**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

**x        Quarterly Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

**For the period ended: July 1, 2006**

**or**

**o        Transition Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

**For the period from***      *to *      *

**Commission File Number:  1-14725**

**MONACO COACH CORPORATION**

 

| **Delaware**              | ** ** | **35-1880244**       |
|---------------------------|------------|----------------------|
| (State of  Incorporation) | ** ** | (I.R.S. Employer     |
|                      |       | Identification  No.) |

**91320Industrial Way**

**Coburg, Oregon97408**

(Addressof principal executive offices)

Registrant’stelephone number, including area code: **(541) 686-8011**

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

YES  x  NOo

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

Large Accelerated Filer oAccelerated Filer xNon-Accelerated Filer o

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

The number of shares outstanding of common stock, $.01 parvalue, as of July 1, 2006:  29,712,546

 

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**MONACO COACH CORPORATION**

**FORM 10-Q**

**July 1, 2006**

**INDEX**
| **PART I - FINANCIAL  INFORMATION**                                                                                      |       |
|--------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                               |       |
| **Item 1. Financial  Statements.**                                                                                       |       |
|                                                                                                                     |       |
| Condensed  Consolidated Balance Sheets as of December 31, 2005 and July 1, 2006                                          |       |
|                                                                                                                     |       |
| Condensed  Consolidated Statements of Income for the quarters and six month periods  ended July 2, 2005 and July 1, 2006 |       |
|                                                                                                                     |       |
| Condensed  Consolidated Statements of Cash Flows for the six month periods ended July 2,  2005 and July 1, 2006          |       |
|                                                                                                                     |       |
| 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 4.  Submission of Matters to a Vote of Security Holders**                                                         | ** ** |
| ** **                                                                                                               |       |
| **Item 6. Exhibits**                                                                                                     |       |
| ** **                                                                                                               |       |
| **Signatures**                                                                                                           |       |
| ** **                                                                                                               |       |
| **Certifications  under Section 302(a) and 906 of the Sarbanes-Oxley Act of 2002**                                       |       |

 

2

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**PART I - FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

3

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**MONACOCOACH CORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(dollars in thousands)**
| ** **                                                                                                                   | ** ** | **December 31,  2005** | ** ** | **July 1,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------|------------|
| ** **                                                                                                                   |       |                        |       | **(unaudited)**        |       |
| **ASSETS**                                                                                                                   |       |                        |       |                   |       |
| Current assets:                                                                                                              |       |                        |       |                   |       |
| Cash                                                                                                                         |       | $                           | 586        |                   | $          | 2,428 |   |
| Trade  receivables, net                                                                                                      |       | 102,666                     |       | 103,226                |       |
| Inventories, net                                                                                                             |       | 183,292                     |       | 190,134                |       |
| Resort lot  inventory                                                                                                        |       | 9,135                       |       | 8,218                  |       |
| Prepaid expenses                                                                                                             |       | 4,364                       |       | 5,426                  |       |
| Income taxes  receivable                                                                                                     |       | 206                         |       | 0                      |       |
| Deferred income  taxes                                                                                                       |       | 36,345                      |       | 41,580                 |       |
| Discontinued  operations                                                                                                     |       | 4,922                       |       | 2,242                  |       |
| Total current  assets                                                                                                        |       | 341,516                     |       | 353,254                |       |
|                                                                                                                         |       |                        |       |                   |       |
| Property, plant, and  equipment, net                                                                                         |       | 159,304                     |       | 158,136                |       |
| Land held for  development                                                                                                   |       | 0                           |       | 16,300                 |       |
| Debt issuance costs net  of accumulated amortization of $678, and $794, respectively                                         |       | 695                         |       | 580                    |       |
| Goodwill                                                                                                                     |       | 85,952                      |       | 86,003                 |       |
| Total assets                                                                                                                 |       | $                           | 587,467    |                   | $          | 614,273 |   |
|                                                                                                                         |       |                        |       |                   |       |
| **LIABILITIES**                                                                                                              |       |                        |       |                   |       |
| Current liabilities:                                                                                                         |       |                        |       |                   |       |
| Book overdraft                                                                                                               |       | $                           | 14,550     |                   | $          | 0 |   |
| Current portion  of long-term debt                                                                                           |       | 5,714                       |       | 5,714                  |       |
| Line of credit                                                                                                               |       | 25,000                      |       | 32,108                 |       |
| Accounts payable                                                                                                             |       | 78,299                      |       | 95,737                 |       |
| Product  liability reserve                                                                                                   |       | 19,275                      |       | 18,092                 |       |
| Product warranty  reserve                                                                                                    |       | 32,902                      |       | 34,230                 |       |
| Income taxes  payable                                                                                                        |       | 0                           |       | 2,236                  |       |
| Accrued expenses  and other liabilities                                                                                      |       | 37,732                      |       | 46,446                 |       |
| Discontinued  operations                                                                                                     |       | 853                         |       | 516                    |       |
| Total current  liabilities                                                                                                   |       | 214,325                     |       | 235,079                |       |
|                                                                                                                         |       |                        |       |                   |       |
| Long-term debt, less  current portion                                                                                        |       | 34,786                      |       | 31,929                 |       |
| Deferred income taxes                                                                                                        |       | 21,624                      |       | 21,492                 |       |
| Other long term  liabilities                                                                                                 |       | 0                           |       | 983                    |       |
| Total  liabilities                                                                                                           |       | 270,735                     |       | 289,483                |       |
|                                                                                                                         |       |                        |       |                   |       |
| Commitments and  contingencies (Note 10)                                                                                     |       |                        |       |                   |       |
|                                                                                                                         |       |                        |       |                   |       |
| **STOCKHOLDERS’ EQUITY**                                                                                                |       |                        |       |                   |       |
| Preferred stock, $.01  par value; 1,934,783 shares authorized, no shares outstanding                                         |       | 0                           |       | 0                      |       |
| Common stock, $.01 par  value; 50,000,000 shares authorized, 29,561,766 and 29,712,546 issued and  outstanding, respectively |       | 296                         |       | 297                    |       |
| Additional paid-in  capital                                                                                                  |       | 59,005                      |       | 61,960                 |       |
| Retained earnings                                                                                                            |       | 257,431                     |       | 262,533                |       |
| Total  stockholders’ equity                                                                                             |       | 316,732                     |       | 324,790                |       |
| Total  liabilities and stockholders’ equity                                                                             |       | $                           | 587,467    |                   | $          | 614,273 |   |

 

See accompanyingnotes.

4

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**MONACO COACHCORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF INCOME**

**(Unaudited:dollars in thousands, except share and per share data)**
| ** **                                                   | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                                   | ** ** | **July 2,  2005** | ** ** | **July 1,  2006**         | ** ** | **July 2,  2005** | ** ** | **July 1,  2006** | ** ** |
| ** **                                                   | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                    |       | $                      | 304,512    |                           | $          | 321,283 |   | $ | 633,325 |   | $ | 706,350 |   |
| Cost of sales                                                |       | 271,526                |       | 290,792                        |       | 564,442 |   | 627,410 |   |
| Gross profit                                                 |       | 32,986                 |       | 30,491                         |       | 68,883 |   | 78,940 |   |
| ** **                                                   | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Selling,  general, and administrative expenses               |       | 28,980                 |       | 29,429                         |       | 55,938 |   | 63,407 |   |
| Plant relocation  costs                                      |       | 2,352                  |       | 269                            |       | 2,352 |   | 269 |   |
| Operating income                                             |       | 1,654                  |       | 793                            |       | 10,593 |   | 15,264 |   |
| ** **                                                   | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Other income,  net                                           |       | 26                     |       | 256                            |       | 140 |   | 388 |   |
| Interest expense                                             |       | (187                   | )          | (940                           | )          | (672 | ) | (2,192 | ) |
| Income before income taxes, discontinued operations          |       | 1,493                  |       | 109                            |       | 10,061 |   | 13,460 |   |
| ** **                                                   | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Provision  (benefit) for income taxes, continuing operations | ** ** | 528                    | ** ** | (370                           | )          | 3,733 | ** ** | 4,688 | ** ** |
| ** **                                                   | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income from  continuing operations                       |       | 965                    |       | 479                            |       | 6,328 |   | 8,772 |   |
| ** **                                                   | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Loss from  discontinued operations, net of tax provision     | ** ** | (210                   | )          | (107                           | )          | (250 | ) | (107 | ) |
| ** **                                                   | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                   |       | $                      | 755        |                           | $          | 372 |   | $ | 6,078 |   | $ | 8,665 |   |
| ** **                                                   | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Earnings per  common share:                                  | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic from continuing operations                             |       | $                      | 0.03       |                           | $          | 0.01 |   | $ | 0.22 |   | $ | 0.29 |   |
| Basic from discontinued operations                           |       | $                      | 0.00       |                           | $          | 0.00 |   | $ | (0.01 | ) | $ | 0.00 |   |
| Basic                                                        |       | $                      | 0.03       |                           | $          | 0.01 |   | $ | 0.21 |   | $ | 0.29 |   |
| ** **                                                   | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Diluted from continuing operations                           |       | $                      | 0.03       |                           | $          | 0.01 |   | $ | 0.21 |   | $ | 0.29 |   |
| Diluted from discontinued operations                         |       | $                      | 0.00       |                           | $          | 0.00 |   | $ | (0.01 | ) | $ | 0.00 |   |
| Diluted                                                      |       | $                      | 0.03       |                           | $          | 0.01 |   | $ | 0.20 |   | $ | 0.29 |   |
| ** **                                                   | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average  common shares outstanding:                 | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Basic                                                        |       | 29,502,165             |       | 29,708,892                     |       | 29,481,152 |   | 29,672,558 |   |
| Diluted                                                      |       | 29,824,570             |       | 29,891,165                     |       | 29,859,237 |   | 29,859,549 |   |

 

See accompanyingnotes.

5

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**MONACO COACHCORPORATION**

** CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(Unaudited: dollars in thousands)**
|                                                                                           | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                | ** ** | **July 2,  2005**         | ** ** | **July 1,  2006** | ** ** |
|                                                                                      |       |                           |       |   |   |
| **Increase  (Decrease) in Cash:**                                                         |       |                           |       |   |   |
|                                                                                      |       |                           |       |   |   |
| Cash flows from  operating activities:                                                    |       |                           |       |   |   |
| Net income                                                                                |       | $                              | 6,078      |   | $ | 8,665 |   |
| Adjustments to reconcile net income to net cash (used)  provided by operating activities: |       |                           |       |   |   |
| Gain (loss) on sale of assets                                                             |       | 24                             |       | (12 | ) |
| Depreciation and amortization                                                             |       | 5,039                          |       | 6,973 |   |
| Deferred income taxes                                                                     |       | (613                           | )          | (5,367 | ) |
| Stock based compensation expense                                                          |       | 0                              |       | 1,720 |   |
| Changes in working capital accounts:                                                      |       |                           |       |   |   |
| Trade receivables, net                                                                    |       | 21,828                         |       | (560 | ) |
| Inventories                                                                               |       | (8,653                         | )          | (6,841 | ) |
| Resort lot inventory                                                                      |       | 2,120                          |       | 917 |   |
| Prepaid expenses                                                                          |       | (120                           | )          | (1,068 | ) |
| Land held for development                                                                 |       | 0                              |       | (16,300 | ) |
| Accounts payable                                                                          |       | (3,328                         | )          | 17,439 |   |
| Product liability reserve                                                                 |       | (457                           | )          | (1,184 | ) |
| Product warranty reserve                                                                  |       | 16                             |       | 1,328 |   |
| Income taxes payable                                                                      |       | (1,937                         | )          | 2,443 |   |
| Accrued expenses and other liabilities                                                    |       | (927                           | )          | 8,663 |   |
| Other long-term liabilities                                                               |       | 0                              |       | 983 |   |
| Discontinued operations                                                                   |       | (1,978                         | )          | 2,247 |   |
| Net cash provided by operating activities                                                 |       | 17,092                         |       | 20,046 |   |
|                                                                                      |       |                           |       |   |   |
| Cash flows from  investing activities:                                                    |       |                           |       |   |   |
| Additions to property, plant, and equipment                                               |       | (7,646                         | )          | (5,771 | ) |
| Proceeds from sale of assets                                                              |       | 68                             |       | 98 |   |
| Discontinued operations                                                                   |       | (4                             | )          | 0 |   |
| Net cash used in investing activities                                                     |       | (7,582                         | )          | (5,673 | ) |
|                                                                                      |       |                           |       |   |   |
| Cash flows from  financing activities:                                                    |       |                           |       |   |   |
| Book overdraft                                                                            |       | 19,774                         |       | (14,545 | ) |
| Advances (payments) on lines of credit, net                                               |       | (26,562                        | )          | 7,108 |   |
| Payments on long-term notes payable                                                       |       | 0                              |       | (2,857 | ) |
| Debt issuance costs                                                                       |       | (10                            | )          | 0 |   |
| Dividends paid                                                                            |       | (3,539                         | )          | (3,563 | ) |
| Issuance of common stock                                                                  |       | 748                            |       | 1,236 |   |
| Discontinued operations                                                                   |       | 79                             |       | 90 |   |
| Net cash used by financing activities                                                     |       | (9,510                         | )          | (12,531 | ) |
|                                                                                      |       |                           |       |   |   |
| Net change in  cash                                                                       |       | 0                              |       | 1,842 |   |
| Cash at  beginning of period                                                              |       | 0                              |       | 586 |   |
| Cash at end of  period                                                                    |       | $                              | 0          |   | $ | 2,428 |   |

 

See accompanyingnotes.

6

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**MONACO COACHCORPORATION**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL 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 31, 2005and July 1, 2006, and the results of its operations and its cash flows for thequarters and six months ended July 2, 2005 and July 1, 2006.  The condensed consolidated financialstatements 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 31, 2005 was derived from audited financialstatements, but does not include all disclosures contained in the Company’sAnnual Report to Stockholders on Form 10-K. These interim condensed consolidated financial statements should be readin conjunction with the audited financial statements and notes theretoappearing in the Company’s Annual Report to Stockholders on Form 10-K for theyear ended December 31, 2005.

**2.    Acquisition**

**R-Vision**

The Company acquired the Indiana-based R-Vision companies andaffiliates in an all cash transaction on November 18, 2005.  The R-Vision companies and affiliates consistof R-Vision, Inc., R-Vision Motorized, LLC, Bison Manufacturing, LLC, andRoadmaster, LLC, which are collectively referred to herein as “R-Vision”.  R-Vision manufactures towable and motorizedrecreational vehicle products, horse trailers, and specialty cargo trailers.The acquisition was primarily consummated to strengthen the Company’s towablerecreational vehicle segment.  R-Vision’sresults of operations since November 18, 2005 are included in the consolidatedfinancial statements of the Company.

The cash paid for R-Vision, including transaction costs of$584,985, totaled $54,601,481, net of cash acquired.  The total R-Vision assets acquired andliabilities assumed based on estimated fair values at November 18, 2005, are asfollows:

|                                                | ** ** | **(in thousands)** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|
|                                           |       |                    |       |
| Receivables                                    |       | $                       | 14,571     |   |
| Inventories                                    |       | 18,160                  |       |
| Prepaids and  other assets                     |       | 618                     |       |
| Property and  equipment                        |       | 12,945                  |       |
| Goodwill                                       |       | 30,749                  |       |
| Total assets acquired                          |       | 77,043                  |       |
|                                           |       |                    |       |
| Accounts payable                               |       | 8,769                   |       |
| Accrued  liabilities                           |       | 11,964                  |       |
| Current deferred  tax liability                |       | 868                     |       |
| Long-term  deferred tax liability              |       | 863                     |       |
| Total liabilities assumed                      |       | 22,464                  |       |
|                                           |       |                    |       |
| Total assets  acquired and liabilities assumed |       | $                       | 54,579     |   |

7

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Thepurchase price was derived from a calculation of a multiple of earnings beforeinterest, taxes, depreciation and amortization for a trailing 12-month period(adjusted for certain non-recurring expense items), which exceeded the bookvalue of R-Vision and generated goodwill of $30.7 million. The allocation ofthe purchase price and the related goodwill has been adjusted for theresolution of pre-aquisition contingencies of $72,800.  The effects of resolution of pre-aquisitioncontingencies occurring: (i) within one year of the acquisition date will bereflected as an adjustment of the allocation of the purchase price andgoodwill, and (ii) after one year will be recognized in the determination ofnet income.

