**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**x**                                                         QuarterlyReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

**For the quarterly period ended:  June 30, 2007**

**or**

**o**                                                            TransitionReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

**For the transition period from                 to                   **

**Commission File Number:  1-14725**

**MONACO COACH CORPORATION**(Exact name of registrant as specified in its charter)

| **Delaware**                                   |   | **35-1880244**                        |
|------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation |   | (I.R.S. Employer  Identification No.) |
| or organization)                               |   |                                  |

 

**91320 Industrial WayCoburg, Oregon 97408**

(Address of principalexecutive offices)(Zip code)

Registrant’s telephonenumber, including area code: **(541) 686-8011**

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

YES  x                     NO  o

Indicate bycheck mark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.
| Large Accelerated Filer o | Accelerated Filer x | Non-Accelerated Filer o |
|--------------------------------|--------------------------|------------------------------|

 

Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).    YES  o  NO  x

The number of shares outstanding ofcommon stock, $.01 par value, as of June 30, 2007: 29,950,917

 

----

**MONACO COACH CORPORATION**

**FORM10-Q**

**June30, 2007**

**INDEX**
|                                                                                                                           | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|
| **PART I - FINANCIAL  INFORMATION**                                                                                       |       |
| ** **                                                                                                                |       |
| **Item 1. Financial  Statements**                                                                                         |       |
| ** **                                                                                                                |       |
| Condensed  Consolidated Balance Sheets as of December 30, 2006 and June 30, 2007                                          |       |
|                                                                                                                      |       |
| Condensed  Consolidated Statements of Income for the quarters and six month periods  ended July 1, 2006 and June 30, 2007 |       |
|                                                                                                                      |       |
| Condensed  Consolidated Statements of Cash Flows for the six month periods ended July 1,  2006 and June 30, 2007          |       |
|                                                                                                                      |       |
| Notes to  Condensed Consolidated Financial Statements                                                                     |       |
|                                                                                                                      |       |
| **Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations**                  |       |
| ** **                                                                                                                |       |
| **Item 3.  Quantitative and Qualitative Disclosures About Market Risk**                                                   |       |
| ** **                                                                                                                |       |
| **Item 4. Controls  and Procedures**                                                                                      |       |
| ** **                                                                                                                |       |
| **PART II - OTHER  INFORMATION**                                                                                          |       |
| ** **                                                                                                                |       |
| **Item 1A. Risk Factors**                                                                                                 |       |
| ** **                                                                                                                |       |
| **Item 1. Legal  Proceedings**                                                                                            |       |
| ** **                                                                                                                |       |
| **Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds**                                                  |       |
| ** **                                                                                                                |       |
| **Item 3.  Default upon Senior Securities**                                                                               |       |
| ** **                                                                                                                |       |
| **Item 4.  Submission of Matters to a Vote of Security Holders**                                                          |       |
| ** **                                                                                                                |       |
| **Item 5. Other  Information**                                                                                            |       |
| ** **                                                                                                                |       |
| **Item 6. Exhibits**                                                                                                      |       |
| ** **                                                                                                                |       |
| **Signatures**                                                                                                            |       |
| ** **                                                                                                                |       |
| **Certifications  under Section 302(a) and 906 of the Sarbanes-Oxley Act of 2002**                                        |       |

 

2

----

**PART I - FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

3

----

**MONACO COACH CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(in thousands of dollars, except share and per share data)**
| ** **                                                                                                                   | ** ** | **December 30,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                   | ** ** | **2006**              | ** ** | **2007**          | ** ** |
| ** **                                                                                                                   | ** ** | ** **            | ** ** | **(unaudited)**   | ** ** |
| **ASSETS**                                                                                                                   | ** ** | ** **            | ** ** | ** **        | ** ** |
| Current assets:                                                                                                              |       |                  |       |              |       |
| Cash                                                                                                                         |       | $                     | 4,984      |              | $          | 2,233 |   |
| Trade  receivables, net                                                                                                      |       | 81,588                |       | 111,590           |       |
| Inventories, net                                                                                                             |       | 155,871               |       | 147,818           |       |
| Resort lot  inventory                                                                                                        |       | 7,997                 |       | 7,151             |       |
| Prepaid expenses                                                                                                             |       | 5,624                 |       | 4,881             |       |
| Income taxes  receivable                                                                                                     |       | 6,901                 |       | 0                 |       |
| Deferred income  taxes                                                                                                       |       | 38,038                |       | 39,894            |       |
| Total current  assets                                                                                                        |       | 301,003               |       | 313,567           |       |
|                                                                                                                         |       |                  |       |              |       |
| Property, plant, and  equipment, net                                                                                         |       | 153,895               |       | 149,017           |       |
| Land held for  development                                                                                                   |       | 16,300                |       | 24,321            |       |
| Investment in joint  venture                                                                                                 |       | 0                     |       | 3,695             |       |
| Debt issuance costs net  of accumulated amortization of $912 and $1,068, respectively                                        |       | 540                   |       | 577               |       |
| Goodwill                                                                                                                     |       | 86,412                |       | 86,412            |       |
| Total assets                                                                                                                 |       | $                     | 558,150    |              | $          | 577,589 |   |
|                                                                                                                         |       |                  |       |              |       |
| **LIABILITIES**                                                                                                              | ** ** | ** **            | ** ** | ** **        | ** ** |
| Current liabilities:                                                                                                         |       |                  |       |              |       |
| Book overdraft                                                                                                               |       | 16,626                |       | 0                 |       |
| Current portion  of long-term debt                                                                                           |       | 5,714                 |       | 5,714             |       |
| Line of credit                                                                                                               |       | 2,036                 |       | 0                 |       |
| Income taxes  payable                                                                                                        |       | 0                     |       | 2,196             |       |
| Accounts payable                                                                                                             |       | 72,591                |       | 97,949            |       |
| Product  liability reserve                                                                                                   |       | 15,764                |       | 15,833            |       |
| Product warranty  reserve                                                                                                    |       | 33,804                |       | 36,126            |       |
| Accrued expenses  and other liabilities                                                                                      |       | 44,364                |       | 50,079            |       |
| Discontinued  operations                                                                                                     |       | 298                   |       | 0                 |       |
| Total current  liabilities                                                                                                   |       | 191,197               |       | 207,897           |       |
|                                                                                                                         |       |                  |       |              |       |
| Long-term debt, less  current portion                                                                                        |       | 29,071                |       | 26,214            |       |
| Deferred income taxes                                                                                                        |       | 21,678                |       | 21,301            |       |
| Deferred revenue                                                                                                             |       | 883                   |       | 783               |       |
| Total  liabilities                                                                                                           |       | 242,829               |       | 256,195           |       |
|                                                                                                                         |       |                  |       |              |       |
| Commitments and  contingencies (Note 11)                                                                                     |       |                  |       |              |       |
|                                                                                                                         |       |                  |       |              |       |
| **STOCKHOLDERS’ EQUITY**                                                                                                | ** ** | ** **            | ** ** | ** **        | ** ** |
| Preferred stock, $.01  par value; 1,934,783 shares authorized, no shares outstanding                                         |       |                  |       |              |       |
| Common stock, $.01 par  value; 50,000,000 shares authorized, 29,769,356 and 29,950,917 issued and  outstanding, respectively |       | 298                   |       | 300               |       |
| Additional paid-in  capital                                                                                                  |       | 63,722                |       | 67,418            |       |
| Retained earnings                                                                                                            |       | 251,301               |       | 253,676           |       |
| Total  stockholders’ equity                                                                                             |       | 315,321               |       | 321,394           |       |
| Total liabilities and  stockholders’ equity                                                                             |       | $                     | 558,150    |              | $          | 577,589 |   |

 

See accompanying notes.

4

----

**MONACO COACH CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited: in thousands ofdollars, except share and per share data)**
| ** **                                                        | ** ** | **Quarter Ended**     | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------|------------|--------------------------------|------------|
| ** **                                                        | ** ** | **July 1, 2006** | ** ** | **June 30, 2007**    | ** ** | **July 1, 2006** | ** ** | **June 30, 2007** | ** ** |
| ** **                                                        | ** ** | ** **                 | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                         |       | $                          | 321,283    |                           | $          | 335,319 |   | $ | 706,350 |   | $ | 657,563 |   |
| Cost of sales                                                     |       | 290,792                    |       | 298,721                        |       | 627,410 |   | 584,969 |   |
| Gross profit                                                      |       | 30,491                     |       | 36,598                         |       | 78,940 |   | 72,594 |   |
|                                                              |       |                       |       |                           |       |   |   |   |   |
| Selling,  general, and administrative expenses                    |       | 29,429                     |       | 27,866                         |       | 63,407 |   | 60,223 |   |
| Plant relocation  costs                                           |       | 269                        |       | 0                              |       | 269 |   | 0 |   |
| Operating income                                                  |       | 793                        |       | 8,732                          |       | 15,264 |   | 12,371 |   |
|                                                              |       |                       |       |                           |       |   |   |   |   |
| Other income,  net                                                |       | 256                        |       | 379                            |       | 388 |   | 492 |   |
| Interest expense                                                  |       | (940                       | )          | (947                           | )          | (2,192 | ) | (1,914 | ) |
| Loss from  investment in joint venture                            |       | 0                          |       | (699                           | )          | 0 |   | (977 | ) |
| Income before income taxes, continuing operations                 |       | 109                        |       | 7,465                          |       | 13,460 |   | 9,972 |   |
|                                                              |       |                       |       |                           |       |   |   |   |   |
| Provision (benefit  from) for income taxes, continuing operations |       | (370                       | )          | 3,001                          |       | 4,688 |   | 4,009 |   |
|                                                              |       |                       |       |                           |       |   |   |   |   |
| Income from  continuing operations                                |       | 479                        |       | 4,464                          |       | 8,772 |   | 5,963 |   |
|                                                              |       |                       |       |                           |       |   |   |   |   |
| Loss from discontinued  operations, net of tax provision          |       | (107                       | )          | 0                              |       | (107 | ) | 0 |   |
|                                                              |       |                       |       |                           |       |   |   |   |   |
| Net income                                                        |       | $                          | 372        |                           | $          | 4,464 |   | $ | 8,665 |   | $ | 5,963 |   |
|                                                              |       |                       |       |                           |       |   |   |   |   |
| Earnings per  common share:                                       |       |                       |       |                           |       |   |   |   |   |
| Basic from continuing operations                                  |       | $                          | 0.01       |                           | $          | 0.15 |   | $ | 0.29 |   | $ | 0.20 |   |
| Basic from discontinued operations                                |       | 0.00                       |       | 0.00                           |       | 0.00 |   | 0.00 |   |
| Basic                                                             |       | $                          | 0.01       |                           | $          | 0.15 |   | $ | 0.29 |   | $ | 0.20 |   |
|                                                              |       |                       |       |                           |       |   |   |   |   |
| Diluted from continuing operations                                |       | $                          | 0.01       |                           | $          | 0.15 |   | $ | 0.29 |   | $ | 0.20 |   |
| Diluted from discontinued operations                              |       | 0.00                       |       | 0.00                           |       | 0.00 |   | 0.00 |   |
| Diluted                                                           |       | $                          | 0.01       |                           | $          | 0.15 |   | $ | 0.29 |   | $ | 0.20 |   |
|                                                              |       |                       |       |                           |       |   |   |   |   |
| Weighted-average  common shares outstanding:                      |       |                       |       |                           |       |   |   |   |   |
| Basic                                                             |       | 29,708,892                 |       | 29,946,436                     |       | 29,672,558 |   | 29,888,068 |   |
| Diluted                                                           |       | 29,891,165                 |       | 30,370,432                     |       | 29,859,549 |   | 30,387,879 |   |

 

See accompanying notes.

5

----

**MONACO COACH CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited: in thousands of dollars)**
| ** **                                                                                   | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                   | ** ** | **July 1, 2006**     | ** ** | **June 30, 2007** | ** ** |
| ** **                                                                                   | ** ** | ** **                     | ** ** | ** ** | ** ** |
| **Increase  (Decrease) in Cash:**                                                            | ** ** | ** **                     | ** ** | ** ** | ** ** |
|                                                                                         |       |                           |       |   |   |
| Cash flows from  operating activities:                                                       |       |                           |       |   |   |
| Net income                                                                                   |       | $                              | 8,665      |   | $ | 5,963 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                           |       |   |   |
| Gain on sale of assets                                                                       |       | (12                            | )          | (111 | ) |
| Depreciation and amortization                                                                |       | 6,973                          |       | 7,068 |   |
| Deferred income taxes                                                                        |       | (5,367                         | )          | (2,232 | ) |
| Stock-based compensation expense                                                             |       | 1,720                          |       | 2,484 |   |
| Net losses in equity investment                                                              |       | 0                              |       | 977 |   |
| Changes in working capital accounts:                                                         |       |                           |       |   |   |
| Trade receivables, net                                                                       |       | (560                           | )          | (30,002 | ) |
| Inventories                                                                                  |       | (6,841                         | )          | 3,993 |   |
| Resort lot inventory                                                                         |       | 917                            |       | 846 |   |
| Prepaid expenses                                                                             |       | (1,068                         | )          | 738 |   |
| Land held for development                                                                    |       | (16,300                        | )          | (8,021 | ) |
| Accounts payable                                                                             |       | 17,439                         |       | 25,358 |   |
| Product liability reserve                                                                    |       | (1,184                         | )          | 69 |   |
| Product warranty reserve                                                                     |       | 1,328                          |       | 2,048 |   |
| Income taxes payable                                                                         |       | 2,443                          |       | 9,097 |   |
| Accrued expenses and other liabilities                                                       |       | 8,663                          |       | 5,717 |   |
| Deferred revenue                                                                             |       | 983                            |       | (100 | ) |
| Discontinued operations                                                                      |       | 2,247                          |       | (18 | ) |
| Net cash provided by operating activities                                                    |       | 20,046                         |       | 23,874 |   |
|                                                                                         |       |                           |       |   |   |
| Cash flows from  investing activities:                                                       |       |                           |       |   |   |
| Additions to property, plant, and equipment                                                  |       | (5,771                         | )          | (2,669 | ) |
| Investment in joint venture                                                                  |       | 0                              |       | (366 | ) |
| Proceeds from sale of assets                                                                 |       | 98                             |       | 505 |   |
| Net cash used in investing activities                                                        |       | (5,673                         | )          | (2,530 | ) |
|                                                                                         |       |                           |       |   |   |
| Cash flows from  financing activities:                                                       |       |                           |       |   |   |
| Book overdraft                                                                               |       | (14,545                        | )          | (16,626 | ) |
| Borrowings (payments) on lines of credit, net                                                |       | 7,108                          |       | (2,036 | ) |
| Payments on long-term notes payable                                                          |       | (2,857                         | )          | (2,857 | ) |
| Debt issuance costs                                                                          |       | 0                              |       | (193 | ) |
| Dividends paid                                                                               |       | (3,563                         | )          | (3,597 | ) |
| Issuance of common stock                                                                     |       | 1,236                          |       | 1,078 |   |
| Tax benefit of stock-based awards exercised or  vested                                       |       | 0                              |       | 136 |   |
| Discontinued operations                                                                      |       | 90                             |       | 0 |   |
| Net cash used in financing activities                                                        |       | (12,531                        | )          | (24,095 | ) |
|                                                                                         |       |                           |       |   |   |
| Net change in  cash                                                                          |       | 1,842                          |       | (2,751 | ) |
| Cash at  beginning of period                                                                 |       | 586                            |       | 4,984 |   |
|                                                                                         |       |                           |       |   |   |
| Cash at end of period                                                                        |       | $                              | 2,428      |   | $ | 2,233 |   |

 

See accompanying notes.

6

----

**MONACO COACH CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

**1.****                   ****Basis of Presentation**

The interim condensed consolidatedfinancial statements have been prepared by Monaco Coach Corporation (the “Company”)without audit.  In the opinion ofmanagement, the accompanying unaudited financial statements contain alladjustments necessary, consisting only of normal recurring adjustments, topresent fairly the financial position of the Company as of December 30, 2006  and June 30, 2007, and the results of itsoperations for the quarters and six months ended July 1, 2006 and June 30, 2007and its cash flows for the six months ended July 1, 2006 and June 30,2007.  The condensed consolidatedfinancial statements include the accounts of the Company and its wholly-ownedsubsidiaries, and all significant intercompany accounts and transactions havebeen eliminated in consolidation.  Thebalance sheet data as of December 30, 2006 was derived from audited financialstatements, but does not include all disclosures contained in the Company’sAnnual Report to Stockholders on Form 10-K for the year ended December 30,2006, nor does it include all the information and footnotes required bygenerally accepted accounting principles for complete financial statements.  These interim condensed consolidatedfinancial statements should be read in conjunction with the audited financialstatements and notes thereto appearing in the Company’s Annual Report toStockholders on Form 10-K for the year ended December 30, 2006.

