from wholesale financing/bank line of credit
            
            
            149,914
            
            
            134,623Repayment
                of wholesale financing/bank line of credit
            
            
            (150,894
            )
            
            (132,153
            )Borrowings
                for Sanford facility repurchase
            
            
            -
            
            
            5,280Settlement
                of Sanford facility lease obligation
            
            
            -
            
            
            (4,435
            )Repayment
                of other short-term debt
            
            
            (608
            )
            
            (598
            )Proceeds
                from other long-term debt
            
            
            320
            
            
            -Repayment
                of other long-term debt
            
            
            (974
            )
            
            (848
            )Proceeds
                from issuance of common stock upon exercise of options
            
            
            57
            
            
            148Increase
                (decrease) in checks issued not yet presented
            
            
            (20
            )
            
            2,387Net
                cash provided by (used for) financing activities
            
            
            (2,205
            )
            
            4,404Net
                cash increase (decrease) for period
            
            
            49
            
            
            (66
            )Cash
                balance, beginning of period
            
            
            91
            
            
            179Cash
                balance, end of period
            
            $
            140
            
            $
            113Supplemental
                disclosure, non-cash:Trailers
                exchanged for advertising
            
            $
            62
            
            $
            -








See
      notes
      to unaudited condensed consolidated financial statements





-5-
 INDEX


FEATHERLITE,
      INC.


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





Note
      1: Basis of Presentation





The
      accompanying unaudited condensed consolidated financial statements of
      Featherlite, Inc. (“Company”) have been prepared, without audit, in accordance
      with the instructions of Form 10-Q and therefore do not include all information
      and footnotes necessary for a complete presentation of financial position,
      results of operations and cash flows in conformity with generally accepted
      accounting principles. Financial information as of December 31, 2005 has been
      derived from the audited consolidated financial statements of the Company,
      but
      does not include all disclosures required by accounting principles generally
      accepted in the United States of America.





The
      preparation of financial statements requires management to make decisions based
      upon estimates, assumptions, and factors it considers as relevant to the
      circumstances. Such decisions include the selection of applicable accounting
      principles and the use of judgment in their application, the results of which
      impact reported amounts and disclosures. The Company’s significant accounting
      policies with respect to these estimates are discussed more fully in its Annual
      Report on Form 10-K for the year ended December 31, 2005. Changes in economic
      conditions or other business circumstances may affect the outcomes of
      management’s estimates and assumptions. Accordingly, actual results could differ
      from those anticipated.





It
      is the
      opinion of management that the unaudited condensed consolidated financial
      statements include all adjustments, consisting of normal recurring accruals,
      necessary to fairly state the results of operations for the three and six month
      periods ended June 30, 2006 and 2005. The results of interim periods may not
      be
      indicative of results to be expected for the year.





The
      unaudited condensed consolidated financial statements include the accounts
      of
      Featherlite, Inc., and its wholly owned subsidiaries, Featherlite Aviation
      Company and Featherlite Chemicals Holdings, LLC (FCH). FCH owns a 51 percent
      interest in Featherlite Chemicals LLC, which discontinued operating activities
      in the fourth quarter of 2005.





Certain
      prior year information has been reclassified to conform to the presentation
      in
      the Company’s 2005 annual report on Form 10-K. These reclassifications had no
      affect on net income or shareholders’ investment as previously
      reported.





Note
      2:
      Other Assets





Other
      assets included in the accompanying condensed consolidated balance sheets as
      of
      June 30, 2006 and December 31, 2005 are as follows (in thousands):





2006
            
            2005Aircraft
                held for resale
            
            $
            2,340
            
            $
            2,340Deposits
            
            
            532
            
            
            532Leased
                promotional trailers
            
            
            398
            
            
            242Advertising
                and promotion
            
            
            675
            
            
            85Total
            
            $
            3,945
            
            $
            3,199





There
      were no aircraft purchases or sales during the three and six month periods
      ended
      June 30, 2006 and 2005. The aircraft is recorded at its estimated net realizable
      value. The Company did not record any market value write-down during the three
      or six month periods ended June 30, 2006 on the aircraft as the market for
      used
      business class aircraft has stabilized.





Advertising
      and promotion has increased as a result of the Company extending a sponsorship
      agreement through 2012 and the recording of certain obligations and benefits
      related to the extension.


-6-
 INDEX





Note
      3:
      Debt Financing Arrangements





***Wholesale
      Financing and Other Notes Payable*** :
      At June
      30, 2006 and December 31, 2005, wholesale financing and other notes payable
      consisted of the following (in thousands):


2006
            
            2005GE
                Commercial Distribution Finance Company (GE) $25 million wholesale
                finance
                agreement, interest rate of prime plus 0.25% when the prime is less
                than
                6.25%, otherwise prime
              (8.00%
                at June 30, 2006 and 7.25% at December 31, 2005); secured by financed
                motorcoaches and other assets of the Company
            
            $
            19,333
            
            $
            17,447Regions
                Bank (Regions) $2 million floor plan financing agreement, monthly
                interest
                at the prime rate plus 0.5% (8.75% at June 30, 2006 and 7.75% at
                December
                31, 2005); secured by financed motorcoaches and Coachmen
                trailers
            
            
            30
            
            
            662Note
                payable with an insurance premium finance company, interest at 5.61%,
                payable in monthly installments of $103,570, including interest.
            
            
            206
            
            
            814$
            19,569
            
            $
            18,923





At
      June
      30, 2006, the Company was in compliance with the covenants contained in the
      financing agreements governing the above facilities and notes.





***Line
      of Credit:*** Under
      the terms of a Revolving Loan and Security Agreement, the Company has a $17
      million asset-based line of credit with U.S Bank. As of June 30, 2006 this
      credit facility had outstanding borrowings of $0.2 million, outstanding letters
      of credit of $2.3 million and remaining borrowing availability of $14.5 million.
      Advance rates are based upon 70-85% of the Company’s eligible accounts
      receivable and 30-70% of the Company’s eligible inventory. Interest is equal to
      the prime interest rate. The Company was in compliance with all of the covenants
      of this credit agreement, which also covers the term notes included in “other
      long-term debt” as of June 30, 2006.





**Other
      Long-Term Debt** :
      Other
      long-term debt consisted of the following at June 30, 2006 and December 31,
      2005
      (in thousands):





2006
            
            2005U.S.
                Bank term notes payable; interest at prime (8.25% at June 30, 2006
                and
                7.00% at December 31, 2005) payable in monthly installments of $106,000
                plus interest; until October 31, 2008 when remaining balance of $115,000
                then due; contains same collateral and covenant provisions as Revolving
                Loan and Security Agreement.
            
            $
            3,818
            
            $
            4,212Mortgage
                note with GE Commercial Finance Business Property Corporation on
                Florida
                real estate, with a fixed annual interest rate of 6.49% and payable
                over a
                12 year term by monthly principal and interest payments of $53,000.
            
            
            4,875
            
            
            5,031Bank
                notes payable; interest at 6.5%; $26,600 payable monthly including
                interest; balance of $2.4 million due May 2007; collateralized by
                aircraft
            
            
            2,531
            
            
            2,606Notes
                and capitalized leases to banks and others, interest at average of
                6.0%,
                payable in varying monthly installments through 2007; collateralized
                by
                real estate and vehicles
            
            
            175
            
            
            110Total
            
            
            11,399
            
            
            11,959Less
                current maturities
            
            
            (1,868
            )
            
            (1,791
            )$
            9,531
            
            $
            10,168








-7-
 INDEX





Note
      4:
      Commitments and Contingencies





*Inventory
      Repurchase Agreements* -Pursuant
      to inventory floor plan financing arrangements available to Featherlite trailer
      dealers, the Company may be required, in the event of default by a financed
      dealer, to repurchase trailers from certain financial institutions or to
      reimburse the institutions for unpaid balances, including finance charges plus
      costs and expenses. The Company was contingently liable under these arrangements
      for a maximum of $20.1 million at June 30, 2006. During the three and six months
      ended June 30, 2006, the Company made no repurchases under these arrangements.
      No reserve has been provided for this contingency because, in the opinion of
      management, there is sufficient historical evidence to support that the
      aggregate amount of such repurchases on an annual basis has been less than
      1
      percent of annual sales and the repossessed inventory has been resold to other
      dealers without a loss. The Company has no motorcoach dealers and has no
      repurchase obligations with respect to motorcoaches except as may arise from
      time to time as a result of litigation or related settlements in the ordinary
      course of business.





