**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

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

**For the period ended:  March 31, 2007**

**or**

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

**For the transition period from                 to                   **

**Commission File Number:  1-14725**

**MONACO COACH CORPORATION**

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

 

**91320 Industrial WayCoburg, Oregon 97408**

(Address of principalexecutive offices)

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

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

YES  x                     NO  o

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

 

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

The number of shares outstanding ofcommon stock, $.01 par value, as of March 31, 2007: 29,936,837

 

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**MONACO COACH CORPORATION**

**FORM10-Q**

**March31, 2007**

**INDEX**
| **PART I - FINANCIAL  INFORMATION**                                                                      |   |
|----------------------------------------------------------------------------------------------------------|--------|
| ** **                                                                                               |   |
| **Item  1. Financial Statements**                                                                        |   |
| ** **                                                                                               |   |
| Condensed Consolidated Balance Sheets as of December  30, 2006 and March 31, 2007                        |   |
|                                                                                                     |   |
| Condensed Consolidated Statements of Income for the  quarters ended April 1, 2006 and March 31, 2007     |   |
|                                                                                                     |   |
| Condensed Consolidated Statements of Cash Flows for  the quarters ended April 1, 2006 and March 31, 2007 |   |
|                                                                                                     |   |
| Notes to Condensed Consolidated Financial Statements                                                     |   |
|                                                                                                     |   |
| **Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations**  |   |
| ** **                                                                                               |   |
| **Item 3. Quantitative and Qualitative Disclosures About  Market Risk**                                  |   |
| ** **                                                                                               |   |
| **Item 4. Controls and Procedures**                                                                      |   |
| ** **                                                                                               |   |
| **PART  II - OTHER INFORMATION**                                                                         |   |
| ** **                                                                                               |   |
| **Item  1A. Risk Factors**                                                                               |   |
| ** **                                                                                               |   |
| **Item 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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**MONACO COACH CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS(in thousands of dollars, except share and per share data)**
| ** **                                                                                                                   | ** ** | **December 30,** | ** ** | **March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
| ** **                                                                                                                   | ** ** | **2006**              | ** ** | **2007**           | ** ** |
| ** **                                                                                                                   | ** ** | ** **            | ** ** | **(unaudited)**    | ** ** |
| **ASSETS**                                                                                                                   | ** ** | ** **            | ** ** | ** **         | ** ** |
| Current assets:                                                                                                              |       |                  |       |               |       |
| Cash                                                                                                                         |       | $                     | 4,984      |               | $          | 29,026 |   |
| Trade  receivables, net                                                                                                      |       | 81,588                |       | 88,399             |       |
| Inventories, net                                                                                                             |       | 155,871               |       | 153,945            |       |
| Resort lot  inventory                                                                                                        |       | 7,997                 |       | 6,783              |       |
| Prepaid expenses                                                                                                             |       | 5,624                 |       | 5,261              |       |
| Income taxes  receivable                                                                                                     |       | 6,901                 |       | 0                  |       |
| Deferred income  taxes                                                                                                       |       | 38,038                |       | 39,802             |       |
| Total current  assets                                                                                                        |       | 301,003               |       | 323,216            |       |
|                                                                                                                         |       |                  |       |               |       |
| Property, plant, and  equipment, net                                                                                         |       | 153,895               |       | 151,570            |       |
| Land held for  development                                                                                                   |       | 16,300                |       | 16,300             |       |
| Investment in joint  venture                                                                                                 |       | 0                     |       | 4,394              |       |
| Debt issuance costs net  of accumulated amortization of $912 and $990, respectively                                          |       | 540                   |       | 655                |       |
| Goodwill                                                                                                                     |       | 86,412                |       | 86,412             |       |
|                                                                                                                         |       |                  |       |               |       |
| Total assets                                                                                                                 |       | $                     | 558,150    |               | $          | 582,547 |   |
|                                                                                                                         |       |                  |       |               |       |
| **LIABILITIES**                                                                                                              | ** ** | ** **            | ** ** | ** **         | ** ** |
| Current liabilities:                                                                                                         |       |                  |       |               |       |
| Book overdraft                                                                                                               |       | 16,626                |       | 0                  |       |
| Current portion  of long-term debt                                                                                           |       | 5,714                 |       | 5,714              |       |
| Line of credit                                                                                                               |       | 2,036                 |       | 0                  |       |
| Income taxes  payable                                                                                                        |       | 0                     |       | 2,557              |       |
| Accounts payable                                                                                                             |       | 72,591                |       | 107,936            |       |
| Product  liability reserve                                                                                                   |       | 15,764                |       | 16,509             |       |
| Product warranty  reserve                                                                                                    |       | 33,804                |       | 34,547             |       |
| Accrued expenses  and other liabilities                                                                                      |       | 44,364                |       | 47,383             |       |
| Discontinued  operations                                                                                                     |       | 298                   |       | 288                |       |
| Total current  liabilities                                                                                                   |       | 191,197               |       | 214,934            |       |
|                                                                                                                         |       |                  |       |               |       |
| Long-term debt, less  current portion                                                                                        |       | 29,071                |       | 27,643             |       |
| Deferred income taxes                                                                                                        |       | 21,678                |       | 21,219             |       |
| Other long-term  liabilities                                                                                                 |       | 883                   |       | 833                |       |
| Total  liabilities                                                                                                           |       | 242,829               |       | 264,629            |       |
|                                                                                                                         |       |                  |       |               |       |
| Commitments and  contingencies (Note 10)                                                                                     |       |                  |       |               |       |
|                                                                                                                         |       |                  |       |               |       |
| **STOCKHOLDERS’ EQUITY**                                                                                                | ** ** | ** **            | ** ** | ** **         | ** ** |
| Preferred stock, $.01  par value; 1,934,783 shares authorized, no shares outstanding                                         |       |                  |       |               |       |
| Common stock, $.01 par  value; 50,000,000 shares authorized, 29,769,356 and 29,936,837 issued and  outstanding, respectively |       | 298                   |       | 299                |       |
| Additional paid-in  capital                                                                                                  |       | 63,722                |       | 66,610             |       |
| Retained earnings                                                                                                            |       | 251,301               |       | 251,009            |       |
| Total  stockholders’ equity                                                                                             |       | 315,321               |       | 317,918            |       |
|                                                                                                                         |       |                  |       |               |       |
| Total  liabilities and stockholders’ equity                                                                             |       | $                     | 558,150    |               | $          | 582,547 |   |

 

See accompanying notes.

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**MONACO COACH CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF INCOME(Unaudited: in thousands ofdollars, except share and per share data)**
| ** **                                     | ** ** | **Quarter Ended**      | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **April 1, 2006** | ** ** | **March 31, 2007** | ** ** |
| ** **                                     | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Net sales                                      |       | $                           | 385,068    |   | $ | 322,244 |   |
| Cost of sales                                  |       | 336,619                     |       | 286,248 |   |
| Gross profit                                   |       | 48,449                      |       | 35,996 |   |
|                                           |       |                        |       |   |   |
| Selling,  general, and administrative expenses |       | 33,979                      |       | 32,358 |   |
| Operating income                               |       | 14,470                      |       | 3,638 |   |
|                                           |       |                        |       |   |   |
| Other income,  net                             |       | 132                         |       | 113 |   |
| Interest expense                               |       | (1,252                      | )          | (967 | ) |
| Loss from investment  in joint venture         |       | 0                           |       | (278 | ) |
| Income before income taxes                     |       | 13,350                      |       | 2,506 |   |
|                                           |       |                        |       |   |   |
| Provision for  income taxes                    |       | 5,057                       |       | 1,007 |   |
|                                           |       |                        |       |   |   |
| Net income                                     |       | $                           | 8,293      |   | $ | 1,499 |   |
|                                           |       |                        |       |   |   |
| Earnings per  common share:                    |       |                        |       |   |   |
| Basic                                          |       | $                           | 0.28       |   | $ | 0.05 |   |
| Diluted                                        |       | $                           | 0.28       |   | $ | 0.05 |   |
|                                           |       |                        |       |   |   |
| Weighted-average  common shares outstanding:   |       |                        |       |   |   |
| Basic                                          |       | 29,636,222                  |       | 29,829,697 |   |
| Diluted                                        |       | 29,828,187                  |       | 30,405,671 |   |

 

See accompanying notes.

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**MONACO COACH CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited: in thousands ofdollars)**
| ** **                                                                                   | ** ** | **Quarter Ended**      | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                   | ** ** | **April 1, 2006** | ** ** | **March 31, 2007** | ** ** |
| ** **                                                                                   | ** ** | ** **                  | ** ** | ** ** | ** ** |
| **Increase  (Decrease) in Cash:**                                                            | ** ** | ** **                  | ** ** | ** ** | ** ** |
|                                                                                         |       |                        |       |   |   |
| Cash flows from  operating activities:                                                       |       |                        |       |   |   |
| Net income                                                                                   |       | $                           | 8,293      |   | $ | 1,499 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                        |       |   |   |
| Gain on sale of assets                                                                       |       | (16                         | )          | (113 | ) |
| Depreciation and amortization                                                                |       | 3,374                       |       | 3,537 |   |
| Deferred income taxes                                                                        |       | (4,320                      | )          | (2,223 | ) |
| Stock-based compensation expense                                                             |       | 331                         |       | 1,826 |   |
| Changes in working capital accounts:                                                         |       |                        |       |   |   |
| Trade receivables, net                                                                       |       | (24,115                     | )          | (6,811 | ) |
| Inventories                                                                                  |       | 914                         |       | (2,134 | ) |
| Resort lot inventory                                                                         |       | 2,554                       |       | 1,214 |   |
| Prepaid expenses                                                                             |       | 400                         |       | 361 |   |
| Accounts payable                                                                             |       | 22,741                      |       | 35,345 |   |
| Product liability reserve                                                                    |       | (635                        | )          | 745 |   |
| Product warranty reserve                                                                     |       | 963                         |       | 743 |   |
| Income taxes payable                                                                         |       | 7,951                       |       | 9,458 |   |
| Accrued expenses and other liabilities                                                       |       | 9,972                       |       | 3,019 |   |
| Deferred revenue                                                                             |       | 0                           |       | (50 | ) |
| Discontinued operations                                                                      |       | 720                         |       | (10 | ) |
| Net cash provided by operating activities                                                    |       | 29,127                      |       | 46,406 |   |
|                                                                                         |       |                        |       |   |   |
| Cash flows from  investing activities:                                                       |       |                        |       |   |   |
| Additions to property, plant, and equipment                                                  |       | (3,746                      | )          | (1,770 | ) |
| Investment in joint venture                                                                  |       | 0                           |       | (88 | ) |
| Proceeds from sale of assets                                                                 |       | 17                          |       | 505 |   |
| Net cash used in investing activities                                                        |       | (3,729                      | )          | (1,353 | ) |
|                                                                                         |       |                        |       |   |   |
| Cash flows from  financing activities:                                                       |       |                        |       |   |   |
| Book overdraft                                                                               |       | (14,529                     | )          | (16,626 | ) |
| Payments on lines of credit, net                                                             |       | (2,500                      | )          | (2,036 | ) |
| Payments on long-term notes payable                                                          |       | 0                           |       | (1,428 | ) |
| Debt issuance costs                                                                          |       | 0                           |       | (193 | ) |
| Dividends paid                                                                               |       | (1,780                      | )          | (1,791 | ) |
| Issuance of common stock                                                                     |       | 1,137                       |       | 927 |   |
| Tax benefit of stock-based awards exercised or  vested                                       |       | 0                           |       | 136 |   |
| Discontinued operations                                                                      |       | 75                          |       | 0 |   |
| Net cash used in financing activities                                                        |       | (17,597                     | )          | (21,011 | ) |
|                                                                                         |       |                        |       |   |   |
| Net change in  cash                                                                          |       | 7,801                       |       | 24,042 |   |
| Cash at  beginning of period                                                                 |       | 586                         |       | 4,984 |   |
|                                                                                         |       |                        |       |   |   |
| Cash at end of period                                                                        |       | $                           | 8,387      |   | $ | 29,026 |   |