**3.     Inventories, net**

Inventories are stated at lower ofcost (first-in, first-out) or market. The composition of inventory is as follows:

|                        | ** ** | **December 31,  2005** | ** ** | **July 1,   2006** | ** ** |
|------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **             | ** ** | **(in thousands)**     | ** ** |
| Raw materials          |       | $                           | 91,028     |                         | $          | 87,809 |   |
| Work-in-process        |       | 61,393                      |       | 48,834                       |       |
| Finished units         |       | 43,134                      |       | 64,868                       |       |
| Raw material  reserves |       | (12,263                     | )          | (11,377                      | )          |
|                   |       | $                           | 183,292    |                         | $          | 190,134 |   |

**4.     Land Held for Development**

In June 2006, the Company acquired undeveloped land near LaQuinta, California for $16.3 million. The 80 acre parcel will be developed into a motorhome resort withapproximately 400 lots available for sale beginning late 2007 or early 2008.

**5.     Line of Credit**

The Company’s credit facilities consist of a revolving lineof credit of up to $105.0 million. As of July 1, 2006, borrowings outstandingon the revolving line of credit (the “Revolving Loan”) were $32.1 million.  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.  At July 1, 2006, the prime interest rate was8.25%.  The Company also pays interestquarterly on the unused available portion of the Revolving Loan at varyingrates, determined by the Company’s leverage ratio.  The Revolving Loan is due and payable in fullon November 17, 2009 and requires monthly interest payments.  The agreement contains restrictive covenantsas to the Company’s leverage ratio, current ratio, fixed charge coverage ratio,and tangible net worth.  As of July 1,2006, the Company was in compliance with these covenants.

**6.     Long-term NotesPayable**

In November 2005, the Company amendedits credit facilities to borrow $40.0 million of term debt (the “Term Debt”) toeffect the acquisition of R-Vision (see Note 2).  As of July 1, 2006, outstanding Term Debt was$37.1 million.  At the election of theCompany, the Term Debt bears interest at varying rates that fluctuate based onthe prime rate or LIBOR and are determined based on the Company’s leverageratio.  The Term Debt requires quarterlyinterest payments and quarterly principal payments, of $1.4 million, with afinal balloon payment of $12.9 million due on November 18, 2010.  At July 1, 2006, the interest rate on theTerm Debt was 6.28%.  The Term Debt iscollateralized by all the assets of the Company.  The agreement contains restrictive covenantsas to the Company’s leverage ratio, current ratio, fixed charge coverage ratio,and tangible net worth.  As of July 1,2006, the Company was in compliance with these covenants.

8

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In November 2005, the Companyobtained a term loan of $500,000 from the State of Oregon in connection withthe relocation of jobs to the Coburg, Oregon production facilities from theBend, Oregon facility.  The principal andinterest is due on April 30, 2009.  Theloan bears a 5% annual interest rate.

The following table displays thescheduled principal payments by year that will be due in thousands on all theCompany’s term loans.

|          | ** ** | **Amount of** | ** ** |
|----------|------------|--------------------|------------|
| **Year** | ** ** | ** **         | ** ** | **Payment Due** | ** ** |
|     |       |               |       |
| 2006     |       | $                  | 2,857      |   |
| 2007     |       | 5,714              |       |
| 2008     |       | 5,714              |       |
| 2009     |       | 6,214              |       |
| 2010     |       | 17,144             |       |
|     |       | $                  | 37,643     |   |
|          |            |                    |            |  |  |  |

**7.    Earnings Per Common Share**

Basic earnings per common share isbased on the weighted 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 July 1, 2006, therewere 835,450 non-dilutive options excluded from the diluted earnings per sharecalculation (655,960 for the quarter ended July 2, 2005).  The weighted average number of common sharesused in the computation of earnings per common share were as follows:
|                                                   | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                        | ** ** | **July 2,  2005** | ** ** | **July 1,  2006**         | ** ** | **July 2,  2005** | ** ** | **July 1,  2006** | ** ** |
| **Basic**                                         |       |                   |       |                           |       |   |   |   |   |
| Issued and  outstanding shares (weighted average) |       | 29,502,165             |       | 29,708,892                     |       | 29,481,152 |   | 29,672,558 |   |
|                                              |       |                   |       |                           |       |   |   |   |   |
| **Effect  of Dilutive Securities**                |       |                   |       |                           |       |   |   |   |   |
| Restricted Stock  Units                           |       | 0                      |       | 27,414                         |       | 0 |   | 15,437 |   |
| Performance  Share Awards                         |       | 0                      |       | 25,280                         |       | 0 |   | 12,640 |   |
| Stock Options                                     |       | 322,405                |       | 129,579                        |       | 378,085 |   | 158,914 |   |
| **Diluted**                                       |       | 29,824,570             |       | 29,891,165                     |       | 29,859,237 |   | 29,859,549 |   |
| ** **                                        |       |                   |       |                           |       |   |   |   |   |
| ** **                                        | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
| ** **                                        | ** ** | **July 2,  2005** | ** ** | **July 1,  2006**         | ** ** | **July 2,  2005** | ** ** | **July 1,  2006** | ** ** |
| ** **                                        |       |                   |       |                           |       |   |   |   |   |
| Cash dividends  per common share                  |       | $                      | 0.06       |                           | $          | 0.06 |   | $ | 0.12 |   | $ | 0.12 |   |
|                                                   |            |                        |            |                                |            |  |  |  |  |  |  |  |  |

 

 

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**8.**              Stock-based Award Plans

TheCompany has an Employee Stock Purchase Plan (the “Purchase Plan”) - 1993,a  non-employee 1993 Director Option Plan(the “Director Plan”) , and an Amended and Restated 1993 Stock Plan (the “StockPlan”).

As of January 1, 2006, the Company adopted the provisions ofFAS 123R, “Share-Based Payment” (the “Statement”).  The Statement replaces FAS 123, “Accountingfor Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees.”  TheStatement establishes fair value as the measurement objective in accounting forshare-based payment arrangements and requires a fair-value-based measurementmethod in accounting for share-based payments to employees except for equityinstruments held by employee share ownership plans.   We elected to adopt the modified prospectiveapplication method of the Statement.

Prior to the adoption, the Company accounted for thestock-based employee compensation plans under the recognition and measurementprinciple of APB Opinion No. 25.  Nostock-based employee compensation cost related to these options was reflectedin net income of prior periods, as all options granted under those plans had anexercise price equal to the market value of the underlying common stock on thedate of grant.

**Stock PurchasePlan**

The  Purchase Plan qualifies under Section 423 ofthe Internal Revenue Code.  The Companyhas reserved 683,438 shares of Common Stock for issuance under the PurchasePlan.  During the quarter ended July 1,2006, no shares were issued under the Purchase Plan.  Under the Purchase Plan, an eligible employeemay purchase shares of common stock from the Company through payroll deductionsof up to 10% of base compensation, at a price per share equal to 85% of thelesser of the fair market value of the Company’s Common Stock as of the firstday (grant date) or the last day (purchase date) of each six month offeringperiod under the Purchase Plan.

ThePurchase Plan is administered by a committee appointed by the Board ofDirectors.  Any employee who iscustomarily employed for at least 20 hours per week and more than five monthsin a calendar year by the Company, or by any majority-owned subsidiarydesignated from time to time by the Board of Directors, and who does not own 5%or more of the total combined voting power or value of all classes of theCompany’s outstanding capital stock, is eligible to participate in the PurchasePlan.

**Director Plan**

EffectiveMay 17, 2006, no further awards will be made under the Director Plan, but itwill continue to govern awards previously granted thereunder.  Future equity awards to directors will bemade under the Stock Plan.  The Board ofDirectors and the stockholders had authorized a total of 352,500 shares ofCommon Stock for issuance pursuant to the Director Plan.  On May 17, 2006 authorization for 90,300shares were transferred from the Director Plan to the Stock Plan, which representedthe number of shares reserved under the Director Plan that had not been issuedpursuant to awards granted under the plan plus the number of shares reservedthat were not subject to any outstanding awards granted under the plan.

Optionsgranted under the Director Plan to non-employee directors on the date theoptionee first became a director vest ratably over a five-year period, whilesubsequent annual grants vest in full on the fifth anniversary of their grantdate.  The exercise price of all optionsgranted under the Director Plan was equal to the fair market value of a shareof the Company’s Common Stock on the date of grant.  The maximum term of these options is 10years.  As of July 1, 2006, 102,000options had been exercised, and options to purchase 146,550 shares of commonstock were outstanding.  As of July 1,2006, 13,650 shares of Common Stock had been issued in lieu of some directors’cash retainer as allowed by the plan.

10

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**Stock Plan**

TheStock Plan provides for the grant of stock based awards to employees, directorsand consultants who provide services to the Company and its affiliates.  Allowed awards include stock options,restricted stock, restricted stock units, stock appreciation rights,performance shares, performance units, dividend equivalents and other stockawards.  A total of 5,548,113 shares ofCommon Stock have been reserved for issuance under the Stock Plan, whichincludes the transfer of unused share authorizations under the Director Plan onMay 17, 2006.  As of July 1, 2006 1,675,566options had been exercised, and options to purchase 1,339,967 shares of CommonStock were outstanding.  These optionsvest ratably over five years commencing with the date of grant.

Theexercise price of stock options granted under the Stock Plan must be at leastequal to the fair market value of a share of the Company’s Common Stock on thedate of grant.  With respect to anyparticipant possessing more than 10% of the voting power of the Company’soutstanding capital stock, the exercise price of any incentive stock optiongranted must equal at least 110% of the fair market value on the grant date,and the maximum term of the option must not exceed five years.  The terms of all other options granted underthe Stock Plan may not exceed ten years.

11

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Optiontransactions involving the Director Plan and the Stock Plan are summarized withcorresponding weighted-average exercise prices as follows:

|                               | ** ** | **Shares** | ** ** | **Price** | ** ** |
|-------------------------------|------------|------------|------------|-----------|------------|
| Outstanding at  April 1, 2006 |       | 1,358,717  |       | $         | 15.29      |   |
| Granted                       |       | —     |       | —    |       |
| Exercised                     |       | (6,050     | )          | 9.81      |       |
| Forfeited                     |       | (12,700    | )          | 19.44     |       |
| Outstanding at July 1,  2006  |       | 1,339,967  |       | 15.27     |       |
|                               |            |            |            |           |            |  |

Forvarious price ranges, weighted average characteristics of all outstanding stockoptions at July 1, 2006 were as follows:

|                                | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**       | ** ** |
|--------------------------------|------------|------------------------------|------------|------------------------------------|------------|
| **Range of  Exercise Prices**  | ** ** | **Shares**                   | ** ** | **Remaining  Life   (years)** | ** ** | **Weighted-  Average  Price** | ** ** | **Shares** | ** ** | **Weighted-  Average  Price** | ** ** |
| $ 2.68 -   5.36 |       | 60,652                       |       | 0.8                                |       | $ | 3.52 |   | 60,652 |   | $ | 3.52 |   |
| $ 5.37 -   8.04 |       | 105,818                      |       | 1.8                                |       | $ | 7.72 |   | 105,818 |   | $ | 7.72 |   |
| $ 8.05 - 10.72            |       | 242,464                      |       | 4.9                                |       | $ | 10.31 |   | 184,204 |   | $ | 10.29 |   |
| $10.73 - 13.40                 |       | 268,493                      |       | 4.3                                |       | $ | 12.23 |   | 265,293 |   | $ | 12.24 |   |
| $13.41 - 16.08                 |       | 47,000                       |       | 8.2                                |       | $ | 15.04 |   | 9,600 |   | $ | 16.08 |   |
| $16.09 - 18.76                 |       | 284,970                      |       | 7.9                                |       | $ | 16.30 |   | 284,970 |   | $ | 16.30 |   |
| $18.77 - 21.44                 |       | 14,000                       |       | 6.3                                |       | $ | 20.03 |   | 14,000 |   | $ | 20.03 |   |
| $21.45 - 24.12                 |       | 24,000                       |       | 8.3                                |       | $ | 21.65 |   | 24,000 |   | $ | 21.65 |   |
| $24.13 - 26.80                 |       | 292,570                      |       | 6.7                                |       | $ | 25.63 |   | 292,570 |   | $ | 25.63 |   |
|                           |       | 1,339,967                    |       |                               |       |   |   | 1,241,107 |   |   |   |

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**The following table illustrates the effect on net incomeand earnings per share if the Company had applied the fair value recognitionprovisions of FAS 123 to stock-based employee compensation in the quarter endedJuly 2, 2005 compared to the fair value recognition provisions of FAS 123R thatare applied to the stock-based payment arrangements in the quarter ended July1, 2006.**

|                                                                                                                                               | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                    | ** ** | **July 2,  2005** | ** ** | **July 1,  2006**         | ** ** | **July 2,  2005** | ** ** | **July 1,  2006** | ** ** |
|                                                                                                                                          |       |                   |       |                           |       |   |   |   |   |
| Net income  before stock-based compensation expense                                                                                           |       | $                      | 755        |                           | $          | 1,199 |   | $ | 6,078 |   | $ | 9,697 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method for all awards, net of related tax effects |       | 227                    |       | 827                            |       | 454 |   | 1,032 |   |
| Net income*                                                                                                                                   |       | $                      | 528        |                           | $          | 372 |   | $ | 5,624 |   | $ | 8,665 |   |

 

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* Net income in 2005 andprior years are pro-forma for the effect of FAS 123R.

 
| Earnings per  share:                      |   |   |   |   |   |   |   |   |   |
|-------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Basic - as reported                       |   | $      | 0.03   |   | $      | 0.01   |   | $      | 0.21   |   | $ | 0.29 |   |
| Basic - with stock-based compensation     |   | $      | 0.02   |   | $      | 0.01   |   | $      | 0.19   |   | $ | 0.29 |   |
|                                      |   |   |   |   |   |   |   |   |   |
| Diluted - as reported                     |   | $      | 0.03   |   | $      | 0.01   |   | $      | 0.20   |   | $ | 0.29 |   |
| Diluted - with  stock-based compensation. |   | $      | 0.02   |   | $      | 0.01   |   | $      | 0.19   |   | $ | 0.29 |   |

Forpurposes of the above information, the fair value of each option grant wasestimated at the date of grant using the Black-Scholes option pricing modelwith the following weighted average assumptions:
|                           | ** ** | **2006** | ** ** |
|---------------------------|------------|----------|------------|
|                      |       |     |       |
| Risk-free  interest rate  |       | 4.03     | %          |
| Expected life  (in years) |       | 6.69     |       |
| Expected  volatility      |       | 31.25    | %          |
| Expected dividend yield   |       | 1.70     | %          |

 

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Therewas approximately $182,000 of stock-based compensation expense recognized fromthe combination of the Stock Plan and the Director Plan during the quarterended July 1, 2006.  The total remainingexpense to be recognized in future periods for outstanding non-vested stockoptions related to the Stock Plan and Director Plan is approximately$527,000.  This amount will be recognizedover the following periods according to the schedule below:

| Fiscal Year | ** ** | **Stock Option Expense** | ** ** |
|------------------|------------|------------------------------------|------------|
| 2006             |       | $                                  | 212,000    |   |
| 2007             |       | 191,000                            |       |
| 2008             |       | 71,000                             |       |
| 2009             |       | 32,000                             |       |
| 2010             |       | 21,000                             |       |
|             |       | $                                  | 527,000    |   |

**Restricted StockUnit Grant**

Acomponent of the Stock Plan permits the Company to grant shares of restrictedstock units (RSU’s).  These grants arecompensation expense under the rules of APB No. 25, and are required to berecognized in the Company’s income statement. During the quarter ended July 1, 2006, no restricted stock units weregranted; $260,000 was recorded as compensation expense in the current quarter’sincome statement relating to previously awarded RSU’s.  The total number of outstanding RSU’s as ofJuly 1, 2006 was 228,409 shares.