*Self
      Insurance* -
      The
      Company is partially self-insured for a portion of certain health benefit and
      workers’ compensation insurance claims. The Company’s maximum annual claim
      exposure under these programs varies as follows: for health claims there is
      an
      annual stop loss of $150,000 per claim but no aggregate loss limit. For workers
      compensation claims, there is a $250,000 per occurrence limit and an aggregate
      annual loss limit of $2.2 million. At June 30, 2006, $1.4 million and $0.6
      million was accrued for estimated unpaid workers compensation and health claims,
      respectively and at December 31, 2005 $1.5 million and $0.5 million was accrued
      for estimated unpaid workers compensation and health claims respectively. These
      amounts are classified in accrued liabilities in the unaudited condensed
      consolidated balance sheets. The Company has obtained irrevocable standby
      letters of credit in the amount of approximately $2.3 million in favor of the
      certain workers’ compensation claim administrators to guarantee settlement of
      claims they process. These letters of credit have reduced amounts available
      for
      borrowing under the U.S. Bank Credit Facility discussed in Note 3.





*Litigation-* The
      Company, in the ordinary course of its business, is periodically named as a
      defendant in various legal actions. These actions are primarily product
      liability or workers’ compensation claims in which the Company is covered by its
      self-insurance program or third-party insurance (subject to applicable
      deductibles). The ultimate outcome of such claims cannot be ascertained or
      reasonably estimated at this time. However, it is the opinion of management,
      after consulting with legal counsel handling such matters, it is unlikely that
      the resolution of such suits will have a material adverse effect on the
      financial position of the Company or its operating results for any particular
      period.





*Aluminum
      and other purchase commitments-* **** The
      Company has not obtained any fixed price commitments from suppliers for any
      part
      of its expected aluminum requirements in 2006. In certain prior years the
      Company has obtained commitments for a substantial portion of its estimated
      production requirements to reduce the risk related to fluctuations in the cost
      of aluminum, the principal commodity used in the Company’s trailer segment. At
      June 30, 2006, the Company had a firm commitment to purchase motorcoach shells
      in an aggregate amount of $6.8 million in 2006, which the Company expects to
      fulfill. There are no commitments for 2007 as of June 30, 2006.





*Warranty* -
      The
      Company is not a guarantor of any obligations that would require it to recognize
      a liability for the fair value of the underlying obligation at its inception.
      However, it does have product warranty liabilities that are provided for as
      described in Note 2 to the consolidated financial statements included in the
      Company’s 2005 annual report on Form 10-K. Following is a summary of the changes
      in these liabilities during the three and six month periods ended June 30,
      2006
      and 2005 (in thousands):





--Three
                months--
            
            --
                Six months--2006
            
            2005
            
            2006
            
            2005Balance
                beginning of period
            
            $
            1,310
            
            $
            1,247
            
            $
            1,198
            
            $
            1,221Provision
                for units sold during period
            
            
            249
            
            
            385
            
            
            738
            
            
            808Claims
                paid during the period
            
            
            (404
            )
            
            (349
            )
            
            (781
            )
            
            (746
            )Balance,
                end of period
            
            $
            1,155
            
            $
            1,283
            
            $
            1,155
            
            $
            1,283








*Operating
      leases* -
      The
      Company leases certain office and production facilities under various operating
      leases that expire at varying dates through 2011. Rent expense for the three
      month periods ended June 30, 2006 and 2005 was $362,000 and $276,000,
      respectively and for the six month periods ended June 30, 2006 and 2005 was
      $708,000 and $546,000 respectively. As of June 30, 2006, aggregate rental
      payments under these operating leases are estimated to be $1.4 million over
      the
      next 12 months.


-8-
 INDEX


*Sponsorship
      and promotional agreements* -
      The
      Company is party to sponsorship and promotional agreements for advertising
      and
      promotional services with certain providers. These agreements expire at varying
      dates through 2012. Advertising and promotional expenses incurred under these
      agreements for the three month periods ended June 30, 2006 and 2005 was $175,000
      and $156,000, respectively and for the six month periods ended June 30, 2006
      and
      2005 was $349,000 and $312,000 respectively. As of June 30, 2006, advertising
      expense resulting from this agreement is estimated to be $774,000 over the
      next
      12 months.











Note
      5:
      Shareholders’ Investment





The
      components of shareholders’ investment are detailed as follows (in
      thousands):





June
                30,
            
            Dec.
                31,2006
            
            2005Common
                stock - without par value;Authorized
                -40,000
                shares;Issued
                -11,060
                shares at June 30, 2006;11,021
                shares at Dec. 31, 2005
            
            $
            18,607
            
            $
            18,562Additional
                paid-in capital
            
            
            4,403
            
            
            4,403Retained
                earnings
            
            
            10,182
            
            
            7,271Total
                Shareholders’ investment
            
            $
            33,192
            
            $
            30,236








On
      April
      9, 2005, the Board of Directors approved a three-for-two split of the Company’s
      common stock with a proportional increase in the number of issued and
      outstanding shares. All shares and per share amounts in this Form 10-Q have
      been
      restated to reflect the retroactive effect of the stock split.





On
      March
      31, 2006, the Company cancelled 1,905 shares of common stock that had been
      issued in 1998 under the earn-out provision of the agreement to acquire the
      assets of Mitchell Motorcoach Company. The earn-out provision expired in 2001
      and these shares remained unearned and should have been cancelled.








Note
      6:
      Stock Option Plans




Under
      the
      Company’s 1994 Stock Option Plan (the 1994 Plan) the Company reserved 1,650,000
      million shares of common stock for issuance as options until July 31, 2004
      when
      the Plan terminated and the granting of options under the 1994 Plan ended.
      In
      2004, the shareholders approved the 2004 Equity Incentive Plan, which reserved
      900,000 shares of common stock for issuance as options after that date. All
      options granted under the 1994 Plan remain in effect until the expiration date
      specified when granted.





At
      June
      30, 2006 and December 31, 2005, respectively, an aggregate of 947,451 options
      and 1,001,651 options were outstanding under these plans. These options were
      granted at prices ranging from $0.74-$4.07 per share, and are exercisable at
      various dates not to exceed 10 years from the date of grant. During the three
      month period ended June 30, 2006 no options were exercised and during the six
      month period ended June 30, 2006, options totaling 40,700 shares were exercised
      at average prices of $1.35 with $55,000 of proceeds received by the Company.
      There were no options granted and options totaling 13,500 shares were forfeited
      during the three and six month periods ended June 30, 2006. ****





In
      December 2004, the Financial Accounting Standards Board (FASB) released its
      final revised standard, Statement of Financial Accounting Standards (SFAS)
      No.
      123(R), Share-Based Payments. SFAS 123(R) requires that an entity measure the
      cost of equity based service awards based on the grant-date fair value of the
      award. That cost will be recognized over the period during which an employee
      is
      required to provide service in exchange for the award or the vesting period.
      No
      compensation cost is recognized for equity instruments for which employees
      do
      not render the requisite service. An entity will initially measure the cost
      of
      liability based service awards based on its current fair value; the fair value
      of that award will be remeasured subsequently at each reporting date through
      the
      settlement date. Changes in fair value during the requisite service period
      will
      be recognized as compensation cost over that period. We have no outstanding
      liability based service awards. SFAS 123(R) also


-9-
 INDEX





requires
      that the benefits of tax deductions in excess of recognized compensation cost
      to
      be reported as a financing cash flow, rather than as an operating cash flow
      as
      was previously required. This requirement will reduce net operating cash flows
      and increase net financing cash flows in periods after the effective date.
      Adoption of SFAS 123(R) is required for annual periods beginning after December
      15, 2005. We adopted the fair value based method of SFAS 123 in January, 2003
      through the provisions allowed in SFAS 148, Accounting for Stock-Based
      Compensation - Transition and Disclosure. The adoption of SFAS 123(R) in the
      third quarter of 2005 did not have a material impact on income from continuing
      operations, income before income taxes, net income, cash flow from operations,
      cash flow from financing activities, or basis and diluted earnings per share.