 

See accompanying notes.

6

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**MONACO COACH CORPORATION****NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)**

**1.     Basis of Presentation**

The interim condensed consolidatedfinancial statements have been prepared by Monaco Coach Corporation (the “Company”)without audit.  In the opinion ofmanagement, the accompanying unaudited financial statements contain alladjustments necessary, consisting only of normal recurring adjustments, topresent fairly the financial position of the Company as of December 30, 2006  and March 31, 2007, and the results of itsoperations and its cash flows for the quarters ended April 1, 2006 and March31, 2007.  The condensed consolidatedfinancial statements include the accounts of the Company and its wholly-ownedsubsidiaries, and all significant intercompany accounts and transactions havebeen eliminated in consolidation.  Thebalance sheet data as of December 30, 2006 was derived from audited financialstatements, but does not include all disclosures contained in the Company’sAnnual Report to Stockholders on Form 10-K. 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 30, 2006.

**2.     Inventories, Net**

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

|                       | ** ** | **December 30,**   | ** ** | **March 31,** | ** ** |
|-----------------------|------------|-------------------------|------------|--------------------|------------|
| ** **            | ** ** | **2006**                | ** ** | **2007**           | ** ** |
| ** **            | ** ** | **(in thousands)** | ** ** |
| ** **            | ** ** | ** **              | ** ** | ** **         | ** ** |
| Raw materials         |       | $                       | 84,069     |               | $          | 87,377 |   |
| Work-in-process       |       | 55,473                  |       | 53,364             |       |
| Finished units        |       | 26,773                  |       | 23,859             |       |
| Raw material reserves |       | (10,444                 | )          | (10,655            | )          |
|                  |       |                    |       |               |       |
|                  |       | $                       | 155,871    |               | $          | 153,945 |   |

 

**3.     Joint Venture**

On February 25,2007, the Company closed a transaction with International Truck and EngineCorporation to form a joint venture to manufacture substantially all of theCompany’s rear diesel chassis.  The termsof the agreement grant the Company a 49% ownership in the joint venture, knownas Custom Chassis Products, LLC (CCP). The investment is accounted for under the equity method.  We contributed $4,060,000 of inventory,$246,000 of fixed assets, $140,000 of cash to CCP and incurred transactioncosts of $226,000.  Our portion of CCP’snet loss for the quarter ended March 31, 2007 was $278,000.

**4.     Line of Credit**

The Company’s credit facilities consist of arevolving line of credit of up to $105.0 million. As of March 31, 2007, thereis no balance outstanding on the revolving line of credit (the “Revolving Loan”).  At the election of the Company, the RevolvingLoan bears interest at varying rates that fluctuate based on the prime rate orLIBOR and are determined based on the Company’s leverage ratio.  The Company also pays interest quarterly onthe unused available portion of the Revolving Loan at varying rates, determinedby the Company’s leverage ratio.  TheRevolving Loan is due and payable in full on November 17, 2009 and requiresmonthly interest payments.  The agreementcontains restrictive covenants as to the Company’s leverage ratio, currentratio, fixed charge coverage ratio, and tangible net worth.  As of March 31, 2007, the Company was incompliance with these covenants.  TheCompany also has two unused letters of credit totaling $3.0 million outstandingas of March 31, 2007.

7

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**5.     Long-Term Notes Payable**

As of March 31, 2007, outstanding TermDebt under the credit facilities was $32.9 million.  At the election of the Company, the Term Debtbears interest at varying rates that fluctuate based on the prime rate or LIBORand are determined based on the Company’s leverage ratio.  The Term Debt requires quarterly interest andprincipal payments of $1.4 million, with a final balloon payment of $12.9million due on November 18, 2010.  At March31, 2007, the weighted-average interest rate on the Term Debt was 7.4%.  The Term Debt is collateralized by all theassets of the Company.  The agreementcontains restrictive covenants as to the Company’s leverage ratio, currentratio, fixed charge coverage ratio, and tangible net worth.  In January 2007, the Company amended itscredit facility to modify certain restrictive covenants.  As of March 31, 2007, the Company was incompliance with these covenants.

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

The following table displays thescheduled principal payments by fiscal year that will be due in thousands onthe term loans.

|            | ** ** | **Amount of**   | ** ** |
|------------|------------|----------------------|------------|
| ** ** | ** ** | **payment due** | ** ** |
|       |       |                 |       |
| 2007       |       | $                    | 4,286      |   |
| 2008       |       | 5,714                |       |
| 2009       |       | 6,214                |       |
| 2010       |       | 17,143               |       |
|       |       |                 |       |
|       |       | $                    | 33,357     |   |

 

**6.     Income Taxes**

The Company adopted FIN 48, “Accounting for Uncertainty in Income Taxes— an Interpretation of FAS 109,” (the “Interpretation”) as of the beginning offiscal year 2007.  The Interpretationclarifies the accounting for uncertainty in income taxes recognized inaccordance with FAS 109, “Accounting for Income Taxes,” by defining a criterionthat an individual tax position must be met for any part of the benefit to berecognized in the financial statements.

As of the beginning of fiscal 2007, the Company’s total unrecognizedtax benefits were $850,000 and all of these benefits, if recognized, wouldaffect the Company’s effective tax rate. The Company also had accrued interest related to these unrecognized taxbenefits of $55,000 as of the date of adoption. The interest expense associated with income tax contingencies isclassified as income taxes in the Company’s financial statements.  Penalties associated with income taxes areclassified as selling, general, and administrative expenses.  Within twelve months of the date of adoption,it is reasonably possible that the unrecognized tax benefits will decrease by$100,000 to $115,000 due to the expiration of federal and state statutes oflimitations.  The federal uncertainty relatesto subjectivity in the measurement of certain deductions claimed for UnitedStates income tax purposes and the state uncertainty relates to state incometax apportionment matters.

As of the date of adoption, the Company’s income tax returns thatremain subject to examination are tax years 2003 through 2006 for U.S. federalincome tax and tax years 2002 through 2006 for major state income taxreturns.  There have been no materialchanges in the information above between the date of adoption and March 31,2007.

8

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**7.     Earnings Per Common Share**

Basicearnings per common share is based on the weighted-average number of sharesoutstanding during the period.  Dilutedearnings per common share is based on the weighted-average number of sharesoutstanding during the period, after consideration of the dilutive effect ofoutstanding stock-based awards.  For thequarter ended March 31, 2007, there were 1,004,915 anti-dilutive stock-basedawards excluded from the diluted earnings per share calculation (682,740 forthe quarter ended April 1, 2006).  Theweighted-average number of common shares used in the computation of earningsper common share were as follows:

|                                                   | ** ** | **Quarter Ended**      | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | **April 1, 2006** | ** ** | **March 31, 2007** | ** ** |
| ** **                                        | ** ** | ** **                  | ** ** | ** ** | ** ** |
| **Basic**                                         | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Issued and outstanding  shares (weighted-average) |       | 29,636,222                  |       | 29,829,697 |   |
|                                              |       |                        |       |   |   |
| **Effect of Dilutive Securities**                 | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Stock-based awards                                |       | 191,965                     |       | 575,974 |   |
|                                              |       |                        |       |   |   |
| **Diluted**                                       |       | 29,828,187                  |       | 30,405,671 |   |

 

|                                     | ** ** | **Quarter Ended**      | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **April 1, 2006** | ** ** | **March 31, 2007** | ** ** |
| ** **                          | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Cash dividends per  common share    |       | $                           | 0.06       |   | $ | 0.06 |   |
| Cash dividends paid*(in thousands)* |       | $                           | 1,780      |   | $ | 1,791 |   |

 

**8.     Stock-Based Award Plans**

The Company has anEmployee Stock Purchase Plan (the “Purchase Plan”) - 1993, a non-employee 1993Director Stock Plan (the “Director Plan”), and an amended and restated 1993Stock Plan (the “Stock Plan”). The compensation expense recognized in thequarters ended April 1, 2006 and March 31, 2007 for the plans was $331,000 and$1.8 million, respectively. The amount of cash received in the quarters endedApril 1, 2006 and March 31, 2007 from the exercise of stock options, stockissued under the Stock Purchase Plan, and stock issued in lieu of somedirectors’ cash retainer was $1.1 million and $927,000, respectively. The taxbenefit realized from stock-based awards exercised or vested in the firstquarter of 2006 and 2007 was zero and $136,000, respectively.