**2.****                   ****Inventories, net**

Inventories are stated at lower of cost(first-in, first-out) or market.  Thecomposition of inventory is as follows:
|                        | ** ** | **December 30,**   | ** ** | **June 30,** | ** ** |
|------------------------|------------|-------------------------|------------|-------------------|------------|
| ** **             | ** ** | **2006**                | ** ** | **2007**          | ** ** |
| ** **             | ** ** | **(in thousands)** | ** ** |
| ** **             | ** ** | ** **              | ** ** | ** **        | ** ** |
| Raw materials          |       | $                       | 84,069     |              | $          | 77,505 |   |
| Work-in-process        |       | 55,473                  |       | 57,306            |       |
| Finished units         |       | 26,773                  |       | 23,065            |       |
| Raw material  reserves |       | (10,444                 | )          | (10,058           | )          |
|                   |       | $                       | 155,871    |              | $          | 147,818 |   |

 

**3.****                      ****Joint Venture**

On February 25,2007, the Company closed a transaction with International Truck and EngineCorporation to form a joint venture to manufacture all of the Company’s reardiesel chassis.  The terms of theagreement grant the Company a 49% ownership in the joint venture, known asCustom Chassis Products, LLC (CCP).  Theinvestment is accounted for under the equity method.  The Company contributed $4,060,000 ofinventory, $246,000 of fixed assets, $140,000 of cash to CCP and incurredtransaction costs of $226,000.  TheCompany’s portion of CCP’s net loss for the quarter and six months ended June30, 2007 was $699,000 and $977,000, respectively.

**4.****                   ****Land Held for Development**

In June 2006, theCompany acquired an 80 acre piece of undeveloped land near LaQuinta, Californiafor $16.3 million.  In addition on April20, 2007, the Company acquired a 20 acre parcel near Naples, Florida for thepurchase price of $8.0 million.  Thesetwo properties will be developed as motorcoach only resorts and should havelots available for sale in the first quarter of 2008.

7

----

 

**5.****                      ****Line of Credit**

The Company’s credit facilities consist of arevolving line of credit of up to $105.0 million. As of June 30, 2007, therewas no balance outstanding on the revolving line of credit (the “Revolving Loan”).  At the election of the Company, the RevolvingLoan bears interest at varying rates that fluctuate based on the prime rate orLIBOR and are determined based on the Company’s leverage ratio.  The Company also pays interest quarterly onthe unused available portion of the Revolving Loan at varying rates, determinedby the Company’s leverage ratio.  TheRevolving Loan is due and payable in full on November 17, 2009 and requiresmonthly interest payments.  The agreementcontains restrictive covenants as to the Company’s leverage ratio, currentratio, fixed charge coverage ratio, and tangible net worth.  As of June 30, 2007, the Company was incompliance with these covenants.  TheCompany also has three unused letters of credit totaling $4.0 million outstandingas of June 30, 2007.

**6.****                   ****Long-Term Notes Payable**

As of June 30, 2007, outstanding TermDebt under the credit facilities was $31.4 million.  At the election of the Company, the Term Debtbears interest at varying rates that fluctuate based on the prime rate or LIBORand are determined based on the Company’s leverage ratio.  The Term Debt requires quarterly interest andprincipal payments of $1.4 million, with a final balloon payment of $12.9million due on November 18, 2010.  AtJune 30, 2007, the weighted-average interest rate on the Term Debt was7.9%.  The Term Debt is collateralized byall of the assets of the Company.  Theagreement contains restrictive covenants as to the Company’s leverage ratio,current ratio, fixed charge coverage ratio, and tangible net worth.  In January 2007, the Company amended itscredit facility to modify certain restrictive covenants.  As of June 30, 2007, the Company was incompliance with these covenants.

In November 2005, the Company obtained aterm loan of $500,000 from the State of Oregon in connection with therelocation of jobs to the Coburg, Oregon production facilities from the Bend,Oregon facility.  The principal andinterest are due on April 30, 2009.  Theloan bears a 5% annual interest rate.

The following table displays thescheduled principal payments by fiscal year that will be due in thousands onthe term loans.
|            | ** ** | **Amount of**   | ** ** |
|------------|------------|----------------------|------------|
| ** ** | ** ** | **payment due** | ** ** |
|       |       |                 |       |
| 2007       |       | $                    | 2,857      |   |
| 2008       |       | 5,714                |       |
| 2009       |       | 6,214                |       |
| 2010       |       | 17,143               |       |
|       |       |                 |       |
|       |       | $                    | 31,928     |   |

 

8

----

 

**7.****                   ****Income Taxes**

The Company adopted FIN 48, “Accounting forUncertainty in Income Taxes — an Interpretation of FAS 109,” (the “Interpretation”)as of the beginning of fiscal year 2007. The Interpretation clarifies the accounting for uncertainty in incometaxes recognized in accordance with FAS 109, “Accounting for Income Taxes,” bydefining a criterion that an individual tax position must be met for any partof the benefit to be recognized in the financial statements.

As of the beginning of fiscal 2007, the Company’stotal unrecognized tax benefits were $850,000 and all of these benefits, ifrecognized, would positively affect the Company’s effective tax rate.  The Company also had accrued interest relatedto these unrecognized tax benefits of $55,000 as of the date of adoption.  The interest expense associated with incometax contingencies is classified as income taxes in the Company’s financialstatements.  Penalties associated withincome taxes are classified as selling, general, and administrativeexpenses.  Within twelve months of thedate of adoption, it is reasonably possible that the unrecognized tax benefitswill decrease by an amount in the range of $100,000 to $115,000 due to theexpiration of federal and state statutes of limitations.  The federal uncertainty relates tosubjectivity in the measurement of certain deductions claimed for United Statesincome tax purposes and the state uncertainty relates to state income taxapportionment matters.

As of the date of adoption, the Company’s income taxreturns that remain subject to examination are tax years 2003 through 2006 forU.S. federal income tax and tax years 2002 through 2006 for major state incometax returns.  There have been no materialchanges in the information above between the date of adoption and June 30,2007.

**8.****                      ****Earnings Per Common Share**

Basic earnings per common share is based on theweighted-average number of shares outstanding during the period.  Diluted earnings per common share is based onthe weighted-average number of shares outstanding during the period, afterconsideration of the dilutive effect of outstanding stock-based awards.  For the quarter ended June 30, 2007, therewere 797,500 anti-dilutive stock-based awards excluded from the dilutedearnings per share calculation (835,450 for the quarter ended July 1, 2006).  The weighted-average number of common sharesused in the computation of earnings per common share were as follows:
|                                                   | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                        | ** ** | **July 1,**       | ** ** | **June 30,**              | ** ** | **July 1,** | ** ** | **June 30,** | ** ** |
| ** **                                        | ** ** | **2006**               | ** ** | **2007**                       | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                                        | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic**                                         | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Issued and  outstanding shares (weighted-average) |       | 29,708,892             |       | 29,946,436                     |       | 29,672,558 |   | 29,888,068 |   |
|                                              |       |                   |       |                           |       |   |   |   |   |
| **Effect  of Dilutive Securities**                | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stock-based  awards                               |       | 182,273                |       | 423,996                        |       | 186,991 |   | 499,811 |   |
|                                              |       |                   |       |                           |       |   |   |   |   |
| **Diluted**                                       |       | 29,891,165             |       | 30,370,432                     |       | 29,859,549 |   | 30,387,879 |   |

 

9

----

 
|                                      | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **July 1,**       | ** ** | **June 30,**              | ** ** | **July 1,** | ** ** | **June 30,** | ** ** |
| ** **                           | ** ** | **2006**               | ** ** | **2007**                       | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                           | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash dividends  per common share     |       | $                      | 0.06       |                           | $          | 0.06 |   | $ | 0.12 |   | $ | 0.12 |   |
| Cash dividends paid *(in thousands)* |       | $                      | 1,783      |                           | $          | 1,797 |   | $ | 3,563 |   | $ | 3,597 |   |

 

**9.****                      ****Stock-Based Award Plans**

The Company has anon-employee 1993 Director Stock Plan (the “Director Plan”), and an amended andrestated 1993 Stock Plan (the “Stock Plan”). The Company also had an EmployeeStock Purchase Plan (the “Purchase Plan”) - 1993, which had expenses recognizedin periods prior to fiscal 2007. The compensation expense recognized in thequarters ended July 1, 2006 and June 30, 2007 for the plans was $1.4 millionand $658,000, respectively. The amount of cash received in the quarters endedJuly 1, 2006 and June 30, 2007 from the exercise of stock options, stock issuedunder the Purchase Plan, and stock issued in lieu of some directors’ cashretainers was $99,000 and $150,000, respectively. There was no tax benefit realizedfrom stock-based awards exercised or vested in the second quarter of 2006 or2007.

On June 21, 2007,the Company’s Board of Directors approved the Monaco Coach Corporation 2007Employee Stock Purchase Plan and reserved 400,000 shares of Common Stock forissuance under the plan. Although the Stock Plan has not yet been approved bythe stockholders, before the Company will issue any shares under the plan, itmust be approved by the stockholders of the Company. The Company intends toseek such approval at the Annual Meeting in May 2008.

**Restricted Stock Unit Grant**

A component of theStock Plan permits the Company to grant restricted stock units (RSU’s). Thesegrants are treated as compensation expense under the rules of FAS 123R,and are required to be recognized in the Company’s consolidated statements ofincome. The valuation of the RSU’s is based on the closing market price of theCommon Stock on the date of grant. The RSU’s vest ratably over four years orvest in full at four years for employees and vest in full at three yearsfor directors.  RSU’s held byparticipants who meet the retirement eligibility provision vest upon actualretirement or the normal vesting period, whichever is earlier. UnderSection 162(m) of the Internal Revenue Code of 1986, as amended, RSU’sgranted to certain employees require performance criteria to be met in orderfor the units to vest in full at three years. The performance criteria arebased on the Company’s return on equity. As of June 30, 2007, there were132,686 RSU’s outstanding that require the attainment of the performancecriteria.

The compensationexpense recognized for RSU’s in the second quarters of 2006 and 2007 was$260,000 and $372,000, respectively. A forfeiture rate is applied to themajority of the RSU participants based on the historical forfeiture experiencewith stock options. The total remaining expense to be recognized in futureperiods for outstanding non-vested RSU’s is approximately $4.0 million. Theexpense is expected to be recognized over a weighted-average period of 3.0years.

10

----

 

Restricted stockunit transactions under the Stock Plan are summarized with the weighted-averagegrant-date fair value as follows:
|                                       | ** ** | ** **           | ** ** | **Weighted-**       | ** ** |
|---------------------------------------|------------|----------------------|------------|---------------------|------------|
| ** **                            | ** ** | ** **           | ** ** | **Average**         | ** ** |
| ** **                            | ** ** | **Restricted**       | ** ** | **Grant-Date**      | ** ** |
| ** **                            | ** ** | **Stock Units** | ** ** | **Fair Value** | ** ** |
| ** **                            | ** ** | ** **           | ** ** | ** **          | ** ** |
| Non-vested at  December 31, 2005 |       | 53,250               |       | $                   | 14.73      |   |
| Granted                               |       | 254,159              |       | 12.71               |       |
| Forfeited                             |       | (27,500              | )          | 14.67               |       |
| Non-vested at  December 30, 2006 |       | 279,909              |       | 12.90               |       |
| Granted                               |       | 198,049              |       | 16.75               |       |
| Vested                                |       | (38,219              | )          | 12.95               |       |
| Forfeited                             |       | (2,500               | )          | 12.95               |       |
| Non-vested at  March 31, 2007         |       | 437,239              |       | 14.64               |       |
| Forfeited                             |       | (1,500               | )          | 14.85               |       |
| Non-vested at June 30,  2007          |       | 435,739              |       | $                   | 14.64      |   |

 

**Performance Share Awards**

A component of the StockPlan also permits the Company to grant performance share awards (PSA’s).  No awards were granted in the second quarterof 2007.  The plan requires theachievement of performance by the Company based on Return on NetAssets-adjusted (RONA) and Total Shareholder Return (TSR) compared to a groupof peer companies. Depending on the ranking of the Company’s performanceagainst the peer group, the participants could earn from 0% up to 200% of thetarget payout of performance shares. A participant who retires during a performanceperiod and meets the retirement eligibility provision is entitled to receive100% of the award that would have otherwise been earned had the participantremained employed through the end of the performance period. The award to sucha participant will be settled at the end of the normal performance period.  Grants are currently outstanding under atwo-year performance period and two three-year performance periods.

The fair value of shareawards requiring achievement of the goal based on TSR is estimated on the dateof grant using a lattice-based valuation model. The assumptions used in the model to value the awards granted in thesecond quarter of 2007 are noted in the following table. Because lattice-basedoption valuation models incorporate ranges of assumptions for inputs, thoseranges are disclosed. Expected volatilities were based on historical volatilityof the Company’s stock and the average of the competitor companies’ stock, aswell as other factors. The Company used historical data to estimate employeeterminations within the valuation model. The expected term of awards grantedwas derived from the output of the option valuation model and represents theperiod of time that awards granted are expected to be outstanding. Therisk-free interest rate is based on interest rates on total constant maturityU.S. Treasury notes with lives consistent with the expected lives of therelated award. The grant-date fair value of the TSR related awards granted inthe first quarter of 2007 is $22.25 per award.

11

----

 
|                                                     | ** ** | **Quarter Ended**      | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|
| ** **                                          | ** ** | **June 30, 2007** | ** ** |
|                                                |       |                        |       |
| Risk-free  interest rate                            |       | 4.50                        | %          |
| Expected life  (in years)                           |       | 2 to 3                      |       |
| Expected  volatility of the Company                 |       | 38.60                       | %          |
| Expected  dividend yield                            |       | 1.40                        | %          |
| Peer companies’ average  volatility experience |       | 33.10                       | %          |

 

The fair value ofthe share awards requiring achievement of the goal based on RONA is the CommonStock market price at grant date, which was $16.75 for the awards granted inthe first quarter of 2007. The recognition of compensation expense is initiallybased on the probable outcome of the performance condition and adjusted forsubsequent changes in the estimated or actual outcome. The Company reassessesat each reporting date whether achievement of the performance condition isprobable. The assessment involves comparing the Company’s forecasted RONA forthe performance period to the historical RONA achieved by a group of peercompanies.

The TSR goal isbased on the market price of the Company’s Common Stock as compared to the peergroup. This is considered a market condition under FAS 123R, thus compensationexpense recognized is not reversed if the goal is not achieved by the end ofthe performance period. The compensation expense related to share awards thatare forfeited is reversed. If the performance goal related to RONA is not met,no compensation expense is recognized and any recognized compensation expenseis reversed as of the end of the plan period. The compensation expenserecognized for performance share awards in the second quarter of 2006 and 2007was $947,000 and $275,000, respectively. As of June 30, 2007, it was not probable that the RONA goal would be metat the end of the performance periods for the awards granted in 2006 and thusno compensation expense has been recognized. As of June 30, 2007, the expectedpayout related to the 2007 RONA grants was 25% of the target payout, thusexpense of $19,000 was recognized in the second quarter of 2007.  The total remaining expense expected to berecognized in future periods for outstanding PSA’s is approximately $1.7million. The expense is expected to be recognized over a weighted-averageperiod of 2.0 years. The total number of non-vested PSA’s as of June 30, 2007was 468,532 shares at target payout. The weighted-average grant-date fair valueof these shares is $14.23.