Note
      7:
      Net Income per Share





Following
      is a reconciliation of the weighted average shares outstanding, including the
      effect of the 3 for 2 stock split described in Note 5, which was used to
      determine basic and diluted net income per share for the three-month and six
      month periods ended June 30, 2006 and 2005 (in thousands, except per share
      data):





Three
                  months
              
              Six
                  months2006
              
              2005
              
              2006
              
              2005Net
                  income
              
              $
              1,539
              
              $
              1,075
              
              $
              2,912
              
              $
              2,536Weighted
                  average number of basic shares Outstanding
              
              
              11,060
              
              
              10,930
              
              
              11,050
              
              
              10,909Dilutive
                  effect ofStock
                  options, net of tax benefit
              
              
              474
              
              
              539
              
              
              403
              
              
              471Warrants
              
              
              163
              
              
              158
              
              
              228
              
              
              152Weighted
                  average number of diluted shares Outstanding
              
              
              11,697
              
              
              11,627
              
              
              11,681
              
              
              11,532Net
                  income per share - basic
              
              $
              0.14
              
              $
              0.10
              
              $
              0.26
              
              $
              0.23Net
                  income per share - diluted
              
              $
              0.13
              
              $
              0.09
              
              $
              0.25
              
              $
              0.22




No shares
      and 13,000 shares at June 30, 2006 and 2005, respectively, were excluded from
      the dilutive effect of stock options because the exercise price of the options
      was greater than the market value of the stock at those dates.





Note
      8:
      Segment Reporting





The
      Company has two principal business segments that manufacture and sell trailers
      and luxury motorcoaches and related parts, accessories and services to many
      different markets, including recreational, entertainment and agriculture.
“Corporate and other” in the table below includes the accounts of Featherlite
      Chemicals, LLC, unallocated aircraft operating costs, certain corporate
      officers’ salaries and other administration costs.





Management
      evaluates the performance of each segment based on income (loss) before income
      taxes. Management has a policy of not charging interest to the segments on
      intercompany borrowing balances and retains all interest expense related to
      the
      U.S. Bank line of credit in the “Corporate and other” segment.





Information
      on business segment net sales, income (loss) before income taxes and
      identifiable assets are as follows for the three-month and six-month periods
      ended June 30, 2006 and 2005 (in thousands):


-10-
 INDEX





Trailers
            
            Motorcoaches
            
            Corporate
                and other
            
            Total**Three
                month period ended June 30,**2006Net
                sales to external customers
            
            $
            43,116
            
            $
            10,980
            
            $
            -
            
            $
            54,096Income
                (loss) before income taxes *
            
            
            4,749
            
            
            (1,343
            )
            
            (883
            )
            
            2,523Identifiable
                assets
            
            
            42,275
            
            
            47,083
            
            
            4,236
            
            
            93,5942005Net
                sales to external customers
            
            $
            34,487
            
            $
            17,594
            
            $
            3
            
            $
            52,084Income
                (loss) before income taxes *
            
            
            2,172
            
            
            (69
            )
            
            (379
            )
            
            1,724Identifiable
                assets
            
            
            39,003
            
            
            52,952
            
            
            4,299
            
            
            96,254**Six
                month period ended June 30,**2006Net
                sales to external customers
            
            $
            82,899
            
            $
            31,630
            
            $
            -
            
            $
            114,529Income
                (loss) before income taxes *
            
            
            7,884
            
            
            (1,457
            )
            
            (1,653
            )
            
            4,774Identifiable
                assets
            
            
            42,275
            
            
            47,083
            
            
            4,236
            
            
            93,5942005Net
                sales to external customers
            
            $
            72,198
            
            $
            38,353
            
            $
            120
            
            $
            110,671Income
                (loss) before income taxes *
            
            
            5,370
            
            
            215
            
            
            (1,493
            )
            
            4,092Identifiable
                assets
            
            
            39,003
            
            
            52,952
            
            
            4,299
            
            
            96,254





*
      There
      was no minority interest in subsidiary income or loss included “Corporate and
      Other” in the three and six month periods ended June 30, 2006 and there was
      minority interest in subsidiary loss of ($11) and income of $1 included in
      “Corporate and Other” and in “Total” for the three months and six month periods
      ended June 30, 2005, respectively.





Note
      9:
      Subsequent Event





The
      Company entered into an Agreement and Plan of Merger, dated as of July 26,
      2006
      (the “Merger Agreement”), with Universal Trailer Holdings Corp. (“Universal
      Trailer”) of Cincinnati, Ohio, a corporation with majority ownership by Dubin
      Clark & Company, a private equity investment firm, and Dart Acquisition
      Corp. (“Dart”), a wholly-owned subsidiary of Universal Trailer. Under the Merger
      Agreement, Dart will merge with and into the Company and the Company will become
      a wholly-owned subsidiary of Universal Trailer (the “Merger”).





Under
      the
      terms of the Merger Agreement, each shareholder of the Company will receive
      $6.50 in cash for each outstanding share of Company stock, and the holders
      of
      outstanding and vested options and warrants to purchase shares of Company stock
      will receive a cash payment for each such share equal to the difference between
      $6.50 and the exercise price under such option or warrant.





A
      special
      committee of the Company’s outside directors has approved the Merger Agreement.
      The consummation of the Merger is subject to various conditions, including
      shareholder approval; the expiration of the applicable waiting period under
      the
      Hart-Scott-Rodino Act; the closing of debt financing arrangements; the continued
      effectiveness of the agreement between Universal Trailer and Featherlite
      Coaches, Inc. (“Featherlite Coaches”) referred to below; and other customary
      closing conditions.





The
      Company expects to announce a special meeting of the Company's shareholders
      following preparation and filing of proxy materials with the Securities and
      Exchange Commission.





In
      addition, Featherlite Coaches, a newly-formed company controlled by Conrad
      Clement, the Company’s Chairman, President and CEO, Tracy Clement, Featherlite’s
      Executive Vice President, and Bulk Resources, Inc., has entered into a
      definitive agreement with Universal Trailer to purchase the assets and assume
      substantially all of the liabilities of Featherlite’s motorcoach
      division following the closing of the Merger. The Company is not a party to
      this agreement and does not own any equity of Featherlite Coaches. As noted
      above, the closing of the Merger is subject to the agreement between Featherlite
      Coaches and Universal Trailer remaining in full force and effect.





Please
      refer to Part II, item 1A for additional information regarding the proposed
      merger.


-11-
 INDEX





Item
      2: MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




The
      following discussion pertains to the Company's results of operations and
      financial condition for the three-month and six-month periods ended June 30,
      2006 and 2005. The Company has rounded its results to the nearest $0.1 million
      increment in the narratives discussing the Company’s operating
      results.