**Restricted StockUnit Grant**

A component of theStock Plan permits the Company to grant shares of restricted stock units (RSU’s).These grants are compensation expense under the rules of FAS 123R, and arerequired to be recognized in the Company’s consolidated statements of income.The valuation of the RSU’s is based on the closing market price of the CommonStock on the date of grant. The RSU’s vest ratably over four years or cliffvest at four years for employees and cliff vest at three years fordirectors. RSU’s outstanding to participants who meet the retirement eligibleprovision vest upon actual retirement or the normal vesting period, whicheveris earlier. Under Section 162(m) of the Internal Revenue Code of1986, as amended, RSU’s granted to certain employees require performance criteriato be met in order for the units to cliff vest at three years. The performancecriteria is based on the return on equity. As of March 31, 2007, there are132,686 RSU’s outstanding that require the attainment of the performancecriteria.

9

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The compensation expense recognized for RSU’s in the first quarter of2006 and 2007 was $260,000 and $989,000, respectively. A forfeiture rate isapplied to the majority of the RSU participants based on the historicalforfeiture experience with stock options. The total remaining expense to berecognized in future periods for outstanding non-vested RSU’s is approximately$4.4 million. The expense is expected to be recognized over a weighted-averageperiod of 3.2 years.

Restricted stockunit transactions under the Stock Plan are summarized with the weighted-averagegrant-date fair value as follows:

|                                       | ** ** | ** **           | ** ** | **Weighted-**       | ** ** |
|---------------------------------------|------------|----------------------|------------|---------------------|------------|
| ** **                            | ** ** | ** **           | ** ** | **Average**         | ** ** |
| ** **                            | ** ** | **Restricted**       | ** ** | **Grant-Date**      | ** ** |
| ** **                            | ** ** | **Stock Units** | ** ** | **Fair Value** | ** ** |
| ** **                            | ** ** | ** **           | ** ** | ** **          | ** ** |
| Non-vested at  December 31, 2005 |       | 53,250               |       | $                   | 14.73      |   |
| Granted                               |       | 254,159              |       | 12.71               |       |
| Forfeited                             |       | (27,500              | )          | 14.67               |       |
| Non-vested at  December 30, 2006 |       | 279,909              |       | 12.90               |       |
| Granted                               |       | 198,049              |       | 16.75               |       |
| Vested                                |       | (38,219              | )          | 12.95               |       |
| Forfeited                             |       | (2,500               | )          | 12.95               |       |
|                                  |       |                 |       |                |       |
| Non-vested at March 31, 2007          |       | 437,239              |       | $                   | 14.64      |   |

 

**Performance ShareAwards**

A component of theStock Plan also permits the Company to grant performance share awards (PSA’s).  During the first quarter of  2007, the Company granted 138,714 sharesunder a three-year performance plan.  Theplan requires the achievement of performance based on Return on NetAssets-adjusted (RONA) and Total Shareholder Return (TSR) compared to a groupof peer companies. Depending on the ranking of the Company’s performanceagainst the peer group, the participants could earn from 0% up to 200% of thetarget payout of performance shares. A participant who retires during aperformance period and meets the retirement eligible provision is entitled toreceive 100% of the award that would have otherwise been earned had theparticipant remained employed through the end of the performance period. Theaward to such a participant will be settled at the end of the normal performanceperiod.  Grants are currently outstandingunder a two-year performance period and two three-year performance periods.

The fair value ofshare awards requiring achievement of the goal based on TSR is estimated on thedate of grant using a lattice-based valuation model.  The assumptions used in the model to valuethe awards granted in the first quarter of 2007 are noted in the followingtable. Because lattice-based option valuation models incorporate ranges of assumptionsfor inputs, those ranges are disclosed. Expected volatilities were based onhistorical volatility of the Company’s stock and the average of the competitorcompanies’ stock, as well as other factors. The Company used historical data toestimate employee termination within the valuation model. The expected term ofawards granted was derived from the output of the option valuation model andrepresents the period of time that awards granted are expected to beoutstanding. The risk-free interest rate is based on interest rates on total constantmaturity U.S. Treasury notes with lives consistent with the expected lives ofthe related award. The grant-date fair value of the TSR related awards grantedin the first quarter of 2007 is $22.25 per award.

10

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** **

|                                                    | ** ** | **Quarter Ended**       | ** ** |
|----------------------------------------------------|------------|------------------------------|------------|
| ** **                                         | ** ** | **March 31, 2007** | ** ** |
|                                               |       |                         |       |
| Risk-free interest rate                            |       | 4.50                         | %          |
| Expected life (in  years)                          |       | 2 to 3                       |       |
| Expected volatility of  the Company                |       | 38.60                        | %          |
| Expected dividend yield                            |       | 1.40                         | %          |
| Peer companies’ average volatility experience |       | 33.10                        | %          |

 

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

The TSR goal isbased on the market price of the Company’s Common Stock as compared to the peergroup. This is considered a market condition under FAS 123R, thus compensationexpense recognized is not reversed if the goal is not achieved by the end ofthe performance period. The compensation expense related to share awards thatare forfeited is reversed. If the performance goal related to RONA is not met,no compensation expense is recognized and any recognized compensation expenseis reversed as of the end of the plan period. A total of $754,000 ofcompensation expense was recorded during the quarter ended March 31, 2007relating to the performance share awards. As of March 31, 2007, it was notprobable that the RONA goal would be met at the end of the performance periodsfor the awards granted in 2006 and thus no compensation expense has beenrecognized. As of March 31, 2007, the expected payout related to the 2007 RONAgrants was 25% of the target payout, thus expense of $95,000 was recognized inthe first quarter of 2007.  The totalremaining expense expected to be recognized in future periods for outstandingPSA’s is approximately $2.0 million. The expense is expected to be recognizedover a weighted-average period of 2.2 years. The total number of PSA’snon-vested as of March 31, 2007 was 468,532 shares at target payout. Theweighted-average grant-date fair value of these shares is $14.23.

**9.****          ****Segment Reporting**

The Company 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, andspecialty trailers under the “Monaco,” “Holiday Rambler,” “Beaver,” “Safari,” “McKenzie,”“R-Vision,” “Bison,” and “Roadmaster” brand names.

In addition to the manufacturing of premiumrecreational vehicles, the Company owns and operates two motorhome resortproperties (Motorhome Resort Segment) located in Las Vegas, Nevada, and Indio,California.  The Company has alsoacquired property in southern California, and subsequent to the end of quarterwe closed on property in Naples, Florida. These properties are planned to be developed and sold over the nextthree to five years.  The resorts offersales of individual lots to motor coach owners and also offer a common interestin the amenities at the resort.  Theresorts provide destination locations for premium Class A motor coach ownersand help to promote the recreational vehicle lifestyle.

11

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** **

The following tableprovides the results of operations of the three segments of the Company for thequarters ended April 1, 2006 and March 31, 2007, respectively.  All dollars represented are in thousands.

|                                                                       | ** ** | **Quarter Ended**      | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                            | ** ** | **April 1, 2006** | ** ** | **March 31, 2007** | ** ** |
| ** **                                                            | ** ** | ** **                  | ** ** | ** ** | ** ** |
| **Motorized Recreational Vehicle  Segment**                           | ** ** | ** **                  | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                           | 254,954    |   | $ | 245,548 |   |
| Cost of sales                                                         |       | 230,001                     |       | 219,061 |   |
| Gross profit                                                          |       | 24,953                      |       | 26,487 |   |
|                                                                  |       |                        |       |   |   |
| Selling, general, and  administrative expenses and corporate overhead |       | 20,133                      |       | 23,155 |   |
|                                                                  |       |                        |       |   |   |
| Operating income                                                      |       | $                           | 4,820      |   | $ | 3,332 |   |
|                                                                  |       |                        |       |   |   |
| **Towable Recreational Vehicle  Segment**                             | ** ** | ** **                  | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                           | 114,413    |   | $ | 69,480 |   |
| Cost of sales                                                         |       | 100,133                     |       | 64,753 |   |
| Gross profit                                                          |       | 14,280                      |       | 4,727 |   |
|                                                                  |       |                        |       |   |   |
| Selling, general, and administrative  expenses and corporate overhead |       | 9,408                       |       | 6,372 |   |
|                                                                  |       |                        |       |   |   |
| Operating income  (loss)                                              |       | $                           | 4,872      |   | $ | (1,645 | ) |
|                                                                  |       |                        |       |   |   |
| **Motorhome Resorts Segment**                                         | ** ** | ** **                  | ** ** | ** ** | ** ** |
| ** **                                                            | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Net sales                                                             |       | $                           | 15,701     |   | $ | 7,216 |   |
| Cost of sales                                                         |       | 6,485                       |       | 2,434 |   |
| Gross profit                                                          |       | 9,216                       |       | 4,782 |   |
|                                                                  |       |                        |       |   |   |
| Selling, general, and  administrative expenses and corporate overhead |       | 4,438                       |       | 2,831 |   |
|                                                                  |       |                        |       |   |   |
| Operating income                                                      |       | $                           | 4,778      |   | $ | 1,951 |   |

 

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** **

|                                                 | ** ** | **Quarter Ended**      | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **April 1, 2006** | ** ** | **March 31, 2007** | ** ** |
| ** **                                      | ** ** | **(in thousands)**          | ** ** |
| ** **                                      | ** ** | ** **                  | ** ** | ** ** | ** ** |
| **Reconciliation to Net Income** | ** ** | ** **                  | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Operating income  (loss):                       |       |                        |       |   |   |
| Motorized  recreational vehicle segment         |       | $                           | 4,820      |   | $ | 3,332 |   |
| Towable  recreational vehicle segment           |       | 4,872                       |       | (1,645 | ) |
| Motorhome  resorts segment                      |       | 4,778                       |       | 1,951 |   |
| Total operating  income                         |       | 14,470                      |       | 3,638 |   |
|                                            |       |                        |       |   |   |
| Other income, net                               |       | 132                         |       | 113 |   |
| Interest expense                                |       | (1,252                      | )          | (967 | ) |
| Loss from investment in  joint venture          |       | 0                           |       | (278 | ) |
| Income before  income taxes                     |       | 13,350                      |       | 2,506 |   |
|                                            |       |                        |       |   |   |
| Provision for income  taxes                     |       | 5,057                       |       | 1,007 |   |
|                                            |       |                        |       |   |   |
| Net income                                      |       | $                           | 8,293      |   | $ | 1,499 |   |

 

**10.****      ****Commitments and Contingencies**

**Repurchase Agreements**

Manyof the Company’s sales to independent dealers are made on a “floor plan” basisby a 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.