12

----

 

**10.****               ****Segment Reporting**

The following tableprovides the results of operations of the three segments of the Company for thequarters ended July 1, 2006 and June 30, 2007, respectively.  All dollars are in thousands.
|                                                                       | ** ** | **Quarter Ended**     | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------|------------|--------------------------------|------------|
| ** **                                                            | ** ** | **July 1, 2006** | ** ** | **June 30, 2007**    | ** ** | **July 1, 2006** | ** ** | **June 30, 2007** | ** ** |
| ** **                                                            | ** ** | ** **                 | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Motorized  Recreational Vehicle Segment**                           | ** ** | ** **                 | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | ** **                 | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                          | 225,620    |                           | $          | 250,662 |   | $ | 480,569 |   | $ | 496,210 |   |
| Cost of sales                                                         |       | 209,727                    |       | 224,403                        |       | 439,589 |   | 443,464 |   |
| Gross profit                                                          |       | 15,893                     |       | 26,259                         |       | 40,980 |   | 52,746 |   |
|                                                                  |       |                       |       |                           |       |   |   |   |   |
| Selling,  general, and administrative expenses and corporate overhead |       | 18,780                     |       | 20,035                         |       | 38,870 |   | 43,189 |   |
| Plant relocation  costs                                               |       | 269                        |       | 0                              |       | 269 |   | 0 |   |
|                                                                  |       |                       |       |                           |       |   |   |   |   |
| Operating income (loss)                                               |       | $                          | (3,156     | )                              | $          | 6,224 |   | $ | 1,841 |   | $ | 9,557 |   |
|                                                                  |       |                       |       |                           |       |   |   |   |   |
| **Towable  Recreational Vehicle Segment**                             |       |                       |       |                           |       |   |   |   |   |
| ** **                                                            | ** ** | ** **                 | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                          | 89,226     |                           | $          | 80,968 |   | $ | 203,643 |   | $ | 150,448 |   |
| Cost of sales                                                         |       | 79,582                     |       | 72,686                         |       | 179,853 |   | 137,439 |   |
| Gross profit                                                          |       | 9,644                      |       | 8,282                          |       | 23,790 |   | 13,009 |   |
|                                                                  |       |                       |       |                           |       |   |   |   |   |
| Selling,  general, and administrative expenses and corporate overhead |       | 8,057                      |       | 5,862                          |       | 17,509 |   | 12,234 |   |
|                                                                  |       |                       |       |                           |       |   |   |   |   |
| Operating income                                                      |       | $                          | 1,587      |                           | $          | 2,420 |   | $ | 6,281 |   | $ | 775 |   |
|                                                                  |       |                       |       |                           |       |   |   |   |   |
| **Motorhome  Resorts Segment**                                        | ** ** | ** **                 | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | ** **                 | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                          | 6,437      |                           | $          | 3,689 |   | $ | 22,138 |   | $ | 10,905 |   |
| Cost of sales                                                         |       | 1,483                      |       | 1,632                          |       | 7,968 |   | 4,066 |   |
| Gross profit                                                          |       | 4,954                      |       | 2,057                          |       | 14,170 |   | 6,839 |   |
|                                                                  |       |                       |       |                           |       |   |   |   |   |
| Selling,  general, and administrative expenses and corporate overhead |       | 2,592                      |       | 1,969                          |       | 7,028 |   | 4,800 |   |
|                                                                  |       |                       |       |                           |       |   |   |   |   |
| Operating income                                                      |       | $                          | 2,362      |                           | $          | 88 |   | $ | 7,142 |   | $ | 2,039 |   |

 

13

----

 
|                                                                   | ** ** | **Quarter Ended**     | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------|------------|--------------------------------|------------|
| ** **                                                        | ** ** | **July 1, 2006** | ** ** | **June 30, 2007**    | ** ** | **July 1, 2006** | ** ** | **June 30, 2007** | ** ** |
| ** **                                                        | ** ** | ** **                 | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Reconciliation to Net Income**                   | ** ** | ** **                 | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                        | ** ** | ** **                 | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating income  (loss):                                         |       |                       |       |                           |       |   |   |   |   |
| Motorized recreational vehicle segment                            |       | $                          | (3,156     | )                              | $          | 6,224 |   | $ | 1,841 |   | $ | 9,557 |   |
| Towable recreational vehicle segment                              |       | 1,587                      |       | 2,420                          |       | 6,281 |   | 775 |   |
| Motorhome resorts segment                                         |       | 2,362                      |       | 88                             |       | 7,142 |   | 2,039 |   |
| Total operating income                                            |       | 793                        |       | 8,732                          |       | 15,264 |   | 12,371 |   |
|                                                              |       |                       |       |                           |       |   |   |   |   |
| Other income,  net                                                |       | 256                        |       | 379                            |       | 388 |   | 492 |   |
| Interest expense                                                  |       | (940                       | )          | (947                           | )          | (2,192 | ) | (1,914 | ) |
| Loss from  investment in joint venture                            |       | 0                          |       | (699                           | )          | 0 |   | (977 | ) |
| Income before income taxes, continuing operations                 |       | 109                        |       | 7,465                          |       | 13,460 |   | 9,972 |   |
|                                                              |       |                       |       |                           |       |   |   |   |   |
| Provision (benefit from) for income taxes, continuing  operations |       | (370                       | )          | 3,001                          |       | 4,688 |   | 4,009 |   |
|                                                              |       |                       |       |                           |       |   |   |   |   |
| Income from  continuing operations                                |       | 479                        |       | 4,464                          |       | 8,772 |   | 5,963 |   |
|                                                              |       |                       |       |                           |       |   |   |   |   |
| Loss from discontinued operations, net of tax  provision          |       | (107                       | )          | 0                              |       | (107 | ) | 0 |   |
|                                                              |       |                       |       |                           |       |   |   |   |   |
| Net income                                                        |       | $                          | 372        |                           | $          | 4,464 |   | $ | 8,665 |   | $ | 5,963 |   |

 

**11.****               ****Commitments and Contingencies**

**Repurchase Agreements**

Most of the Company’s sales toindependent dealers are made on a “floor plan” basis by a bank or financecompany which lends the dealer all or substantially all of the wholesalepurchase price and retains a security interest in the vehicles.  Upon request of a lending institutionfinancing a dealer’s purchases of the Company’s product, the Company willexecute a repurchase agreement.  Theseagreements provide that, for up to 15 months after a unit is shipped, theCompany will repurchase a dealer’s inventory in the event of a default by adealer to its lender.

The Company’s liability under repurchaseagreements is limited to the unpaid balance owed to the lending institution byreason of its extending credit to the dealer to purchase its vehicles, reducedby the resale value of vehicles which may be repurchased.  The risk of loss is spread over numerousdealers and financial institutions.

14

----

 

The approximate amount subject tocontingent repurchase obligations arising from these agreements at June 30,2007 is $540.2 million, with approximately 5.4% concentrated with onedealer.  If the Company were obligated torepurchase a significant number of units under any repurchase agreement, itsbusiness, operating results, and financial condition could be adverselyaffected.  The Company has included thedisclosure requirements of FASB Interpretation No. 45 (FIN 45), “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others” in its financial statements, and hasdetermined that the recognition provisions of FIN 45 apply to certainguarantees routinely made by the Company, including contingent repurchaseobligations to third party lenders for inventory financing of dealerinventories.  The Company has recorded aliability of approximately $362,000 for potential losses resulting fromguarantees on repurchase obligations for products shipped to dealers.  This estimated liability is based on theCompany’s experience of losses associated with the repurchase and resale ofunits in prior years.

**Product Liability**

The Company is subject to regulationswhich may require the Company to recall products with design or safety defects,and such recall could have a material adverse effect on the Company’s business,results of operations, and financial condition.

The Company has from time to time beensubject to product liability claims.  Todate, the Company has been successful in obtaining product liability insuranceon terms the Company considers acceptable. The terms of the policy contain a self-insured retention amount of$500,000 per occurrence, with a maximum annual aggregate self-insured retentionof $3.0 million.  Overall productliability insurance, including umbrella coverage, is available up to a maximumamount of $100.0 million for each occurrence, as well as in the aggregate.  There can be no assurance that the Companywill be able to obtain insurance coverage in the future at acceptable levels orthat the cost of insurance will be reasonable. Furthermore, successful assertion against the Company of one or a seriesof large uninsured claims, or of one or a series of claims exceeding anyinsurance coverage, could have a material adverse effect on the Company’sbusiness, results of operations, and financial condition.   The following table discloses significantchanges in the product liability:
|                      | ** ** | **Quarter Ended**     | ** ** |
|----------------------|------------|----------------------------|------------|
| ** **           | ** ** | **July 1, 2006** | ** ** | **June 30, 2007** | ** ** |
| ** **           | ** ** | **(in thousands)**    | ** ** |
| ** **           | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Beginning balance    |       | $                          | 18,713     |   | $ | 16,509 |   |
| Expense              |       | 3,649                      |       | 2,580 |   |
| Payments/adjustments |       | (4,270                     | )          | (3,256 | ) |
|                 |       |                       |       |   |   |
| Ending balance       |       | $                          | 18,092     |   | $ | 15,833 |   |

 

15

----

 

**Product Warranty**

Estimated warranty costs are provided forat the time of sale of products with warranties covering the products for up toone year from the date of retail sale (five years for the front and sidewallframe structure, and three years on the Roadmaster chassis).  These estimates are based on historicalaverage repair costs, as well as other reasonable assumptions deemedappropriate by management.  The followingtable discloses significant changes in the product warranty reserve:
|                      | ** ** | **Quarter Ended**     | ** ** |
|----------------------|------------|----------------------------|------------|
| ** **           | ** ** | **July 1, 2006** | ** ** | **June 30, 2007** | ** ** |
| ** **           | ** ** | **(in thousands)**    | ** ** |
| ** **           | ** ** | ** **                 | ** ** | ** ** | ** ** |
| Beginning balance    |       | $                          | 33,865     |   | $ | 33,547 |   |
| Expense              |       | 10,113                     |       | 11,463 |   |
| Payments/adjustments |       | (9,748                     | )          | (8,884 | ) |
|                 |       |                       |       |   |   |
| Ending balance       |       | $                          | 34,230     |   | $ | 36,126 |   |

 

**Litigation**

The Company is involved invarious legal proceedings which are incidental to the industry and for whichcertain matters are covered in whole or in part by insurance or, for thosematters not covered by insurance, the Company has recorded accruals forestimated settlements.  Managementbelieves that any liability which may result from these proceedings will nothave a material adverse effect on the Company’s consolidated financialstatements.

16

----

**ITEM2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

This Quarterly Report on Form 10-Qcontains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended.  Thesestatements include, but are not limited to, those in this report that have beenmarked with an asterisk (*).  In addition,statements containing words such as “anticipates,” “believes,” “estimates,” “expects,”“intends,” “plans,” “seeks,” and variations of such words and similarexpressions are intended to identify forward-looking statements.  Such forward-looking statements involve knownand unknown risks, uncertainties and other factors that may cause our actualresults, performance or achievements to differ materially from those expressedor implied by such forward-looking statements, including those set forth belowin Part II, Item 1A under the caption “Risk Factors” and elsewhere in this QuarterlyReport on Form 10-Q.  The reader shouldcarefully consider, together with the other matters referred to herein, thefactors set forth in Part II, Item 1A under the caption “Risk Factors,” as wellas in other documents we file with the Securities and Exchange Commission.  We caution the reader, however, that thesefactors may not be exhaustive.  Inaddition, we do not undertake the obligation to publicly update or revise any “forward-lookingstatements,” whether as a result of new information, future events orotherwise, except as required by law or the rules of the New York StockExchange.

**GENERAL**

OVERVIEW

*Background*

Monaco Coach Corporation(the “Company”) is a leading manufacturer of premium recreational vehiclesincluding Class A, B, and C motor coaches, as well as towable recreationalvehicles. The Company also develops and sells luxury motorcoach resortfacilities. These three operations, while closely tied into the recreationallifestyle, are segmented for reporting purposes as the Motorized RecreationalVehicle (MRV) segment, the Towable Recreational Vehicle (TRV) segment, and theMotorhome Resort (MR) segment.

*Motorized and TowableRecreational Vehicle Segment Products*

Our products range insuggested retail price from $45,000 to $700,000 for motor coaches and from$11,000 to $80,000 for towables. Based upon retail registrations in the firstfive months of 2007, we believe we had a 25.5% share of the market for dieselClass A motor coaches, a 6.5% share of the market for gas Class A motorcoaches, a 16.2% share of the market for all Class A motor coaches, a 2.9%share of the market for Class C motor coaches, a 3.9% share of the market forfifth wheel towables and a 4.5% share of the market for travel trailers.

*Motorhome ResortSegment*

In addition to themanufacturing of premium recreational vehicles, the Company also owns andoperates two motorhome resort properties (the “Resorts”), located in Las Vegas,Nevada, and Indio, California. In addition, the Company has acquired land todevelop properties in La Quinta, California, and in Naples, Florida. TheResorts offer sales of individual lots to owners, and also offer commoninterests in the amenities at the resort. Lot prices for remaining unsold lotsat the two resorts range from $149,900 to $349,900. Amenities at the Resortsinclude:  club house facilities, tennis,swimming, and golf. The Resorts provide destination locations for premiumClass A motor coach owners, and help to promote the recreational lifestyle.

*Business Changes*

During the first quarterof 2007, we completed the formation of a joint venture with International Truckand Engine Corporation (ITEC) for the purpose of manufacturing rear dieselchassis.  This joint venture, known asCustom Chassis Products LLC (CCP), will enable us to take advantage ofpurchasing synergies, access engineering and design expertise from ITEC, andimprove the utilization of our Roadmaster chassis manufacturing facility inElkhart, Indiana.  Our ownership interestis 49%, and we are accounting for the activity of this operation using theequity method of accounting.

17

----

**RESULTS OF CONSOLIDATEDOPERATIONS**

*Quarter ended June 30, 2007Compared to Quarter ended July 1, 2006*

The following table illustrates theresults of consolidated operations for the quarters ended July 1, 2006 and June30, 2007.  All dollar amounts are inthousands.
| ** **                                     | ** ** | **Quarter Ended**     | ** ** | **%**             | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **July 1, 2006** | ** ** | **of Sales** | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $                          | 321,283    |              | 100.0      | %                           | $          | 335,319           |       | 100.0      | %          | $          | 14,036     |   | 4.4 | % |
| Cost of sales                                  |       | 290,792                    |       | 90.5              | %          | 298,721                     |       | 89.1              | %          | (7,929     | )          | (2.8       | )%         |
| Gross profit                                   |       | 30,491                     |       | 9.5               | %          | 36,598                      |       | 10.9              | %          | 6,107      |       | 20.0       | %          |
| Selling,  general, and administrative expenses |       | 29,429                     |       | 9.2               | %          | 27,866                      |       | 8.3               | %          | 1,563      |       | 5.3        | %          |
| Plant relocation  costs                        |       | 269                        |       | 0.1               | %          | 0                           |       | 0.0               | %          | 269        |       | 100.0      | %          |
|                                           |       |                       |       |              |       |                        |       |              |       |       |       |       |       |
| Operating income                               |       | $                          | 793        |              | 0.2        | %                           | $          | 8,732             |       | 2.6        | %          | $          | 7,939      |   | 1,001.1 | % |

 

*Motorized and TowableRecreational Vehicle Segments*

The recreational vehicle (“RV”) market inthe second quarter of 2007 displayed some signs of modest growth compared to thesecond quarter of 2006. Fuel prices, while still at or near historical highs,have climbed more slowly.  However, eventhough retail sales by our independent dealers on a year-over-year basis haveshown some improvement, the overall contraction in the RV market, down 1.3%through May 2007, continues to put pressure on our business.  We believe that this trend will likelycontinue through most of 2007.*  However,we believe the long-term potential of the RV market is still rooted in soliddemographics.  This is most readilyevidenced by the  so-called “ baby boomer”generation, which as it ages will continue to expand our target market wellinto 2015 and should provide a consumer base that is enthusiastic to embracethe RV lifestyle.