**PerformanceShare Awards**

Acomponent of the Stock Plan permits the Company to grant performance shareawards (PSA’s).  Grants were effective asof the date of approval of the Stock Plan by the shareholders on May 17, 2006and included target payouts to participants of a total of 164,909 shares undera two-year performance plan and 164,909 shares under a three-year performanceplan.  Both plans require the achievementof performance based on Return on Net Assets-adjusted (RONA) and TotalShareholder Return (TSR) compared to a group of peer companies.  Depending on the ranking of the Company’sperformance against the peer group, the participants could earn from 0% up to200% of the target payout of performance shares.  A total of $947,000 of compensation expensewas recorded during the quarter ended July 1, 2006 relating to the performanceshare awards.  The total number of outstandingPSA’s was 329,818 shares at target payout.

**9.**           Segment Reporting

Monaco Coach Corporation is a leading manufacturer of premiumClass A, B and C motor coaches (Motorized Recreational Vehicle Segment) andtowable recreational vehicles (Towable Recreational Vehicle Segment).  Our product line currently consists of abroad line of motor coaches, fifth wheel trailers, travel trailers, and specialtytrailers under the “Monaco,” “Holiday Rambler,” “Beaver,” “Safari,” “McKenzie,”“R-Vision,” “Bison,” and “Roadmaster” brand names.

In addition to the manufacturing of premium recreationalvehicles, the Company also owns and operates two motorhome resort properties(Motorhome Resort Segment) located in Las Vegas, Nevada, and Indio,California.  In addition to these tworesorts, the Company has also acquired a piece of property in southernCalifornia, and has a second piece of property under contract in southernFlorida.  These properties are planned tobe developed and sold over the next two to five years.*  The resorts offer sales of individual lots torecreational vehicle owners and also offer a common interest in the amenitiesat the resort.  The resorts providedestination locations for premium Class A recreational vehicle owners and helpto promote the recreational vehicle lifestyle.

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The following table provides the results of operations of thethree segments of the Company for the quarters and six months ended July 2,2005 and July 1, 2006, respectively. All dollars represented are in thousands.
| ** **                                     | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                     | ** ** | **July 2,  2005** | ** ** | **July 1,  2006**         | ** ** | **July 2,  2005** | ** ** | **July 1,  2006** | ** ** |
| **Motorized  Recreational Vehicle Segment**    |       |                   |       |                           |       |   |   |   |   |
|                                           |       |                   |       |                           |       |   |   |   |   |
| Net sales                                      |       | $                      | 259,931    |                           | $          | 225,620 |   | $ | 550,084 |   | $ | 480,569 |   |
| Cost of sales                                  |       | 237,685                |       | 209,727                        |       | 496,999 |   | 439,589 |   |
| Gross profit                                   |       | 22,246                 |       | 15,893                         |       | 53,085 |   | 40,980 |   |
|                                           |       |                   |       |                           |       |   |   |   |   |
| Selling, general  and administrative expenses  |       | 10,354                 |       | 8,730                          |       | 20,608 |   | 17,259 |   |
| Corporate  overhead allocation                 |       | 12,312                 |       | 10,050                         |       | 23,886 |   | 21,611 |   |
| Plant relocation  costs                        |       | 2,352                  |       | 269                            |       | 2,352 |   | 269 |   |
| Operating income (loss)                        |       | $                      | (2,772     | )                              | $          | (3,156 | ) | $ | 6,239 |   | $ | 1,841 |   |
|                                           |       |                   |       |                           |       |   |   |   |   |
| **Towable  Recreational Vehicle Segment**      |       |                   |       |                           |       |   |   |   |   |
|                                           |       |                   |       |                           |       |   |   |   |   |
| Net sales                                      |       | $                      | 32,124     |                           | $          | 89,226 |   | $ | 65,491 |   | $ | 203,643 |   |
| Cost of sales                                  |       | 29,541                 |       | 79,582                         |       | 61,270 |   | 179,853 |   |
| Gross profit                                   |       | 2,583                  |       | 9,644                          |       | 4,221 |   | 23,790 |   |
|                                           |       |                   |       |                           |       |   |   |   |   |
| Selling,  general, and administrative expenses |       | 1,089                  |       | 3,559                          |       | 2,323 |   | 7,188 |   |
| Corporate  overhead allocation                 |       | 1,596                  |       | 4,498                          |       | 2,984 |   | 10,321 |   |
| Operating income (loss)                        |       | $                      | (102       | )                              | $          | 1,587 |   | $ | (1,086 | ) | $ | 6,281 |   |
|                                           |       |                   |       |                           |       |   |   |   |   |
| **Motorhome  Resorts Segment**                 |       |                   |       |                           |       |   |   |   |   |
|                                           |       |                   |       |                           |       |   |   |   |   |
| Net sales                                      |       | $                      | 12,457     |                           | $          | 6,437 |   | $ | 17,750 |   | $ | 22,138 |   |
| Cost of sales                                  |       | 4,300                  |       | 1,483                          |       | 6,173 |   | 7,968 |   |
| Gross profit                                   |       | 8,157                  |       | 4,954                          |       | 11,577 |   | 14,170 |   |
|                                           |       |                   |       |                           |       |   |   |   |   |
| Selling,  general, and administrative expenses |       | 2,568                  |       | 1,581                          |       | 4,030 |   | 4,653 |   |
| Corporate  overhead allocation                 |       | 1,061                  |       | 1,011                          |       | 2,107 |   | 2,375 |   |
| Operating income                               |       | $                      | 4,528      |                           | $          | 2,362 |   | $ | 5,440 |   | $ | 7,142 |   |

 

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|                                                                   | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| **Reconciliation to Net Income**                   | ** ** | **July 2,  2005** | ** ** | **July 1,  2006**         | ** ** | **July 2,  2005** | ** ** | **July 1,  2006** | ** ** |
|                                                              |       |                   |       |                           |       |   |   |   |   |
| Operating income  (loss):                                         |       |                   |       |                           |       |   |   |   |   |
| Motorized recreational vehicle segment                            |       | $                      | (2,772     | )                              | $          | (3,156 | ) | $ | 6,239 |   | $ | 1,841 |   |
| Towable recreational vehicle segment                              |       | (102                   | )          | 1,587                          |       | (1,086 | ) | 6,281 |   |
| Motorhome resorts segment                                         |       | 4,528                  |       | 2,362                          |       | 5,440 |   | 7,142 |   |
| Total operating income                                            |       | 1,654                  |       | 793                            |       | 10,593 |   | 15,264 |   |
|                                                              |       |                   |       |                           |       |   |   |   |   |
| Other income,  net                                                |       | 26                     |       | 256                            |       | 140 |   | 388 |   |
| Interest expense                                                  |       | (187                   | )          | (940                           | )          | (672 | ) | (2,192 | ) |
| Income before income taxes and discontinued operations            |       | 1,493                  |       | 109                            |       | 10,061 |   | 13,460 |   |
|                                                              |       |                   |       |                           |       |   |   |   |   |
| Provision (benefit from) for income taxes, continuing  operations |       | 528                    |       | (370                           | )          | 3,733 |   | 4,688 |   |
|                                                              |       |                   |       |                           |       |   |   |   |   |
| Net income from  continuing operations                            |       | 965                    |       | 479                            |       | 6,328 |   | 8,772 |   |
|                                                              |       |                   |       |                           |       |   |   |   |   |
| Loss from discontinued operations, net of tax  provision          |       | (210                   | )          | (107                           | )          | (250 | ) | (107 | ) |
|                                                              |       |                   |       |                           |       |   |   |   |   |
| Net income                                                        |       | $                      | 755        |                           | $          | 372 |   | $ | 6,078 |   | $ | 8,665 |   |

**10.**       Commitments and Contingencies

RepurchaseAgreements

Many ofthe Company’s sales to independent dealers are made on a “floor plan” basis bya bank or finance company which lends the dealer all or substantially all ofthe wholesale purchase price and retains a security interest in thevehicles.  Upon request of a lendinginstitution financing a dealer’s purchases of the Company’s product, theCompany will execute a repurchase agreement. These agreements provide that, for up to 18 months after a unit isshipped, the Company will repurchase a dealer’s inventory in the event of adefault by a dealer to its lender.

The Company’s liabilityunder repurchase agreements is limited to the unpaid balance owed to thelending institution by reason of its extending credit to the dealer to purchaseits vehicles, reduced by the resale value of vehicles which may be repurchased.  The risk of loss is spread over numerousdealers and financial institutions.

 

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Theapproximate amount subject to contingent repurchase obligations arising fromthese agreements at July 1, 2006 is $601.8 million, with approximately 5.0%concentrated with one dealer.  If theCompany were obligated to repurchase a significant number of units under anyrepurchase agreement, its business, operating results, and financial conditioncould be adversely affected.  The Companyhas included the disclosure requirements of FASB Interpretation No. 45 (FIN 45),“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” in its financial statements, andhas determined 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 $350,000 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.

ProductLiability

TheCompany is subject to regulations which may require the Company to recallproducts with design or safety defects, and such recall could have a materialadverse effect on the Company’s business, results of operations, and financialcondition.

TheCompany has from time to time been subject to product liability claims.  To date, the Company has been successful inobtaining product liability insurance on terms the Company considersacceptable.  The terms of the policycontain a self-insured retention amount of $500,000 per occurrence, with amaximum annual aggregate self-insured retention of $3.0 million.  Overall product liability insurance,including umbrella coverage, is available to a maximum amount of $100.0 millionfor 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.

ProductWarranty

Estimatedwarranty costs are provided for at the time of sale of products with warrantiescovering the products for up to one year from the date of retail sale (fiveyears for the front and sidewall frame structure, and three years on theRoadmaster chassis). These estimates are based on historical average repaircosts, as well as other reasonable assumptions deemed appropriate bymanagement. The following table discloses significant changes in the productwarranty reserve:

|                      | ** ** | **Quarter Ended**     | ** ** |
|----------------------|------------|----------------------------|------------|
| ** **           | ** ** | **July 2, 2005** | ** ** | **July 1, 2006** | ** ** |
| Beginning balance    |       | $                          | 32,159     |   | $ | 34,297 |   |
| Expense              |       | 9,274                      |       | 10,113 |   |
| Payments/adjustments |       | (9,104                     | )          | (9,769 | ) |
| Ending balance       |       | $                          | 32,329     |   | $ | 34,641 |   |

 

Litigation

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.

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**2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

This Quarterly Report on Form 10-Q contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended.  These statements include, butare not limited to, those below that have been marked with an asterisk(*).  In addition, statements containingwords such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,”“seeks,” and variations of such words and similar expressions are intended toidentify forward-looking statements. Such forward-looking statements involve known and unknown risks,uncertainties and other factors that may cause our actual results, performanceor achievements to differ materially from those expressed or implied by suchforward-looking statements, including those set forth below under the caption “FactorsThat May Affect Future Operating Results” and elsewhere in this QuarterlyReport on Form 10-Q.  The reader shouldcarefully consider, together with the other matters referred to herein, thefactors set forth under the caption “Factors That May Affect Future OperatingResults.”  We caution the reader,however, that these factors may not be exhaustive.

**GENERAL**

OVERVIEW

*Background*

Monaco Coach Corporation (the “Company”) is a leadingmanufacturer of premium recreational vehicles including Class A, B, and C motorcoaches, as well as towable recreational vehicles.  The Company also develops and sells luxurymotorcoach resort facilities.  Thesethree operations, while closely tied into the recreational lifestyle, aresegmented for reporting purposes as the Motorized Recreational Vehicle (MRV)segment, the Towable Recreational Vehicle (TRV) segment, and the MotorhomeResort (MR) segment.

*Motorized and Towable  Recreational Vehicle Segment Products*

Our products range in suggested retail price from$45,000 to $575,000 for motor coaches and from $1,000 to $70,000 for towables.  Based upon retail registrations through May2006, we believe we had a 23.5% share of the market for diesel Class A motorcoaches, a 7.9% share of the market for gas Class A motor coaches, a 15.8%share of the market for all Class A motor coaches, a 2.3% market for all ClassC motor coaches, a 4.2% share of the market for fifth wheel towables and a 4.7%share of the market for travel trailers.

*Motorhome Resort Segment*

In addition to manufacturing premium recreationalvehicles, the Company also owns and operates two motorhome resort properties(the “Resorts”), located in Las Vegas, Nevada, and Indio, California. Inaddition to these two resorts, the Company has also acquired a piece ofproperty in southern California, and has a second piece of property undercontract in southern Florida.  Theseproperties are planned to be developed and sold over the next two to fiveyears.* The Resorts offer sales of individual lots to owners, and also offer acommon interest in the amenities at the resort. Lot prices at the two resorts range from $79,900 to $319,900.  Amenities at the Resorts include club housefacilities, tennis, swimming, and golf. The Resorts provide destination locations for premium Class Arecreational vehicle owners and help to promote the recreational lifestyle.

*Business Changes*

We have conducted a series of acquisitions during ourhistory. Beginning in March 1993, when we commenced operations by acquiringsubstantially all of the assets and liabilities of a predecessor company thathad been formed in 1968.  In March 1996,we acquired the Holiday Rambler Division of Harley-Davidson, Inc., a manufacturerof a full line of Class A motor coaches and towables.  In August 2001, we acquired SMC Corporation,manufacturer of the Beaver and Safari brand Class A motorhomes.  In November 2002, we acquired from Outdoor Resortsof America (“ORA”) three luxury motorcoach resort properties being developed byORA in Las Vegas, Nevada, Indio, California, and Naples, Florida.  In September 2003, we sold the property inNaples, Florida.  And, in November of2005, we acquired R-Vision, Inc., R-Vision Motorized, LLC, Bison Manufacturing,LLC, and Roadmaster, LLC (collectively referred to as “R-Vision”),manufacturers of R-Vision, Bison, and Roadmaster motorized and towableproducts.  The R-Vision acquisition wasaccomplished as a cash purchase on November 18, 2005 and was accounted forusing the purchase method of accounting. All operations of R-Vision have been

18

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incorporated for the period ended July 1, 2006 in theconsolidated quarterly financial statements of the Company included with thisQuarterly Report on Form 10-Q.

During the third quarter of 2005, the Companyannounced that it was closing its Royale Coach operations in Elkhart,Indiana.  Royale Coach produced Prevostbus conversion motor coaches with price points in excess of $1.4 million.  Royale Coach sold approximately 20 coachesper year and was not a significant portion of the Company’s overallbusiness.  All closure costs have beenaccrued for in the Company’s financial statements.

**RESULTS OF CONSOLIDATEDOPERATIONS**

*Quarter ended July 1, 2006Compared to Quarter ended July 2, 2005*

The followingtable illustrates the results of consolidated operations for the quarters endedJuly 2, 2005 and July 1, 2006. All dollars represented are in thousands.
| ** **                                     | ** ** | **Quarter  Ended  July 2, 2005** | ** ** | **%  of Sales** | ** ** | **Quarter  Ended  July 1, 2006** | ** ** | **%  of Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|----------------------|------------|--------------------------------------------|------------|----------------------|------------|---------------|------------|---------------|------------|
| Net sales                                      |       | $                                          | 304,512    |                 | 100.0      | %                                          | $          | 321,283              |       | 100.0         | %          | $             | 16,771     |   | 5.5 | % |
| Cost of sales                                  |       | 271,526                                    |       | 89.2                 | %          | 290,792                                    |       | 90.5                 | %          | (19,266       | )          | -7.1          | %          |
| Gross profit                                   |       | 32,986                                     |       | 10.8                 | %          | 30,491                                     |       | 9.5                  | %          | (2,495        | )          | -7.6          | %          |
| Selling,  general, and administrative expenses |       | 28,980                                     |       | 9.5                  | %          | 29,429                                     |       | 9.2                  | %          | (449          | )          | -1.6          | %          |
| Plant relocation  costs                        |       | 2,352                                      |       | 0.8                  | %          | 269                                        |       | 0.1                  | %          | 2,083         |       | 88.6          | %          |
| Operating income                               |       | $                                          | 1,654      |                 | 0.5        | %                                          | $          | 793                  |       | 0.2           | %          | $             | (861       | ) | -52.1 | % |

 

*Motorized and TowableRecreational Vehicle Segments*

The recreational vehicle market in 2006, as was the case in2005, is continuing to experience a period of contraction.  In part, this contraction is due to factorssuch as higher fuel prices, rising interest rates, and uncertainty in consumerconfidence related to international events. While these cyclical factors have negatively impacted the recreationalvehicle market, the underlying demographics for future expansion are still verystrong as the key buying groups for recreational vehicles continue to grow innumbers.  The so-called “baby boomer”generation will continue to expand in size well into 2015 and should provide aconsumer base that is enthusiastic to embrace the recreational vehiclelifestyle.