TheCompany’s liability under repurchase agreements is limited to the unpaidbalance owed to the lending institution by reason of its extending credit tothe dealer to purchase its vehicles, reduced by the resale value of vehicleswhich may be repurchased.  The risk ofloss is spread over numerous dealers and financial institutions.

Theapproximate amount subject to contingent repurchase obligations arising fromthese agreements at March 31, 2007 is $576.8 million, with approximately 5.5%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 (FIN45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others” in its financialstatements, and has determined that the recognition provisions of FIN 45 applyto certain guarantees routinely made by the Company, including contingentrepurchase obligations to third party lenders for inventory financing of dealerinventories.  The Company has recorded aliability of approximately $362,000 for potential losses resulting fromguarantees on repurchase obligations for products shipped to dealers.  This estimated liability is based on theCompany’s experience of losses associated with the repurchase and resale ofunits in prior years.

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** **

**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, includingumbrella coverage, is available to a maximum amount of $100.0 million for eachoccurrence, as well as in the aggregate. There can be no assurance that the Company will be able to obtaininsurance coverage in the future at acceptable levels or that the cost ofinsurance will be reasonable. Furthermore, successful assertion against the Company of one or a seriesof large uninsured claims, or of one or a series of claims exceeding anyinsurance coverage, could have a material adverse effect on the Company’sbusiness, results of operations, and financial condition.   The following table discloses significantchanges in the product liability:

|                   | ** ** | **Quarter Ended**      | ** ** |
|-------------------|------------|-----------------------------|------------|
| ** **        | ** ** | **April 1, 2006** | ** ** | **March 31, 2007** | ** ** |
| ** **        | ** ** | **(in thousands)**     | ** ** |
| ** **        | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Beginning balance |       | $                           | 19,275     |   | $ | 15,764 |   |
| Expense           |       | 2,318                       |       | 3,911 |   |
| Payments          |       | (2,953                      | )          | (3,166 | ) |
| Adjustments       |       | 73                          |       | 0 |   |
|              |       |                        |       |   |   |
| Ending balance    |       | $                           | 18,713     |   | $ | 16,509 |   |

 

**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 arebased on historical average repair costs, as well as other reasonableassumptions deemed appropriate by management. The following table discloses significant changes in the productwarranty reserve:

|                   | ** ** | **Quarter Ended**      | ** ** |
|-------------------|------------|-----------------------------|------------|
| ** **        | ** ** | **April 1, 2006** | ** ** | **March 31, 2007** | ** ** |
| ** **        | ** ** | **(in thousands)**     | ** ** |
| ** **        | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Beginning balance |       | $                           | 32,902     |   | $ | 33,804 |   |
| Expense           |       | 10,721                      |       | 9,883 |   |
| Payments          |       | (9,758                      | )          | (9,140 | ) |
|              |       |                        |       |   |   |
| Ending balance    |       | $                           | 33,865     |   | $ | 34,547 |   |

 

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**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.

**11.****   ****Subsequent Events**

**Purchase of Land for Development**

On April 20, 2007, theCompany acquired land near Naples, Florida for $8.0 million.  The 80 acre parcel will be developed into amotorhome resort with approximately 198 lots available for sale beginning in2008.

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

This Quarterly Report on Form 10-Qcontains forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended.  Thesestatements include, but are not limited to, those in this report that have beenmarked with an asterisk (*).  In addition,statements containing words such as “anticipates,” “believes,” “estimates,” “expects,”“intends,” “plans,” “seeks,” and variations of such words and similarexpressions are intended to identify forward-looking statements.  Such forward-looking statements involve knownand unknown risks, uncertainties and other factors that may cause our actualresults, performance or achievements to differ materially from those expressedor implied by such forward-looking statements, including those set forth belowin Part II, Item 1A under the caption “Risk Factors” and elsewhere in thisQuarterly Report on Form 10-Q.  Thereader should carefully consider, together with the other matters referred toherein, the factors set forth in Part II, Item 1A under the caption “RiskFactors,” as well as in other documents we file with the Securities andExchange Commission.  We caution thereader, 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 Cmotor coaches, as well as towable recreational vehicles. The Company alsodevelops and sells luxury motorcoach resort facilities. These three operations,while closely tied into the recreational lifestyle, are segmented for reportingpurposes as the Motorized Recreational Vehicle (MRV) segment, the TowableRecreational Vehicle (TRV) segment, and the Motorhome Resort (MR) segment.

*Motorized and TowableRecreational Vehicle Segment Products*

Our products range in suggested retail price from$45,000 to $700,000 for motor coaches and from $11,000 to $80,000 for towables.Based upon retail registrations in 2006, we believe we had a 23.8% share of themarket for diesel Class A motor coaches, a 7.7% share of the market forgas Class A motor coaches, a 16.0% share of the market for allClass A motor coaches, a 2.6% share of the market for all Class B andC motor coaches, a 4.2% share of the market for fifth wheel towables and a 4.6%share of the market for travel trailers.

*Motorhome ResortSegment*

In addition to the manufacturing of premiumrecreational vehicles, the Company also owns and operates two motorhome resortproperties (the “Resorts”), located in Las Vegas, Nevada, and Indio, California.In addition, the Company has acquired land to develop properties in La Quinta,California, and in Naples, Florida. The Resorts offer sales of individual lotsto owners, and also offer common interests in the amenities at the resort. Lotprices at the two resorts range from $79,900 to $339,900. Amenities at theResorts include: club house facilities, tennis, swimming, and golf. The Resortsprovide destination locations for premium Class A motor coach owners, andhelp to promote the recreational lifestyle.

*Business Changes*

We have conducted a series of acquisitions during ourhistory. Beginning in March 1993, 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 RamblerDivision of Harley-Davidson, Inc., a manufacturer of a full line ofClass A motor coaches and towables. In August 2001, we acquired SMCCorporation, manufacturer of the Beaver and Safari brand Class Amotorhomes. In November 2002, we acquired from Outdoor Resorts of America(“ORA”) three luxury motorcoach resort properties being developed by ORA in LasVegas, Nevada, Indio, California, and Naples, Florida. In September 2003,we sold the property in Naples, Florida. In November of 2005, we acquiredR-Vision, Inc., R-Vision Motorized, LLC, Bison Manufacturing, LLC,and Roadmaster LLC, (collectively referred to as “R-Vision”), manufacturers ofR-Vision, Bison, and Roadmaster motorized and towable products. The R-Vision acquisitionwas accounted for using the purchase method of accounting, through a cash offeron November 18, 2005. All operations of R-Vision have been incorporatedfor the quarters ended April 1, 2006 and March 31, 2007 in the consolidatedquarterly financial statements of the Company included with this QuarterlyReport on Form 10-Q.

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During the third quarter of 2005, the Companyannounced the closure of its Royale Coach operations in Elkhart, Indiana.Royale Coach produced Prevost bus conversion motor coaches with price points inexcess of $1.4 million. Royale Coach sold approximately 20 coaches per year andwas not a significant portion of the Company’s overall business. As of the endof 2006, the Company had sold all remaining assets of Royale Coach.

During the first quarter of 2007 we completed theformation of a joint venture with International Truck and Engine Corporation(ITEC) for the purpose of manufacturing rear diesel chassis.  This joint venture, known as Custom ChassisProducts LLC (CCP), will enable us to take advantage of purchasing synergies,access engineering and design expertise from ITEC, and improve the utilizationof our Roadmaster chassis manufacturing facility in Elkhart, Indiana.  Our ownership interest is 49%, and we areaccounting for the activity of this operation using the equity method ofaccounting.

**RESULTS OF CONSOLIDATEDOPERATIONS**

*Quarter ended March 31,2007 Compared to Quarter ended April 1, 2006*

The following table illustrates theresults of consolidated operations for the quarters ended April 1, 2006 andMarch 31, 2007.  All dollar amounts arein thousands. 
|                                                | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|-------------------|------------|------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                     | ** ** | **April 1, 2006** | ** ** | **of Sales** | ** ** | **March 31, 2007** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                      |       | $                           | 385,068    |              | 100.0      | %                            | $          | 322,244           |       | 100.0      | %          | $          | (62,824    | ) | (16.3 | )% |
| Cost of sales                                  |       | 336,619                     |       | 87.4              | %          | 286,248                      |       | 88.8              | %          | 50,371     |       | 15.0       | %          |
| Gross profit                                   |       | 48,449                      |       | 12.6              | %          | 35,996                       |       | 11.2              | %          | (12,453    | )          | (25.7      | )%         |
| Selling, general, and  administrative expenses |       | 33,979                      |       | 8.8               | %          | 32,358                       |       | 10.0              | %          | 1,621      |       | 4.8        | %          |
|                                           |       |                        |       |              |       |                         |       |              |       |       |       |       |       |
| Operating income                               |       | $                           | 14,470     |              | 3.8        | %                            | $          | 3,638             |       | 1.2        | %          | $          | (10,832    | ) | (74.9 | )% |

 

*Motorized and TowableRecreational Vehicle Segments*

The recreational vehicle (“RV”) market inthe first quarter of 2007 is continuing to show little signs of returning tomore historical levels.  Higher fuelprices, rising interest rates, and uncertainty related to international eventshave impacted consumer confidence and continue to create challenges for the RVmarket.  Even though retail sales by ourindependent dealers on a year over year basis have shown some improvement, theoverall contraction in the RV market continues to put pressure on ourbusiness.  We believe that this trendwill likely continue through most of 2007.* However, we believe the long-term potential of the RV market is stillrooted in solid demographics.  This ismost readily evidenced by the  so-called “baby boomer” generation, which as it ages will continue to expand our targetmarket well into 2015 and should provide a consumer base that is enthusiasticto embrace the RV lifestyle.