The motorized market has beensignificantly impacted by the current market conditions.  Higher interest rates are placing pressureson our dealers.  Floorplan interestcharges are a significant cost of carrying inventory, and as interest ratesrise, our dealers, whom we share with our competitors, are more cautious in theamount of inventory that they are willing to carry.  Consequently, we have been very diligent inmonitoring the wholesale versus retail shipments of our products.  This has enabled us to manage our finished goodsinventory levels without the use of extensive wholesale discounting.  While our gross margins have improved due tothe reduced levels of discounting and improvements in our plant efficiencies,they are still not at optimal levels due to the lower run rates within ourproduction facilities.  We continue toresearch ways to consolidate component manufacturing operations to improve ourindirect costs of sales.  We expect thatwe will have more of these projects over the next several quarters.*

Despite the current cyclical downturn inthe motorized market, we continue to remain optimistic on the prospects forlong-term growth in this sector, as the demographics for our customer base showa continuing increase in the number of new entrants into our target age andeconomic group.*

The towable market in 2007 has slowedsomewhat compared to 2006.  During thefirst five months of 2007, retail unit sales for the industry finished down1.8% from the same period in 2006. However, the low-to-mid-priced products areperforming better than the higher-end products. We recently introduced several new floorplans, and new lightweight andinexpensive models to compete in this market sector.  We believe that these new offerings, whichbecame available at the end of the second quarter of 2007, will enable us tocompete more effectively in these more challenging market conditions. *

As in the case of our motorizedproduction, we also have excess capacity at our towable facilities.  As a result, we recently announced our plannedconsolidation of the Elkhart towable production into our Wakarusa and Warsaw,Indiana production facilities.   Thismove will increase plant utilization in the remaining facilities and decreaseindirect costs of sales.*  We expect tocomplete the consolidation in the fourth quarter of 2007.*  Expenses associated with relocation costsshould be approximately $900,000, and will be incurred during the third andfourth quarters of 2007.  Synergiesassociated with the relocation are expected to more than offset the relatedcosts in the fourth quarter.*

18

----

The recreational vehicleindustry is extremely competitive, and retail customers have many choicesavailable to them. To distinguish ourselves within the industry, we introducedour Franchise For The Future (FFTF) program in June of 2005. This programis designed to introduce the concept to our dealer partners that our specificbrands have intrinsic values as a selling tool. To support this, and toencourage our dealers to participate in FFTF, we have worked with outsidemarketing consultants to develop brand signage, informational computer kiosks,and brand specific displays that are placed within our various independentdealer locations. In 2006, we followed this up with Monaco Financial Services(MFS). MFS is a branded financing program from General Electric CommercialDistribution Finance (GECDF) and General Electric Consumer Finance (GECF).Through MFS, our dealer partners earn rebates from GECDF and GECF for wholesalefloorplanning and retail financing for customers. We believe that theseconcepts, along with other features designed to encourage our dealers to focusselling efforts on our various product offerings, will assist them in theirsales efforts through the strength of improved brand identity. *

*Motorhome ResortSegment*

We are nearing the end of the resortprojects in both Indio and Las Vegas. Currently we have sixty-nine lots available between the tworesorts.  Second quarter sales wereslower than the prior year, but this was due mostly to having fewer lotsavailable for sale, which impacts sales absorption of new lots as they competewith resales of owner lots.  We remainconfident that these resort properties will continue to sell through a majorityof their remaining lots by the end of 2007.* To ensure the continued growth of this segment, we have acquiredproperty in Southern California, and in Naples, Florida.  We have complied with most permittingrequirements in Naples and La Quinta, and are in the process of breaking groundin Naples.  We expect that we will begin ground work in La Quinta duringthe third quarter of 2007.  We expect to have completed lots available forsale in both resorts in the first and second quarters of 2008.*

*Overall Company Performance inthe Second Quarter of 2007*

Second quarter net sales increased 4.4%to $335.3 million compared to $321.3 million for the same period lastyear.  The sales increase was due toincreased MRV segment sales that offset slower sales in the TRV and MRsegments.  Gross diesel motorized saleswere up 13.2%, gas motorized sales were down 14.1%, and towables were down5.5%.  Diesel products accounted for65.3% of our second quarter revenues while gas products were 8.4%, and towableswere 26.3%.  Our overall unit sales weredown 4.2% in the second quarter of 2007 to 6,728 units, with diesel motorizedunit sales up 11.8% to 1,096 units, gas motorized unit sales down 1.4% to 422units, and towable unit sales down 7.2% to 5,210 units.  Our total average unit selling priceincreased to $50,000 from $45,700 in the same period last year, reflecting ashift in the mix of products sold.

Gross profit for the second quarter of2007 increased to $36.6 million, up from $30.5 million in the second quarter of2006, and gross margin increased from 9.5% in the second quarter of 2006 to10.9% in the second quarter of 2007. Changes in the components of cost of sales are set forth in thefollowing table (dollars in thousands):
|                      | ** ** | **Quarter Ended**     | ** ** | **%**             | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **July 1, 2006** | ** ** | **of Sales** | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                          | 198,797    |              | 61.9       | %                           | $          | 210,495           |       | 62.8                     | %          | 0.9 | % |
| Direct labor         |       | 33,810                     |       | 10.5              | %          | 32,583                      |       | 9.7               | %          | (0.8                     | )%         |
| Warranty             |       | 10,114                     |       | 3.1               | %          | 11,463                      |       | 3.4               | %          | 0.3                      | %          |
| Other direct         |       | 19,325                     |       | 6.0               | %          | 16,345                      |       | 4.9               | %          | (1.1                     | )%         |
| Indirect             |       | 28,746                     |       | 9.0               | %          | 27,835                      |       | 8.3               | %          | (0.7                     | )%         |
|                 |       |                       |       |              |       |                        |       |              |       |                     |       |
| Total cost of  sales |       | $                          | 290,792    |              | 90.5       | %                           | $          | 298,721           |       | 89.1                     | %          | (1.4 | )% |

 

·       Direct materials increases in 2007, as a percentof sales, were 0.9% or $3.0 million. The majority of this difference is becausethe total cost of diesel chassis that are now purchased from the CCP jointventure are now included in this line item whereas in 2006 only the materialsportion of the overall chassis cost was included. Direct labor and indirectcosts related to chassis production were recorded in those respective lineitems in 2006. The net increase in total dollars associated with directmaterials of $11.7 million was related to sales volume increases in 2007 comparedto 2006.

·       Direct labor decreases in 2007, as a percent ofsales, were 0.8% or $2.7 million. This decrease was the result of improvementsin our plants as we realigned production facilities and consolidated componentfacilities to meet demand.  This includedmoving chassis production to the CCP joint venture as discussed above.  The net decrease in total dollars associatedwith direct labor of $1.2 million was the result of sales volume increases in2007 compared to 2006.

·       Increases in warranty expense in 2007, as apercent of sales, were 0.3% or $1.0 million. These increases were the result ofhigher warranty costs associated with some of our current model year motorizedproducts. The net increase in total dollars associated with warranty costs of$1.3 million was the result of sales volume increases in 2007 compared to 2006.

19

----

·       Decreases in other direct costs in 2007, as apercent of sales, were 1.1% or $3.7 million. This decrease was primarily theresult of improvements in costs associated with workers’ compensation expense, andother employee related benefit costs. The net decrease in total dollarsassociated with other direct costs of $3.0 million was the result of salesvolume increases in 2007 compared to 2006.

·       Decreases in indirect costsin 2007 were $911,000. These decreases were the result of improvements in efficienciesat our plants as a result of consolidation of component facilities, includingthe changes due to the joint venture operations. The decrease in total dollarsassociated with indirect costs resulted in an improvement of 0.7% as apercentage of sales in 2007 compared to 2006.

Selling, general, and administrativeexpenses (S,G,&A) decreased by $1.6 million in the second quarter of 2007to $27.9 million compared to the second quarter of 2006 and decreased as apercentage of sales from 9.2% in the second quarter of 2006 to 8.3% in thesecond quarter of 2007.  Changes inS,G,&A expenses are set forth in the following table (dollars inthousands):
|                                        | ** ** | **Quarter Ended**     | ** ** | **%**             | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------------------------|------------|----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **                             | ** ** | **July 1, 2006** | ** ** | **of Sales** | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Salaries, bonus,  and benefit expenses |       | $                          | 5,275      |              | 1.6        | %                           | $          | 6,836             |       | 2.0                      | %          | 0.4 | % |
| Selling expenses                       |       | 9,936                      |       | 3.2               | %          | 8,162                       |       | 2.4               | %          | (0.8                     | )%         |
| Settlement  expense                    |       | 3,649                      |       | 1.1               | %          | 2,580                       |       | 0.8               | %          | (0.3                     | )%         |
| Marketing  expenses                    |       | 2,404                      |       | 0.8               | %          | 1,998                       |       | 0.6               | %          | (0.2                     | )%         |
| Other                                  |       | 8,165                      |       | 2.5               | %          | 8,290                       |       | 2.5               | %          | 0.0                      | %          |
|                                   |       |                       |       |              |       |                        |       |              |       |                     |       |
| Total S,G,&A  expenses             |       | $                          | 29,429     |              | 9.2        | %                           | $          | 27,866            |       | 8.3                      | %          | (0.9 | )% |

 

·       Increases in salaries, bonus and benefit expensesin 2007 were $1.6 million. This increase was due to an increase in managementbonus expense of $2.5 million that was offset by decreases in the expensesassociated with long-term incentive stock-based programs.

·       Decreases in selling expenses in 2007 were $1.8million. This decrease was due to lower costs for selling programs at ourdealers’ lots of $1.5 million.   Theremaining difference was comprised of various other related selling expenses.

·       Settlement expense (litigation settlementexpense) in 2007 decreased by $1.1 million. The total dollar decrease was theresult of decreases in the number of litigation cases in 2007 compared to 2006as well as for favorable resolutions of certain litigation claims.

·       Decreases in marketingexpenses in 2007 were $407,000. These reductions were the result of savings dueto lower expenses associated with shows and rallies as well as reductions inco-op advertising.

Plant relocation costs in the secondquarter of 2006 were related to costs associated with the termination of one ofthe facilities in our Bend, Oregon operations. In 2005, the Company relocated the Bend operations to its Coburg, Oregonlocation.  All costs associated with thisrelocation have already been accrued in previous periods. The Company does notexpect that there will be future costs related to this relocation that willsignificantly impact ongoing results of operations.*

Operating income was $8.7 million, or2.6% of sales, in the second quarter of 2007 compared to $793,000, or 0.2% ofsales, in the similar 2006 period.** **The increase in operating incomewas due predominantly to increased sales, improved gross margins, and lowerS,G&A costs.

Net interest expense was $947,000 in thesecond quarter of 2007 versus $940,000 in the comparable 2006 period,reflecting lower corporate borrowing during the second quarter of 2007 that wasoffset by higher interest rates.

Wereported a provision for income taxes of $3.0 million, or an effective tax rateof 40.2%, in the second quarter of 2007, compared to a benefit from incometaxes of $370,000 in the second quarter of 2006.  The income tax benefitin the second quarter of 2006 was primarily attributable to a favorable outcomefrom a state income tax audit.  The absence of this non-recurring benefitin the second quarter of 2007 is the primary reason for the increase in theeffective tax rate.

Net income for the second quarter of 2007was $4.5 million compared to $372,000 for the second quarter of 2006 dueprimarily to higher sales and gross margin.

20

----

*Second  Quarter 2007 versus Second Quarter 2006 forthe Motorized Recreational Vehicle Segment*

The following tableillustrates the results of the MRV segment for the quarters ended July 1, 2006,and June 30, 2007 (dollars in thousands):
|                                                                       | ** ** | **Quarter Ended**     | ** ** | **%**             | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **July 1, 2006** | ** ** | **of Sales** | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $                          | 225,620    |              | 100.0      | %                           | $          | 250,662           |       | 100.0      | %          | $          | 25,042     |   | 11.1 | % |
| Cost of sales                                                         |       | 209,727                    |       | 93.0              | %          | 224,403                     |       | 89.5              | %          | (14,676    | )          | (7.0       | )%         |
| Gross profit                                                          |       | 15,893                     |       | 7.0               | %          | 26,259                      |       | 10.5              | %          | 10,366     |       | 65.2       | %          |
| Selling,  general, and administrative expenses and corporate overhead |       | 18,780                     |       | 8.3               | %          | 20,035                      |       | 8.0               | %          | (1,255     | )          | (6.7       | )%         |
| Plant relocation  costs                                               |       | 269                        |       | 0.1               | %          | 0                           |       | 0.0               | %          | 269        |       | 100.0      | %          |
|                                                                  |       |                       |       |              |       |                        |       |              |       |       |       |       |       |
| Operating income                                                      |       | $                          | (3,156     | )                 | (1.4       | )%                          | $          | 6,224             |       | 2.5        | %          | $          | 9,380      |   | 297.2 | % |

 

Total net sales for the MRV segment wereup from $225.6 million in the second quarter of 2006 to $250.7 million in thesecond quarter of 2007.  Gross dieselmotorized revenues were up 13.2% and gas motorized revenues were down14.1%.  Diesel products accounted for88.6% of the MRV segment’s second quarter of 2007 gross revenues while gasproducts were 11.4%.  The overallincrease in revenues is due to the Company’s increase in retail market share.  Our MRV segment unit sales were up 7.8% yearover year from 1,408 units in the second quarter of 2006 to 1,518 units in thesecond quarter of 2007.  Diesel motorizedunit sales were up 11.8% to 1,096 units and gas motorized unit sales were down1.4% to 422 units.

Gross profit for the MRV segment for thesecond quarter of 2007 increased to $26.3 million, up from $15.9 million in thesecond quarter of 2006, and gross margin increased from 7.0% in the secondquarter of 2006 to 10.5% in the second quarter of 2007.  Changes in the components of cost of salesare set forth in the following table (dollars in thousands):
|                      | ** ** | **Quarter Ended**     | ** ** | **%**             | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **July 1, 2006** | ** ** | **of Sales** | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                          | 142,225    |              | 63.0       | %                           | $          | 159,149           |       | 63.5                     | %          | 0.5 | % |
| Direct labor         |       | 23,657                     |       | 10.5              | %          | 23,233                      |       | 9.3               | %          | (1.2                     | )%         |
| Warranty             |       | 7,655                      |       | 3.4               | %          | 8,599                       |       | 3.4               | %          | 0.0                      | %          |
| Other direct         |       | 12,297                     |       | 5.5               | %          | 10,320                      |       | 4.1               | %          | (1.4                     | )%         |
| Indirect             |       | 23,893                     |       | 10.6              | %          | 23,102                      |       | 9.2               | %          | (1.4                     | )%         |
|                 |       |                       |       |              |       |                        |       |              |       |                     |       |
| Total cost of  sales |       | $                          | 209,727    |              | 93.0       | %                           | $          | 224,403           |       | 89.5                     | %          | (3.5 | )% |

 

·       Direct materials increases in 2007, as a percentof sales, were 0.5% or $1.3 million. The majority of this difference is becausethe total cost of diesel chassis that are now purchased from CCP joint venture arenow included in this line item whereas in 2006, only the materials portion ofthe overall chassis cost was included. Direct labor and indirect costs relatedto chassis production were recorded on those respective line items in 2006. Thenet increase in total dollars associated with direct materials of $16.9 millionwas due to higher sales volumes in 2007 as compared to 2006.

·       Direct labor decreases in 2007, as a percent ofsales, were 1.2% or $3.0 million. This decrease was the result of improvementsin our plants as we realigned production facilities and consolidated componentfacilities to meet demand, as well as the joint venture operations as discussedabove.  The net decrease in total dollarsassociated with direct labor of $424,000 was due to higher sales volumes in2007 as compared to 2006.

·       Increases in warranty costs in 2007 were theresult of some fit and finish issues in our current year products.

·       Decreases in other direct costs in 2007, as apercent of sales, were 1.4% or $3.5 million. This decrease was the result ofimprovements of $1.5 million in costs associated with workers’ compensationexpense and other employee related benefit costs. The remainder of thereduction related mostly to costs associated with out of warranty repairs of$750,000, and delivery expense of $700,000. The remaining difference is related to various other direct costs. Thenet decrease in total dollars associated with other direct costs of $2.0million was due to higher sales volumes in 2007 as compared to 2006.

·       Decreases in indirect costs in 2007, as apercent of sales, were 1.4% or $3.5 million.  These decreases were the result of improvements in efficiencies at ourplants as a result of consolidation of component facilities, and the impact ofthe joint venture operations as previously discussed.  The net decrease in total dollars associatedwith indirect costs of $791,000 was due to higher sales volumes in 2007 ascompared to 2006.

21

----

S,G,&A expenses forthe MRV segment decreased as a percent of sales due to higher sales levels anddecreases in selling expenses. In addition, in the fourth quarter of 2006 wecompleted a study on the allocation of corporate overhead, and allocatedcertain costs on an activity basis. These costs are now classified in a singleline item for S,G,&A expense and corporate overhead allocation. Corporateoverhead allocation is comprised of certain shared services such as executive,financial, information systems, legal, and investor relations expenses.

Plant relocation costswere related to the costs incurred to relocate the Bend, Oregon manufacturingfacility to the Coburg, Oregon plant in prior years.  We believe this relocation will continue toresult in improved margins for the Oregon operations.*

Operating income increased as both apercent of sales and in total dollars due to higher sales and higher grossmargins that were only partially offset by increases in S,G,&A expenses asa percent of sales.