The motorizedmarket has been significantly 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, who we share with our competitors, are more cautious in theamount of inventory that they are willing to carry.  Due to these factors, competition for spaceon dealer lots among manufacturers has increased the discounting of product, asmanufacturers, including ourselves, seek to ensure that prior model year productsare sold to make space for new models. As a result, motorized margins have been impacted negatively, but wehave been successful in moving substantially all of our prior year inventoryonto dealer lots.  Despite the current cyclicaldownturn in the motorized market, we continue to remain optimistic on theprospects for long-term growth in this sector, as the demographics for ourcustomer base shows a continuing increase in the number of new entrants intoour target age and economic group.*

The towable market, while not as weak as the motorizedmarket, has begun to show signs of slowing down.  This is in part due to rising fuel prices andhigher interest rates which are beginning to have an impact on consumerspending.  In addition, as in the case ofthe motorized product, competition for space on dealer lots is increasing andthe result is an increase in discounting necessary to maintain shelf space.  In spite of these conditions, we remainconfident that indicators such as the demographics for our customer base remainpositive and that the market will remain viable well into the future.*

The recreationalvehicle industry is extremely competitive, and independent retail dealers aswell as retail customers have many choices available to them.  To distinguish ourselves within the industry,we introduced our Franchise For The Future (FFTF) program for our Class Adealers in June of 2005.  This programwas designed to

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introduce the concept toour dealer partners that our specific brands have intrinsic values as a sellingtool.  To support this, and to encourageour dealers to participate in FFTF, we worked with outside marketingconsultants to develop brand signage, informational computer kiosks, and brandspecific displays that are placed within our various independent dealerlocations.  We believe that this concept,along with other features designed to entice our dealers to focus sellingefforts on our various product offerings, will assist them in their salesefforts through the strength of improved brand identity.

*Motorhome Resort Segment*

Our motorhome resort properties sales and profits were verysuccessful in the first quarter of 2006, and continued to remain profitable inthe second quarter of 2006.  Ourproperties contributed operating profits of $2.4 million for the second quarterof 2006.  We believe that these resortproperties will continue to sell through their respective remaining availableinventories of lots for the remainder of 2006 and into the first and second quarters of 2007.*  To ensure the continued growth of thissegment, we have acquired a piece of property in southern California, and havea second piece of property in Naples, Florida under contract.  We expect to begin developing these resortsin late 2006 and continue into 2007, with sales of lots from these resorts tocommence in either the fourth quarter of 2007, or in the first quarter of2008.*

*Performance in the second quarterof 200*6

Second quarter net sales increased 5.5% to $321.3 millioncompared to $304.5 million for the same period last year.  Sales increases were driven by the inclusionsales of R-Vision products in the current year. Gross diesel motorized sales were down 12.9%, gas motorized sales weredown 14.4%, and towables were up 172.6%. Diesel products accounted for 60.6% of our second quarter revenues whilegas products were 10.2%, and towables were 29.2%.  Our overall unit sales were up 149.9% in thesecond quarter of 2006 to 7,025 units, with diesel motorized unit sales down12.5% to 983 units, gas motorized unit sales down 12.0% to 425 units, andtowable unit sales up 366.1% to 5,617 units. Towable unit sales increases were due primarily to the inclusion ofunits from the R-Vision acquisition.   Our total average unit selling price decreased to $45,700 from $105,400in the same period last year, reflecting the impact of the inclusion ofR-Vision products.

Gross profit for the second quarter of 2006 decreased to$30.5 million, down from $33.0 million in 2005, and gross margin decreased from10.8% in the second quarter of 2005 to 9.5% in the second quarter of 2006.  Changes in the components of cost of salesare set forth in the following table (dollars in thousands):
| ** **           | ** ** | **Quarter Ended**          | ** ** | ** **               | ** ** | **Quarter Ended**          | ** ** | ** **               | ** ** | **Change in % of** | ** ** |
|----------------------|------------|----------------------------|------------|--------------------------|------------|----------------------------|------------|--------------------------|------------|-----------------------------------|------------|
|                      | ** ** | **July 2, 2005** | ** ** | **% of Sales** | ** ** | **July 1, 2006** | ** ** | **% of Sales** | ** ** | **Sales**                         | ** ** |
| Direct materials     |       | $                          | 188,290    |                     | 61.8       | %                          | $          | 198,797                  |       | 61.9                              | %          | 0.1 | % |
| Direct labor         |       | 29,781                     |       | 9.8                      | %          | 33,810                     |       | 10.5                     | %          | 0.7                               | %          |
| Warranty             |       | 9,245                      |       | 3.0                      | %          | 10,114                     |       | 3.1                      | %          | 0.1                               | %          |
| Other direct         |       | 16,215                     |       | 5.3                      | %          | 19,325                     |       | 6.0                      | %          | 0.7                               | %          |
| Indirect             |       | 27,995                     |       | 9.2                      | %          | 28,746                     |       | 9.0                      | %          | -0.2                              | %          |
| Total cost of  sales |       | $                          | 271,526    |                     | 89.1       | %                          | $          | 290,792                  |       | 90.5                              | %          | 1.4 | % |

 

·                  Direct materialincreases in 2006 as a percent of sales were due mostly to shifts in the mixtoward lower-priced recreational vehicles, which tend to have a higher materialcontent as a percent of sales.

·                  Direct labor increases in 2006 as apercent of sales were predominantly due to changes in product mix to a greaterconcentration of towable products, which have a higher labor content as apercent of sales.

·                  Increases in warranty expense in2006 as a percent of sales were due mostly to a slightly higher warranty rateon 2006 model year products.

·                  Increases in other direct costs in2006 as a percent of sales were due mostly to increases in employee healthbenefits and delivery expense for the Company’s product.

·                  Decreases in indirect costs in 2006as a percent of sales were due mostly to reductions in plant capacity throughplant closures that occurred in 2005, as well as in reductions in expendituresfor worker’s compensation and general insurance.

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Selling, general, and administrative expenses (S,G,&A)increased by $449,000 in the second quarter of 2006 to $29.4 million comparedto the second quarter of 2005 and decreased as a percentage of sales from 9.5%in 2005 to 9.1% in the second quarter of 2006. Changes in S,G,&A expenses are set forth in the following table (dollarsin thousands):

|                                        | ** ** | **Quarter  Ended  July 2,  2005** | ** ** | **% of  Sales** | ** ** | **Quarter  Ended  July 1,  2006** | ** ** | **% of  Sales** | ** ** | **Change in  % of Sales** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|----------------------|------------|----------------------------------------|------------|----------------------|------------|------------------------------------------|------------|
| Salaries, bonus,  and benefit expenses |       | $                                      | 4,448      |                 | 1.4        | %                                      | $          | 5,275                |       | 1.6                                      | %          | 0.2 | % |
| Selling expenses                       |       | 10,560                                 |       | 3.5                  | %          | 9,935                                  |       | 3.1                  | %          | -0.4                                     | %          |
| Settlement  expense                    |       | 2,831                                  |       | 0.9                  | %          | 3,649                                  |       | 1.1                  | %          | 0.2                                      | %          |
| Marketing  expenses                    |       | 2,362                                  |       | 0.8                  | %          | 2,404                                  |       | 0.8                  | %          | 0.0                                      | %          |
| Other                                  |       | 8,779                                  |       | 2.9                  | %          | 8,165                                  |       | 2.5                  | %          | -0.4                                     | %          |
| Total S,G,&A  expenses             |       | $                                      | 28,980     |                 | 9.5        | %                                      | $          | 29,428               |       | 9.1                                      | %          | -0.4 | % |

 

·                  Increases in salaries, bonus, andbenefits expenses in 2006 as a percent of sales were due primarily to the inclusionof long-term, incentive-based compensation in 2006.

·                  Decreases in selling expenses in2006 as a percent of sales, were due to reductions in expenditures for salescommissions related to motorized products.

·                  Increases in settlement expense(litigation settlement expense) in 2006 as a percent of sales, were due to anincrease in the number of new cases added in 2006 compared to the same periodin 2005.

·                  Decreases in other expenses in 2006as a percent of sales  were due primarilyto a reduction in start-up costs for the new franchise program****that was launched in 2005.

Plant relocation costs in the second quarter of 2006 wererelated to costs associated with the termination of one of the facilities inour vacated Bend, Oregon operations.  In2005, the Company relocated the Bend operations to its Coburg, Oregonlocation.  The expenditures in the firstquarter of 2006 relate to the successful sub-lease of one of the plants in Bendheld under a long-term lease.  Remaininglease commitments were accrued for in 2005, and the Company does not expectthat these future costs will significantly impact on-going results ofoperations.

Operating income was $793,000, or 0.2% of sales, in thesecond quarter of 2006 compared to $1.7 million, or 0.5% of sales, in thesimilar 2005 period.** **The decrease in operating income****was due predominantly to decreased gross margin andincreases in S,G,&A costs.

Net interest expense was $684,000 in the second quarter of2006 versus $161,000 in the comparable 2005 period, reflecting higher corporateborrowing during the second quarter of 2006.

We reported a benefit from income taxes of $370,000 in thesecond quarter of 2006, compared to an expense of $528,000, or an effective taxrate of 35.4%, for the comparable 2005 period. The benefit from taxes in the second quarter of 2006 was primarily dueto a favorable outcome from a state income tax audit.

Net income for the second quarter of 2006 (including lossesfrom discontinued operations of $107,000, net of taxes, related to the closureof the Royale Coach facility) was $372,000 compared to $755,000 for the secondquarter of 2005 due to a lower gross margin, an increase in S,G&A expensesthat more than offset higher sales and a tax benefit.  The Company did not expense stock optiongrants in 2005 and earlier periods, however, if option expensing had beenrequired, the effect on net income for the second quarter of 2005 for all previouslygranted options would have been a decrease of $227,000.  See Note 8 of the Company’s consolidatedfinancial statements for information regarding the calculation of the impact ofexpensing stock options.  The Company hasreflected the cost of stock options in its results of operations beginning in2006.

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*Second Quarter 2006 versus SecondQuarter 2005 for the Motorized Recreational Vehicle Segment*

The followingtable illustrates the results of the MRV Segment for the quarters ended July 2,2005, and July 1, 2006 (dollars in thousands):
| ** **                                     | ** ** | **Quarter Ended  July 2, 2005** | ** ** | **%  of Sales** | ** ** | **Quarter Ended  July 1,  2006** | ** ** | **%  of Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------------|------------|------------------------------------------------|------------|----------------------|------------|------------------------------------------------------|------------|----------------------|------------|---------------|------------|---------------|------------|
| Net sales                                      |       | $                                              | 259,931    |                 | 100.0      | %                                                    | $          | 225,620              |       | 100.0         | %          | $             | (34,311    | ) | -13.2 | % |
| Cost of sales                                  |       | 237,685                                        |       | 91.4                 | %          | 209,727                                              |       | 93.0                 | %          | 27,958        |       | 11.8          | %          |
| Gross profit                                   |       | 22,246                                         |       | 8.6                  | %          | 15,893                                               |       | 7.0                  | %          | (6,353        | )          | -28.6         | %          |
| Selling,  general, and administrative expenses |       | 10,354                                         |       | 4.0                  | %          | 8,730                                                |       | 3.9                  | %          | 1,624         |       | 15.7          | %          |
| Corporate  overhead allocation                 |       | 12,312                                         |       | 4.7                  | %          | 10,050                                               |       | 4.4                  | %          | 2,262         |       | 18.4          | %          |
| Plant relocation  costs                        |       | 2,352                                          |       | 0.9                  | %          | 269                                                  |       | 0.1                  | %          | 2,083         |       | 88.6          | %          |
| Operating loss                                 |       | $                                              | (2,772     | )                    | -1.0       | %                                                    | $          | (3,156               | )          | -1.4          | %          | $             | (384       | ) | -13.8 | % |

 

Total net sales for the MRV segment were down from $259.9million in the second quarter of 2005 to $225.6 million in the second quarterof 2006.  Gross diesel motorized revenueswere down 12.9% and gas motorized revenues were down 14.4%.  Diesel products accounted for 85.6% of theMRVsegment’s second quarter of 2006 gross revenues while gas products were14.4%.  The overall decrease in revenuesreflected continuing challenges in the marketplace as dealers sought to lowertheir current inventories because of softened retail demand and higher interestcosts associated with their floorplan borrowings.  Our MRV segment unit sales were down 12.2%year over year from 1,603 units in the second quarter of 2005 to 1,408 units inthe second quarter of 2006.  Dieselmotorized unit sales were down 12.2% to 983 units and gas motorized unit saleswere down 12.0% to 425 units.

Gross profit for the MRV segment for the second quarter of2006 decreased to $15.9 million, down from $22.4 million in the second quarterof 2005, and gross margin decreased from 8.6% in the second quarter of 2005 to7.0% in the second quarter of 2006. Gross profit reductions were the result of lower sales volumes in the secondquarter of 2006 versus the comparable period in 2005.  Changes in the components of cost of salesare set forth in the following table (dollars in thousands):

|                      | ** ** | **Quarter  Ended  July 2, 2005** | ** ** | **% of Sales** | ** ** | **Quarter  Ended  July 1, 2006** | ** ** | **% of Sales** | ** ** | **Change in  % of Sales** | ** ** |
|----------------------|------------|--------------------------------------------|------------|--------------------------|------------|--------------------------------------------|------------|--------------------------|------------|------------------------------------------|------------|
| Direct materials     |       | $                                          | 163,422    |                     | 62.9       | %                                          | $          | 142,225                  |       | 63.0                                     | %          | 0.1 | % |
| Direct labor         |       | 25,952                                     |       | 10.0                     | %          | 23,657                                     |       | 10.5                     | %          | 0.5                                      | %          |
| Warranty             |       | 8,225                                      |       | 3.2                      | %          | 7,655                                      |       | 3.4                      | %          | 0.2                                      | %          |
| Other direct         |       | 13,413                                     |       | 5.1                      | %          | 12,297                                     |       | 5.5                      | %          | 0.4                                      | %          |
| Indirect             |       | 26,673                                     |       | 10.2                     | %          | 23,893                                     |       | 10.6                     | %          | 0.4                                      | %          |
| Total cost of  sales |       | $                                          | 237,685    |                     | 91.4       | %                                          | $          | 209,727                  |       | 93.0                                     | %          | 1.6 | % |

 

·         Direct material increasesin 2006 as a percent of sales were mostly due to increased sales of productsthat have a higher material cost as a percentage of sales.

·         Direct labor increases in 2006 as apercent of sales were predominantly due to changes in the product mix towardproducts that have a higher labor cost as a percent of sales, as well as toshifting products between production facilities.

·         Increases in warranty expense in2006 as a percent of sales were due mostly to a slight increase in the warrantyexperience on current year models.

·         Increases in other direct costs in2006 as a percent of sales were due mostly to increases in employee healthbenefits and delivery expense for the Company’s products.

·         Increases in indirect costs in 2006as a percent of sales were due mostly to inefficiencies within the productionfacilities associated with lower run rates in the second quarter of 2006 versusthe same period in 2005.