The motorized market has beensignificantly impacted by the current market conditions.  Higher interest rates are placing pressureson our dealers.  Floorplan interest chargesare a significant cost of carrying inventory, and as interest rates rise, ourdealers, whom we share with our competitors, are more cautious in the amount ofinventory that they are willing to carry. Consequently, we have been very diligent in monitoring the wholesaleversus retail shipments of our products. This has enabled us to manage our finished goods inventories levelswithout the use of extensive wholesale discounting.  While our gross margins have improved due tothe reduced levels of discounting and improvements in our plant efficiencies,they are still not at optimal levels due to the lower run rates within ourproduction facilities.  Despite thecurrent cyclical downturn in the motorized market, we continue to remainoptimistic on the prospects for long-term growth in this sector, as thedemographics for our customer base show a continuing increase in the number ofnew entrants into our target age and economic group.*

The towable market has slowedconsiderably.  The first quarter 2007 retailsales for the industry finished down by 12.6% of the volume of the same periodin 2006. FEMA shipments weren’t retail registered.  However, certain price points in the low tomid-priced products are performing better than the higher-end products.  We have been working on developing newfloorplans, and new lightweight and inexpensive models to compete in thismarket sector.  We believe that these newofferings, which will be available in the second quarter of 2007, will enableus to compete very well in these more challenging market conditions. *  Even though the towable market is currentlysoft, we remain confident that indicators such as the demographics for ourcustomer base remain positive and that the market will remain viable well intothe future.*

17

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The recreational vehicle industry is extremelycompetitive, and retail customers have many choices available to them. Todistinguish ourselves within the industry, we introduced our Franchise For TheFuture (FFTF) program in June of 2005. This program is designed tointroduce the concept to our dealer partners that our specific brands haveintrinsic values as a selling tool. To support this, and to encourage ourdealers to participate in FFTF, we have worked with outside marketingconsultants to develop brand signage, informational computer kiosks, and brandspecific displays that are placed within our various independent dealerlocations. In 2006, we followed this up with Monaco Financial Services (MFS).MFS is a branded financing program from General Electric Commercial DistributionFinance (GECDF) and General Electric Consumer Finance (GECF). Through MFS, ourdealer partners earn rebates from GECDF and GECF for wholesale floorplanning,and retail financing for customers. We believe that these concepts, along withother features designed to encourage our dealers to focus selling efforts onour various product offerings, will assist them in their sales efforts throughthe strength of improved brand identity. *

*Motorhome ResortSegment*

In the first quarter, our motorhomeresort properties experienced challenges in Las Vegas and Indio related toweather conditions, as well as construction access restrictions in LasVegas.  Even though this caused areduction in the number of potential new owners visiting our resort, we weresuccessful in maintaining a profitable quarter. Normal access to the Las Vegas resort was restored near the end of thefirst quarter and we have seen improved sales since then.  We remain confident that these resortproperties will continue to sell through their respective remaining availableinventories of lots by the end of 2007.* To ensure the continued growth of this segment, we have acquiredproperty in southern California, and subsequent to the end of the quarter weclosed on property in Naples, Florida. We will begin construction on these two resorts in the second and thirdquarters of 2007, and expect to have lots available for sale in the firstquarter of 2008.*

*Overall CompanyPerformance in the First Quarter of 2007*

First quarternet sales decreased 16.3% to $322.2 million compared to $385.1 million for thesame period last year.  Sales decreaseswere the results of continued weakness in the RV segments, and slower seasonalresults from our recreational resort properties.  Gross diesel motorized sales were down 0.5%,gas motorized sales were down 35.7%, and towables were down 35.1%.  Diesel products accounted for 68.9% of ourfirst quarter revenues while gas products were 7.4%, and towables were23.7%.  Our overall unit sales were down34.9% in the first quarter of 2007 to 5,749 units, with diesel motorized unitsales down 2.7% to 1,112 units, gas motorized unit sales down 26.3% to 348units, and towable unit sales down 40.6% to 4,289 units.  Towable unit sales decreases were due primarilyto the inclusion in the first quarter of 2006 of FEMA related travel trailersthat were ordered for hurricane Katrina victims.  In 2007 there was no hurricane related FEMAorder placement.  Excluding FEMA relatedactivity, unit sales for towable products declined from 5,198 units in thefirst quarter of 2006 to 4,289 units in the first quarter of 2007.   Our total average unit selling priceincreased to $55,800 from $42,600 in the same period last year, reflecting ashift in the mix of products sold.

Gross profitfor the first quarter of 2007 decreased to $36.0 million, down from $48.4million in the first quarter of 2006, and gross margin decreased from 12.6% inthe first quarter of 2006 to 11.2% in the first quarter of 2007.  Changes in the components of cost of salesare set forth in the following table (dollars in thousands):

|                     | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|---------------------|------------|-----------------------------|------------|-------------------|------------|------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **          | ** ** | **April 1, 2006** | ** ** | **of Sales** | ** ** | **March 31, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials    |       | $                           | 232,095    |              | 60.3       | %                            | $          | 196,944           |       | 61.1                     | %          | 0.8 | % |
| Direct labor        |       | 38,386                      |       | 10.0              | %          | 32,041                       |       | 9.9               | %          | (0.1                     | )%         |
| Warranty            |       | 10,722                      |       | 2.8               | %          | 9,883                        |       | 3.1               | %          | 0.3                      | %          |
| Other direct        |       | 23,295                      |       | 6.0               | %          | 16,900                       |       | 5.2               | %          | (0.8                     | )%         |
| Indirect            |       | 32,121                      |       | 8.3               | %          | 30,480                       |       | 9.5               | %          | 1.2                      | %          |
|                |       |                        |       |              |       |                         |       |              |       |                     |       |
| Total cost of sales |       | $                           | 336,619    |              | 87.4       | %                            | $          | 286,248           |       | 88.8                     | %          | 1.4 | % |

 

·       Directmaterial increases in 2007, as a percent of sales, were 0.8% or $2.6 million.This increase was a result of the changes in the mix of products sold.  In 2006 versus 2007 there was a substantialamount of sales to FEMA for travel trailers. These units had a lower direct material cost. The remaining portion ofthe overall total dollar decrease in direct materials of $35.1 million wasrelated to sales volume decreases.

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·       Directlabor decreases in 2007, as a percent of sales, were $322,000. This decreasewas the result of improvements in our plants as we realigned productionfacilities and consolidated component facilities to meet demand. The remainingportion of the overall total dollar decrease of $6.3 million in direct laborwas the result of sales volume decreases.

·       Increasesin warranty expense in 2007, as a percent of sales, were $967,000. Theseincreases were the result of higher warranty costs associated with some of ourcurrent model year motorized products. The remaining portion of the overalltotal dollar decrease in warranty costs of $839,000 was the result of salesvolume decreases.

·       Decreasesin other direct costs in 2007, as a percent of sales, were $2.6 million. Thisdecrease was primarily the result of improvements in costs associated withworkers’ compensation expense . The remaining portion of the overall totaldollar decrease in other direct costs of $6.4 million was the result of salesvolume decreases.

·       Increasesin indirect costs in 2007, as a percent of sales, were $3.9 million.   These increases were the result of runningat our plants at lower efficiency due to the reduced volume of sales in 2007versus 2006.  The overall total dollardecrease of $1.6 million was the result of sales volume decreases.

Selling, general, and administrativeexpenses (S,G,&A) decreased by $1.6 million in the first quarter of 2007 to$32.4 million compared to the first quarter of 2006 and increased as apercentage of sales from 8.8% in the first quarter of 2006 to 10.0% in thefirst quarter of 2007.  Changes inS,G,&A expenses are set forth in the following table (dollars inthousands):

|                                        | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------------------------|------------|-----------------------------|------------|-------------------|------------|------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **                             | ** ** | **April 1, 2006** | ** ** | **of Sales** | ** ** | **March 31, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Salaries, bonus, and  benefit expenses |       | $                           | 9,581      |              | 2.5        | %                            | $          | 7,897             |       | 2.4                      | %          | (0.1 | )% |
| Selling expenses                       |       | 10,987                      |       | 2.8               | %          | 9,846                        |       | 3.1               | %          | 0.3                      | %          |
| Settlement expense                     |       | 2,318                       |       | 0.6               | %          | 3,911                        |       | 1.2               | %          | 0.6                      | %          |
| Marketing expenses                     |       | 1,876                       |       | 0.5               | %          | 1,667                        |       | 0.5               | %          | 0.0                      | %          |
| Other                                  |       | 9,217                       |       | 2.4               | %          | 9,037                        |       | 2.8               | %          | 0.4                      | %          |
|                                   |       |                        |       |              |       |                         |       |              |       |                     |       |
| Total S,G,&A  expenses             |       | $                           | 33,979     |              | 8.8        | %                            | $          | 32,358            |       | 10.0                     | %          | 1.2 | % |

 

·       Decreasesin salaries, bonus and benefit expenses in 2007 were $1.7 million. Thisdecrease was due to a reduction in management bonus expense of $3.2 millionthat was offset by an increase in the expenses associated with long-termincentive stock-based programs.

·       Decreasesin selling expenses in 2007 were $1.1 million. This decrease was due to lowercosts for selling programs at our resort properties of $500,000, lower salescommissions of $237,000, and lower costs of $207,000 related to employeebenefits.   The remaining difference wascomprised of various other related selling expenses.

·       Settlementexpense (litigation settlement expense) in 2007 increased by $1.6 million. Thetotal dollar increase was the result of increases in the number of litigationcases in 2007 versus 2006 as well as for the increases in the amounts reservedfor certain pending litigation.

·       Decreasesin marketing expenses in 2007 were $209,000. These reductions were the resultof savings due to lower expenses associated with shows and rallies.

·       Decreasesin other expenses in 2007 were $180,000.

Operatingincome was $3.6 million, or 1.2% of sales, in the first quarter of 2007compared to $14.5 million, or 3.8% of sales, in the similar 2006 period.** **Thedecrease in operating income was due predominantly to decreased sales.

Net interestexpense was $967,000 in the first quarter of 2007 versus $1.3 million in thecomparable 2006 period, reflecting lower corporate borrowing during the firstquarter of 2007.