*Second Quarter 2007 versusSecond Quarter 2006 for the Towable Recreational Vehicle Segment*

The following table illustrates theresults of the TRV Segment for the quarters ended July 1, 2006, and June 30,2007 (dollars in thousands):
|                                                                       | ** ** | **Quarter Ended**     | ** ** | **%**             | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **July 1, 2006** | ** ** | **of Sales** | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $                          | 89,226     |              | 100.0      | %                           | $          | 80,968            |       | 100.0      | %          | $          | (8,258     | ) | (9.3 | )% |
| Cost of sales                                                         |       | 79,582                     |       | 89.2              | %          | 72,686                      |       | 89.8              | %          | 6,896      |       | 8.7        | %          |
| Gross profit                                                          |       | 9,644                      |       | 10.8              | %          | 8,282                       |       | 10.2              | %          | (1,362     | )          | (14.1      | )%         |
| Selling,  general, and administrative expenses and corporate overhead |       | 8,057                      |       | 9.0               | %          | 5,862                       |       | 7.2               | %          | 2,195      |       | 27.2       | %          |
|                                                                  |       |                       |       |              |       |                        |       |              |       |       |       |       |       |
| Operating income                                                      |       | $                          | 1,587      |              | 1.8        | %                           | $          | 2,420             |       | 3.0        | %          | $          | 833        |   | 52.5 | % |

 

Total net sales for the TRV segment weredown from $89.2 million in the second quarter of 2006 to $81.0 million in thesecond quarter of 2007.  This decrease ismostly due to softer market conditions in the towable sector.  The Company’s unit sales were down 7.2% to5,210 units.  Average unit selling priceincreased to $17,000 in the second quarter of 2007 from $16,700 in the sameperiod last year.

Gross profit for the second quarter of2007 decreased to $8.3 million, down from $9.6 million in the second quarter of2006, and gross margin decreased from 10.8% in the second quarter of 2006 to10.2% in the second quarter of 2007.  Changesin the components of cost of sales are set forth in the following table(dollars in thousands):
|                      | ** ** | **Quarter Ended**     | ** ** | **%**             | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **July 1, 2006** | ** ** | **of Sales** | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                          | 55,439     |              | 62.1       | %                           | $          | 49,910            |       | 61.7                     | %          | (0.4 | )% |
| Direct labor         |       | 10,054                     |       | 11.3              | %          | 9,307                       |       | 11.5              | %          | 0.2                      | %          |
| Warranty             |       | 2,458                      |       | 2.7               | %          | 2,864                       |       | 3.5               | %          | 0.8                      | %          |
| Other direct         |       | 7,019                      |       | 7.9               | %          | 6,020                       |       | 7.4               | %          | (0.5                     | )%         |
| Indirect             |       | 4,612                      |       | 5.2               | %          | 4,585                       |       | 5.7               | %          | 0.5                      | %          |
|                 |       |                       |       |              |       |                        |       |              |       |                     |       |
| Total cost of  sales |       | $                          | 79,582     |              | 89.2       | %                           | $          | 72,686            |       | 89.8                     | %          | 0.6 | % |

 

·       Direct material decreases in 2007, as a percentof sales, were 0.4% or $324,000. This decrease was due to changes in the mix ofproducts produced in the second quarter of 2007 versus 2006.  The net decrease in total dollars associatedwith direct materials of $5.5 million is the result of the decrease of salesvolumes in 2007 compared to 2006.

·       Direct labor increases in 2007, as a percent ofsales, were 0.2% or $162,000.  Thisincrease was due to changes in the mix of products produced in the secondquarter of 2007 versus 2006.  The netdecrease in total dollars associated with direct labor of $747,000 is theresult of the decrease of sales volumes in 2007 compared to 2006.

·       Increases in warranty expense in 2007, as apercent of sales, were 0.8% or $648,000. This increase was due to a shift inthe mix of towables produced that have a higher cost as a percent of sales. Thenet increase in total dollars associated with warranty costs of $406,000 is theresult of the decrease of sales volumes in 2007 compared to 2006.

22

----

·       Decreases in other direct costs, as a percent ofsales, were 0.5% or $405,000.  Thisdecrease was the result of improvements in employee benefit and workers’compensation costs.  The net decrease intotal dollars associated with other direct costs  in 2007 of $999,000 are the result of thedecrease of sales volumes in 2007 compared to 2006.

·       Increases in indirect costsin 2007, as a percent of sales, were 0.5% or $405,000. These increases relateto lower absorption of indirect costs in some of our plants as we reducedoutput in the second quarter of 2007. The net decrease in total dollarsassociated with indirect costs of $27,000 is the result of the decrease ofsales volumes in 2007 compared to 2006.

S,G,&A expenses forthe TRV segment decreased as both a percent of sales and in total dollars dueto decreases in selling expenses. In addition, in the fourth quarter of 2006 wecompleted a study on the allocation of corporate overhead, and allocatedcertain costs on an activity basis. These costs are now classified in a singleline item for S,G,&A expense and corporate overhead allocation. Corporateoverhead allocation is comprised of certain shared services such as executive,financial, information systems, legal, and investor relations expenses.

Operating incomeincreased in dollars and as a percent of sales due to lower S,G,&A expensesmore than offsetting the reduction in gross profit and gross margin.

*SecondQuarter 2007 versus Second Quarter 2006 for the Motorhome Resort Segment*

The following table illustrates theresults of the Motorhome Resort Segment (MR segment) for the quarters endedJuly 1, 2006, and June 30, 2007 (dollars in thousands):
|                                                                       | ** ** | **Quarter Ended**     | ** ** | **%**             | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                            | ** ** | **July 1, 2006** | ** ** | **of Sales** | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                             |       | $                          | 6,437      |              | 100.0      | %                           | $          | 3,689             |       | 100.0      | %          | $          | (2,748     | ) | (42.7 | )% |
| Cost of sales                                                         |       | 1,483                      |       | 23.0              | %          | 1,632                       |       | 44.2              | %          | (149       | )          | (10.0      | )%         |
| Gross profit                                                          |       | 4,954                      |       | 77.0              | %          | 2,057                       |       | 55.8              | %          | (2,897     | )          | (58.5      | )%         |
| Selling,  general, and administrative expenses and corporate overhead |       | 2,592                      |       | 40.3              | %          | 1,969                       |       | 53.4              | %          | 623        |       | 24.0       | %          |
|                                                                  |       |                       |       |              |       |                        |       |              |       |       |       |       |       |
| Operating income                                                      |       | $                          | 2,362      |              | 36.7       | %                           | $          | 88                |       | 2.4        | %          | $          | (2,274     | ) | (96.3 | )% |

 

Net sales decreased 42.7% to $3.7 millioncompared to $6.4 million for the same period last year.  This decrease was mostly due to havingrelatively few remaining lots to sell. The limited supply impacts how the absorption of sales occurs.  Sales of new lots are in direct competitionwith resales of existing lots.  We expectthat we will sell substantially all of the remaining lots by the end of 2007.*

Gross profit for the MR segment decreasedto 55.8­­% of sales in the second quarter of 2007 compared to 77.0% of sales inthe same period last year.  This was dueto the mix of lot sales.  In the secondquarter 2007, most sales were from the Las Vegas resort which has a lower grossmargin.

S,G,&A expensesdecreased in total dollars due to the reduction in sales, as well as to thereduction in participation expense accrued, which was a result of lowerprofits.  In addition, in the fourthquarter of 2006 we completed a study on the allocation of corporate overhead,and allocated certain costs on an activity basis. These costs are now locatedin a single line item for S,G,&A expense and corporate overhead allocation.Corporate overhead allocation is comprised of certain shared services such asexecutive, financial, information systems, legal and investor relationsexpenses.

Operating income decreased due to lowersales and gross margin, and to higher S,G,&A costs and corporate overheadallocation as a percent of sales*.*

23

----

*Six months Ended June 30,  2007 Compared to Six months ended July 1,2006*

The following table illustrates theresults of consolidated operations for the six months ended July 1, 2006 andJune 30, 2007 (dollars in thousands):
| ** **                                     | ** ** | **Six Months**        | ** ** | ** **        | ** ** | **Six Months**         | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **Ended**                  | ** ** | **%**             | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                     | ** ** | **July 1, 2006** | ** ** | **of Sales** | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $                          | 706,350    |              | 100.0      | %                           | $          | 657,563           |       | 100.0      | %          | $          | (48,787    | ) | (6.9 | )% |
| Cost of sales                                  |       | 627,410                    |       | 88.8              | %          | 584,969                     |       | 88.9              | %          | 42,441     |       | 6.8        | %          |
| Gross profit                                   |       | 78,940                     |       | 11.2              | %          | 72,594                      |       | 11.1              | %          | (6,346     | )          | (8.0       | )%         |
| Selling,  general, and administrative expenses |       | 63,407                     |       | 9.0               | %          | 60,223                      |       | 9.2               | %          | 3,184      |       | 5.0        | %          |
| Plant relocation  costs                        |       | 269                        |       | 0.0               | %          | 0                           |       | 0.0               | %          | 269        |       | 100.0      | %          |
|                                           |       |                       |       |              |       |                        |       |              |       |       |       |       |       |
| Operating income                               |       | $                          | 15,264     |              | 2.2        | %                           | $          | 12,371            |       | 1.9        | %          | $          | (2,893     | ) | (19.0 | )% |

 

Consolidated sales for the six monthsended June 30, 2007 were $657.6 million versus $706.4 million, a 6.9% decrease.  This decrease was predominantly due tothe impact of FEMA travel trailer orders filled in the first quarter of 2006,as well as softer market conditions in the towable sector in 2007.

Cost of sales decreased by $42.4 millionfrom the first six months of 2006 to the first six months of 2007, butincreased as a percent of sales by 0.1%. The decrease in the cost of sales was predominantly caused by lowersales volumes in the first half of 2007 compared to the same period in2006.  The changes in the components ofcost of sales are set forth in the following table (dollars in thousands):
|                      | ** ** | **Six Months**        | ** ** | ** **        | ** ** | **Six Months**         | ** ** | ** **        | ** ** | ** **               | ** ** |
|----------------------|------------|----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **Ended**                  | ** ** | **%**             | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **Change in**       | ** ** |
| ** **           | ** ** | **July 1, 2006** | ** ** | **of Sales** | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                          | 430,892    |              | 61.0       | %                           | $          | 407,439           |       | 62.0                     | %          | 1.0 | % |
| Direct labor         |       | 72,196                     |       | 10.2              | %          | 64,624                      |       | 9.8               | %          | (0.4                     | )%         |
| Warranty             |       | 20,835                     |       | 3.0               | %          | 21,346                      |       | 3.2               | %          | 0.2                      | %          |
| Other direct         |       | 42,620                     |       | 6.0               | %          | 33,245                      |       | 5.0               | %          | (1.0                     | )%         |
| Indirect             |       | 60,867                     |       | 8.6               | %          | 58,315                      |       | 8.9               | %          | 0.3                      | %          |
|                 |       |                       |       |              |       |                        |       |              |       |                     |       |
| Total cost of  sales |       | $                          | 627,410    |              | 88.8       | %                           | $          | 584,969           |       | 88.9                     | %          | 0.1 | % |

 

·       Direct materials increases in 2007, as a percentof sales, were 1.0% or $6.6 million. This increase was a result of the changesin the mix of products sold.  In 2006versus 2007 there was a substantial amount of sales to FEMA for travel trailersin the first quarter.  These units had alower direct material cost. The net decrease in total dollars of $23.5 millionin direct materials was related to sales volume decreases in 2007 compared to 2006.

·       Direct labor decreases in 2007, as a percent ofsales, were 0.4% or $2.6 million. This decrease was primarily the result ofimprovements in our plants as we realigned production facilities andconsolidated component facilities to meet demand. The net decrease in totaldollars of $7.6 million in direct labor was the result of sales volumedecreases in 2007 compared to 2006.

·       Decreases in other directcosts in 2007, as a percent of sales, were 1.0% or $6.5 million. This decreasewas primarily the result of improvements in costs associated with workers’compensation expense and other employee benefits of $3.9 million, as well asfor the reduction in out-of-policy goodwill repairs of $1.9 million. The netdecrease in total dollars of $9.4 million in other direct costs was the resultof sales volume decreases in 2007 compared to 2006.

·       Increases in indirect costsin 2007, as a percent of sales, were 0.3% or $2.0 million.  These increases were the result of runningour plants at lower efficiency due to the reduced volume of sales in 2007versus 2006.  The net decrease in totaldollars of $2.6 million in indirect costs was the result of sales volumedecreases in 2007 compared to 2006.

24

----

S,G,&A decreased by $3.2 million to$60.2 million for the first six months of 2007, but increased as a percentageof sales from 9.0% in 2006 to 9.2% in 2007. Changes in S,G,&A expenses areset forth in the following table (dollars in thousands):
|                                        | ** ** | **Six Months**        | ** ** | ** **        | ** ** | **Six Months**         | ** ** | ** **        | ** ** | ** **               | ** ** |
|----------------------------------------|------------|----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **                             | ** ** | **Ended**                  | ** ** | **%**             | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **Change in**       | ** ** |
| ** **                             | ** ** | **July 1, 2006** | ** ** | **of Sales** | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Salaries, bonus,  and benefit expenses |       | $                          | 14,866     |              | 2.1        | %                           | $          | 14,733            |       | 2.2                      | %          | 0.1 | % |
| Selling expenses                       |       | 20,912                     |       | 3.0               | %          | 18,006                      |       | 2.8               | %          | (0.2                     | )%         |
| Settlement  expense                    |       | 5,966                      |       | 0.8               | %          | 6,491                       |       | 1.0               | %          | 0.2                      | %          |
| Marketing  expenses                    |       | 4,281                      |       | 0.6               | %          | 3,666                       |       | 0.6               | %          | 0.0                      | %          |
| Other                                  |       | 17,382                     |       | 2.5               | %          | 17,327                      |       | 2.6               | %          | 0.1                      | %          |
|                                   |       |                       |       |              |       |                        |       |              |       |                     |       |
| Total S,G,&A  expenses             |       | $                          | 63,407     |              | 9.0        | %                           | $          | 60,223            |       | 9.2                      | %          | 0.2 | % |

 

·       Decreases in salaries, bonus and benefitexpenses in 2007 were $133,000. This decrease was due to a reduction inmanagement bonus expense of $690,000 that was offset by an increase in theexpenses associated with long-term incentive stock-based programs.

·       Decreases in selling expenses in 2007 were $2.9million. This decrease was due to lower costs for selling programs at ourresort properties of $1.4 million, lower sales commissions of $300,000, andlower costs of $1.9 million related to sales programs.   The remaining difference was comprised ofvarious other related selling expenses.

·       Settlement expense (litigation settlementexpense) in 2007 increased by $525,000. The total dollar increase was theresult of increases in the number of litigation cases in 2007 versus 2006 aswell as for the increases in the amounts reserved for certain pendinglitigation.

·       Decreases in marketingexpenses in 2007 were $615,000.  Thesereductions were the result of savings due to lower expenses associated withshows and rallies.

Operatingincome was $12.4 million, or 1.9% of sales, for the first six months of 2007compared to $15.3 million, or 2.2% of sales, in the similar 2006 period.** **Decreasesin operating income****were duepredominantly to lower sales, with slightly lower gross margins andimprovements in S,G,&A costs.

Netinterest expense was $1.9 million for the first six months of 2007 versus $2.2in the comparable 2006 period, reflecting a lower level of borrowing during thefirst six months of 2006.

Wereported a provision for income taxes of $4.0 million, or an effective tax rateof 40.2% for the first six months of 2007, compared to $4.7 million, or aneffective tax rate of 34.8% for the comparable 2006 period.  The increasein the effective tax rate was due primarily to the lack of certainnon-recurring income tax benefits that were recorded during the first sixmonths of 2006.  These non-recurring benefits included a favorable outcomefrom a state income tax audit and a benefit attributable to certain stateincome tax law changes.

Netincome for the first six months in 2007 was $6.0 million compared to $8.7million for the comparable period in 2006 (including losses from discontinuedoperations of $107,000 in 2006, net of taxes, related to the closure of theRoyale Coach facility) due to a decrease in sales combined with a loweroperating margin. 