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S,G,&A expenses for the MRV segment decreased slightly asa percent of sales and in total dollars due primarily to reductions in marketingand selling expenses. Corporate overhead allocation decreased in 2006, as apercent of sales, due to larger allocations to the other segments of theCompany’s operations.  Allocations ofcorporate overhead are based partially on sales levels.  Corporate overhead allocation is comprised ofcertain shared services such as executive, financial, information systems,legal, and investor relations expenses.

Plant relocation costs are related to the costs incurred torelocate the Bend, Oregon manufacturing facility to the Coburg, Oregonplant.  We believe this relocation willultimately result in improved margins for the Oregon operations.*

Operating loss increased as both a percent of sales and intotal dollars due to lower gross margins that were only partially offset bydecreases in S,G,&A expenses.

*Second Quarter 2006 versus SecondQuarter 2005 for the Towable Recreational Vehicle Segment*

The following table illustrates the results of the TRVSegment for the quarters ended July 2, 2005, and July 1, 2006 (dollars inthousands):

|                                                | ** ** | **Quarter Ended  July 2, 2005** | ** ** | **%  of Sales** | ** ** | **Quarter Ended  July 1, 2006** | ** ** | **%  of Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------------|------------|------------------------------------------------|------------|----------------------|------------|------------------------------------------------|------------|----------------------|------------|---------------|------------|---------------|------------|
| Net sales                                      |       | $                                              | 32,124     |                 | 100.0      | %                                              | $          | 89,226               |       | 100.0         | %          | $             | 57,102     |   | 177.8 | % |
| Cost of sales                                  |       | 29,541                                         |       | 92.0                 | %          | 79,582                                         |       | 89.2                 | %          | (50,041       | )          | -169.4        | %          |
| Gross profit                                   |       | 2,583                                          |       | 8.0                  | %          | 9,644                                          |       | 10.8                 | %          | 7,061         |       | 273.4         | %          |
| Selling, general, and  administrative expenses |       | 1,089                                          |       | 3.4                  | %          | 3,559                                          |       | 4.0                  | %          | (2,470        | )          | -226.8        | %          |
| Corporate overhead  allocation                 |       | 1,596                                          |       | 4.9                  | %          | 4,498                                          |       | 5.0                  | %          | (2,902        | )          | -181.8        | %          |
| Operating income  (loss)                       |       | $                                              | (102       | )                    | -0.3       | %                                              | $          | 1,587                |       | 1.8           | %          | $             | 1,689      |   | -1,655.8 | % |

Total net sales for the TRV segment were up from $32.1million in the second quarter of 2005 to $89.2 million in the second quarter of2006.  The increase in revenues reflectsthe impact of the R-Vision acquisition in November 2005.  The Company’s unit sales were up 366.1% to5,617 units.  Due to the addition of thelower-priced R-Vision products, average unit selling price decreased to $16,700in the second quarter of 2006 from $28,500 in the same period last year.

Gross profit for the second quarter of 2006 increased to $9.6million, up from $2.6 million in the second quarter of 2005, and gross marginincreased from 8.0% in the second quarter of 2005 to 10.8% in the secondquarter of 2006.  Changes in thecomponents of cost of sales are set forth in the following table (dollars inthousands):
| ** **          | ** ** | **Quarter Ended   July 2, 2005** | ** ** | **% of Sales** | ** ** | **Quarter Ended    July 1, 2006** | ** ** | **% of Sales** | ** ** | **Change in   % of Sales** | ** ** |
|---------------------|------------|------------------------------------------------------|------------|--------------------------|------------|------------------------------------------------------------|------------|--------------------------|------------|------------------------------------------------|------------|
| Direct materials    |       | $                                                    | 20,569     |                     | 64.0       | %                                                          | $          | 55,439                   |       | 62.1                                           | %          | -1.9 | % |
| Direct labor        |       | 3,830                                                |       | 11.9                     | %          | 10,054                                                     |       | 11.3                     | %          | -0.6                                           | %          |
| Warranty            |       | 1,021                                                |       | 3.2                      | %          | 2,458                                                      |       | 2.7                      | %          | -0.5                                           | %          |
| Other direct        |       | 2,801                                                |       | 8.7                      | %          | 7,019                                                      |       | 7.9                      | %          | -0.8                                           | %          |
| Indirect            |       | 1,320                                                |       | 4.1                      | %          | 4,612                                                      |       | 5.2                      | %          | 1.1                                            | %          |
| Total cost of sales |       | $                                                    | 29,541     |                     | 91.9       | %                                                          | $          | 79,582                   |       | 89.2                                           | %          | -2.7 | % |

·         Direct material decreasesin 2006 as a percent of sales were mostly due to increased sales of productsthat have a lower material cost as a percentage of sales, in particular, theinclusion of the R-Vision brand of products.

·         Direct labor decreases in 2006 as apercent of sales were predominantly due to changes in the product mix towardproducts that have a lower labor cost.

·         Decreases in warranty expense in2006 as a percent of sales were due mostly to improvements in warranty experiencefor the current model year product.

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·         Decreases in other direct costs in2006 as a percent of sales were due mostly to the addition of R-Vision products,which have lower direct costs as a percent of sales.

·         Increases in indirect costs in 2006as a percent of sales were due mostly to plant inefficiencies from lower productionlevels in one of the Company’s plants.

S,G,&A expenses for the TRV segment increased as apercent of sales due in part to higher sales levels for which additionalselling and administrative costs were incurred. Corporate overhead allocation increased due to higher levels allocatedto the TRV segment as a result of the growth in this segment.  Corporate overhead allocation is comprised ofcertain shared services such as executive, financial, information systems,legal, and investor relations expenses.

Operating income increased as both a percent of sales and intotal dollars due to higher sales and gross profit that was only partiallyoffset by higher S,G,&A expenses as a percent of sales.

*Second Quarter 2006 versus SecondQuarter 2005 for the Motorhome Resorts Segment*

Thefollowing table illustrates the results of the Motorhome Resorts Segment (MRsegment) for the quarters ended July 2, 2005, and July 1, 2006 (dollars inthousands):
| ** **                                     | ** ** | **Quarter   Ended  July 2, 2005** | ** ** | **%  of Sales** | ** ** | **Quarter   Ended  July 1, 2006** | ** ** | **%  of Sales** | ** ** | **$  Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------|------------|-----------------|------------|--------------------------------------------------|------------|-----------------|------------|---------------|------------|---------------|------------|
| Net sales                                      |       | $                                                | 12,457     |            | 100.0      | %                                                | $          | 6,437           |       | 100.0         | %          | $             | (6,020     | ) | -48.3 | % |
| Cost of sales                                  |       | 4,300                                            |       | 34.5            | %          | 1,483                                            |       | 23.0            | %          | 2,817         |       | 65.5          | %          |
| Gross profit                                   |       | 8,157                                            |       | 65.5            | %          | 4,954                                            |       | 77.0            | %          | (3,203        | )          | -39.3         | %          |
| Selling,  general, and administrative expenses |       | 2,568                                            |       | 20.6            | %          | 1,581                                            |       | 24.6            | %          | 987           |       | 38.4          | %          |
| Corporate  overhead allocation                 |       | 1,061                                            |       | 8.5             | %          | 1,011                                            |       | 15.7            | %          | 50            |       | 4.7           | %          |
| Operating income                               |       | $                                                | 4,528      |            | 36.4       | %                                                | $          | 2,362           |       | 36.7          | %          | $             | (2,166     | ) | -47.8 | % |

Net sales decreased 48.3% to $6.4 million compared to $12.5million for the same period last year. This decrease was due in part to a buildup of pending lot sales from thefirst quarter of 2005 that were closed and funded in the second quarter of2005. In 2006, there was a return to a more normalized sales level.

Gross profit for the MR segment increased to 77.0% of salescompared to 65.5% of sales in the same period last year.  This was due to a heavier absorption ofinfrastructure costs in earlier phases. These costs were expensed in earlier phases due to uncertainties as tothe ultimate completion and sell through of the entire projects. The result wasan improvement in the gross margins in the later phases of the developments,and most particularly in the second quarter of 2006.

Selling, general, and administrative expenses, and corporateoverhead allocation, as a percent of sales, increased due to lower sales levelsin the second quarter of 2006 versus the second quarter of 2005.  Corporate overhead allocation is comprised ofcertain shared services such as executive, financial, information systems,legal and investor relations expenses.

Operating income decreased due to lower sales and to higherS,G,&A costs and corporate overhead allocation as a percent of sales*.*

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*Six months ended July 1, 2006Compared to Six months ended July 2, 2005*

The followingtable illustrates the results of consolidated operations for the six monthsended July 2, 2005 and July 1, 2006 (dollars in thousands):
| ** **                                     | ** ** | **Six Months  Ended  July 2,  2005** | ** ** | **%  of Sales** | ** ** | **Six Months  Ended  July 1, 2006** | ** ** | **%  of Sales** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------|------------|----------------------------------------------------|------------|----------------------|------------|-------------------|------------|---------------|------------|
| Net sales                                      |       | $                                                        | 633,325    |                 | 100.0      | %                                                  | $          | 706,350              |       | 100.0             | %          | $             | 73,025     |   | 11.5 | % |
| Cost of sales                                  |       | 564,442                                                  |       | 89.1                 | %          | 627,410                                            |       | 88.8                 | %          | (62,968           | )          | -11.2         | %          |
| Gross profit                                   |       | 68,883                                                   |       | 10.9                 | %          | 78,940                                             |       | 11.2                 | %          | 10,057            |       | 14.6          | %          |
| Selling,  general, and administrative expenses |       | 55,938                                                   |       | 8.8                  | %          | 63,407                                             |       | 9.0                  | %          | (7,469            | )          | -13.3         | %          |
| Plant relocation  costs                        |       | 2,352                                                    |       | 0.4                  | %          | 269                                                |       | 0.0                  | %          | 2,083             |       | 88.6          | %          |
| Operating income                               |       | $                                                        | 10,593     |                 | 1.7        | %                                                  | $          | 15,264               |       | 2.2               | %          | $             | 4,671      |   | 44.1 | % |

Consolidated sales for the six months ended July 1, 2006 were$706.4 million versus $633.3 million, an 11.5% increase. This increase waspredominantly due to the impact of FEMA travel trailer orders filled in thefirst quarter of 2006, as well as the inclusion of R-Vision sales for the firstsix months of 2006.

Cost of sales increased by $63.0 million from the first sixmonths of 2005 to the first six months of 2006, but decreased as a percent ofsales by 0.3%.  This change waspredominantly caused by higher sales volumes generated by FEMA orders in thefirst quarter of 2006, as well as sales of R-Vision products that tend to havehigher margins.  The changes in thecomponents of cost of sales are set forth in the following table (dollars inthousands):
| ** **           | ** ** | **Six Months   Ended  July 2, 2005** | ** ** | **% of  Sales** | ** ** | **Six Months   Ended    July 1, 2006** | ** ** | **% of  Sales** | ** ** | **Change in  % of Sales** | ** ** |
|----------------------|------------|----------------------------------------------------------|------------|----------------------|------------|----------------------------------------------------------------------|------------|----------------------|------------|---------------------------|------------|
| Direct materials     |       | $                                                        | 394,390    |                 | 62.3       | %                                                                    | $          | 430,892              |       | 61.0                      | %          | -1.3 | % |
| Direct labor         |       | 61,546                                                   |       | 9.7                  | %          | 72,196                                                               |       | 10.2                 | %          | 0.5                       | %          |
| Warranty             |       | 16,762                                                   |       | 2.6                  | %          | 20,835                                                               |       | 3.0                  | %          | 0.4                       | %          |
| Other direct         |       | 33,909                                                   |       | 5.4                  | %          | 42,620                                                               |       | 6.0                  | %          | 0.6                       | %          |
| Indirect             |       | 57,835                                                   |       | 9.1                  | %          | 60,867                                                               |       | 8.6                  | %          | -0.5                      | %          |
| Total cost of  sales |       | $                                                        | 564,442    |                 | 89.1       | %                                                                    | $          | 627,410              |       | 88.8                      | %          | -0.3 | % |
|                      |            |                                                          |            |                      |            |                                                                      |            |                      |            |                           |            |  |  |  |  |

·         Direct material decreasesin 2006 as a percent of sales were mostly due to increases in sales of productsthat have a lower material cost as a percentage of sales.

·   Direct labor increases in 2006 as a percent of saleswere predominantly due to changes in the product mix toward products that havea higher labor cost.

·   Increases in warranty expense in 2006 as a percent ofsales were due mostly to higher costs associated with current model yearproducts.

·   Increases in other direct costs in 2006 as a percentof sales were due mostly to increases in the cost of health benefits foremployees and delivery costs for the Company’s products.

·   Decreases in indirect costs in 2006 as a percent ofsales were due mostly to the impact of the addition of R-Vision products, whichtypically have a lower indirect cost of sales.

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Selling, general, and administrative expenses (S,G,&A)increased by $7.5 million to $63.4 million for the first six months of 2006 andincreased as a percentage of sales from 8.8% in 2005 to 9.0% in 2006. Changesin S,G,&A expenses are set forth in the following table (dollars inthousands):
| ** **                              | ** ** | **Six Months   Ended  July 2, 2005** | ** ** | **% of  Sales** | ** ** | **Six Months   Ended  July 1, 2006** | ** ** | **% of  Sales** | ** ** | **Change  in % of  Sales** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------|------------|----------------------|------------|----------------------------------------------------------|------------|----------------------|------------|--------------------------------------|------------|
| Salaries, bonus,  and benefits expenses |       | $                                                        | 9,731      |                 | 1.5        | %                                                        | $          | 14,866               |       | 2.1                                  | %          | 0.6 | % |
| Selling expenses                        |       | 19,918                                                   |       | 3.1                  | %          | 20,912                                                   |       | 3.0                  | %          | -0.1                                 | %          |
| Settlement  expense                     |       | 5,791                                                    |       | 1.0                  | %          | 5,966                                                    |       | 0.8                  | %          | -0.2                                 | %          |
| Marketing expenses                      |       | 5,115                                                    |       | 0.8                  | %          | 4,281                                                    |       | 0.6                  | %          | -0.2                                 | %          |
| Other                                   |       | 15,383                                                   |       | 2.4                  | %          | 17,382                                                   |       | 2.5                  | %          | 0.1                                  | %          |
| Total S,G,&A expenses               |       | $                                                        | 55,938     |                 | 8.8        | %                                                        | $          | 63,407               |       | 9.0                                  | %          | 0.2 | % |

 

·                  Increases in salaries, bonus, andbenefits expenses in 2006 compared to 2005 as a percent of sales were dueprimarily to increased management bonuses and long-term incentive programs.

·                  Decreased selling expenses in 2006compared to 2005 as a percent of sales were due to a slight reduction in salesefforts to assist dealers in developing programs  to increase customer awareness of productofferings.

·                  Decreased settlement expense(litigation settlement expense) in 2006 compared to 2005  as a percent of sales was due to a reductionin the number of new cases added in the first six months of 2006.

·                  Decreased marketing expenses in 2006compared to 2005 as a percent of sales were due to a reduction in the numbersof shows and rallies as well as in general advertising.

·                  Increases in other expenses in 2006compared to 2005 as a percent of sales were due primarily to costs associatedwith the installation of new information systems, as well for participation ofincome on the resort properties by a third party.

Plant relocation costs were associated with the consolidationof our Bend, Oregon manufacturing facility to our Coburg, Oregon operations in2005.  We relocated these operations toimprove utilization of our plants, to improve direct and indirect labor rates,and to reduce warranty and related costs. Costs associated with the relocation of the Bend facility are comprisedof employee termination, relocation, and job assistance programs.  In addition we incurred costs related tovarious operating leases.  We expect thatongoing relocation costs will not have a significant impact on the results ofthe Company’s operations.*

Operating income was $15.3 million, or 2.2% of sales, for thefirst six months of 2006 compared to $10.6 million, or 1.7% of sales, in thesimilar 2005 period.** **Increases in operating income****were due predominantly to higher sales, with improved grossmargins and only slight increases in S,G,&A costs.

Net interest expense was $1.8 million for the first sixmonths of 2006 versus $532,000 in the comparable 2005 period, reflecting ahigher level of borrowing during the first six months of 2006.