We reported aprovision for income taxes of $1.0 million in the first quarter of 2007,compared to $5.1 million in the first quarter of 2006, or an effective tax rateof 40.2% in the first quarter of 2007, compared to 37.9% for the comparable2006 period.  The income tax provision inthe first quarter of 2006 included a one-time benefit of $336,000 attributableto the enactment of certain state laws that reduced the Company’s deferred taxliabilities.  The absence of this benefitin the first quarter of 2007 is the primary reason for the increase in theeffective tax rate.

Net income forthe first quarter of 2007 was $1.5 million compared to $8.3 million for thefirst quarter of 2006 due primarily to lower sales and gross margin.

19

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*First Quarter 2007versus First Quarter 2006 for the Motorized Recreational Vehicle Segment*

The following table illustrates the results of the MRVsegment for the quarters ended April 1, 2006, and March 31, 2007 (dollars inthousands):
| ** **                                                              | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------|------------|------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                              | ** ** | **April 1, 2006** | ** ** | **of Sales** | ** ** | **March 31, 2007** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                               |       | $                           | 254,954    |              | 100.0      | %                            | $          | 245,548           |       | 100.0      | %          | $          | (9,406     | ) | (3.7 | )% |
| Cost of sales                                                           |       | 230,001                     |       | 90.2              | %          | 219,061                      |       | 89.2              | %          | 10,940     |       | 4.8        | %          |
| Gross  profit                                                           |       | 24,953                      |       | 9.8               | %          | 26,487                       |       | 10.8              | %          | 1,534      |       | 6.1        | %          |
| Selling, general, and  administrative expenses & corporate overhead |       | 20,133                      |       | 7.9               | %          | 23,155                       |       | 9.4               | %          | (3,022     | )          | (15.0      | )%         |
|                                                                    |       |                        |       |              |       |                         |       |              |       |       |       |       |       |
| Operating  income                                                       |       | $                           | 4,820      |              | 1.9        | %                            | $          | 3,332             |       | 1.4        | %          | $          | (1,488     | ) | (30.9 | )% |

 

Total net salesfor the MRV segment were down from $255.0 million in the first quarter of 2006to $245.5 million in the first quarter of 2007. Gross diesel motorized revenues were down 0.5% and gas motorizedrevenues were down 35.7%.  Dieselproducts accounted for 90.4% of the MRV segment’s first quarter of 2007 grossrevenues while gas products were 9.6%. The overall decrease in revenues reflected continuing challenges in themarketplace as dealers sought to lower their current inventories because ofsoftened retail demand and higher interest costs associated with theirfloorplan borrowings.  Our MRV segmentunit sales were down 9.6% year over year from 1,615 units in the first quarterof 2006 to 1,460 units in the first quarter of 2007.  Diesel motorized unit sales were down 2.7% to1,112 units and gas motorized unit sales were down 26.3% to 348 units.

Gross profitfor the MRV segment for the first quarter of 2007 increased to $26.5 million,up from $25.0 million in the first quarter of 2006, and gross margin increasedfrom 9.8% in the first quarter of 2006 to 10.8% in the first quarter of2007.  Changes in the components of costof sales are set forth in the following table (dollars in thousands):
| ** **           | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|-----------------------------|------------|-------------------|------------|------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **April 1, 2006** | ** ** | **of Sales** | ** ** | **March 31, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                           | 157,272    |              | 61.7       | %                            | $          | 150,726           |       | 61.4                     | %          | (0.3 | )% |
| Direct labor         |       | 25,536                      |       | 10.0              | %          | 24,138                       |       | 9.8               | %          | (0.2                     | )%         |
| Warranty             |       | 7,568                       |       | 3.0               | %          | 7,573                        |       | 3.1               | %          | 0.1                      | %          |
| Other direct         |       | 13,454                      |       | 5.3               | %          | 10,998                       |       | 4.5               | %          | (0.8                     | )%         |
| Indirect             |       | 26,171                      |       | 10.2              | %          | 25,626                       |       | 10.4              | %          | 0.2                      | %          |
|                 |       |                        |       |              |       |                         |       |              |       |                     |       |
| Total cost of  sales |       | $                           | 230,001    |              | 90.2       | %                            | $          | 219,061           |       | 89.2                     | %          | (1.0 | )% |

 

·       Directmaterial decreases in 2007, as a percent of sales, were 0.3% or $737,000. Thisdecrease was due to changes in the mix of products produced in 2007 versus2006. The remaining portion of the overall decrease in total dollars associatedwith direct materials of $6.5 million was due to lower sales volumes in 2007 ascompared to 2006.

·       Directlabor decreases in 2007, as a percent of sales, were 0.2% or $491,000. Thisdecrease was the result of improvements in our plants as we realignedproduction facilities and consolidated component facilities to meet demand. Theremaining portion of the overall decrease in total dollars associated withdirect labor of $1.4 million was due to lower sales volumes in 2007 as comparedto 2006.

·       Increasesin warranty costs in 2007, as a percent of sales, were 0.1% or $246,000. Theseincreases were the result of some fit and finish issues. The remaining impactto warranty expense is a result of lower sales volumes in 2007 as compared to2006.

·       Decreasesin other direct costs in 2007, as a percent of sales, were 0.8% or $2.0million. This decrease was due to improvements in workers’ compensationexpense, and a reduction in the amount of out-of-warranty policy reworkperformed. The remaining portion of the overall decrease in total dollarsassociated with other direct costs of $2.5 million was due to lower salesvolumes in 2007 as compared to 2006.

·       Increasesin indirect costs in 2007, as a percent of sales, were 0.2% or $491,000. Theincrease in indirect costs is related to lower absorption of these costs in ourplants as we ran lower production rates in 2007 versus 2006. The overall decreasein total dollars associated with indirect costs of $545,000 was due to lowersales volumes in 2007 as compared to 2006.

20

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S,G,&Aexpenses for the MRV segment increased as a percent of sales due to lower saleslevels and increases in selling expenses. In addition, in the fourth quarter of2006 we completed a study on the allocation of corporate overhead, andallocated certain costs on an activity basis. These costs are now classified ina single line item for S,G,&A expense and corporate overhead allocation.Corporate overhead allocation is comprised of certain shared services such asexecutive, financial, information systems, legal, and investor relationsexpenses.

Operatingincome decreased as both a percent of sales and in total dollars due to salesand higher gross margins that were offset by increases in S,G,&A expensesas a percent of sales.

*First Quarter 2007versus First Quarter 2006 for the Towable Recreational Vehicle Segment*

The following table illustrates theresults of the TRV Segment for the quarters ended April 1, 2006, and March 31,2007 (dollars in thousands):
| ** **                                                              | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------|------------|------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                              | ** ** | **April 1, 2006** | ** ** | **of Sales** | ** ** | **March 31, 2007** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                               |       | $                           | 114,413    |              | 100.0      | %                            | $          | 69,480            |       | 100.0      | %          | $          | (44,933    | ) | (39.3 | )% |
| Cost of sales                                                           |       | 100,133                     |       | 87.5              | %          | 64,753                       |       | 93.2              | %          | 35,380     |       | 35.3       |  %    |
| Gross profit                                                            |       | 14,280                      |       | 12.5              | %          | 4,727                        |       | 6.8               | %          | (9,553     | )          | (66.9      | )%         |
| Selling, general,  and administrative expenses & corporate overhead |       | 9,408                       |       | 8.2               | %          | 6,372                        |       | 9.2               | %          | 3,036      |       | 32.3       |  %    |
|                                                                    |       |                        |       |              |       |                         |       |              |       |       |       |       |       |
| Operating income (loss)                                                 |       | $                           | 4,872      |              | 4.3        | %                            | $          | (1,645            | )          | (2.4       | )%         | $          | (6,517     | ) | (133.8 | )% |

 

Total net sales forthe TRV segment were down from $114.4 million in the first quarter of 2006 to$69.5 million in the first quarter of 2007. The decrease in revenues  was dueprimarily to the inclusion in the first quarter of 2006 of FEMA related traveltrailers that were ordered for hurricane Katrina victims.  In 2007 there was no hurricane related FEMAorder placement.  Excluding FEMA relatedactivity, unit sales for towable products declined from 5,198 units in thefirst quarter of 2006 to 4,289 units in the first quarter of 2007.  The Company’s unit sales were down 40.6% to4,289 units.  Average unit selling priceincreased to $17,800 in the first quarter of 2007 from $16,300 in the sameperiod last year.

Gross profitfor the first quarter of 2007 decreased to $4.7 million,  down from $14.3 million in the first quarterof 2006, and gross margin decreased from 12.5% in the first quarter of 2006 to6.8% in the first quarter of 2007. Changes in the components of cost of sales are set forth in thefollowing table (dollars in thousands):

|                      | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **Change in**       | ** ** |
|----------------------|------------|-----------------------------|------------|-------------------|------------|------------------------------|------------|-------------------|------------|--------------------------|------------|
| ** **           | ** ** | **April 1, 2006** | ** ** | **of Sales** | ** ** | **March 31, 2007** | ** ** | **of Sales** | ** ** | **% of Sales** | ** ** |
| Direct materials     |       | $                           | 68,829     |              | 60.2       | %                            | $          | 44,070            |       | 63.4                     | %          | 3.2 | % |
| Direct labor         |       | 12,626                      |       | 11.0              | %          | 7,693                        |       | 11.1              | %          | 0.1                      | %          |
| Warranty             |       | 3,154                       |       | 2.7               | %          | 2,310                        |       | 3.3               | %          | 0.6                      | %          |
| Other direct         |       | 9,812                       |       | 8.6               | %          | 5,875                        |       | 8.5               | %          | (0.1                     | )%         |
| Indirect             |       | 5,712                       |       | 5.0               | %          | 4,805                        |       | 6.9               | %          | 1.9                      | %          |
|                 |       |                        |       |              |       |                         |       |              |       |                     |       |
| Total cost of  sales |       | $                           | 100,133    |              | 87.5       | %                            | $          | 64,753            |       | 93.2                     | %          | 5.7 | % |

 

·       Directmaterial increases in 2007, as a percent of sales, were 3.2% or $2.2 million.This increase was due to changes in the mix of products produced in the firstquarter of 2007 versus 2006.  The mostsignificant change in the mix relates to the production of FEMA units in 2006,which had a low material cost as a percent of sales. The remaining portion ofthe overall decrease in total dollars associated with direct materials of $24.8million is the result of the decrease of sales volumes in 2007 compared to2006.