25

----

*First Six Months of  2007 versus First Six Months of 2006 for theMotorized Recreational Vehicle Segment*

The followingtable illustrates the results of the MRV segment for the six months ended July1, 2006 and June 30, 2007 (dollars in thousands):
|                                                                         | ** ** | **Six Months**        | ** ** | ** **        | ** ** | **Six Months**         | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                              | ** ** | **Ended**                  | ** ** | **%**             | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                                              | ** ** | **July 1, 2006** | ** ** | **of Sales** | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                               |       | $                          | 480,569    |              | 100.0      | %                           | $          | 496,210           |       | 100.0      | %          | $          | 15,641     |   | 3.3 | % |
| Cost of sales                                                           |       | 439,589                    |       | 91.5              | %          | 443,464                     |       | 89.4              | %          | (3,875     | )          | (0.9       | )%         |
| Gross profit                                                            |       | 40,980                     |       | 8.5               | %          | 52,746                      |       | 10.6              | %          | 11,766     |       | 28.7       | %          |
| Selling,  general, and administrative expenses & corporate overhead |       | 38,870                     |       | 8.1               | %          | 43,189                      |       | 8.7               | %          | (4,319     | )          | (11.1      | )%         |
| Plant relocation  costs                                                 |       | 269                        |       | 0.1               | %          | 0                           |       | 0.0               | %          | 269        |       | 100.0      | %          |
|                                                                    |       |                       |       |              |       |                        |       |              |       |       |       |       |       |
| Operating income                                                        |       | $                          | 1,841      |              | 0.3        | %                           | $          | 9,557             |       | 1.9        | %          | $          | 7,716      |   | 419.1 | % |

 

Netsales for the MRV segment were up from $480.6 million in the first six monthsof 2006 to $496.2 million in the first six months of 2007.  Gross diesel motorized revenues were up 5.9%,and gas motorized revenues were down 25.5%. Diesel products accounted for 89.5% of our first six months MRV segmentrevenues while gas products were 10.5%. The overall increase in revenues reflects the Company’s increase inretail market share in 2007 as well as an increase in diesel Class A unit salesvolume as a percentage of total motorized sales.  Our MRV unit sales were down 1.5% in thefirst six months of 2007 to 2,978 units, with diesel motorized unit sales up4.0% to 2,208 units,  and gas motorizedunit sales down 14.4% to 770 units.  Ouraverage unit selling price increased to $165,500 for the first six months of2007 from $160,800 in the same period last year.

Grossprofit for the first six months of 2007 increased to $52.7 million, up from$41.0 million in 2006, and gross margin increased from 8.5% in the first sixmonths of 2006 to 10.6% in the first six months of 2007.  The changes in the components of cost ofsales are set forth in the following table (dollars in thousands):
|                      | ** ** | **Six Months**        | ** ** | ** **        | ** ** | **Six Months**         | ** ** | ** **        | ** ** | ** **               | ** ** |
|----------------------|------------|----------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **Ended**                  | ** ** | **%**             | ** ** | **Ended**                   | ** ** | **%**             | ** ** | **Change in**       | ** ** |
| ** **           | ** ** | **July 1, 2006** | ** ** | **of Sales** | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                          | 299,497    |              | 62.3       | %                           | $          | 309,875           |       | 62.4                     | %          | 0.1 | % |
| Direct labor         |       | 49,192                     |       | 10.3              | %          | 47,371                      |       | 9.6               | %          | (0.7                     | )%         |
| Warranty             |       | 15,085                     |       | 3.1               | %          | 16,172                      |       | 3.3               | %          | 0.2                      | %          |
| Other direct         |       | 25,751                     |       | 5.4               | %          | 21,317                      |       | 4.3               | %          | (1.1                     | )%         |
| Indirect             |       | 50,064                     |       | 10.4              | %          | 48,729                      |       | 9.8               | %          | (0.6                     | )%         |
|                 |       |                       |       |              |       |                        |       |              |       |                     |       |
| Total cost of  sales |       | $                          | 439,589    |              | 91.5       | %                           | $          | 443,464           |       | 89.4                     | %          | (2.1 | )% |

 

·       Direct materials increases in 2007, as a percentof sales, were 0.1% or $496,000. This increase was a result of the changes inthe mix of products sold.  In addition,chassis cost of sales in prior quarters were broken up into direct materials,direct labor and indirect costs.  Thesecosts are now all accounted for as direct materials.  The net increase in total dollars of $10.4million in direct materials was related to sales volume increases in 2007compared to 2006.

·       Direct labor decreases in 2007, as a percent ofsales, were 0.7% or $3.4 million. This decrease was the result of improvementsin our plants as we realigned production facilities and consolidated componentfacilities to meet demand, as well as the joint venture operations as discussedabove. The net decrease in total dollars of $1.8 million in direct labor wasthe result of sales volume increases in 2007 compared to 2006.

·       Increases in warranty expense in 2007, as apercent of sales, were 0.2% or $992,000. These increases were the result ofhigher warranty costs associated with some of our current model year motorizedproducts. The net increase in total dollars of $1.1 million in warranty costswas the result of sales volume decreases in 2007 compared to 2006.

·       Decreases in other direct costs in 2007, as apercent of sales, were 1.1% or $5.5 million. This decrease was primarily theresult of improvements in costs associated with workers’ compensation expense,employee benefits of $3.0 million, and reductions in out-of-policy goodwillexpenses of $1.9 million. The net decrease in total dollars of $4.4 million inother direct costs was the result of sales volume increases in 2007 compared to2006.

·       Decreases in indirect costsin 2007, as a percent of sales, were 0.6% or $3.0 million.  These decreases were the result of runningour plants at lower efficiency due to the reduced volume of sales in 2007versus 2006, and the impact of the joint venture operations as previouslydiscussed.  The net decrease in total dollarsof $1.3 million in indirect costs was the result of sales volume decreases in2007 compared to 2006.

26

----

S,G,&A for the MRV segment increased slightly due to highermanagement bonus levels allocated to the MRV segment as a result of improvedprofits for the Company as a whole.  Inaddition, in the fourth quarter of 2006 we completed a study on the allocation ofcorporate overhead, and allocated certain costs on an activity basis. Thesecosts are now located in a single line item for S,G,&A expense andcorporate overhead allocation. Corporate overhead allocation is comprised ofcertain shared services such as executive, financial, information systems,legal and investor relations expenses.

Plantrelocation costs were related to the costs incurred to relocate the Bend,Oregon manufacturing facility to the Coburg, Oregon plant in prior years.  We believe this relocation will continue toresult in improved margins for the Oregon operations.*

Operatingincome increased as both a percent of sales and in total dollars due to highersales and higher gross margins.

*First Six Months of  2007 versus First Six Months of 2006 for theTowable Recreational Vehicle Segment*

Thefollowing table illustrates the results of the TRV segment for the six monthsended July 1, 2006 and June 30, 2007 (dollars in thousands):
|                                                                      | ** ** | **Six Months  Ended** | ** ** | **%**             | ** ** | **Six Months  Ended** | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|----------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                           | ** ** | **July 1, 2006**      | ** ** | **of Sales** | ** ** | **June 30, 2007**     | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                            |       | $                     | 203,643    |              | 100.0      | %                     | $          | 150,448           |       | 100.0      | %          | $          | (53,195    | ) | (26.1 | )% |
| Cost of sales                                                        |       | 179,853               |       | 88.3              | %          | 137,439               |       | 91.4              | %          | 42,414     |       | 23.6       | %          |
| Gross profit                                                         |       | 23,790                |       | 11.7              | %          | 13,009                |       | 8.6               | %          | (10,781    | )          | (45.3      | )%         |
| Selling, general, and administrative expenses and corporate overhead |       | 17,509                |       | 8.6               | %          | 12,234                |       | 8.1               | %          | 5,275      |       | 30.1       | %          |
|                                                                 |       |                  |       |              |       |                  |       |              |       |       |       |       |       |
| Operating income                                                     |       | $                     | 6,281      |              | 3.1        | %                     | $          | 775               |       | 0.5        | %          | $          | (5,506     | ) | (87.7 | )% |

 

Netsales for the TRV segment were down from $203.6 million in the first six monthsof 2006 to $150.4 million in the first six months of 2007.  The overall decrease in revenues reflectedthe FEMA travel trailer sales filled in the first quarter or 2006, as well asthe softer market conditions in 2007. The Company’s unit sales were down 26.0% to 9,499 units.  The average unit selling price increased to$17,300 in the first six months of 2007 from $16,450 in the same period lastyear.

Grossprofit for the first six months of 2007 decreased to $13.0 million, down from$23.8 million in 2006, and gross margin decreased from 11.7% in the first sixmonths of 2006 to 8.6% in the first six months of 2007.  The changes in the components of cost ofsales are set forth in the following table (dollars in thousands):
|                     | ** ** | **Six Months  Ended**      | ** ** | **%**             | ** ** | **Six Months  Ended**  | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|---------------------|------------|----------------------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **          | ** ** | **July 1, 2006** | ** ** | **of Sales** | ** ** | **June 30, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials    |       | $                          | 124,268    |              | 61.0       | %                      | $          | 93,979            |       | 62.5                     | %          | 1.5 | % |
| Direct labor        |       | 22,681                     |       | 11.1              | %          | 17,001                 |       | 11.3              | %          | 0.2                      | %          |
| Warranty            |       | 5,750                      |       | 2.8               | %          | 5,174                  |       | 3.4               | %          | 0.6                      | %          |
| Other direct        |       | 16,831                     |       | 8.3               | %          | 11,895                 |       | 7.9               | %          | (0.4                     | )%         |
| Indirect            |       | 10,323                     |       | 5.1               | %          | 9,390                  |       | 6.3               | %          | 1.2                      | %          |
|                |       |                       |       |              |       |                   |       |              |       |                     |       |
| Total cost of sales |       | $                          | 179,853    |              | 88.3       | %                      | $          | 137,439           |       | 91.4                     | %          | 3.1 | % |

 

·       Directmaterial increases in 2007, as a percent of sales, were 1.5% or $2.3 million.This increase was a result of the changes in the mix of products sold.  In 2006 versus 2007 there was a substantialamount of sales to FEMA for travel trailers in the first quarter.  These units had a lower direct material cost.The net decrease in total dollars of $30.3 million in direct materials wasrelated to sales volume decreases in 2007 compared to 2006.

27

----

·       Directlabor increases in 2007, as a percent of sales, were 0.2% or $301,000. Thisincrease was the result of inefficiencies in our plants due to lower run ratesin 2007 versus 2006. The net decrease in total dollars of $5.7 million indirect labor was the result of sales volume decreases in 2007 compared to 2006.

·       Increasesin warranty expense in 2007, as a percent of sales, were 0.6% or $903,000.These increases were the result of higher warranty costs associated with someof our current model year motorized products. The net decrease in total dollarsof $576,000 in warranty costs was the result of sales volume decreases in 2007compared to 2006.

·       Decreasesin other direct costs in 2007, as a percent of sales, were 0.4% or $602,000.This decrease was primarily the result of improvements in costs associated withworkers’ compensation expense and employee benefits. The net decrease in totaldollars of $4.9 million in other direct costs was the result of sales volumedecreases in 2007 compared to 2006.

·       Increases in indirect costsin 2007, as a percent of sales, were 1.2% or $1.8 million.   These increases were the result of runningour plants at lower efficiency due to the reduced volume of sales in 2007versus 2006.  The net decrease in totaldollars of $933,000 in indirect costs was the result of sales volume decreasesin 2007 compared to 2006.

S,G,&A expenses forthe TRV segment, as a percent of sales, were consistent year to year.  In addition, in the fourth quarter of 2006 wecompleted a study on the allocation of corporate overhead, and allocated certaincosts on an activity basis. These costs are now located in a single line itemfor S,G,&A expense and corporate overhead allocation. Corporate overheadallocation is comprised of certain shared services such as executive,financial, information systems, legal and investor relations expenses.

Operatingincome decreased as both a percent of sales and in total dollars due to lowersales and gross profit which was only partially offset by a decrease incorporate overhead allocation expense as a percent of sales.

*First Six Months of  2007 versus First Six Months of 2006 for theMotorhome Resorts Segment*

Thefollowing table illustrates the results of the Motorhome Resorts Segment (MRsegment) for the six months ended July 1, 2006 and June 30, 2007 (dollars inthousands):
| ** **                                                           | ** ** | **Six Months  Ended** | ** ** | **%**             | ** ** | **Six Months  Ended** | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|----------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|-----------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                           | ** ** | **July 1, 2006**      | ** ** | **of Sales** | ** ** | **June 30, 2007**     | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                            |       | $                     | 22,138     |              | 100.0      | %                     | $          | 10,905            |       | 100.0      | %          | $          | (11,233    | ) | (50.7 | )% |
| Cost of sales                                                        |       | 7,968                 |       | 36.0              | %          | 4,066                 |       | 37.3              | %          | 3,902      |       | 49.0       | %          |
| Gross profit                                                         |       | 14,170                |       | 64.0              | %          | 6,839                 |       | 62.7              | %          | (7,331     | )          | (51.7      | )%         |
| Selling, general, and administrative expenses and corporate overhead |       | 7,028                 |       | 31.7              | %          | 4,800                 |       | 44.0              | %          | 2,228      |       | 31.7       | %          |
|                                                                 |       |                  |       |              |       |                  |       |              |       |       |       |       |       |
| Operating income                                                     |       | $                     | 7,142      |              | 32.3       | %                     | $          | 2,039             |       | 18.7       | %          | $          | (5,103     | ) | (71.5 | )% |

 

Netsales decreased 50.7% to $10.9 million compared to $22.1 million for the sameperiod last year.  This is due in part toweather conditions in the first quarter of 2007, as well as a limited number oflots available for sale in the current year.

Grossprofit for the MR segment decreased to 62.7% of sales compared to 64.0% ofsales in the same period last year. Gross margin decreases were due to the additions of some amenitiesdesigned to enhance the appeal of the resorts and demand for lots, but alsoadded slightly to the cost of sales.

Selling,general, and administrative expenses decreased as a percent of sales due to areduction in expenditures for advertising and marketing.  In addition, in the fourth quarter of 2006 wecompleted a study on the allocation of corporate overhead, and allocatedcertain costs on an activity basis. These costs are now located in a singleline item for S,G,&A expense and corporate overhead allocation. Corporateoverhead allocation is comprised of certain shared services such as executive,financial, information systems, legal and investor relations expenses.

Operatingincome decreased due to lower lot sales volumes and an increase in S,G&Aexpenses as a percentage of sales.

28

----

**LIQUIDITY AND CAPITAL RESOURCES**

The Company’s primarysources of liquidity are internally generated cash from operations andavailable borrowings under its credit facilities.  During the first six months of 2007, theCompany generated cash of $22.9 million from operating activities and had a cashbalance of $2.2 million at June 30, 2007. The Company generated $13.2 million from net income and non-cashexpenses such as depreciation and amortization, losses on sales of assets, andexpenses associated with stock-based compensation.  Other sources of cash included a $25.3million increase in accounts payable, a decrease of $4.0 million in inventorylevels, a decrease of $846,000 in resort inventory, a $738,000 decrease inprepaid expenses, a $2.0 million increase in accruals for product warranty, a$5.7 million increase in accrued liabilities, a $9.1 million increase in incometax payable, and a $69,000 increase in accruals for product liability reserve.The uses of cash in the second quarter of 2007 included a $30.0 millionincrease in trade receivables, an $8.0 million increase in land held fordevelopment, a decrease of $100,000 in deferred revenue, and a decrease inassets from discontinued operations of $18,000. Increases in accounts payable are mostly timing of shut downs of ourplants.  At the end of 2006, we had aregularly scheduled Christmas shutdown, and accordingly we ordered loweramounts of raw materials.  At the end ofthe second quarter 2007, we had a normal schedule of deliveries.  Decreases in inventories are a result of theCompany continuing to focus on reducing these levels to meet demand.  Decreases in resort lot inventories are theresult of the continued sell through of the Company’s resort properties.  Decreases in prepaid expenses reflect theamortization of prepaid expenses for insurance costs.  Increases in warranty reserves were theresult of increases in experience for warranty costs on some of our currentmodel year products. Increases in accrued expenses and other liabilities areassociated with increases for accruals for promotions and advertising, employeebenefit costs, and participation income. Increases in income taxes payable reflect the provision for expectedincome taxes due.  Increases in accruedproduct liability reflect the increase in activity on pending litigationclaims.  Increases in trade accountsreceivable reflect the effects of the shipments of products near the end of thequarter.  Increases in land held fordevelopment reflect the purchases of property for resort development in Naples,Florida. Decreases in deferred revenues are related to revenue associated withMonaco Financial Services that the Company received in 2006 and is amortizingover the length of the contract with GECDF and GECF.   Decreases in assets related to discontinuedoperations are for the sales of all remaining Royale Coach discontinuedproducts.