We reported a provision for income taxes of $4.7 million, oran effective tax rate of 34.8% for the first six months of 2006, compared to$3.7 million, or an effective tax rate of 37.1% for the comparable 2005period.  The decrease in the effectivetax rate was due primarily to benefits received from foreign sales activities,as well as favorable tax law changes at certain state levels, and a favorableoutcome from a state tax audit.

Net income for the first six months in  2006 was $8.7 million compared to $6.3million for the comparable period in 2005 (including losses from discontinuedoperations of $107,000 and $250,000, respectively, net of taxes, related to theclosure of the Royale Coach facility) due to an increase in sales combined witha higher operating margin and a benefit from tax law changes.  The Company did not expense stock option grantsin 2005 and earlier periods, however, if option expensing had been required,the effect on net income for the first six months of 2005 for all previouslygranted options would have been a decrease of $454,000.  See Note 8 of the Company’s consolidatedfinancial statements for information regarding the calculation of the impact ofexpensing stock options.  The Company hasreflected the cost of stock options in its results of operations beginning in2006.

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*First Six Months of 2006 versusFirst Six Months 2005 for the Motorized Recreational Vehicle Segment*

The following table illustrates the results of the MRV segmentfor the six months ended July 2, 2005 and July 1, 2006 (dollars inthousands):
| ** **                                     | ** ** | **Six Months  Ended  July 2, 2005** | ** ** | **%  of Sales** | ** ** | **Six Months  Ended  July 1, 2006** | ** ** | **%  of Sales** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|----------------------|------------|----------------------------------------------------|------------|----------------------|------------|-------------------|------------|---------------|------------|
| Net sales                                      |       | $                                                  | 550,084    |                 | 100.0      | %                                                  | $          | 480,569              |       | 100.0             | %          | $             | (69,515    | ) | -12.6 | % |
| Cost of sales                                  |       | 496,999                                            |       | 90.4                 | %          | 439,589                                            |       | 91.5                 | %          | 57,410            |       | 11.6          | %          |
| Gross profit                                   |       | 53,085                                             |       | 9.6                  | %          | 40,980                                             |       | 8.5                  | %          | (12,105           | )          | -22.8         | %          |
| Selling, general, and  administrative expenses |       | 20,608                                             |       | 3.8                  | %          | 17,259                                             |       | 3.6                  | %          | 3,349             |       | 16.3          | %          |
| Corporate overhead  allocation                 |       | 23,886                                             |       | 4.3                  | %          | 21,611                                             |       | 4.5                  | %          | 2,275             |       | 9.5           | %          |
| Plant relocation costs                         |       | 2,352                                              |       | 0.4                  | %          | 269                                                |       | 0.1                  | %          | 2,083             |       | 88.6          | %          |
| Operating income                               |       | $                                                  | 6,239      |                 | 1.1        | %                                                  | $          | 1,841                |       | 0.3               | %          | $             | (4,398     | ) | -70.5 | % |

 

Total net sales for the MRV segment were down from $550.1million in the first six months of 2005, to $480.6 million in the first sixmonths of 2006.  Gross dieselmotorized  revenues were down 12.2%,  and gas motorized revenues were down10.2%.  Diesel products accounted for85.9% of our first six months MRV segment revenues while gas products were14.1%.  The overall decrease in revenuesreflects continuing challenges in the market place as dealers seek to matchtheir current inventories with retail demand. Our overall unit sales were down 11.0% in the first six months of 2006to 3,023 units, with diesel motorized unit sales down 12.2% to 2,139units,  and gas motorized unit sales down8.0% to 884 units.  Our average unitselling price decreased to $160,800 for the first six months of 2006 from$162,500 in the same period last year.

Gross profit for the first six months of 2006 decreased to$41.0 million, down from $53.1 million in 2005, and gross margin decreased from9.6% in the first six months of 2005 to 8.5% in the first six months of2006.  The changes in the components ofcost of sales are set forth in the following table (dollars in thousands):

|                     | ** ** | **Six Months  Ended  July 2, 2005** | ** ** | **% of  Sales** | ** ** | **Six Months  Ended  July 1, 2006** | ** ** | **% of  Sales** | ** ** | **Change in  % of Sales** | ** ** |
|---------------------|------------|----------------------------------------------------|------------|----------------------|------------|----------------------------------------------------|------------|----------------------|------------|------------------------------------------|------------|
| Direct materials    |       | $                                                  | 345,313    |                 | 62.8       | %                                                  | $          | 299,497              |       | 62.3                                     | %          | -0.5 | % |
| Direct labor        |       | 53,819                                             |       | 9.8                  | %          | 49,192                                             |       | 10.2                 | %          | 0.4                                      | %          |
| Warranty            |       | 14,783                                             |       | 2.7                  | %          | 15,085                                             |       | 3.1                  | %          | 0.4                                      | %          |
| Other direct        |       | 28,208                                             |       | 5.1                  | %          | 25,751                                             |       | 5.4                  | %          | 0.3                                      | %          |
| Indirect            |       | 54,876                                             |       | 10.0                 | %          | 50,064                                             |       | 10.4                 | %          | 0.4                                      | %          |
| Total cost of sales |       | $                                                  | 496,999    |                 | 90.4       | %                                                  | $          | 439,589              |       | 91.4                                     | %          | 1.0 | % |

 

·   Direct material increases in 2006 compared to2005 as a percent of sales were mostly due to production of more products thathave a lower material cost as a percentage of sales.

·   Direct labor increases in 2006compared to 2005 as a percent of sales were predominantly due to a shift inproduct mix to products that have a higher labor cost as a component of cost ofsales.

·   Increases in warranty expense in 2006compared to 2005 as a percent of sales were due mostly to an increase in thewarranty experience on current year models.

·   Increases in other direct costs in2006 compared to 2005 as a percent of sales were due mostly to increases inemployee health benefits and delivery expense for the Company’s products.

·   Increases in indirect costs in 2006compared to 2005 as a percent of sales were due mostly to inefficiencies withinthe production facilities associated with lower run rates in the first sixmonths of 2006 versus the same period in 2005.

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Selling, general, and administrative expenses (S,G,&A)for the MRV segment decreased slightly due to initiatives to controlspending.  Corporate overhead allocation increasedslightly, as a percentage of sales, due to higher management bonus levelsallocated to the MRV segment as a result of improved profits for the Company asa whole.  Corporate overhead allocationis comprised of certain shared services such as executive, financial, informationsystems, legal and investor relations expenses.

Plant relocation costs are related to the costs incurred torelocate the Bend, Oregon manufacturing facility to the Coburg, Oregonplant.  We believe this relocation willultimately result in improved margins for the Oregon operations.*

Operating income decreased as both a percent of sales and intotal dollars due to lower sales and lower gross margins.

*First Six Months of 2006 versusFirst Six Months 2005 for the Towables Recreational Vehicle Segment*

The followingtable illustrates the results of the TRV segment for the six months endedJuly 2, 2005 and July 1, 2006 (dollars in thousands):
| ** **                                     | ** ** | **Six Months  Ended  July 2, 2005** | ** ** | **%  of Sales** | ** ** | **Six Months  Ended  July 1, 2006** | ** ** | **%  of Sales** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|----------------------|------------|----------------------------------------------------|------------|----------------------|------------|-------------------|------------|---------------|------------|
| Net sales                                      |       | $                                                  | 65,491     |                 | 100.0      | %                                                  | $          | 203,643              |       | 100.0             | %          | $             | 138,152    |   | 210.9 | % |
| Cost of sales                                  |       | 61,270                                             |       | 93.6                 | %          | 179,853                                            |       | 88.3                 | %          | (118,583          | )          | -193.5        | %          |
| Gross profit                                   |       | 4,221                                              |       | 6.4                  | %          | 23,790                                             |       | 11.7                 | %          | 19,569            |       | 463.6         | %          |
| Selling, general, and  administrative expenses |       | 2,323                                              |       | 3.5                  | %          | 7,188                                              |       | 3.5                  | %          | (4,865            | )          | -209.4        | %          |
| Corporate overhead  allocation                 |       | 2,984                                              |       | 4.6                  | %          | 10,321                                             |       | 5.1                  | %          | (7,337            | )          | -245.9        | %          |
| Operating income (loss)                        |       | $                                                  | (1,086     | )                    | -1.7       | %                                                  | $          | 6,281                |       | 3.1               | %          | $             | 7,367      |   | 678.4 | % |

 

Total net sales for the TRV segment were up from $65.5million in the first six months of 2005 to $203.6 million in the first sixmonths of 2006.  The overall increase inrevenues reflected both the impact of the R-Vision acquisition in November 2005as well as the strong sales for FEMA related to hurricane Katrina in the firstquarter of 2006.  The Company’s unitsales were up 427.7% to 12,834 units.  Inaddition, predominantly due to the addition of R-Vision brand lower-pricedunits and the FEMA trailers, the average unit selling price decreased to$16,400 in the first six months of 2006 from $28,400 in the same period lastyear.

Gross profit for the first six months of 2006 increased to$23.8 million, up from $4.2 million in 2005, and gross margin increased from6.4% in the first six months of 2005 to 11.7% in the first six months of2006.  The changes in the components ofcost of sales are set forth in the following table (dollars in thousands):

|                     | ** ** | **Six Months  Ended   July 2, 2005** | ** ** | **% of  Sales** | ** ** | **Six Months  Ended   July 1, 2006** | ** ** | **% of  Sales** | ** ** | **Change in  % of Sales** | ** ** |
|---------------------|------------|----------------------------------------------------------|------------|----------------------|------------|----------------------------------------------------------|------------|----------------------|------------|------------------------------------------|------------|
| Direct materials    |       | $                                                        | 42,904     |                 | 65.5       | %                                                        | $          | 124,268              |       | 61.0                                     | %          | -4.5 | % |
| Direct labor        |       | 7,727                                                    |       | 11.8                 | %          | 22,681                                                   |       | 11.1                 | %          | -0.7                                     | %          |
| Warranty            |       | 1,979                                                    |       | 3.0                  | %          | 5,750                                                    |       | 2.8                  | %          | -0.2                                     | %          |
| Other direct        |       | 5,701                                                    |       | 8.7                  | %          | 16,831                                                   |       | 8.3                  | %          | -0.4                                     | %          |
| Indirect            |       | 2,959                                                    |       | 4.5                  | %          | 10,323                                                   |       | 5.1                  | %          | 0.6                                      | %          |
| Total cost of sales |       | $                                                        | 61,270     |                 | 93.5       | %                                                        | $          | 179,853              |       | 88.3                                     | %          | -5.2 | % |

 

·   Directmaterial increases in 2006 compared to 2005 as a percent of sales were mostlydue to the inclusion of R-Vision brand products, which have a lower materialcost as a percentage of sales, as well as the impact of FEMA sales in the firstquarter of 2006 which also had a lower material cost.

28

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·   Direct labor decreases in 2006compared to 2005 as a percent of sales, were predominantly due to the impact ofFEMA orders in the first quarter of 2006 which had a lower labor cost as apercent of sales, as well as for the addition of R-Vision products, which alsohave a lower labor cost as a percent of sales.

·   Decreases in warranty expense in 2006compared to 2005 as a percent of sales were due mostly to a slight decrease inthe warranty experience on current year models.

·   Decreases in other direct costs in2006 compared to 2005 as a percent of sales were due mostly to sales ofR-Vision products that have lower direct costs than other products.

·   Increases in indirect costs in 2006compared to 2005 as a percent of sales, were due mostly to allocations for theproduction of FEMA travel trailers that were produced in one of our motorizedfacilities.

S,G,&A expenses for the TRV segment, as a percent ofsales, were consistent year to year. Corporate overhead allocation increased slightly due to higher levelsallocated to the TRV segment as a result of the growth in this segment.  Corporate overhead allocation is comprised ofcertain shared services such as executive, financial, information systems,legal, and investor relations expenses.

Operating income increased as both a percent of sales and intotal dollars due to higher sales and gross profit which more than offset anincrease in corporate overhead allocation expense as a percent of sales.

*First Six Months 2006 versusFirst Six Months 2005 for the Motorhome Resorts Segment*

The following table illustrates the results of theMotorhome Resorts Segment (MR segment) for the six months ended July 2,2005 and July 1, 2006 (dollars in thousands):

|                                                | ** ** | **Six Months  Ended  July 2, 2005** | ** ** | **%  of Sales** | ** ** | **Six Months  Ended  July 1, 2006** | ** ** | **%  of Sales** | ** ** | **$ Change** | ** ** | **%  Change** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|----------------------|------------|----------------------------------------------------|------------|----------------------|------------|-------------------|------------|---------------|------------|
| Net sales                                      |       | $                                                  | 17,750     |                 | 100.0      | %                                                  | $          | 22,138               |       | 100.0             | %          | $             | 4,388      |   | 24.7 | % |
| Cost of sales                                  |       | 6,173                                              |       | 34.8                 | %          | 7,968                                              |       | 36.0                 | %          | (1,795            | )          | -29.1         | %          |
| Gross profit                                   |       | 11,577                                             |       | 65.2                 | %          | 14,170                                             |       | 64.0                 | %          | 2,593             |       | 22.4          | %          |
| Selling, general, and  administrative expenses |       | 4,030                                              |       | 22.7                 | %          | 4,653                                              |       | 21.0                 | %          | (623              | )          | -15.5         | %          |
| Corporate overhead  allocation                 |       | 2,107                                              |       | 11.9                 | %          | 2,375                                              |       | 10.7                 | %          | (268              | )          | -12.7         | %          |
| Operating income                               |       | $                                                  | 5,440      |                 | 30.6       | %                                                  | $          | 7,142                |       | 32.3              | %          | $             | 1,702      |   | 31.3 | % |

 

Net sales increased 24.7% to $22.1 million compared to $17.8million for the same period last year. This was due to the continued strong demand for lots at both of ourresort locations.

Gross profit for the MR segment decreased to 64.0% of salescompared to 65.2% of sales in the same period last year.  Gross margin decreases were due to theadditions of some amenities that enhanced the appeal of the resorts andenhanced demand for lot sales, but also added slightly to the cost of sales.

Selling, general, and administrative expenses decreased as apercent of sales due to a reduction in expenditures for advertising andmarketing.  Corporate overhead allocationdecreased as a percent of sales due to certain fixed allocations that did notgrow at the same rate as sales. Corporate overhead allocation is comprised of certain shared servicessuch as executive, financial, information systems, legal and investor relationsexpenses.

Operating income increased due to improvements in sales thatwere partially offset by lower gross margins and improved by reductions inS,G,&A costs as a percent of sales.

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**LIQUIDITY AND CAPITAL RESOURCES**

The Company’s primary sources of liquidity are internallygenerated cash from operations and available borrowings under its creditfacilities.  During the second quarter of2006, the Company generated cash of $20.0 million from operating activities andhad a cash balance of $2.4 million at July 1, 2006.  The Company generated $12.0 million from netincome and non-cash expenses such as depreciation and amortization, gains onsales of assets, changes in deferred income taxes, and expense associated withstock-based compensation.  Other sourcesof cash included a $917,000 decrease in resort lot inventories, a $17.4 millionincrease in accounts payable, an $1.3 million increase in accruals for productwarranty, an $8.7 million increase in accrued liabilities, a $983,000 increasein deferred revenue, a $2.4 million increase in income taxes payable, and a$2.2 decrease in the net assets from discontinued operations. The uses of cashin the second quarter of 2006 included an increase of $560,000 in tradereceivables, a $6.8 million increase in inventory levels, an $1.1 millionincrease in prepaid expenses, and a decrease of $1.2 million in accruals forproduct liability reserves.  Decreases inresort lot inventories reflect the sell through of our resort properties.  Increases in trade accounts payables reflectaccruals for dealer Franchise For The Future (FFTF) payments which will be madein the third quarter.  Increases inaccrued product warranty reflect higher warranty costs for current model yearproducts.  Increases in accruedliabilities reflect increases for accruals for management bonus and long-termincentive programs.  Increases indeferred revenues were generated from deferred earnings from Monaco FinancialServices (MFS).  Increases in income taxare related to improved earnings in 2006, and increases in net assets fromdiscontinued operations reflect the disposal of assets from the Royale Coachmanufacturing facility.  Increases ininventories reflect a buildup in finished goods that was partially offset by decreasesin work in process and raw materials. Increases in prepaid expenses reflect payments of insurance policiesthat are expensed over the next 12 months. Decreases in product liability reserves reflect payments for settlementof certain litigation claims.