Results
      of Operations





**Three-month
      periods ended June 30, 2006 and 2005 (second quarter)**





The
      following table summarizes changes in the Company’s consolidated and segment
      results of operations (in millions) and as a percentage of net sales for the
      second quarter ended June 30, 2006 and 2005:




CONSOLIDATED
                  DATA
              
              2nd
                  Quarter 2006 vs. 2005 Increase
                (Decrease)
              
              Percent
                  of Net SalesAmount
                (mil)
              
              Percent
                Change
              
              2006
              
              2005Net
                  sales
              
              $
              2.0
              
              
              3.9
              %
              
              100.0
              %
              
              100.0
              %Gross
                  profit
              
              
              1.6
              
              
              20.1
              
              
              17.6
              
              
              15.2Selling
                  and administrative expenses
              
              
              0.8
              
              
              14.5
              
              
              (11.8
              )
              
              (10.6
              )Interest
                  expense
              
              
              -
              
              
              -
              
              
              (1.2
              )
              
              (1.4
              )Other
                  income (expense)
              
              
              -
              
              
              -
              
              
              0.1
              
              
              -Income
                  before income taxes
              
              
              0.8
              
              
              46.3
              
              
              4.7
              
              
              3.3Minority
                  interest in subsidiary
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income
              
              $
              0.4
              
              
              43.2
              %
              
              2.8
              %
              
              2.1
              %
 
 SEGMENT
                  DATA
              
              2nd
                  Quarter 2006 vs. 2005 Increase (Decrease)
              
              Percent
                  of Net SalesAmount
                (mils)
              
              Percent
                Change
              
              2006
              
              2005Net
                  SalesTrailers
              
              $
              8.6
              
              
              25.0
              %
              
              79.7
              %
              
              66.2
              %Motorcoach
              
              
              (6.6
              )
              
              (37.6
              )
              
              20.3
              
              
              33.8Corporate
                  and other
              
              
              -
              
              
              -
              
              
              -
              
              
              -Income
                  before income taxesTrailers
              
              $
              2.6
              
              
              118.6
              %
              
              8.8
              %
              
              4.2
              %Motorcoach
              
              
              (1.3
              )
              
              (1,846
              )
              
              (2.5
              )
              
              (0.1
              )Corporate
                  and other
              
              
              (0.5
              )
              
              (113.9
              )
              
              (1.6
              )
              
              (0.7
              )






On
      a
      consolidated basis, the Company’s net income for the second quarter ended June
      30, 2006 was $1.5 million or $0.13 cents per diluted share, compared with net
      income of $1.1 million, or $0.09 cents per diluted share for the second quarter
      of 2005. The higher second quarter net income results in 2006 were the result
      of
      increased sales and gross margin improvement in the trailer division, partially
      offset by decreased margins as a result of decreased sales of new motorcoaches
      in the motorcoach division and an increase in bonus accruals in the corporate
      and other segment compared to the same period of 2005.





Consolidated
      net sales for the second quarter of 2006 increased 3.9 percent ($2.0 million)
      to
      $54.1 million compared to net sales of $52.1 million for the second quarter
      of
      2005. For the trailer segment, net sales of specialty trailers and transporters
      increased by 25.0 percent ($8.6 million) in 2006 compared to the second quarter
      of 2005. Unit sales were up by 13.7 percent, as nearly all product categories
      showed increased unit sales. Net revenue per unit was up 10.0 percent in 2006
      compared to 2005, which reflects a favorable impact from the 4 percent price
      increase effective January 1, 2006, the 4.5 percent aluminum surcharge effective
      January 17, 2006, the 2% surcharge increase effective April 3, 2006, as well
      as
      changes in product mix. Motorcoach segment net sales decreased by 37.6 percent
      ($6.6 million) in the second quarter of 2006 compared to the same


-12-
 INDEX


quarter
      of 2005. New unit sales were down 60.0 percent and used unit sales decreased
      by
      44.4 percent in 2006 compared to 2005, as management believes that customers
      postponed buying decisions due to uncertainties related to the Company’s January
      9, 2006 announcement that it intended to explore strategic alternatives. These
      unit decreases were partially offset by an increase in the average net revenue
      per motorcoach unit sold in 2006, which increased by 24.8 percent compared
      with
      the same quarter of 2005. The net revenue per new unit sold increased by 10.7
      percent and the net revenue per used unit sold increased by 43.1
      percent.





Consolidated
      gross profit margin increased by 20.1 percent ($1.6 million) to $9.5 million
      for
      the second quarter of 2006 from $7.9 million for the same quarter in 2005,
      as a
      significantly increased gross profit in the trailer segment was partially offset
      by a decreased gross profit in the motorcoach segment. As a percentage of net
      sales, consolidated gross profit margin for the quarter was 17.6 percent in
      2006
      compared to 15.2 percent in 2005 due to manufacturing efficiencies experienced
      in the trailer division as a result of increased unit volume and a greater
      mix
      of trailers, which carry higher margin percentages than motorcoaches. Total
      trailer segment gross profit increased by $2.9 million (54.2 percent) in the
      second quarter of 2006 compared to 2005, as the result of higher unit sales
      and
      an increase in gross profit as a percent of sales of 3.6 percentage points
      in
      2006 compared to 2005. The price increases implemented were sufficient to fully
      absorb the increased cost of aluminum and the increased unit volume allowed
      the
      Company to leverage the fixed elements of supervision and overhead. Motorcoach
      segment total gross margin decreased by $1.3 million (51.4 percent) in 2006,
      primarily as the result of reduced unit sales. Motorcoach segment gross profit
      margin as a percentage of sales also decreased by 3.3 percentage points in
      the
      second quarter of 2006 compared to 2005, contributing to the margin reduction
      as
      management believes that purchasing decisions were delayed while customers
      awaited resolution of uncertainties related to the Company’s January 9, 2006
      announcement that it intended to explore strategic alternatives.





Consolidated
      selling and administrative expenses increased by $0.8 million (14.5 percent)
      in
      the second quarter of 2006, to $6.3 million from $5.5 million in the second
      quarter of 2005. As a percentage of sales, these expenses increased to
      11.8 **** percent
      in 2006 from 10.6 percent in 2005. Trailer segment expenses increased by $0.3
      million compared to 2005, as increased sales expenses were required to support
      the higher level of sales. Motorcoach segment expenses were flat in 2006
      compared to 2005. Corporate and other expenses increased by $0.5 million in
      2006
      compared to the second quarter of 2005, primarily reflecting an increased
      accrual of executive management performance bonuses and costs related to
      exploring strategic alternatives in 2006, partially offset by a reduced market
      value write-down of the Company aircraft in 2006 that was recorded in 2005.





Consolidated
      interest expense decreased **** by
      less
      than $0.1 million **** in
      the
      second quarter of 2006 compared to the same quarter in 2005 as higher interest
      rates in 2006 were offset by lower average borrowings. Other income, net, was
      unchanged in the second quarter of 2006 compared to the same quarter in 2005.





Minority
      interest in the Company’s 51 percent owned subsidiary’s loss was $0 in the
      second quarter of 2006 compared to $11,000 in the same quarter in 2005. This
      amount represents the equity interest of the 49 percent minority owned share
      of
      pre-tax losses in Featherlite Chemicals, LLC (FCC) that was formed in 2003
      to
      market car care products. The accompanying condensed consolidated statement
      of
      operations for the quarter includes the accounts of FCC, which reflected a
      total
      pre-tax operating income of $0 for the second quarter of 2006 compared to a
      loss
      of $22,000 in the same period in 2005. This activity has been discontinued
      due
      to lack of profitable operations at the end of 2005.





Consolidated
      income before taxes (IBT) increased by approximately $0.8 million in the second
      quarter of 2006 to $2.5 million compared to $1.7 million the same quarter in
      2005. This increase in 2006 compared to 2005 reflects an increase $2.6 million
      in trailer segment IBT, partially offset by decreases of $1.3 million and $0.5
      million of IBT in the motorcoach and corporate and other segments, respectively,
      for the reasons discussed above.