On November 18,2005, the Company amended its credit facilities to borrow $40.0 million of termdebt (the “Term Debt”) to complete the acquisition of R-Vision. The revolvingline of credit remains at $105.0 million. At June 30, 2007, borrowingsoutstanding on the revolving line of credit (the “Revolving Loan”) were zero,and Term Debt borrowings were $31.4 million. At the election of the Company,the Revolving Loan and the Term Debt bear interest at varying rates that fluctuatebased on the prime rate or LIBOR, and are determined based on the Company’sleverage ratio. The Company also pays interest quarterly on the unusedavailable portion of the Revolving Loan at varying rates, determined by theCompany’s leverage ratio. The Revolving Loan is due and payable in full onNovember 17, 2009 and requires interest payments quarterly. The Term Debtrequires quarterly interest payments and quarterly principal payments of $1.4million, with a final balloon payment of $12.9 million due on November 18,2010. Both the Revolving Loan and Term Debt are collateralized by all theassets of the Company and the credit facilities include various restrictionsand financial covenants. The Company was in compliance with these covenants atJune 30, 2007. The Company utilizes “zero balance” bank disbursement accountsin which an advance on the line of credit is automatically made for checksclearing each day. Since the balance of the disbursement account at the bankreturns to zero at the end of each day, the outstanding checks of the Companyare reflected as a liability. The outstanding check liability is combined withthe Company’s positive cash balance accounts to reflect a net book overdraft ora net cash balance for financial reporting. At June 30, 2007, cash is apositive net balance and thus no book overdraft is reported.

In November 2005,the Company obtained a term loan of $500,000 from the State of Oregon inconnection with the relocation of jobs to the Coburg, Oregon productionfacilities from the Bend, Oregon facility. The principal and interest is due onApril 30, 2009. The loan bears a 5% annual interest rate.

The Company’s principalworking capital requirements are for purchases of inventory and financing oftrade receivables. Many of the Company’s dealers finance product purchasesunder wholesale floor plan arrangements with third parties as described below.At June 30, 2007, the Company had working capital of approximately $105.7million, a decrease of $4.1 million from working capital of $109.8 million atDecember 30, 2006. The Company has been using short-term credit facilities andoperating cash flow to finance its capital expenditures.

The Company believes thatcash flow from operations and funds available under its anticipated creditfacilities will be sufficient to meet the Company’s liquidity requirements forthe next 12 months.* The Company’s capital expenditures were $2.7 million inthe second quarter of  2007, whichincluded costs related to additions of automated machinery in many of itsproduction facilities, upgrades to its information systems infrastructure, andother various capitalized upgrades to existing 

29

----

facilities.The Company anticipates that capital expenditures for all of 2007 will beapproximately $10 to $12 million, which includes expenditures to purchaseadditional machinery and equipment in both the Company’s Coburg, Oregon andWakarusa, Indiana facilities, as well as upgrades to existing informationsystems infrastructures.* The Company may require additional equity or debtfinancing to address working capital and facilities expansion needs,particularly if the Company significantly increases the level of workingcapital assets such as inventory and accounts receivable. The Company may alsofrom time to time seek to acquire businesses that would complement the Company’scurrent business, and any such acquisition could require additional financing.There can be no assurance that additional financing will be available ifrequired or on terms deemed favorable by the Company.

As is typical in therecreational vehicle industry, many of the Company’s retail dealers utilizewholesale floor plan financing arrangements with third party lendinginstitutions to finance their purchases of the Company’s products. Under theterms of these floor plan arrangements, institutional lenders customarilyrequire the recreational vehicle manufacturer to agree to repurchase any unsoldunits if the dealer defaults on its credit facility from the lender, subject tocertain conditions. The Company has agreements with several institutionallenders under which the Company currently has repurchase obligations. TheCompany’s contingent obligations under these repurchase agreements are reducedby the proceeds received upon the sale of any repurchased units. The Company’sobligations under these repurchase agreements vary from period to period up to15 months. At June 30, 2007, approximately $540.2 million of products sold bythe Company to independent dealers were subject to potential repurchase underexisting floor plan financing agreements with approximately 5.4% concentratedwith one dealer. Historically, the Company has been successful in mitigatinglosses associated with repurchase obligations. During the second quarter of2007, the losses associated with the exercise of repurchase agreements wereapproximately $109,000. Dealers for the Company undergo a credit review priorto becoming a dealer and periodically thereafter. Financial institutions thatprovide floor plan financing also perform credit reviews and floor checks on anongoing basis. We closely monitor sales to dealers that are a higher creditrisk. The repurchase period is limited, usually up to a maximum of 15 months.We believe these activities help to minimize the number of required repurchases.Additionally, the repurchase agreement specifies that the dealer is required tomake principal payments during the repurchase period. Since the Companyrepurchases the units based on the schedule of principal payments, therepurchase amount is typically less than the original invoice amount. Thislower repurchase amount helps mitigate our loss when we offer the inventory toanother dealer at an amount lower than the original invoice as incentive forthe dealer to take the repurchased inventory.

**OFF-BALANCESHEET ARRANGEMENTS**

As of June 30, 2007, theCompany did not have any off-balance sheet arrangements that have, or arereasonably likely to have, a current or future material effect on the Company’sconsolidated financial condition, results of operations, liquidity, capitalexpenditures or capital resources.

**CONTRACTUALOBLIGATIONS**

As part of the normal course of business,we incur certain contractual obligations and commitments which will requirefuture cash payments. The following tables summarize the significantobligations and commitments (dollars in thousands).
| ** **                          | ** ** | **PAYMENTS DUE BY PERIOD**        | ** ** |
|-------------------------------------|------------|-----------------------------------|------------|
| **Contractual Obligations**    | ** ** | **1 year or less** | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Long-Term Debt (1)                  |       | $                                 | 5,714      |   | $ | 11,928 |   | $ | 14,286 |   | $ | 0 |   | $ | 31,928 |   |
| Operating Leases (2)                |       | 1,735                             |       | 4,244 |   | 3,864 |   | 2,008 |   | 11,851 |   |
|                                |       |                              |       |   |   |   |   |   |   |   |   |
| Total Contractual Cash  Obligations |       | $                                 | 7,449      |   | $ | 16,172 |   | $ | 18,150 |   | $ | 2,008 |   | $ | 43,779 |   |

 
| ** **                 | ** ** | **AMOUNT OF COMMITMENT EXPIRATION BY PERIOD** | ** ** |
|----------------------------|------------|-----------------------------------------------|------------|
| **Other Commitments** | ** ** | **1 year or less**             | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Line of Credit (3)         |       | $                                             | 0          |   | $ | 105,000 |   | $ | 0 |   | $ | 0 |   | $ | 105,000 |   |
| Guarantees (4)             |       | 0                                             |       | 0 |   | 10,930 |   | 0 |   | 10,930 |   |
| Repurchase Obligations (5) |       | 0                                             |       | 540,241 |   | 0 |   | 0 |   | 540,241 |   |
|                       |       |                                          |       |   |   |   |   |   |   |   |   |
| Total Commitments          |       | $                                             | 0          |   | $ | 645,241 |   | $ | 10,930 |   | $ | 0 |   | $ | 656,171 |   |

 

----

| (1) | See Note 6 to  the Condensed Consolidated Financial Statements.                                                                                            |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Various leases  including manufacturing facilities, aircraft, and machinery and equipment.                                                                 |
| (3) | See Note 5 to  the Condensed Consolidated Financial Statements. The amount listed represents  available borrowings on the line of credit at June 30, 2007. |
| (4) | Guarantees  related to aircraft operating lease.                                                                                                           |
| (5) | Reflects  obligations under manufacturer repurchase commitments. See Note 11 to the  Condensed Consolidated Financial Statements.                          |

 

30

----

**INFLATION**

During2006 and to a lesser extent in the first six months of 2007, the Companyexperienced increases in the prices of certain commodity items that we use inthe manufacturing of our products.  Theseinclude, but are not limited to, steel, copper, aluminum, petroleum, andwood.  While price increases for theseraw materials are not necessarily indicative of widespread inflationary trends,they had an impact on the Company’s production costs.  To date, the Company has been successful inpassing along most of these increases by increasing the selling prices of itsproducts.  However, there is no certaintythat the Company will be able to successfully pass these along in the future.  The current trend in these prices, if itcontinues, could have a materially adverse impact on the Company’s businessgoing forward.

**CRITICAL ACCOUNTING POLICIES**

The discussion andanalysis of our financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States of America.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. On anon-going basis, we evaluate our estimates, including those related to warrantycosts, product liability, and impairment of goodwill. We base our estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances. Actual results may differ from theseestimates under different assumptions or conditions and such differences couldbe material. We believe the following critical accounting policies and relatedjudgments and estimates affect the preparation of our consolidated financialstatements.

**WARRANTYCOSTS**   Estimated warranty costs are provided for at thetime of sale of products with warranties covering the products for up to oneyear from the date of retail sale (five years for the front and sidewall framestructure, and three years on the Roadmaster chassis). These estimates arebased on historical average repair costs, as well as other reasonable assumptionsas have been deemed appropriate by management.

**PRODUCTLIABILITY**   The Company provides an estimate for accruedproduct liability based on current pending cases, as well as for those caseswhich are incurred but not reported. This estimate is developed by legalcounsel based on professional judgment, as well as historical experience.

**IMPAIRMENTOF GOODWILL**   The Company assesses the potentialimpairment of goodwill in accordance with Financial Accounting Standards Board(FASB) Statement No. 142. This annual test involves management comparingthe fair value of each of the Company’s reporting units, to the respectivecarrying amounts, including goodwill, of the net book value of the reportingunit, to determine if goodwill has been impaired. The Company uses an estimateof discounted future cash flows to determine fair value for each reportingunit.

**INVENTORYALLOWANCE**   The Company writes down its inventory forobsolescence, and the difference between the cost of inventory and itsestimated fair market value. These write-downs are based on assumptions aboutfuture sales demand and market conditions. If actual sales demand or marketconditions change from those projected by management, additional inventorywrite-downs may be required.

31

----

**INCOMETAXES**   In conjunction with preparing its consolidatedfinancial statements, the Company must estimate its income taxes in each of thejurisdictions in which it operates. This process involves estimating actualcurrent tax expense together with assessing temporary differences resultingfrom differing treatment of items for tax and accounting purposes. Thesedifferences result in deferred tax assets and liabilities, which are includedin the consolidated balance sheets. The Company must then assess the likelihoodthat the deferred tax assets will be recovered from future taxable income, andto the extent management believes that recovery is not likely, a valuation allowancemust be established. Significant management judgment is required in determiningthe Company’s provision for income taxes, deferred tax assets and liabilities,and any valuation allowance recorded against net deferred tax assets.

The Company adopted FIN48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FAS 109,”as of the beginning of fiscal year 2007. See Note 7 to the Company’s consolidated quarterly financial statementsincluded in this Quarterly Report on Form 10-Q.

**REPURCHASEOBLIGATIONS**   Upon request of a lending institutionfinancing a dealer’s purchases of the Company’s product, the Company willexecute a repurchase agreement. The Company has recorded a liability associatedwith the disposition of repurchased inventory. To determine the appropriateliability, the Company calculates a reserve, based on an estimate of potentialnet losses, along with qualitative and quantitative factors, including dealerinventory turn rates, and the financial strength of individual dealers.

**NEWLY ISSUED FINANCIAL REPORTING PRONOUNCEMENTS**

***FIN 48***

In June 2006, theBoard issued FIN 48, “Accounting for Uncertainty in Income Taxes” (the “Interpretation”).The Interpretation clarifies the accounting for uncertainty in income taxesrecognized in accordance with FASB 109, “Accounting for Income Taxes” bydefining a criterion that an individual tax position must be met for any partof the benefit to be recognized in the financial statements. The Interpretationis effective for fiscal years beginning after December 15, 2006.  See Note 7 to the Company’s consolidatedquarterly financial statements included with this Quarterly Report on Form10-Q.

We have adopted theInterpretation as of the beginning of fiscal year 2007 and there was nosignificant impact to the financial statements.

***FAS 157***

In September 2006,the Board issued FAS 157, “Fair Value Measurements.” The Statement defines fairvalue, establishes a framework for measuring fair value, and expands disclosurerequirements regarding fair value measurements.

FAS 157 is effective forfiscal years beginning after November 15, 2007. We are reviewing theprovisions of the Statement and will adopt it for the fiscal year beginning2008.

***FAS 159***

In February 2007,the Board issued FAS 159, “Fair Value Option for Financial Assets and FinancialLiabilities.” This statement permits entities to choose to measure manyfinancial instruments and certain other items at fair value that are notcurrently required to be measured at fair value.

FAS 159 is effective forfiscal years beginning after November 15, 2007. We are reviewing theprovisions of this statement and will adopt it for the fiscal year beginning2008.

**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

No material change since December 30, 2006.

**Item 4.  Controls andProcedures**

32

----

**Evaluation of Disclosure Controlsand Procedures**

Ourmanagement evaluated, with the participation of our Chief Executive Officer andour Chief Financial Officer, the effectiveness of our disclosure controls andprocedures as of the end of the period covered by this Quarterly Report on Form10-Q.  Based on this evaluation, ourChief Executive Officer and our Chief Financial Officer have concluded that ourdisclosure controls and procedures are effective to ensure that information weare required to disclose in reports that we file or submit under the SecuritiesExchange Act of 1934, as amended, is accumulated and communicated to ourmanagement including our principal executive and principal financial officers,as appropriate to allow timely decisions regarding required disclosure, andthat such information is recorded, processed, summarized and reported withinthe time periods specified in Securities and Exchange Commission rules andforms.

Our management, including our ChiefExecutive Officer and Chief Financial Officer, does not expect that ourdisclosure controls and procedures will prevent all error and all fraud.  Because of inherent limitations in any systemof disclosure controls and procedures, no evaluation of controls can provideabsolute assurance that all instances of error or fraud, if any, within theCompany may be detected.  However, ourmanagement, including our Chief Executive Officer and our Chief FinancialOfficer, have designed our disclosure controls and procedures to providereasonable assurance of achieving their objectives and have, pursuant to theevaluation discussed above, concluded that our disclosure controls andprocedures are, in fact, effective at this reasonable assurance level.

Therewas no change in our internal control over financial reporting that occurredduring the period covered by this Quarterly Report on Form 10-Q that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

**PART II - OTHER INFORMATION**

**Item 1A.  Risk Factors**

We have listed below various risks and uncertaintiesrelating to our businesses. This list is not inclusive of all the risks anduncertainties we face, but any of these could cause our actual results todiffer materially from the results contemplated by the forward-lookingstatements contained in this report or that we may issue from time to time inthe future.

**WE MAY EXPERIENCE UNANTICIPATED FLUCTUATIONSIN OUR OPERATING RESULTS FOR A VARIETY OF REASONS**   Ournet sales, gross margin, and operating results may fluctuate significantly fromperiod to period due to a number of factors, many of which are not readilypredictable. These factors include the following:

·             The varying marginsassociated with the mix of products we sell in any particular period.

·             The fact that wetypically ship a large amount of products near quarter-end.

·             Our ability toutilize and expand our manufacturing resources efficiently.

·             Shortages ofmaterials used in our products.

·             Commodity pricing andthe effects of inflation on the costs of materials used in our products.

·             Fuel costs and fuelavailability.

·             A determination by usthat goodwill or other intangible assets are impaired and have to be writtendown to their fair values, resulting in a charge to our results of operations.

·             Our ability tointroduce new models that achieve consumer acceptance.

·             The introduction,marketing and sale of competing products by others, including significant discountingoffered by our competitors.

·             The addition or lossof our dealers.

33

----

·             The timing of tradeshows and rallies, which we use to market and sell our products.

·             Factors affecting therecreational vehicle industry as a whole, including economic and seasonalfactors.

·             Our inability toacquire and develop key pieces of property for on-going resort activity.

·             Fluctuations indemand for our resort lots due to changing economic and other conditions.

Our overall gross marginmay decline in future periods to the extent that we increase the percentage ofsales of lower gross margin towable products or if the mix of motor coaches wesell shifts to lower gross margin units. In addition, a relatively smallvariation in the number of recreational vehicles we sell in any quarter canhave a significant impact on total sales and operating results for thatquarter.

Demand in therecreational vehicle industry generally declines during the winter months,while sales are generally higher during the spring and summer months. With thebroader range of products we now offer, seasonal factors could have asignificant impact on our operating results in the future. Additionally,unusually severe weather conditions in certain markets could delay the timingof shipments from one quarter to another.

We attempt to forecastorders for our products accurately and commence purchasing and manufacturingprior to receipt of such orders. However, it is highly unlikely that we willconsistently be able to accurately forecast the timing, rate, and mix oforders. This aspect of our business makes our planning inexact and, in turn,affects our shipments, costs, inventories, operating results, and cash flow forany given quarter.