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 revolving line of credit remains at$105.0 million.  At the end of the secondquarter 2006, borrowings outstanding on the revolving line of credit (the “RevolvingLoan”) were $32.1 million, and Term Debt borrowings were $37.1 million.  At the election of the Company, the RevolvingLoan  and the Term Debt bear interest atvarying rates that fluctuate based on the prime rate or LIBOR, and are determinedby the Company’s leverage ratio.  TheCompany also pays interest quarterly on the unused available portion of theRevolving Loan at varying rates, determined by the Company’s leverage ratio.  The Revolving Loan is due and payable in fullon November 17, 2009 and requires interest payments quarterly.  The Term Debt requires quarterly interestpayments and quarterly principal payments of $1.4 million, with a final balloonpayment of $12.9 million due on November 18, 2010.  Both the Revolving Loan and Term Debt arecollateralized by all the assets of the Company and the credit facilitiesinclude various restrictions and financial covenants.  The Company was in compliance with thesecovenants at July 1, 2006.  The Companyutilizes “zero balance” bank disbursement accounts in which an advance on theline of credit is automatically made for checks clearing each day.  Since the balance of the disbursement accountat the bank returns to zero at the end of each day, the outstanding checks ofthe Company are reflected as a liability. The outstanding check liability is combined with the Company’s positivecash balance accounts to reflect a net book overdraft or a net cash balance forfinancial reporting.

In November 2005, the Company obtained a term loan of$500,000 from the State of Oregon in connection with the relocation of jobs tothe Coburg, Oregon production facilities from the Bend, Oregon facility.  The principal and interest is due on April30, 2009.  The loan bears a 5% annualinterest rate.

Our principalworking capital requirements are for purchases of inventory and financing oftrade receivables.  Many of the Company’sdealers finance product purchases under wholesale floor plan arrangements withthird parties as described below.  AtJuly 1, 2006, we had working capital of approximately $118.2 million, adecrease of $9.0 million from working capital of $127.2 million at December 31,2005.  The Company has been using cashflow from operations to finance capital expenditures.

The Companybelieves that cash flow from operations and funds available under itsanticipated credit facilities will be sufficient to meet the Company’sliquidity requirements for the next 12 months.* The Company’s capital expenditures were $5.8 million in the six monthsended July 1, 2006, which included costs related to additions of automatedmachinery in many of its production facilities, upgrades to its informationsystems infrastructure, and other various capitalized upgrades to existingfacilities.  The Company anticipates thatcapital expenditures for all of 2006 will be approximately $12.0 to $15.0million, which includes expenditures to purchase additional machinery andequipment in both the Company’s Coburg, Oregon and Wakarusa, Indianafacilities, as well as upgrades to existing information systemsinfrastructures.*  The Company mayrequire additional equity or

30

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debt financing to addressworking capital and facilities expansion needs, particularly if the Companysignificantly increases the level of working capital assets such as inventoryand accounts receivable.  The Company mayalso from time to time seek to acquire businesses that would complement theCompany’s current business, and any such acquisition could require additionalfinancing.  There can be no assurancethat additional financing will be available if required or on terms deemedfavorable by the Company.

As is typical inthe recreational vehicle industry, many of the Company’s retail dealers utilizewholesale floor plan financing arrangements with third party lendinginstitutions to finance their purchases of our products.  Under the terms of these floor planarrangements, institutional lenders customarily require the recreationalvehicle manufacturer to agree to repurchase any unsold units if the dealerfails to meet its commitments to the lender, subject to certainconditions.  The Company has agreementswith several institutional lenders under which the Company currently hasrepurchase obligations.  The Company’scontingent obligations under these repurchase agreements are reduced by theproceeds received upon the sale of any repurchased units.  The Company’s obligations under these repurchaseagreements vary from period to period up to 18 months.  At July 1, 2006, approximately $601.8 millionof products sold by the Company to independent dealers were subject topotential repurchase under existing floor plan financing agreements withapproximately 5.0% concentrated with one dealer.  Historically, the Company has been successfulin mitigating losses associated with repurchase obligations.  During the second quarter of 2006, losses associatedwith the exercise of repurchase agreements with institutional lenders was$116,000.  If the Company were obligatedto repurchase a significant number of units under any repurchase agreement, theCompany’s business, operating results, and financial condition could beadversely affected.  Dealers for theCompany undergo credit review prior to becoming a dealer and periodicallythereafter.  Financial institutions thatprovide floorplan financing also perform credit reviews and floor checks on anongoing basis.  The Company closelymonitors sales to dealers that are a higher credit risk.  The repurchase period is limited, usually toa maximum of 18 months.  The Company believesthese activities minimize the number of required repurchases.  Additionally, the repurchase agreement specifiesthat the dealer is required to make principal payments during the repurchaseperiod.  Since the Company repurchasesthe units based on the schedule of principal payments, the repurchase amount istypically less than the original invoice amount.  Therefore, there is already some built indiscount when the Company offers the inventory to another dealer at an amountlower than the original invoice as incentive for the dealer to take therepurchased inventory.  This helpsminimize the losses the Company incurs on repurchased inventory.

As part of thenormal course of business, we incur certain contractual obligations andcommitments which will require future cash payments. The following tablessummarize the significant obligations and commitments.

PAYMENTS DUE BY PERIOD
| **Contractual Obligations (in thousands)** | ** ** | ** ** | **1 year or less** | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------|------------|------------|-----------------------------------|------------|---------------------------------|------------|---------------------------------|------------|----------------|------------|-----------|------------|
| Lines of Credit (1)                                       |       | $          | 0                                 |       | $                               | 0          |                            | $          | 32,108         |       | $         | 0          |   | $ | 32,108 |   |
| Long-Term Debt (2)                                        |       | $          | 5,714                             |       | $                               | 11,928     |                            | $          | 20,001         |       | $         | 0          |   | $ | 37,643 |   |
| Operating Leases (3)                                      |       | $          | 2,539                             |       | $                               | 1,853      |                            | $          | 1,422          |       | $         | 2,118      |   | $ | 7,932 |   |
| Total Contractual Cash Obligations                        |       | $          | 8,253                             |       | $                               | 13,781     |                            | $          | 53,531         |       | $         | 2,118      |   | $ | 77,683 |   |

 

AMOUNT OF COMMITMENT EXPIRATION BY PERIOD
| **Other Commitments (in thousands)** | ** ** | ** ** | **1 year or less** | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|------------|-----------------------------------|------------|---------------------------------|------------|---------------------------------|------------|----------------|------------|-----------|------------|
| Line of Credit (4)                                  |       | $          | 0                                 |       | $                               | 0          |                            | $          | 72,892         |       | $         | 0          |   | $ | 72,892 |   |
| Guarantees (5)                                      |       | $          | 14,302                            |       | $                               | 0          |                            | $          | 0              |       | $         | 0          |   | $ | 14,302 |   |
| Repurchase Obligations  (6)                         |       | $          | 0                                 |       | $                               | 601,826    |                            | $          | 0              |       | $         | 0          |   | $ | 601,826 |   |
| Total Commitments                                   |       | $          | 14,302                            |       | $                               | 601,826    |                            | $          | 72,892         |       | $         | 0          |   | $ | 689,020 |   |

 

(1)    See Note 5 of the CondensedConsolidated Financial Statements.  Theamount listed represents the outstanding balance at July 1, 2006.

(2)    See Note 6 of the CondensedConsolidated Financial Statements.

(3)    Various leases includingmanufacturing facilities, aircraft, and machinery and equipment.

(4)    See Note 5 of the CondensedConsolidated Financial Statements.  Theamount listed represents available borrowings on the line of credit at July 1,2006.

(5)    Guarantees related to aircraftoperating lease.

(6)    Reflects obligations under manufacturer repurchasecommitments.  See Note 10 of the CondensedConsolidated Financial Statements.

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**INFLATION**

During 2005 and the first six months of 2006, the Company experiencedincreases in the prices of certain commodity items that we use in themanufacturing 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.  The impact of these increases has not causedthe Company to increase its selling prices at the current time, however, theCompany may need to pass along increases in the future to maintain acceptablegross margins.  The current trend inthese prices, 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 ofAmerica.  The preparation of thesefinancial statements requires the Company to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities.  On an ongoing basis, the Company evaluatesits estimates, including those related to warranty costs, product liability,and impairment of goodwill.  The Companybases estimates on historical experience and on various other assumptions thatare believed to be reasonable under the circumstances.  Actual results may differ from theseestimates under different assumptions or conditions.  The Company believes the following accountingpolicies and related judgments and estimates are critical in the preparation ofour consolidated financial statements.

WARRANTY COSTSEstimated warranty costs are provided for at the time of sale of products withwarranties covering the products for up to one year from the date of retailsale (five years for the front and sidewall frame structure, and three years onthe Roadmaster chassis).  These estimatesare based on historical average repair costs, feedback from the Company’sproduction facilities on new product design changes, technical advice fromvendors, as well as other reasonable assumptions that have been deemedappropriate by management.

PRODUCTLIABILITY  The Company provides anestimate for accrued product liability based on current pending cases, as wellas for those cases which are incurred but not reported.  This estimate is developed by legal counselbased on professional judgment, as well as historical experience.

IMPAIRMENT OFGOODWILL  The Company assesses thepotential impairment of goodwill in accordance with Financial AccountingStandards Board (FASB) Statement No. 142. This initial test involves management comparing the marketcapitalization of the Company, to the carrying amount, including goodwill, ofthe net book value of the Company, to determine if goodwill has beenimpaired.  If the Company determines thatthe market capitalization is not representative of the fair value of thereporting unit as a whole, then the Company will use an estimate of discountedfuture cash flows to determine fair value.

INVENTORYALLOWANCE  The Company writes down itsinventory for obsolescence, and the difference between the cost of inventoryand its estimated market value. These write-downs are based on assumptionsabout future sales demand and market conditions. If actual sales demand ormarket conditions change from those projected by management, additional inventorywrite-downs may be required.

BRAND ELEMENTS ANDSIGNAGE  As part of its franchise programfor dealers, the Company places certain fixed assets at independent dealerships.  These assets are comprised of informationalcomputer kiosks, brand island displays, furniture and fixtures, as well asoutdoor storefront signage.  These assetsare leased to dealers over 10 years through an operating lease, and the Companydepreciates the assets over their respective useful lives.

INCOME TAXES  In conjunction with preparing itsconsolidated financial statements, the Company must estimate its income taxesin each of the jurisdictions in which it operates. This process involves estimatingactual current tax expense together with assessing temporary differencesresulting from differing treatment of items for tax and accounting purposes.These differences result in deferred tax assets and liabilities, which areincluded in the consolidated balance sheets. The Company must then assess thelikelihood that the deferred tax assets will be recovered from future taxableincome, and to the extent management believes that recovery is not likely, avaluation allowance must be established. Significant management judgment isrequired in determining the Company’s provision for income taxes, deferred taxassets and liabilities, and any valuation allowance recorded against netdeferred tax assets.

 

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REPURCHASE OBLIGATIONS Upon request of a lending institution financing a dealer’s purchases ofthe Company’s product, the Company will execute a repurchase agreement.** **The Company hasrecorded a liability associated with the disposition of repurchased inventory.  To determine the appropriate liability, theCompany calculates a reserve, based on an estimate of potential net losses,along with qualitative and quantitative factors, including dealer inventoryturn rates, and the financial strength of individual dealers.

**NEWLY ISSUED FINANCIAL REPORTINGPRONOUNCEMENTS**

**FIN 48**

In June 2006, the Board issued FIN 48, “Accounting forUncertainty in Income Taxes.”  TheInterpretation 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 meet for any part ofthe benefit to be recognized in the financial statements.

The Interpretation is effective for fiscal years beginningafter December 15, 2006.  We arereviewing the provisions of the Interpretation and will adopt it for the fiscalyear beginning 2007.

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

Not applicable.

**Item 4.  Controls and Procedures**

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our ChiefExecutive Officer and our Chief Financial Officer, the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisQuarterly Report on Form 10-Q.  Based onthis evaluation, our Chief Executive Officer and our Chief Financial Officerhave concluded that our disclosure controls and procedures are effective toensure that information we are required to disclose in reports that we file orsubmit under the Securities Exchange Act of 1934 is accumulated and communicatedto our management including our principal executive and principal financialofficers, as appropriate to allow timely decisions regarding requireddisclosure, and that such information is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and forms.

Our management,including our Chief Executive Officer and Chief Financial Officer, does notexpect that our disclosure controls and procedures will prevent all error andall fraud.  Because of inherentlimitations in any system of disclosure controls and procedures, no evaluationof controls can provide absolute assurance that all instances of error or fraud,if any, within the Company may be detected. However, our management, including our Chief Executive Officer and ourChief Financial Officer, have designed our disclosure controls and proceduresto provide reasonable assurance of achieving their objectives and have,pursuant to the evaluation discussed above, concluded that our disclosurecontrols and procedures are, in fact, effective at this reasonable assurancelevel.

There was no change in our internal control over financialreporting that occurred during the period covered by this Quarterly Report onForm 10-Q that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

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**PART II - OTHER INFORMATION**

**ITEM 1A.  RISK FACTORS**

We have listed below various risks and uncertainties relating to ourbusinesses.  This list is not inclusiveof all the risks and uncertainties we face, but any of these could cause ouractual results to differ materially from the results contemplated by theforward-looking statements contained in this report or that we may issue fromtime to time in the future.

WE MAY EXPERIENCEUNANTICIPATED FLUCTUATIONS IN OUR OPERATING RESULTS FOR A VARIETY OFREASONS  The Company’s net sales, grossmargin, and operating results may fluctuate significantly from period to perioddue to a number of factors, many of which are not readily predictable.  These factors include the following:

·                  The marginsassociated with the mix of products the Company sells in any particular period.

·                  The Company ships a large amount ofproducts near quarter end.

·                  The Company’sability to utilize and expand our manufacturing resources efficiently.

·                  Shortages ofmaterials used in our products.

·                  The effects of inflation on thecosts of materials used in the Company’s products.

·                  A determinationby the Company that goodwill or other intangible assets are impaired and haveto be written down to their fair values, resulting in a charge to the Company’sresults of operations.

·                  The Company’sability to introduce new models that achieve consumer acceptance.

·                  Theintroduction, marketing and sale of competing products by others, includingsignificant discounting offered by the Company’s competitors.

·                  The addition orloss of the Company’s dealers.

·                  The timing oftrade shows and rallies, which the Company uses to market and sell ourproducts.

·                  Factorsaffecting the recreational vehicle industry as a whole, including economic andseasonal factors.

·                  The Company’s inability to acquireand develop key pieces of property for on-going resort activity.

·                  Fluctuations in demand for theCompany’s resort lots due to changing economic and other conditions.

TheCompany’s overall gross margin may decline in future periods to the extent thatthe Company increases the percentage of sales of lower gross margin towableproducts or if the mix of motor coaches the Company sells shifts to lower grossmargin units.  In addition, a relativelysmall variation in the number of recreational vehicles the Company sells in anyquarter can have a significant impact on total sales and operating results forthat quarter.

Demandin the recreational vehicle industry generally declines during the wintermonths, while sales are generally higher during the spring and summermonths.  With the broader range ofproducts we now offer, seasonal factors could have a significant impact on ouroperating results in the future. Additionally, unusually severe weather conditions in certain marketscould delay the timing of shipments from one quarter to another.

TheCompany attempts to forecast orders for our products accurately and commencepurchasing and manufacturing prior to receipt of such orders.  However, it is highly unlikely that we willconsistently accurately forecast the timing, rate, and mix of orders.  This aspect of our business makes ourplanning inexact and, in turn, affects our shipments, costs, inventories,operating results, and cash flow for any given quarter. 