Income
      tax provision rates of approximately 39 and 38 percent were used in 2006 and
      2005, respectively, reflecting the federal corporate tax rate and effective
      state tax rates estimated for each year. A higher rate is being used for 2006
      because of the reduced availability of state loss carryforwards that were used
      previously.


-13-
 INDEX





**Six-month
      periods ended June 30, 2006 and 2005 (six months)**





The
      following table summarizes changes in the Company’s consolidated and segment
      results of operations (in millions) and as a percentage of net sales for the
      six
      months ended June 30, 2006 and 2005:




CONSOLIDATED
                  DATA
              
              Six
                  months
                2006
                  vs. 2005 Increase (Decrease)
              
              Percent
                  of Net SalesAmount
                (mil)
              
              Percent
                Change
              
              2006
              
              2005Net
                  sales
              
              $
              3.9
              
              
              3.5
              %
              
              100.0
              %
              
              100.0
              %Gross
                  profit
              
              
              1.1
              
              
              6.3
              
              
              16.4
              
              
              16.0Selling
                  and administrative expenses
              
              
              0.5
              
              
              4.0
              
              
              (11.2
              )
              
              (11.1
              )Interest
                  expense
              
              
              -
              
              
              -
              
              
              (1.1
              )
              
              (1.2
              )Other
                  income (expense)
              
              
              -
              
              
              -
              
              
              0.1
              
              
              -Income
                  before income taxes
              
              
              0.7
              
              
              16.7
              
              
              4.2
              
              
              3.7Provision
                  for income taxes
              
              
              0.3
              
              
              19.7
              
              
              (1.6
              )
              
              (1.4
              )Minority
                  interest in subsidiary
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income
              
              $
              0.4
              
              
              14.9
              %
              
              2.5
              %
              
              2.3
              %
 
 SEGMENT
                  DATA
              
              Six
                  months 2006 vs. 2005 Increase (Decrease)
              
              Percent
                  of Net SalesAmount
                (mils)
              
              Percent
                Change
              
              2006
              
              2005Net
                  SalesTrailers
              
              $
              10.7
              
              
              14.8
              %
              
              72.4
              %
              
              65.2
              %Motorcoach
              
              
              (6.7
              )
              
              (17.5
              )
              
              27.6
              
              
              34.7Corporate
                  and other
              
              
              (0.1
              )
              
              (100.0
              )
              
              -
              
              
              0.1Income
                  before income taxesTrailers
              
              $
              2.5
              
              
              46.8
              %
              
              6.9
              %
              
              4.9
              %Motorcoach
              
              
              (1.7
              )
              
              (777.7
              )
              
              (1.3
              )
              
              0.2Corporate
                  and other
              
              
              (0.2
              )
              
              (10.8
              )
              
              (1.4
              )
              
              (1.3
              )






On
      a
      consolidated basis, the Company’s net income for the six months ended June 30,
      2006 was $2.9 million or $0.25 cents per diluted share, compared with net income
      of $2.5 million, or $0.22 cents per diluted share for the same period in 2005.
      The higher first six months net income results in 2006 were the result of
      increased sales and gross margin improvement in the trailer division, partially
      offset by decreased margins as a result of decreased sales of new motorcoaches.





Consolidated
      net sales for the first six months of 2006 increased 3.5 percent ($3.9 million)
      to $114.5 million compared to net sales of $110.6 million for the same period
      in
      2005. For the trailer segment, net sales of specialty trailers and transporters
      increased by 14.8 percent ($10.7 million) in 2006 compared to the same period
      of
      2005. Unit sales were up by 6.7 percent, as most product categories showed
      increased unit sales, with the exceptions being horse and commercial trailers,
      which showed decreased unit sales. Net revenue per unit was up 7.8 percent
      in
      2006 compared to 2005, which reflects a favorable impact from the 4 percent
      price increase effective January 1, 2006, the 4.5 percent aluminum surcharge
      effective January 17, 2006, the 2% surcharge increase effective April 3, 2006,
      as well as changes in product mix. Motorcoach segment net sales decreased by
      17.5 percent ($6.7 million) in the first six months of 2006 compared to the
      same
      period in 2005. New unit sales were down 28.6 percent and used unit sales
      decreased by 19.4 percent in 2006 compared to 2005, as management believes
      that
      customers postponed buying decisions due to uncertainties related to the
      Company’s January 9, 2006 announcement that it intended to explore strategic
      alternatives. These unit decreases were partially offset by an increase in
      the
      average net revenue per used unit sold in 2006, which increased by 18.0 percent
      compared with the same period of 2005 due to an increase in the mix of higher
      priced units. The net revenue per new unit sold decreased by 1.4 percent in
      2006
      compared to 2005.





Consolidated
      gross profit margin increased by 6.3 percent ($1.1 million) to $18.8 million
      for
      the six months ended June 30, 2006 from $17.7 million for the same period in
      2005, as a significantly increased gross profit in the trailer segment was
      partially offset by a decreased gross profit in the motorcoach segment. As
      a
      percentage of net sales, consolidated gross profit


-14-
 INDEX


margin
      for the six months ended June 30, 2006 was 16.4 percent compared to 16.0 percent
      for the same period in 2005 due to improving margins in the trailer segment
      and
      a greater mix of trailers, which carry higher margin percentages than
      motorcoaches, partially offset by reduced margins in the coach division. Total
      trailer segment gross profit increased by $2.9 million (24.4 percent) in the
      six
      months ended June 30, 2006 compared to 2005, as the result of higher sales
      and
      an increase in gross profit as a percent of sales by 1.4 percentage points
      in
      2006 compared to 2005. Motorcoach segment total gross margin decreased by $1.8
      million in 2006, primarily the result of reduced unit sales. Motorcoach segment
      gross profit margin as a percentage of sales also decreased by 2.4 percentage
      points in the six months ended June 30, 2006 compared to 2005, as management
      believes that purchasing decisions were delayed while customers awaited
      resolution of uncertainties related to the Company’s January 9, 2006
      announcement that it intended to explore strategic alternatives.





Consolidated
      selling and administrative expenses increased by $0.5 million (4.0 percent)
      in
      the six months ended June 30, 2006, to $12.8 million from $12.3 million in
      the
      same period of 2005. As a percentage of sales, these expenses increased to
      11.2 **** percent
      in 2006 from 11.1 percent in 2005. Trailer segment expenses increased by $0.5
      million compared to 2005, as increased sales expenses were required to support
      the higher level of sales. Motorcoach segment expenses decreased by $0.1 million
      in 2006 compared to 2005. Corporate and other expenses increased by $0.1 million
      in 2006 compared to the first six months of 2005, primarily reflecting an
      increased accrual of executive management performance bonuses and costs related
      to the exploration of strategic alternatives, partially offset by a reduced
      market value write-down of the Company aircraft in 2006 than was necessary
      in
      2005.





Consolidated
      interest expense decreased **** by
      less
      that $0.1 million **** in
      the
      first six months of 2006 compared to the same period in 2005 as higher interest
      rates in 2006 were offset by lower average borrowings. Other income, net, was
      unchanged in the first six months of 2006 compared to the same period in 2005.





Minority
      interest in the Company’s 51 percent owned subsidiary’s loss was $1,000 in the
      six months ended June 30, 2006 compared to a minority interest in income of
      $(1,000) in the same period in 2005. This amount represents the equity interest
      of the 49 percent minority owned share of pre-tax losses in Featherlite
      Chemicals, LLC (FCC) that was formed in 2003 to market car care products. The
      accompanying condensed consolidated statement of operations for the six month
      periods includes the accounts of FCC, which reflected no pre-tax operating
      income for the first six months of 2006 compared to income of $1,000 in 2005.
      This activity has been discontinued due to lack of profitable operations at
      the
      end of 2005.





Consolidated
      income before taxes (IBT) increased by approximately $0.7 million in the six
      months ended June 30, 2006 to $4.8 million compared to $4.1 million the same
      period in 2005. This increase in 2006 compared to 2005 reflects an increase
      $2.5
      million in trailer segment IBT, partially offset by decreases of $1.7 million
      and $0.1 million of IBT in the motorcoach and corporate and other segments,
      respectively, for the reasons discussed above.