**THERECREATIONAL VEHICLE INDUSTRY IS CYCLICAL AND SUSCEPTIBLE TO SLOWDOWNS IN THEGENERAL ECONOMY**   The recreational vehicle industry hasbeen characterized by cycles of growth and contraction in consumer demand,reflecting prevailing economic, demographic, and political conditions thataffect disposable income for leisure-time activities. Our business isparticularly influenced by cycle swings in the Class A market. While there hasbeen strong secular demand for recreational vehicles since the early 90’s, ithas been driven by demand for towable recreational products. Since 2004 therehas been a notable divergence in growth rates between towable and motorizedrecreational vehicles.

Class A unitshipments peaked at approximately 37,300 units in 1994 and declined toapproximately 33,000 units in 1995. The Class A segment then went on a steadyclimb and in 1999 recorded the highest year, in recent history, of Class Ashipments, approximately 49,400. Over the next two years, motorhome shipmentsdeclined to 33,400 in 2001. Class A shipments then rose for the next 3years and in 2004 reached 46,300. Over the last two years, however, shipmentsof Class A motorhomes have dropped, reaching a pre-1994 level of 32,700in 2006.

The towable segment movedthrough many of the same cyclical peaks and troughs historically. The shipmentlevel peaked in 1994 at 201,100, dropping-off to 192,200 in 1996 and thengrowing to 249,600 in 1999. Towable unit shipments suffered a two-year declinein 2000 and 2001, dropping to 207,600. Since then the market has expandedsignificantly reaching 334,600 in 2006. Like the Class A market, thetowables segment has also begun to experience a slow down over the last sixmonths.

Our business is subjectto the cyclical nature of this industry and principally the Class A segment.Some of the factors that contribute to this cyclicality include fuelavailability and costs, interest rate levels, the level of discretionaryspending, and availability of credit and overall consumer confidence.Increasing interest rates and fuel prices over the last two years have adverselyaffected the Class A recreational vehicle market. An extended continuationof these conditions would materially affect our business, results ofoperations, and financial condition.

**WE RELYON A RELATIVELY SMALL NUMBER OF DEALERS FOR A SIGNIFICANT PERCENTAGE OF OURSALES**   Although our products were offered by over 700dealerships located primarily in the United States and Canada as of June 30,2007, a significant percentage of our sales are concentrated among a relativelysmall number of independent dealers. For the quarter ended June 30, 2007, salesto one dealer, Lazy Days RV Center, accounted for 9.4% of total sales comparedto 6.8% of sales in the same period ended last year.  For quarters ended July 1, 2006 and June 30,2007,  sales to our 10 largest dealers,including Lazy Days RV Center, accounted for a total of 30.9% and 42.7% oftotal sales, respectively. The loss of a significant dealer or a substantialdecrease in sales by any of these dealers could have a material impact on ourbusiness, results of operations, and financial condition.

34

----

**WEMAY HAVE TO REPURCHASE A DEALER’S INVENTORY OF OUR PRODUCTS IN THE EVENTTHAT THE DEALER DOES NOT REPAY ITS LENDER**   As is commonin the recreational vehicle industry, we enter into repurchase agreements withthe financing institutions used by our dealers to finance their purchases ofour products. These agreements require us to repurchase the dealer’s inventoryin the event that the dealer defaults on its credit facility with its lender.Obligations under these agreements vary from period to period, but totaled approximately$540.2 million as of June 30, 2007, with approximately 5.4% concentrated withone dealer. If we were obligated to repurchase a significant number of unitsunder any repurchase agreement, our business, operating results, and financialcondition could be adversely affected.

**OURACCOUNTS RECEIVABLE BALANCE IS SUBJECT TO RISK**   We sellour product to dealers who are predominantly located in the United States andCanada. The terms and conditions of payment are a combination of open tradereceivables and commitments from dealer floor plan lending institutions. Forour RV dealers, terms are net 30 days for units that are financed by a thirdparty lender. Terms of open trade receivables are granted by us, on a verylimited basis, to dealers who have been subjected to evaluative creditprocesses conducted by us. For open receivables, terms vary from net 30 days tonet 180 days, depending on the specific agreement. Agreements for payment termsbeyond 30 days generally require additional collateral, as well as securityinterest in the inventory sold. As of June 30, 2007, total trade receivableswere $111.6 million, with approximately $88.2 million, or 79.0% of theoutstanding accounts receivable balance concentrated among floor plan lenders.The remaining $23.2 million of trade receivables were concentratedsubstantially all with one dealer. For resort lot customers, funds are requiredat the time of closing.

**WEMAY EXPERIENCE A DECREASE IN SALES OF OUR PRODUCTS DUE TO AN INCREASE INTHE PRICE OR A DECREASE IN THE SUPPLY OF FUEL**   Aninterruption in the supply, or a significant increase in the price or tax onthe sale, of diesel fuel or gasoline on a regional or national basis couldsignificantly affect our business. Diesel fuel and gasoline have, at varioustimes in the past, been either expensive or difficult to obtain.

**WE DEPENDON SINGLE OR LIMITED SOURCES TO PROVIDE US WITH CERTAIN IMPORTANT COMPONENTSTHAT WE USE IN THE PRODUCTION OF OUR PRODUCTS**   A numberof important components for our products are purchased from a single or alimited number of sources. These include chassis from Workhorse and Ford forgas motor coaches and diesel chassis from our newly formed joint venture withInternational Truck and Engine Corporation. The joint venture sources turbo diesel engines from Cummins andCaterpillar, substantially all transmissions from Allison and axles fromDana.   We have no long-term supplycontracts with these suppliers or their distributors, and we cannot be certainthat these suppliers will be able to meet our future requirements.Consequently, the Company has periodically been placed on allocation of theseand other key components. The last significant allocation occurred in 1997 fromAllison, and in 1999 from Ford. An extended delay or interruption in the supplyof any components that we obtain from a single supplier or from a limitednumber of suppliers could adversely affect our business, results of operations,and financial condition.

**OURINDUSTRY IS VERY COMPETITIVE. WE MUST CONTINUE TO INTRODUCE NEW MODELS AND NEWFEATURES TO REMAIN COMPETITIVE**   The market for ourproducts is very competitive. We currently compete with a number ofmanufacturers of motor coaches, fifth wheel trailers, and travel trailers. Someof these companies have greater financial resources than we have and extensivedistribution networks. These companies, or new competitors in the industry, maydevelop products that customers in the industry prefer over our products.

We believe that theintroduction of new products and new features is critical to our success.Delays in the introduction of new models or product features, quality problemsassociated with these introductions, or a lack of market acceptance of newmodels or features could affect us adversely. For example, unexpected costsassociated with model changes have affected our gross margin in the past.Further, new product introductions can divert revenues from existing models andresult in fewer sales of existing products.

**OUR PRODUCTSCOULD FAIL TO PERFORM ACCORDING TO SPECIFICATIONS OR PROVE TO BEUNRELIABLE, CAUSING DAMAGE TO OUR CUSTOMER RELATIONSHIPS AND OUR REPUTATION ANDRESULTING IN LOSS OF SALES**   Our customers requiredemanding specifications for product performance and reliability. Because ourproducts are complex and often use advanced components, processes andtechniques, undetected errors and design flaws may occur. Product defectsresult in higher product service, warranty and replacement costs and may causeserious damage to our customer relationships and industry reputation, all ofwhich would negatively affect our sales and business.

35

----

**OURBUSINESS IS SUBJECT TO VARIOUS TYPES OF LITIGATION, INCLUDING PRODUCT LIABILITYAND WARRANTY CLAIMS**   We are subject to litigationarising in the ordinary course of our business, typically for product liabilityand warranty claims that are common in the recreational vehicle industry. Whilewe do not believe that the outcome of any pending litigation, net of insurancecoverage, will materially adversely affect our business, results of operations,or financial condition, we cannot provide assurances in this regard becauselitigation is an inherently uncertain process.*

To date, we have beensuccessful in obtaining product liability insurance on terms that we consideracceptable. The terms of the policy contain a self-insured retention amount of$500,000 per occurrence, with a maximum annual aggregate self-insured retentionof $3.0 million. Overall product liability insurance, including umbrella coverage,is available to a maximum amount of $100.0 million for each occurrence, as wellas in the aggregate. We cannot be certain we will be able to obtain insurancecoverage in the future at acceptable levels or that the costs of such insurancewill be reasonable. Further, successful assertion against us of one or a seriesof large uninsured claims, or of a series of claims exceeding our insurancecoverage, could have a material adverse effect on our business, results ofoperations, and financial condition.

**IN ORDERTO BE SUCCESSFUL, WE MUST ATTRACT, RETAIN AND MOTIVATE MANAGEMENT PERSONNEL ANDOTHER KEY EMPLOYEES, AND OUR FAILURE TO DO SO COULD HAVE AN ADVERSE EFFECT ONOUR RESULTS OF OPERATIONS**   The Company’s future prospectsdepend upon retaining and motivating key management personnel, including Kay L.Toolson, the Company’s Chairman and Chief Executive Officer, and John W.Nepute, the Company’s President. The loss of one or more of these keymanagement personnel could adversely affect the Company’s business. Theprospects of the Company also depend in part on its ability to attract andretain highly skilled engineers and other qualified technical, manufacturing,financial, managerial, and marketing personnel. Competition for such personnelis intense, and there can be no assurance that the Company will be successfulin attracting and retaining such personnel.

**OURRECENT GROWTH HAS PUT PRESSURE ON THE CAPABILITIES OF OUR OPERATING, FINANCIAL,AND MANAGEMENT INFORMATION SYSTEMS**   In the past fewyears, we have significantly expanded the complexity of our business. As aresult, our management personnel have assumed additional responsibilities. Theincrease in complexity over a relatively short period of time has put pressureon our operating, financial, and management information systems. If we continueto expand, such growth would put additional pressure on these systems and maycause such systems to malfunction or to experience significant delays.

**WEMAY EXPERIENCE UNEXPECTED PROBLEMS AND EXPENSES ASSOCIATED WITH OURMANUFACTURING EQUIPMENT AUTOMATION PLAN**   As we continueto work towards involving automated machinery and equipment to improveefficiencies and quality, we will be subject to certain risks involving implementingnew technologies into our facilities.

Theexpansion into new machinery and equipment technologies involves risks,including the following:

·             We must rely ontimely performance by contractors, subcontractors, and government agencies,whose performance we may be unable to control.

·             The development ofnew processes involves costs associated with new machinery, training ofemployees, and compliance with environmental, health, and other governmentregulations.

·             The newly developedproducts may not be successful in the marketplace.

·             We may be unable tocomplete a planned machinery and equipment implementation in a timely manner,which could result in lower production levels and an inability to satisfycustomer demand for our products.

**WE MAY EXPERIENCE UNEXPECTED PROBLEMS ANDEXPENSES ASSOCIATED WITH OUR ENTERPRISE RESOURCE PLANNING SYSTEM (ERP)IMPLEMENTATION**   Throughout 2007, we will continue to implementa new ERP system and will be subject to certain risks including the following:

·             We must rely ontimely performance by contractors whose performance we may be unable tocontrol.

·             The implementationcould result in significant and unexpected increases in our operating expensesand capital expenditures, particularly if the project takes longer than weexpect.

36

----

·             The project couldcomplicate and prolong our internal data gathering and analysis processes.

·             We may need torestructure or develop our internal processes to adapt to the new system.

·             We could requireextended work hours from our employees and use temporary outside resources,resulting in increased expenses, to resolve any software configuration issuesor to process transactions manually until issues are resolved.

·             As management focusesattention on the implementation, they could be diverted from other issues.

·             The project coulddisrupt our operations if the transition to the ERP system creates new orunexpected difficulties or if the system does not perform as expected.

**OUR STOCKPRICE HAS HISTORICALLY FLUCTUATED AND MAY CONTINUE TO FLUCTUATE**   Themarket price of our Common Stock is subject to wide fluctuations in response toquarter-to-quarter variations in operating results, changes in earningsestimates by analysts, announcements of new products by us or our competitors,general conditions in the recreational vehicle market, and other events orfactors. In addition, the stocks of many recreational vehicle companies haveexperienced price and volume fluctuations which have not necessarily beendirectly related to the companies’ operating performance, and the market priceof our Common Stock could experience similar fluctuations.

**Item 1.  LegalProceedings**

TheCompany is involved in various legal proceedings which are incidental to theindustry and for which certain matters are covered in whole or in part byinsurance or, for those matters not covered by insurance, the Company hasrecorded accruals for estimated settlements. Management believes that any liability which may result from theseproceedings will not have a material adverse effect on the Company’sconsolidated financial statements.

**Item 2.  Unregistered Sales of EquitySecurities and Use of Proceeds**

NotApplicable.

**Item 3.  Defaults of Senior Securities**

NotApplicable.

**Item 4.  Submission of Matters to a Voteof Security Holders**

 At the Annual Meeting of Stockholders of theCompany, held on May 17, 2007 in Rosemont, Illinois, the Stockholders(i) elected five Class II directors to serve on the Company’s Boardof Directors, and, (ii) ratified the appointment of PricewaterhouseCoopersLLP as our independent registered public accounting firm for the 2007 fiscalyear.

The vote for the election of the five Class IIdirectors was as follows:
| Nominee                 | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|-------------------------|------------|------------|------------|--------------|------------|
| John F. Cogan           |       | 28,220,801 |       | 400,276      |       |
| Richard E.  Colliver    |       | 28,220,383 |       | 400,694      |       |
| Robert P.  Hanafee, Jr. |       | 28,220,151 |       | 400,926      |       |
| Dennis D. Oklak         |       | 28,220,937 |       | 400,140      |       |
| Roger A. Vandenberg     |       | 27,996,469 |       | 624,608      |       |

 

Other directors whose terms of office continued afterthe meeting are:
| L. Ben Lytle     |   |   |   |   |   |
|------------------|--------|--------|--------|--------|--------|
| Richard A. Rouse |   |   |   |   |   |
| Kay L. Toolson   |   |   |   |   |   |
| Daniel C. Ustian |   |   |   |   |   |

 

The vote for the ratification of the independentauditors was as follows:
| For:    28,603,668 |   |   |   |   |   |
|-----------------------------------|--------|--------|--------|--------|--------|
|                              |   |   |   |   |   |
| Against:  11,438             |   |   |   |   |   |
|                              |   |   |   |   |   |
| Abstain:  5,971              |   |   |   |   |   |

 

37

----

**Item 5.  Other Information**

NotApplicable.

**Item 6.  Exhibits**
| 10.1(1) |   | Monaco Coach Corporation 2007 Employee Stock  Purchase Plan                                                                                                                       |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                              |
| 31.1    |   | Sarbanes-Oxley Section 302(a) Certification.                                                                                                                                      |
|    |   |                                                                                                                                                                              |
| 31.2    |   | Sarbanes-Oxley Section 302(a) Certification.                                                                                                                                      |
|    |   |                                                                                                                                                                              |
| 32.1    |   | Certification of Chief Executive Officer and Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, and Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

----

(1)             Incorporatedby reference to exhibits filed with Registrant’s Registration Statement on FormS-8 (333-143976) as declared effective by the Securities and ExchangeCommission on June 22, 2007.

38

----

**SIGNATURES**

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.
|                        | ** ** | **MONACO COACH CORPORATION**     |
|------------------------|------------|----------------------------------|
| ** **             | ** ** | ** **                       |
| ** **             | ** ** | ** **                       |
| Dated: August 9,  2007 |       | /s/ P. Martin Daley              |   |
|                   |       | P. Martin Daley                  |
|                   |       | Vice President and               |
|                   |       | Chief Financial Officer (Duly    |
|                   |       | Authorized Officer and Principal |
|                   |       | Financial Officer)               |

 

39

----

**EXHIBITS INDEX**
| Exhibit  Number | ** ** | **Description of Document**                                                                                                                                                       |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                              |
| 10.1(1)         |       | Monaco Coach Corporation 2007 Employee Stock Purchase  Plan                                                                                                                       |
|            |       |                                                                                                                                                                              |
| 31.1            |       | Sarbanes-Oxley Section 302(a) Certification.                                                                                                                                      |
|            |       |                                                                                                                                                                              |
| 31.2            |       | Sarbanes-Oxley Section 302(a) Certification.                                                                                                                                      |
|            |       |                                                                                                                                                                              |
| 32.1            |       | Certification of Chief Executive Officer and Chief  Financial Officer Pursuant to 18 U.S.C. Section 1350, and Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

----

(1)             Incorporatedby reference to exhibits filed with Registrant’s Registration Statement on FormS-8 (333-143976) as declared effective by the Securities and ExchangeCommission on June 22, 2007.

40

----