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THERECREATIONAL VEHICLE INDUSTRY IS CYCLICAL AND SUSCEPTIBLE TO SLOWDOWNS IN THEGENERAL ECONOMY  The recreational vehicleindustry has been characterized by cycles of growth and contraction in consumerdemand, reflecting prevailing economic, demographic, and political conditionsthat affect disposable income for leisure-time activities.  For example, unit shipments of recreationalvehicles (excluding conversion vehicles) peaked at approximately 259,000 unitsin 1994 and declined to approximately 247,000 units in 1996.  The industry peaked again in 1999 atapproximately 321,000 units and declined in 2001 to 257,000 units.  The industry continued to climb toapproximately 321,000 units in 2003, 370,000 units in 2004, and 384,000 in2005.  Our business is subject to thecyclical nature of this industry.  Someof the factors that contribute to this cyclicality include fuel availabilityand costs, interest rate levels, the level of discretionary spending, andavailability of credit and overall consumer confidence.  The recent decline in consumer confidence andslowing of the overall economy has adversely affected the recreational vehiclemarket.  An extended continuation ofthese conditions would materially affect our business, results of operations,and financial condition.

THE EXPECTEDBENEFITS OF OUR RECENT ACQUISITION OF R-VISION AND AFFILIATES MAY NOT BEREALIZED  On November 18, 2005, theCompany acquired Indiana based towable and motorhome manufacturer R-Vision,Inc., R-Vision Motorized, LLC, Bison Manufacturing, LLC, and Roadmaster, LLC(collectively “R-Vision”) to acquire all of the outstanding shares ofR-Vision.  The process of integratingR-Vision into our Company operations may result in unforeseen operatingdifficulties and expenditures and may absorb significant management attentionthat would otherwise be available for the ongoing development of the Company’sbusiness.  This may cause an interruptionor a loss of momentum in the Company’s operating activities, which in turn,could have a material adverse affect on the Company’s operating results andfinancial condition.  Moreover, the acquisitioninvolves a number of additional risks, such as the loss of key employees ofR-Vision as a result of the acquisition, the incorporation of acquired productsinto our existing product line, the amortization of debt issuance costs, andthe difficulty of integrating disparate corporate cultures.  Accordingly, the anticipated benefits may notbe realized or the acquisition may have a material adverse affect on ouroperating results and financial condition.

WE RELY ON ARELATIVELY SMALL NUMBER OF DEALERS FOR A SIGNIFICANT PERCENTAGE OF OURSALES  Although the Company’s productswere offered by 580 dealerships located primarily in the United States andCanada as of July 1, 2006, a significant percentage of the Company’s sales areconcentrated among a relatively small number of independent dealers.  For the quarter ended July 1, 2006, sales toone dealer, DeMartini RV Sales, accounted for 6.8% of total sales compared to5.6% of sales in the same period ended last year.  For quarters ended July 2, 2005 and July 1,2006, sales to our 10 largest dealers, including DeMartini RV Sales, accountedfor a total of 44.6% and 30.9% of total sales, respectively.  The loss of a significant dealer or a substantialdecrease in sales by any of these dealers could have a material impact on theCompany’s business, results of operations, and financial condition.

WE MAY HAVE TOREPURCHASE A DEALER’S INVENTORY OF OUR PRODUCTS IN THE EVENT THAT THE DEALERDOES NOT REPAY ITS LENDER  As is commonin the recreational vehicle industry, the Company enters into repurchaseagreements with the financing institutions used by the Company’s dealers to financetheir purchases of our products.  Theseagreements require the Company to repurchase the dealer’s inventory in theevent that the dealer does not repay its lender.  Obligations under these agreements vary fromperiod to period, but totaled approximately $601.8 million as of July 1, 2006,with approximately 5.0% concentrated with one dealer.  If the Company were obligated to repurchase asignificant number of units under any repurchase agreement, the Company’sbusiness, operating results, and financial condition could be adverselyaffected.

OUR ACCOUNTS RECEIVABLE BALANCE IS SUBJECT TO RISK  The Company sells products to dealers who arepredominantly located in the United States and Canada.  The terms and conditions of payment are acombination of open trade receivables, and commitments from dealer floor planlending institutions.  For the Company’sRV dealers, terms are net 30 days for units that are financed by a third partylender.  Terms of open trade receivablesare granted by us, on a very limited basis, to dealers who have been subjectedto evaluative credit processes conducted by the Company.  For open receivables, terms vary from net 30days to net 180 days, depending on the specific agreement.  Agreements for payment terms beyond 30 daysgenerally require additional collateral, as well as security interest in theinventory sold.  As of July 1, 2006,total trade receivables were $103.2 million, with approximately $82.3 million,or 79.8% of the outstanding accounts receivable balance concentrated amongfloor plan lenders. The remaining $20.9 million of trade receivables wereconcentrated substantially all with one dealer. For resort lot customers, funds are required at the time of closing.

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WE MAY EXPERIENCEA DECREASE IN SALES OF OUR PRODUCTS DUE TO AN INCREASE IN THE PRICE OR ADECREASE 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 the Company’s business. Diesel fuel and gasoline have, at various times in the past, been eitherexpensive or difficult to obtain, and prices of these commodities are currentlyat high levels on an historical basis.

WE DEPEND ONSINGLE OR LIMITED SOURCES TO PROVIDE US WITH CERTAIN IMPORTANT COMPONENTS THATWE USE IN THE PRODUCTION OF OUR PRODUCTS A number of important components for the Company’s products arepurchased from a single or a limited number of sources. These include turbodiesel engines (Cummins and Caterpillar), substantially all of the Company’stransmissions (Allison), axles (Dana) for all diesel motor coaches, and chassis(Workhorse and Ford) for gas motor coaches. The Company has no long-term supply contracts with these suppliers ortheir distributors, and the Company cannot be certain that these suppliers willbe able to meet the Company’s future requirements.  Consequently, the Company has periodicallybeen placed on allocation of these and other key components.  The last significant allocation occurred in1997 from Allison, and in 1999 from Ford. An extended delay or interruption in the supply of any components thatthe Company obtains from a single supplier or from a limited number ofsuppliers could adversely affect the Company’s business, results of operations,and financial condition.

OUR INDUSTRY ISVERY COMPETITIVE.  WE MUST CONTINUE TOINTRODUCE NEW MODELS AND NEW FEATURES TO REMAIN COMPETITIVE  The market for the Company’s products is verycompetitive.  The Company currentlycompetes with a number of manufacturers of motor coaches, fifth wheel trailers,and travel trailers.  Some of thesecompanies have greater financial resources than the Company has and extensivedistribution networks.  These companies,or new competitors in the industry, may develop products that customers in theindustry prefer over our products.

The Company believes that the introduction of new productsand new features is critical to our success. Delays in the introduction of new models or product features, qualityproblems associated with these introductions, or a lack of market acceptance ofnew models or features could affect us adversely.  For example, unexpected costs associated withmodel changes have affected our gross margin in the past.  Further, new product introductions can divertrevenues from existing models and result in fewer sales of existing products.

OUR PRODUCTS COULDFAIL TO PERFORM ACCORDING TO SPECIFICATIONS OR PROVE TO BE UNRELIABLE, CAUSINGDAMAGE TO OUR CUSTOMER RELATIONSHIPS AND OUR REPUTATION AND RESULTING IN LOSSOF SALES  The Company’s customers requiredemanding specifications for product performance and reliability.  Because the Company’s products are complexand often use advanced components, processes and techniques, undetected errorsand design flaws may occur.  Productdefects result in higher product service and warranty and replacement costs andmay cause serious damage to the Company’s customer relationships and industryreputation, all of which could negatively affect our sales and business.

OUR BUSINESS ISSUBJECT TO VARIOUS TYPES OF LITIGATION, INCLUDING PRODUCT LIABILITY ANDWARRANTY CLAIMS  The Company is subjectto litigation arising in the ordinary course of our business, typically forproduct liability and warranty claims that are common in the recreationalvehicle industry.  While the Company doesnot believe that the outcome of any pending litigation, net of insurancecoverage, will materially adversely affect its business, results of operations,or financial condition, the Company cannot provide assurances in this regardbecause litigation is an inherently uncertain process.*

To date, the Company has been successful in obtaining productliability insurance on terms that the Company considers acceptable.  The terms of the policy contain aself-insured retention amount of $500,000 per occurrence, with a maximum annualaggregate self-insured retention of $3.0 million.  Overall product liability insurance, includingumbrella coverage, is available to a maximum amount of $100.0 million for eachoccurrence, as well as in the aggregate. The Company cannot be certain they will be able to obtain insurancecoverage in the future at acceptable levels or that the costs of such insurancewill be reasonable.  Further, successfulassertion against the Company of one or a series of large uninsured claims, orof a series of claims exceeding our insurance coverage, could have a materialadverse effect on the Company’s business, results of operations, and financialcondition. 

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INORDER TO BE SUCCESSFUL, WE MUST ATTRACT, RETAIN AND MOTIVATE MANAGEMENTPERSONNEL AND OTHER KEY EMPLOYEES, AND OUR FAILURE TO DO SO COULD HAVE ANADVERSE EFFECT ON OUR RESULTS OF OPERATIONS The Company’s future prospects depend upon retaining and motivating keymanagement personnel, including Kay L. Toolson, the Company’s Chief ExecutiveOfficer, 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.  The prospects of the Company also depend inpart on its ability to attract and retain highly skilled engineers and otherqualified technical, manufacturing, financial, managerial, and marketingpersonnel.  Competition for suchpersonnel is intense, and there can be no assurance that the Company will besuccessful in attracting and retaining such personnel.

OURRECENT GROWTH HAS PUT PRESSURE ON THE CAPABILITIES OF OUR OPERATING, FINANCIAL,AND MANAGEMENT INFORMATION SYSTEMS  Inthe past few years, the Company has significantly expanded the size and scopeof its business, which has required the Company to hire additional employees.  Some of these new employees include new managementpersonnel.  In addition, the Company’scurrent management personnel have assumed additional responsibilities.   The increase in size over a relatively shortperiod of time has put pressure on our operating, financial, and managementinformation systems.  If the Companycontinues to expand, such growth would put additional pressure on these systemsand may cause such systems to malfunction or to experience significant delays.

WEMAY EXPERIENCE UNEXPECTED PROBLEMS AND EXPENSES ASSOCIATED WITH OUR MANUFACTURINGEQUIPMENT AUTOMATION PLAN  As the Companycontinues to work towards involving automated machinery and equipment toimprove efficiencies and quality, we will be subject to certain risks involvingimplementing new 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 developmentof new processes involves costs associated with new machinery, training ofemployees, and compliance with environmental, health, and other governmentregulations.

·                  The newlydeveloped products may not be successful in the marketplace.

·                  We may be unableto complete a planned machinery and equipment implementation in a timelymanner, which could result in lower production levels and an inability tosatisfy customer demand for our products.

WE MAY EXPERIENCE UNEXPECTED PROBLEMSAND EXPENSES ASSOCIATED WITH OUR ENTERPRISE RESOURCE PLANNING SYSTEM (ERP)IMPLEMENTATION  We have recently begun toimplement a new ERP system and will be subject to certain risks including thefollowing:

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

·                  The implementation could result insignificant and unexpected increases in our operating expenses and capitalexpenditures, particularly if the project takes longer than we expect.

·                  The project could complicate andprolong our internal data gathering and analysis processes.

·                  It could require us to restructureor develop our internal processes to adapt to the new system.

·                  We could require extended work hoursfrom our employees and use temporary outside resources, resulting in increasedexpenses, to resolve any software configuration issues or to processtransactions manually until issues are resolved.

·                  As management focuses attention tothe implementation, they could be diverted from other issues.

·                  The project could disrupt our operationsif the transition to the ERP system creates new or unexpected difficulties orif the system does not perform as expected.

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OUR STOCK PRICE HAS HISTORICALLY FLUCTUATED AND MAY CONTINUETO FLUCTUATE  The market price of ourCommon Stock is subject to wide fluctuations in response to quarter-to-quartervariations in operating results, changes in earnings estimates by analysts,announcements of new products by us or our competitors, general conditions inthe recreational vehicle market, and other events or factors.  In addition, the stocks of many recreationalvehicle companies have experienced price and volume fluctuations which have notnecessarily been directly related to the companies’ operating performance, andthe market price of our Common Stock could experience similar fluctuations**.**

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**PART II - OTHER INFORMATION**

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

At the Annual Meeting of Stockholders of the Company, held onMay 17, 2006 in Coburg, Oregon, the Stockholders (i) elected fourClass I directors to serve on the Company’s Board of Directors, and,(ii) approved the amended and restated 1993 Stock Plan.

The vote for the election of the four Class I directorswas as follows:

| Nominee          | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|------------------|------------|------------|------------|--------------|------------|
| L. Ben Lytle     |       | 27,752,357 |       | 227,280      |       |
| Richard A. Rouse |       | 27,515,262 |       | 464,376      |       |
| Kay L. Toolson   |       | 27,554,352 |       | 425,285      |       |
| Daniel C. Ustian |       | 27,651,329 |       | 328,308      |       |

 

Other directors whose terms ofoffice continued after the meeting are:

| John F. Cogan          |   |   |   |   |   |
|------------------------|--------|--------|--------|--------|--------|
| Robert P. Hanafee, Jr. |   |   |   |   |   |
| Dennis D. Oklak        |   |   |   |   |   |
| Roger A. Vandenberg    |   |   |   |   |   |

 

The vote toapprove the amended and restated 1993 Stock Plan (formerly known as the 1993Incentive Stock Option Plan) was as follows:

 
| **For**    | ** ** | **Against** | ** ** | **Abstained** | ** ** |
|------------|------------|-------------|------------|---------------|------------|
| 22,036,864 |       | 2,648,984   |       | 25,803        |       |

 

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**Item 6.  Exhibits**
| 10.1*  |   | Monaco Coach Corporation 1993 Stock Plan (formerly  known as the 1993 Incentive Stock Option Plan) (as amended and restated through  May 17, 2006).                               |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                              |
| 10.2*  |   | Form of Performance Share Agreement for use with  1993 Stock Plan.                                                                                                                |
|   |   |                                                                                                                                                                              |
| 10.3*  |   | Form of Restricted Stock Unit Agreement for Kay L.  Toolson and John W. Nepute.                                                                                                   |
|   |   |                                                                                                                                                                              |
| 10.4*  |   | Monaco Coach Corporation Annual Incentive 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. |

 

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*Incorporatedby reference to the exhibit bearing the same number filed with the Registrant’sCurrent Report on Form 8-K filed on May 23, 2006.

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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 10, 2006 |                             |   | /s/ P. Martin Daley |   |   |   |
|   |            | P. Martin Daley                  |   |                |
|   |            | Vice President and               |   |                |
|   |            | Chief Financial Officer (Duly    |   |                |
|   |            | Authorized Officer and Principal |   |                |
|   |            | Financial Officer)               |   |                |
|        |                 |                                  |        |                     |  |  |  |

 

41

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**EXHIBITS INDEX**
| **Exhibit** |       |                                                                                                                                                                              |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description  of Document**                                                                                                                                                      |
| 10.1*       |       | Monaco Coach Corporation 1993 Stock Plan (formerly  known as the 1993 Incentive Stock Option Plan) (as amended and restated  through May 17, 2006).                               |
|        |       |                                                                                                                                                                              |
| 10.2*       |       | Form of Performance Share Agreement for use with  1993 Stock Plan.                                                                                                                |
|        |       |                                                                                                                                                                              |
| 10.3*       |       | Form of Restricted Stock Unit Agreement for Kay L.  Toolson and John W. Nepute.                                                                                                   |
|        |       |                                                                                                                                                                              |
| 10.4*       |       | Monaco Coach Corporation Annual Incentive 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. |

 

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*Incorporatedby reference to the exhibit bearing the same number filed with the Registrant’sCurrent Report on Form 8-K filed on May 23, 2006.

42

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