Income
      tax provision rates of approximately 39 and 38 percent were used in 2006 and
      2005, respectively, reflecting the federal corporate tax rate and effective
      state tax rates estimated for each year. A higher rate is being used for 2006
      because of the reduced availability of state loss carryforwards that were used
      previously.








**Outlook**





The
      Company remains cautiously optimistic about the level of sales for the remainder
      of 2006. At June 30, 2006, the trailer order backlog was $14.2 million compared
      to $18.1 million at December 31, 2005 and $16.3 million at June 30, 2005. While
      trailer backlog has decreased from December 31, 2005, order levels have remained
      strong in 2006 and have been filled from increased finished trailer inventory
      levels. The motorcoach backlog was $1.7 million at June 30, 2006, compared
      to
      $2.3 million and $9.2 million at December 31, 2005 and June 30, 2005,
      respectively. While fluctuations in motorcoach backlog and inventory levels
      will
      occur with variations in customer preferences in buying completed coaches rather
      than ordering custom coaches for future delivery, management expects that demand
      for new coaches during the remainder of 2006 will be stronger than the demand
      experienced in the first six months of 2006 as uncertainties related to the
      Company’s process of exploring strategic alternatives have been removed. If the
      rise in gasoline prices or other future events harm the general economy, the
      Company may experience reduced demand for its products. There is continuing
      focus by the Company on the sales and marketing related activities that have
      been effective in increasing sales in the past, but there is no assurance they
      will be successful in generating orders sufficient to meet management’s
      expectations.


-15-
 INDEX





The
      Company believes its name recognition and close affiliation with the motorsports
      industry will continue to have a positive impact on its sales of specialty
      trailers, transporters and luxury motorcoaches. With more than 75 percent of
      its
      revenue from end users in motorsports and leisure and entertainment categories,
      which also includes equestrian events, and with its strong position in the
      livestock trailer market, the Company believes it is strategically
      well-positioned to continue to benefit from these markets. The Company intends
      to continue introducing new models and models with enhanced features. It also
      continues to expand its trailer dealer organization in unserved or underserved
      markets.





**Liquidity
      and Capital Resources**





***General***





The
      Company’s liquidity is primarily affected by its cash flow from operations
      together with changes in amounts available to borrow on its approved lines
      of
      credit with U.S. Bank and GE. During the six months ended June 30, 2006, the
      Company’s operating activities provided net cash of $2.8 million, as net income
      and non-cash depreciation and amortization charges provided $3.9 million and
      working capital changes used $1.0 million. At June 30, 2006, the Company had
      approximately $16.3 million available to borrow under its credit lines compared
      to $12.3 million at December 31, 2005, an increase of $4.0 million as
      availability under both lines increased due to changes in eligible inventories
      and reduced borrowings.





The
      Company’s liquidity can be measured by two key indicators, its current ratio and
      its ratio of debt to shareholders’ investment. The Company’s ratio of current
      assets to current liabilities was 1.48 to 1 at June 30, 2006, compared with
      a
      ratio of 1.56 to 1 at December 31, 2005. **** Current
      assets increased by $5.3 million and current liabilities increased by $5.7
      million. The ratio of total debt to shareholders’ investment decreased to 0.94
      to 1 at June 30, 2006 from 1.10 to 1 at December 31, 2005. This ratio improved
      as stockholders’ investment increased during 2006 as a result of additional net
      income earned during the year.





To
      maintain an efficient level of trailer production, increased expenditures for
      working capital items have been and may continue to be required from time to
      time to support production levels in excess of sales. Production levels in
      excess of new order levels during the first six months of 2006 have resulted
      in
      the growth of finished trailer inventories by $1.0 million from December 31,
      2005. It is the Company’s expectation that a substantial portion of these
      additional trailers will be sold to dealers in the coming months. However,
      there
      is no assurance this will occur, which could adversely impact the liquidity
      of
      the Company.





To
      maintain a level motorcoach production schedule, production may begin on coaches
      before an order has been received from a specific buyer. As of June 30, 2006,
      100 percent of the coaches in production and to be completed over the next
      four
      months have not been sold to specific customers as compared to 59 percent at
      June 30, 2005 and 86 percent at December 31, 2005. During the six months ended
      June 30, 2006, units produced exceeded units sold and new coach inventory
      valuation increased by $5.9 million. While it is the Company’s expectation that
      substantially all of these motorcoaches will be sold to specific customers,
      there is no assurance this will occur. Accordingly, this could adversely impact
      the liquidity of the Company.





During
      the third quarter of 2006, the Company has scheduled payments for debt principal
      and interest, expiring motorcoach shell consignment agreements, and other fixed
      obligations that will require cash flows of $7.4 million in addition to amounts
      required to cover checks not yet presented for payment, which at June 30, 2006
      was $4.4 million. At June 30, 2006 the Company had availability on its credit
      lines of approximately $16.3 million. Additional payments may be required for
      the commitments and contingencies referred to in Note 4 of the unaudited
      condensed consolidated financial statements included in this quarterly report
      on
      Form 10-Q. These payments are expected to be funded by cash generated from
      operations, including reductions in receivable and inventory levels, as well
      as
      availability on existing lines of credit.











-16-
 INDEX


***Credit
      Facilities and Other Financing Activities***





The
      following, read in conjunction with Note 3 to the unaudited condensed
      consolidated financial statements included in this quarterly report on Form
      10-Q, is a summary of the Company’s agreements with its principal
      lenders:





1.
      The
      Company’s Amended and Restated Loan Agreement with U.S. Bank is in an aggregate
      amount of $27.8 million, including $17.0 million in an asset-based revolving
      credit commitment, $8.1 million in term loans on existing real estate and
      equipment and $2.7 million as a term loan for new equipment purchases. As of
      June 30, 2006, asset-based availability on the revolving credit line was $17.0
      million with outstanding borrowings of $0.2 million, outstanding letters of
      credit of $2.3 million and remaining borrowing availability of $14.5 million.
      The $8.1 million term notes are repayable over varying terms ending October
      31,
      2008 with aggregate monthly principal payments of $106,000 plus interest until
      maturity. Monthly principal payments are required on the outstanding principal
      balance on the new equipment term loan based on a 60 month amortization schedule
      and will be determined as borrowings are made on this note with the unpaid
      balance due on October 31, 2008. The Company was in compliance with all the
      covenants of this agreement at June 30, 2006.








2.
      The
      Company’s Amended Wholesale Financing Agreement with GE provides for aggregate
      financing of $25 million on new and used motorcoaches held as inventory by
      the
      Company. As of June 30, 2006, the aggregate availability under this agreement
      based upon motorcoach inventory levels and composition was $21.1 million with
      $19.3 million outstanding and $1.8 million available to borrow. The Company
      was
      in compliance with all the covenants of this agreement at June 30, 2006.








3.
      In
      2003, the Company entered into a Floor Plan Financing Agreement with Regions
      Bank, for aggregate financing of $3.0 million to fund 100 percent of the cost
      of
      new motorcoaches purchased for resale from Foretravel, the manufacturer. During
      2004, the Agreement was amended to provide for use of this line to also fund
      purchases of travel trailers from Coachmen, Inc. In December 2005, this
      agreement was amended to reduce the available line from $3.0 million to $2.0
      million, as the Company’s need for this financing has been reduced as the
      Foretravel dealership was discontinued. As of March 31, 2006, less than $0.1
      million was outstanding under this agreement. The Company was in compliance
      with
      the financial covenants of this agreement at June 30, 2006.