·       Directlabor decreases in 2007 are the result of the decrease of sales volumes in 2007compared to 2006.

·       Increasesin warranty expense in 2007, as a percent of sales, were 0.6% or $417,000. Thisincrease was due to a shift in the mix of towables produced that have a highercost as a percent of sales. The remaining portion of the overall decrease intotal dollars associated with warranty costs of $844,000 is the result of thedecrease of sales volumes in 2007 compared to 2006.

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·       Decreasesin other direct costs in 2007 of $3.9 million are the result of the decrease ofsales volumes in 2007 compared to 2006.

·       Increasesin indirect costs in 2007, as a percent of sales, were 1.9% or $1.3 million.These increases relate to lower absorption of indirect costs in some of ourplants as we reduced output in the first quarter of 2007. The remaining portionof the overall decrease in total dollars associated with indirect costs of$907,000 is the result of the decrease of sales volumes in 2007 compared to2006.

S,G,&A expenses for the TRV segment increased asboth a percent of sales and in total dollars due to increases in sellingexpenses. In addition, in the fourth quarter of 2006 we completed a study onthe allocation of corporate overhead, and allocated certain costs on anactivity basis. These costs are now classified in a single line item forS,G,&A expense and corporate overhead allocation. Corporate overhead allocationis comprised of certain shared services such as executive, financial,information systems, legal, and investor relations expenses.

Operating incomedecreased as a percent of sales due to lower gross margins and higherS,G,&A expenses as a percent of sales.

*First Quarter 2007versus First Quarter 2006 for the Motorhome Resort Segment*

The following table illustrates theresults of the Motorhome Resort Segment (MR segment) for the quarters endedApril 1, 2006, and March 31, 2007 (dollars in thousands): 
| ** **                                                              | ** ** | **Quarter Ended**      | ** ** | **%**             | ** ** | **Quarter Ended**       | ** ** | **%**             | ** ** | **$**      | ** ** | **%**      | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------|------------|-------------------|------------|------------------------------|------------|-------------------|------------|------------|------------|------------|------------|
| ** **                                                              | ** ** | **April 1, 2006** | ** ** | **of Sales** | ** ** | **March 31, 2007** | ** ** | **of Sales** | ** ** | **Change** | ** ** | **Change** | ** ** |
| Net sales                                                               |       | $                           | 15,701     |              | 100.0      | %                            | $          | 7,216             |       | 100.0      | %          | $          | (8,485     | ) | (54.0 | )% |
| Cost of sales                                                           |       | 6,485                       |       | 41.3              | %          | 2,434                        |       | 33.7              | %          | 4,051      |       | 62.5       |  %    |
| Gross profit                                                            |       | 9,216                       |       | 58.7              | %          | 4,782                        |       | 66.3              | %          | (4,434     | )          | (48.1      | )%         |
| Selling, general,  and administrative expenses & corporate overhead |       | 4,438                       |       | 28.3              | %          | 2,831                        |       | 39.3              | %          | 1,607      |       | 36.2       |  %    |
|                                                                    |       |                        |       |              |       |                         |       |              |       |       |       |       |       |
| Operating income                                                        |       | $                           | 4,778      |              | 30.4       | %                            | $          | 1,951             |       | 27.0       | %          | $          | (2,827     | ) | (59.2 | )% |

 

Net salesdecreased 54.0% to $7.2 million compared to $15.7 million for the same periodlast year.  This decrease was due in partto challenges in Las Vegas and Indio related to weather conditions, as well asconstruction access restrictions in Las Vegas.

Gross profitfor the MR segment increased to ­­66.3% of sales in the first quarter of 2007compared to 58.7% of sales in the same period last year.  This was due to the mix of lot sales.  In the first quarter 2007 most sales werefrom the Indio resort which has a higher gross margin.

S,G,&A expenses decreased in total dollars due tothe reduction in sales, as well as to the reduction in participation expense accruedfor which was a result of lower profits. In addition, in the fourth quarter of 2006 we completed a study on theallocation of corporate overhead, and allocated certain costs on an activitybasis. These costs are now located in a single line item for S,G,&A expenseand corporate overhead allocation. Corporate overhead allocation is comprisedof certain shared services such as executive, financial, information systems,legal and investor relations expenses.

Operatingincome decreased due to lower sales and to higher S,G,&A costs andcorporate overhead allocation as a percent of sales*.*

**LIQUIDITY AND CAPITAL RESOURCES**

The Company’s primary sources of liquidity areinternally generated cash from operations and available borrowings under itscredit facilities.  For the first quarterof 2007, the Company generated cash of $46.4 million from operating activitiesand had a cash balance of $29.0 million at March 31, 2007.  The Company generated $6.7 million from netincome and non-cash expenses such as depreciation and amortization, gains onsales of assets, and expenses associated with stock-based compensation.  Other sources of cash included a $35.3million increase in accounts payable, a decrease of $1.2 million in resortinventory, a $361,000 decrease in prepaid expenses, a $743,000 increase inaccruals for product warranty, a $3.0 million increase in accrued liabilities,a $9.5 million increase in income tax payable, and a $745,000 increase inaccruals for

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product liabilityreserve. The uses of cash in the first quarter of 2007 included a $6.8 millionincrease in trade receivables, a $2.1 million increase in inventory levels, a decreaseof $50,000 in deferred revenue, and a decrease in assets from discontinuedoperations of $10,000.  Increases inaccounts payable are mostly the result of a purchase of a large number ofengines from Cummins, and the changes in the amounts of other raw materials atthe end of  the first quarter of 2007versus the fourth quarter of 2006. Decreases in resort lot inventories are the result of the continued sellthrough of the Company’s resort properties. Decreases in prepaid expenses reflect the amortization of prepaidexpenses for insurance costs.  Increasesin warranty reserves were the result of increases in experience for warrantycosts on some of our current model year products. Increases in accrued expensesand other liabilities are associated with increases for accruals for promotionsand advertising, employee benefit costs, and participation income.  Increases in income taxes payable reflect theprovision for expected income taxes due. Increases in accrued product liability reflect the increase in activityon pending litigation claims.  Increasesin trade accounts receivable reflect the effects of the shipments of productsnear the end of the quarter.  Increasesin inventory  levels were due to thereceipt of a large number of Cummins engines that were partially offset by the$4.1 million of inventory contributed to the joint venture. Decreases indeferred revenues are related to revenue associated with Monaco FinancialServices that the Company received in 2006 and is amortizing over the length ofthe contract with GECDF and GECF.   Decreasesin assets related to discontinued operations are for the sales of all remainingRoyale Coach discontinued products.

On November 18, 2005, the Company amended itscredit facilities to borrow $40.0 million of term debt (the “Term Debt”) tocomplete the acquisition of R-Vision. The revolving line of credit remains at$105.0 million. At the quarter ended March 31, 2007, borrowings outstanding on therevolving line of credit (the “Revolving Loan”) were zero, and Term Debtborrowings were $32.9 million. At the election of the Company, the RevolvingLoan and the Term Debt bear interest at varying rates that fluctuate based onthe Prime rate or LIBOR, and are determined based on the Company’s leverageratio. The Company also pays interest quarterly on the unused available portionof the Revolving Loan at varying rates, determined by the Company’s leverageratio. The Revolving Loan is due and payable in full on November 17, 2009and requires interest payments quarterly. 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. Both theRevolving Loan and Term Debt are collateralized by all the assets of theCompany and the credit facilities include various restrictions and financialcovenants. The Company was in compliance with these covenants at March 31,2007. The Company utilizes “zero balance” bank disbursement accounts in whichan advance on the line of credit is automatically made for checks clearing eachday. Since the balance of the disbursement account at the bank returns to zeroat the end of each day, the outstanding checks of the Company are reflected asa liability. The outstanding check liability is combined with the Company’spositive cash balance accounts to reflect a net book overdraft or a net cashbalance for financial reporting. At March 31, 2007, cash is a positive net balanceand thus no book overdraft is reported.

In November 2005, the Company obtained a termloan of $500,000 from the State of Oregon in connection with the relocation ofjobs to the Coburg, Oregon production facilities from the Bend, Oregonfacility. The principal and interest is due on April 30, 2009. The loanbears a 5% annual interest rate.

The Company’s principal working capital requirementsare for purchases of inventory and financing of trade receivables. Many of theCompany’s dealers finance product purchases under wholesale floor planarrangements with third parties as described below. At March 31, 2007, theCompany had working capital of approximately $108.3 million, a decrease of $1.5million from working capital of $109.8 million at December 30, 2006. TheCompany has been using short-term credit facilities and operating cash flow tofinance its capital expenditures.

The Company believes that cash flow from operationsand funds available under its anticipated credit facilities will be sufficientto meet the Company’s liquidity requirements for the next 12 months.* TheCompany’s capital expenditures were $1.8 million in the first quarter of  2007, which included costs related toadditions of automated machinery in many of its production facilities, upgradesto its information systems infrastructure, and other various capitalizedupgrades to existing facilities. The Company anticipates that capitalexpenditures for all of 2007 will be approximately $10 to $12 million, whichincludes expenditures to purchase additional machinery and equipment in boththe Company’s Coburg, Oregon and Wakarusa, Indiana facilities, as well asupgrades to existing information systems infrastructures.* The Company mayrequire additional equity or debt financing to address working capital andfacilities expansion needs, particularly if the Company significantly increasesthe level of working capital assets such as inventory and accounts receivable.The Company may also from time to time seek to acquire businesses that would complementthe Company’s current business, and any such acquisition could requireadditional financing. There can be no assurance that additional financing willbe available if required or on terms deemed favorable by the Company.