4.
      The
      Company’s motorcoach shell manufacturer provides shells to the Company on a four
      month consignment basis. Payment is required at the time a motorcoach is sold
      or
      at the end of the consignment period, whichever occurs first. At June 30, 2006,
      the amount due to the Company’s shell manufacturer for consigned shells was $6.4
      million and there were no shells with an expired consignment term.





5.
      On
      January 21, 2005, the Company entered into a Mortgage Agreement with GE
      Commercial Finance Business Property Corporation (GE Property) whereby the
      Company borrowed the funds to purchase for $5.3 million the Sanford, Florida
      property it uses as a sales and service center for the motorcoach division.
      The
      mortgage note matures on February 1, 2017, bears interest at 6.49 percent per
      annum and requires monthly principal and interest payments of $52,874.





6.
      On May
      25, 2004 the Company entered into an agreement to reschedule payments due under
      an Aircraft Security Agreement dated June 11, 1999 between the Company and
      1 st Source
      Bank. Under the revised repayment schedule, the remaining principal balance
      is
      to become due on May 21, 2007. However, the Company expects to refinance this
      note and as a result is classifying the balance of $2,531,000 less the current
      portion of $161,000 as a long term liability.











***Certain
      Other Obligations***





As
      described in Note 4 to the unaudited condensed consolidated financial statements
      included in this quarterly report on Form 10-Q, the Company is subject to a
      number of commitments and contingencies that may affect its
      liquidity.





-17-
 INDEX


***Statement
      of Cash Flows***





Following
      is a discussion of the principal components of the Company’s cash flow for the
      six months ended June 30, 2006, as reflected in the condensed consolidated
      statements of cash flow:




Operating
      activities generated net cash of $2.8 million. The Company’s net income provided
      $2.9 million and depreciation, amortization and other non-cash items provided
      $0.9 million, while changes in working capital items consumed $1.0 million
      of
      cash. Net changes in receivables, inventories and prepaid assets used cash
      of
      $5.5 million. Inventories increased by $4.0 million due primarily to an increase
      in new coaches on hand, accounts receivable increased by 2.1 million, and leased
      trailers increased by $0.1 million. These increases were partially offset by
      a
      decrease in prepaid expenses of $0.7 million. Net changes in accounts payable,
      accrued liabilities and other current liabilities provided net cash of $4.3
      million. Changes in these liabilities included: an increase of $1.2 million
      in
      accounts payable as a result of higher purchasing activity and raw material
      inventory levels at the trailer division, an increase of $3.3 million in
      motorcoach shells payable as the number of shells in process increased; a
      decrease of $1.3 million in customer deposits and a $1.1 million increase in
      accrued liabilities.





The
      Company’s investing activities used cash of $0.6 million. Purchases of plant and
      equipment items totaled $0.7 million and have been financed with cash provided
      by operating activities and borrowings of $0.3 million on the capital
      expenditures term note, while sales of retired equipment provided proceeds
      of
      $0.1 million.





The
      Company’s financing activities used net cash of $2.2 million. Wholesale
      financing and credit line borrowings were reduced by $1.0 million. Other long
      term borrowings were reduced by $0.9 million as a result of payments and
      increased by $0.3 million for additional borrowings. Net other short term
      borrowings were reduced by $0.6 million. Checks issued but not presented for
      payment were substantially unchanged. Borrowings on the U.S. Bank line of credit
      are used to fund these checks as they are presented for payment at the bank.
      Issuance of common stock for exercised options provided $0.1
      million.





The
      Company believes that its current sources of liquidity will be sufficient to
      fund continued operations and capital requirements for the next twelve months.
      As described above, the Company has agreements with its two major lenders to
      continue funding for the remainder of 2006, assuming ongoing compliance with
      applicable covenants. ****





For
      the
      foreseeable future, the Company does not plan to pay dividends but instead
      will
      follow the policy of reinvesting any earnings in order to finance the expansion
      and development of its business. The Company is a party to certain loan
      agreements that prohibit the payment of dividends without the lenders’
consent.











**Off-balance
      sheet arrangements**





The
      Company had no off-balance sheet arrangements or transactions with
      unconsolidated, limited purpose entities.





**Other
      events**





The
      Company entered into an Agreement and Plan of Merger, dated as of July 26,
      2006
      (the “Merger Agreement”), with Universal Trailer Holdings Corp. (“Universal
      Trailer”) of Cincinnati, Ohio, a corporation with majority ownership by Dubin
      Clark & Company, a private equity investment firm, and Dart Acquisition
      Corp. (“Dart”), a wholly-owned subsidiary of Universal Trailer. Under the Merger
      Agreement, Dart will merge with and into the Company and the Company will become
      a wholly-owned subsidiary of Universal Trailer (the “Merger”).





Under
      the
      terms of the Merger Agreement, each shareholder of the Company will receive
      $6.50 in cash for each outstanding share of Company stock, and the holders
      of
      outstanding and vested options and warrants to purchase shares of Company stock
      will receive a cash payment for each such share equal to the difference between
      $6.50 and the exercise price under such option or warrant.





A
      special
      committee of the Company’s outside directors has approved the Merger Agreement.
      The consummation of the Merger is subject to various conditions, including
      shareholder approval; the expiration of the applicable waiting period under
      the
      Hart-Scott-Rodino Act; the closing of debt financing arrangements; the continued
      effectiveness of the agreement between Universal Trailer and Featherlite
      Coaches, Inc. (“Featherlite Coaches”) referred to below; and other customary
      closing conditions.


-18-
 INDEX


The
      Company expects to announce a special meeting of the Company's shareholders
      following preparation and filing of proxy materials with the Securities and
      Exchange Commission.





In
      addition, Featherlite Coaches, a newly-formed company controlled by Conrad
      Clement, the Company’s Chairman, President and CEO, Tracy Clement, Featherlite’s
      Executive Vice President, and Bulk Resources, Inc., has entered into a
      definitive agreement with Universal Trailer to purchase the assets and assume
      substantially all of the liabilities of Featherlite’s motorcoach
      division following the closing of the Merger. The Company is not a party to
      this agreement and does not own any equity of Featherlite Coaches. As noted
      above, the closing of the Merger is subject to the agreement between Featherlite
      Coaches and Universal Trailer remaining in full force and effect.








**Forward-looking
      statements**





We
      have
      made, and may continue to make, various written or verbal forward-looking
      statements with respect to our business, including statements contained in
      this
      quarterly report on Form 10-Q, other filings with the Securities and Exchange
      Commission, and reports to stockholders. Forward looking statements are those
      involving the outcome of future events that are based upon current expectations,
      estimates, forecasts and projections as well as the current beliefs and
      assumptions of our management. Any statement that is not a historical fact,
      including any statement regarding estimates, projections, future trends and
      the
      outcome of events that have not occurred, is a forward-looking statement. The
      Company’s forward-looking statements generally relate to its growth strategy,
      adequacy of and ability to implement price increases to address rising aluminum
      prices, its industry outlook, product development programs, effectiveness of
      sales efforts and marketing affiliations and sufficiency of capital and ability
      to comply with respective debt covenants. Our forward-looking statements
      generally relate to The Private Securities Litigation Reform Act of 1995 which
      provides a safe harbor for forward-looking statements made by us or on our
      behalf.





The
      words
“believe,” “estimate,” “expect,” “intend,” “may,” “could,” “will,” “plan,”
“anticipate,” and similar words and expressions are intended to identify
      forward-looking statements. Forward-looking statements speak only as of the
      date
      made, are based on current expectations, are inherently uncertain and should
      be
      viewed with caution. The Company makes no commitment to update any
      forward-looking statement or to disclose any facts, events, or circumstances
      after the date hereof that may affect the accuracy of any forward-looking
      statement, other that required by law.





Featherlite
      wishes to caution readers that the factors described in “Risk Factors” in the
      Company’s Annual Report on Form 10-K, among others, in some cases have affected,
      and in the future could affect, Featherlite’s actual results and could cause
      Featherlite’s actual consolidated results to differ materially from those
      expressed in any forward-looking statements made by, or on behalf of,
      Featherlite.







ITEM
      3.  QUANTITATIVE
      & QUALITATIVE DISCLOSURES ABOUT MARKET RISK





*Commodity
      Risk*




The
      Company is exposed to market risks related to changes in the cost of aluminum.
      Aluminum is a commodity that is traded daily on the commodity markets and
      fluctuates in price. The average Midwest delivered cash price per pound for
      ingot aluminum during the three years ended December 31, 2005, as reported
      to
      the Company by its suppliers was $0.92 in 2005 **,** $0.85 in
      2004, and $0.68 in 2003. The current average aluminum cost per pound for 2006
      delivery was $1.19 for the first six months of 2006. The Company’s cost of
      aluminum, which was approximately 15 percent of consolidated cost of sales
      in
      2005, varies from these market prices due to vendor processing charges, timing
      of purchases, and contractual commitments with suppliers for specific prices
      and
      other factors. In 2004, the Company obtained commitments from suppliers to
      provide, at an agreed upon fixed price, more than 90 percent of its anticipated
      requirements for 2004, which reduced substantially the risk of aluminum cost
      fluctuations for the year. The Company did not obtain such commitments for
      2005
      nor has it obtained such commitments for 2006.  In
      the
      event the Company elects to enter into fixed-price aluminum contracts, there
      is
      a potential risk of loss related to such contracts if there is a substantial
      drop in the actual cost of aluminum in relation to the contract price, which
      would affect the competitive price of the Company’s products.





The
      Company initiated a 4 percent price increase for substantially all trailer
      products other than interior packages that are invoiced after December 31,
      2005
      unless they were ordered and in backlog at December 31, 2005. The Company also
      initiated a 4.5 percent aluminum surcharge on all aluminum trailer models
      invoiced after January 17, 2006 unless they were


-19-
 INDEX


ordered
      and in backlog at January 17, 2006. This surcharge was increased to 6.5 percent
      on April 3, 2006, unless the trailers were ordered and in backlog at April
      3,
      2006. The Company also implemented a 3.5% price increase effective on all 2007
      model trailers, which began shipping approximately July 1, 2006 and is expected
      to be fully implemented over the next three months. Management believes these
      price increases and the surcharge will cover the higher aluminum costs in 2006
      but may not cover other cost increases as well. If the cost of aluminum
      increases significantly above current levels and the Company cannot increase
      its
      product prices sufficiently to cover such increases, the Company’s results of
      operations may be harmed. Based upon 2005 annual pounds used, a price increase
      for aluminum of $0.01 per pound could reduce the Company’s future net income by
      approximately $132,000 per year if not compensated for by price increases or
      reductions in other costs.








*Interest
      Rate Risk*





The
      Company is exposed to market risks related to changes in U.S. and international
      interest rates. Approximately $23 million of the Company’s debt bears interest
      at a variable rate. An interest rate increase by one percentage point would
      reduce the Company’s future annual net income by approximately $145,000 at
      current debt levels.




Item
      4. CONTROLS
      AND PROCEDURES





(a)  Evaluation
      of disclosure controls and procedures. After evaluating the effectiveness of
      the
      design and operation of Company’s “disclosure controls and procedures” pursuant
      to Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act)
      as
      of the end of the period covered by this report, our chief executive officer
      and
      chief financial officer, with the participation of the Company’s management,
      have concluded that the Company’s disclosure controls and procedures are
      effective to ensure that information that is required to be disclosed by the
      Company in reports that it files under the Exchange Act is recorded, processed,
      summarized and reported within the time periods specified in the rules of the
      Securities Exchange Commission.





(b)
      Changes in internal controls. There were no changes in our internal control
      over
      financial reporting that occurred during the period covered by this quarterly
      report that have materially affected, or are reasonably likely to materially
      affect the Company’s internal control over financial reporting.


-20-
 INDEX


PART
      II. OTHER INFORMATION





Item
      1A.  RISK
      FACTORS





***Failure
      to complete the recently announced acquisition of Featherlite could negatively
      affect the market price of our common stock and our future business and
      operations.***





On
      July
      26, 2006, we signed a definitive merger agreement to be acquired by Universal
      Trailer Holdings Corp., which is majority-owned by Dubin Clark & Company, a
      private equity firm. If this transaction is not completed for any reason, we
      will be subject to a number of material risks, including:





·
            Under
                circumstances described in the merger agreement, we could be required
                to
                pay termination fees of $2 million or
                $500,000;





·
            Under
                circumstances described in the merger agreement, we could be required
                to
                pay up to $1 million of Universal Trailer’s expenses in connection with
                the merger transaction;





·
            Our
                motorcoach division may be unable to increase order and sales levels,
                which management believes have been materially adversely affected
                as a
                result of the Company's exploration of strategic alternatives (including
                the proposed merger);





·
            The
                market price of our common stock may decline to the extent the current
                market price of such shares reflects a market assumption that the
                merger
                transaction will be completed; and





·
            The
                Company’s costs and expenses related to the merger transaction, such as
                legal and accounting fees and a portion of the investment banking
                fees,
                must be paid even if the transaction is not
                completed.





If
      this
      transaction is not completed for any reason, including, without limitation,
      the
      inability of the acquirer to obtain the necessary debt financing or the
      inability of Universal Trailer and Featherlite Coaches to maintain the
      effectiveness of the agreement between them, we may not be able to identify
      other alternative strategic options that are worth pursuing. Prior to the
      closing of this proposed merger transaction, or, if this proposed merger
      transaction is not consummated, we may be subject to other uncertainties and
      risks, including the diversion of management’s attention, which could have a
      material adverse effect our business, financial condition and results of
      operations.





***Other
      risk factors***





In
      addition to the above and other information set forth in this report, including
      the important information in “Forward-looking statements,” you should carefully
      consider the factors discussed in our Annual Report on Form 10-K for the year
      ended December 31, 2005. Those factors, if they were to occur, could cause
      our
      actual results to differ materially from those expressed in our forward-looking
      statements in this report, and materially adversely affect our financial
      condition or future results. Although we are not aware of any other factors
      that
      we currently anticipate will cause our forward-looking statements to differ
      materially from our future actual results, or materially affect the Company’s
      financial condition or future results, additional risks and uncertainties not
      currently known to us or that we currently deem to be immaterial might
      materially adversely affect our actual business, financial condition and/or
      operating results.


-21-
 INDEX





Item
      6.  EXHIBITS





See
      Exhibit Index on page following signatures.








**SIGNATURES**





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





FEATHERLITE,
      INC.


(Registrant)







Date: August
              11, 2006
            By:
            /s/ CONRAD
              D. CLEMENTPresident
              & CEO


Date: August
              11, 2006
            By:
            /s/ JEFFERY
              A. MASONChief
              Financial Officer





-22-
 INDEX




**EXHIBIT
      INDEX**


Form
      10-Q


Quarter
      ended June 30, 2006





Exhibit
      No.         Description





**2.1**
            Agreement
                and Plan of Merger, dated as of July 26, 2006, by and among Universal
                Trailer Holdings Corp., Dart Acquisition Corp. and Featherlite, Inc.
                (incorporated herein by reference to Exhibit 2.1 to the Company’s Form 8-K
                filed with the Commission on July 27, 2006).**31.1**
            Certification
                of Chief Executive Officer pursuant to
                Section 302 of the Sarbanes-Oxley Act of 2002.**31.2**
            Certification
                of Chief Financial Officer pursuant to
                Section 302 of the Sarbanes-Oxley Act of 2002.**32.1**
            Certification
                of Chief Executive Officer pursuant to
                Section 906 of the Sarbanes-Oxley Act of 2002.**32.2**
            Certification
                of Chief Financial Officer pursuant to
                Section 906 of the Sarbanes-Oxley Act of
                2002.









-23-
 INDEX