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As is typical in the recreational vehicle industry,many of the Company’s retail dealers utilize wholesale floor plan financingarrangements with third party lending institutions to finance their purchasesof the Company’s products. Under the terms of these floor plan arrangements, institutionallenders customarily require the recreational vehicle manufacturer to agree torepurchase any unsold units if the dealer defaults on its credit facility fromthe lender, subject to certain conditions. The Company has agreements withseveral institutional lenders under which the Company currently has repurchaseobligations. The Company’s contingent obligations under these repurchase agreementsare reduced by the proceeds received upon the sale of any repurchased units.The Company’s obligations under these repurchase agreements vary from period toperiod up to 15 months. At March 31, 2007, approximately $576.8 million ofproducts sold by the Company to independent dealers were subject to potentialrepurchase under existing floor plan financing agreements with approximately ­­­5.5%concentrated with one dealer. Historically, the Company has been successful inmitigating losses associated with repurchase obligations. During the firstquarter of 2007, the losses associated with the exercise of repurchaseagreements were approximately $99,000. Dealers for the Company undergo creditreview prior to becoming a dealer and periodically thereafter. Financialinstitutions that provide floor plan financing also perform credit reviews andfloor checks on an ongoing basis. We closely monitor sales to dealers that area higher credit risk. The repurchase period is limited, usually to a maximum of15 months. We believe these activities help to minimize the number of requiredrepurchases. Additionally, the repurchase agreement specifies that the dealeris required to make principal payments during the repurchase period. Since theCompany repurchases the units based on the schedule of principal payments, therepurchase amount is typically less than the original invoice amount. Thislower repurchase amount helps mitigate our loss when we offer the inventory toanother dealer at an amount lower than the original invoice as incentive forthe dealer to take the repurchased inventory. This helps minimize the losses weincur on repurchased inventory.

**OFF-BALANCE SHEETARRANGEMENTS**

As of March 31, 2007, the Company did not have anyoff-balance sheet arrangements that have, or are reasonably likely to have, acurrent or future material effect on the Company’s consolidated financialcondition, results of operations, liquidity, capital expenditures or capitalresources.

**CONTRACTUALOBLIGATIONS**

As part of the normal course of business,we incur certain contractual obligations and commitments which will requirefuture cash payments. The following tables summarize the significantobligations and commitments (dollars in thousands).
| ** **                        | ** ** | **PAYMENTS DUE BY PERIOD** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**  | ** ** | **1 year or less**         | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Long-Term Debt  (1)               |       | $                                         | 5,714      |   | $ | 11,928 |   | $ | 15,715 |   | $ | 0 |   | $ | 33,357 |   |
| Operating Leases  (2)             |       | 1,229                                     |       | 1,582 |   | 1,402 |   | 1,593 |   | 5,806 |   |
|                              |       |                                      |       |   |   |   |   |   |   |   |   |
| Total Contractual Cash Obligation |       | $                                         | 6,943      |   | $ | 13,510 |   | $ | 17,117 |   | $ | 1,593 |   | $ | 39,163 |   |

 
| ** **                  | ** ** | **AMOUNT OF COMMITMENT EXPIRATION BY PERIOD** | ** ** |
|-----------------------------|------------|------------------------------------------------------------------------|------------|
| **Other Commitments**  | ** ** | **1 year or less**                                      | ** ** | **1 to 3 years** | ** ** | **4 to 5 years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Line of Credit  (3)         |       | $                                                                      | 0          |   | $ | 105,000 |   | $ | 0 |   | $ | 0 |   | $ | 105,000 |   |
| Guarantees (4)              |       | 14,302                                                                 |       | 0 |   | 0 |   | 0 |   | 14,302 |   |
| Repurchase  Obligations (5) |       | 0                                                                      |       | 576,767 |   | 0 |   | 0 |   | 576,767 |   |
|                        |       |                                                                   |       |   |   |   |   |   |   |   |   |
| Total  Commitments          |       | $                                                                      | 14,302     |   | $ | 681,767 |   | $ | 0 |   | $ | 0 |   | $ | 696,069 |   |

----

(1)   See Note 5 of the CondensedConsolidated Financial Statements.

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

(3)   See Note 4 of the CondensedConsolidated Financial Statements. The amount listed represents availableborrowings on the line of credit at March 31, 2007.

(4)   Guarantees related toaircraft operating lease.

(5)   Reflects obligations under manufacturerrepurchase commitments. See Note 10 of the Condensed Consolidated FinancialStatements.

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**INFLATION**

During 2006 and the first quarter of 2007, theCompany experienced increases in the prices of certain commodity items that weuse in the manufacturing of our products. These include, but are not limited to, steel, copper, aluminum,petroleum, and wood.  While priceincreases for these raw materials are not necessarily indicative of widespreadinflationary trends, they had an impact on the Company’s production costs.  To date, the Company has been successful inpassing along most of these increases through increasing the selling prices ofits products.  However, there is nocertainty that the Company will be able to successfully pass these along in thefuture.  The current trend in theseprices, could have a materially adverse impact on the Company’s business goingforward.

**CRITICAL ACCOUNTING POLICIES**

The discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. On an on-going basis, we evaluate ourestimates, including those related to warranty costs, product liability, andimpairment of goodwill. We base our estimates on historical experience and onvarious other assumptions that are believed to be reasonable under thecircumstances. Actual results may differ from these estimates under differentassumptions or conditions. We believe the following critical accounting policiesand related judgments and estimates affect the preparation of our consolidatedfinancial statements.

**WARRANTY COSTS**   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 as have been deemed appropriateby management.

**PRODUCT LIABILITY**   TheCompany provides an estimate for accrued product liability based on currentpending cases, as well as for those cases which are incurred but not reported.This estimate is developed by legal counsel based on professional judgment, aswell as historical experience.

**IMPAIRMENT OF GOODWILL**   TheCompany assesses the potential impairment of goodwill in accordance withFinancial Accounting Standards Board (FASB) Statement No. 142. This annualtest involves management comparing the fair value of each of the Company’sreporting units, to the respective carrying amounts, including goodwill, of thenet book value of the reporting unit, to determine if goodwill has beenimpaired. The Company uses an estimate of discounted future cash flows todetermine fair value for each reporting unit.

**INVENTORY ALLOWANCE**   TheCompany writes down its inventory for obsolescence, and the difference betweenthe cost of inventory and its estimated fair market value. These write-downsare based on assumptions about future sales demand and market conditions. Ifactual sales demand or market conditions change from those projected bymanagement, additional inventory write-downs may be required.

**INCOME TAXES**   Inconjunction with preparing its consolidated financial statements, the Companymust estimate its income taxes in each of the jurisdictions in which itoperates. This process involves estimating actual current tax expense togetherwith assessing temporary differences resulting from differing treatment ofitems for tax and accounting purposes. These differences result in deferred taxassets and liabilities, which are included in the consolidated balance sheets.The Company must then assess the likelihood that the deferred tax assets willbe recovered from future taxable income, and to the extent management believesthat recovery is not likely, a valuation allowance must be established.Significant management judgment is required in determining the Company’sprovision for income taxes, deferred tax assets and liabilities, and anyvaluation allowance recorded against net deferred tax assets.

The Company adopted FIN 48, “Accounting forUncertainty in Income Taxes — an Interpretation of FAS 109,” as of thebeginning of fiscal year 2007.  See Note6 to the Company’s consolidated quarterly financial statements included withthis Quarterly Report on Form 10-Q.

**REPURCHASE OBLIGATIONS**   Uponrequest of a lending institution financing a dealer’s purchases of the Company’sproduct, the Company will execute a repurchase agreement. The Company hasrecorded a liability associated with the disposition of repurchased inventory.To determine the appropriate liability, the Company calculates a reserve, basedon an estimate of potential net losses, along with qualitative and quantitativefactors, including dealer inventory turn rates, and the financial strength ofindividual dealers.

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**NEWLY ISSUED FINANCIALREPORTING PRONOUNCEMENTS**

***FIN 48***

In June 2006, the Board issued FIN 48, “Accountingfor Uncertainty in Income Taxes” (the “Interpretation”). The Interpretationclarifies the accounting for uncertainty in income taxes recognized inaccordance with FASB 109, “Accounting for Income Taxes” by defining a criterionthat an individual tax position must be met for any part of the benefit to berecognized in the financial statements. The Interpretation is effective forfiscal years beginning after December 15, 2006.

We have adopted the Interpretation as of the beginningof fiscal year 2007 and there was no significant impact to the financialstatements.

***FAS 157***

In September 2006, the Board issued FAS 157, “FairValue Measurements.” The Statement defines fair value, establishes a frameworkfor measuring fair value, and expands disclosure requirements regarding fairvalue measurements.

FAS 157 is effective for fiscal years beginning afterNovember 15, 2007. We are reviewing the provisions of the Statement andwill adopt it for the fiscal year beginning 2008.

***FAS 159***

In February 2007, the Board issued FAS 159, “FairValue Option for Financial Assets and Financial Liabilities.” This statementpermits entities to choose to measure many financial instruments and certainother items at fair value that are not currently required to be measured atfair value.

FAS 159 is effective for fiscal years beginning afterNovember 15, 2007. We are reviewing the provisions of this statement andwill adopt it for the fiscal year beginning 2008.

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

Notapplicable.

**Item 4.  Controls andProcedures**

**Evaluationof Disclosure Controls and Procedures**

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

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

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There was no change in our internalcontrol over financial reporting that occurred during the period covered bythis Quarterly Report on Form 10-Q that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

**PART II - OTHERINFORMATION**

**ITEM 1A.  RISK FACTORS**

We have listedbelow various risks and uncertainties relating to our businesses. This list isnot inclusive of all the risks and uncertainties we face, but any of thesecould cause our actual results to differ materially from the resultscontemplated by the forward-looking statements contained in this report or thatwe may issue from time to time in the future.

**WEMAY EXPERIENCE UNANTICIPATED FLUCTUATIONS IN OUR OPERATING RESULTS FOR AVARIETY OF REASONS**   Our net sales, gross margin, andoperating results may fluctuate significantly from period to period due to anumber of factors, many of which are not readily predictable. These factorsinclude the following:

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

·       The fact that we typicallyship a large amount of products near quarter-end.

·       Our ability to utilize andexpand our manufacturing resources efficiently.

·       Shortages of materials usedin our products.

·       Commodity pricing and theeffects of inflation on the costs of materials used in our products.

·       Fuel costs and fuelavailability.

·       A determination by us thatgoodwill or other intangible assets are impaired and have to be written down totheir fair values, resulting in a charge to our results of operations.

·       Our ability to introducenew models that achieve consumer acceptance.

·       The introduction, marketingand sale of competing products by others, including significant discounting offeredby our competitors.

·       The addition or loss of ourdealers.

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

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

·       Our inability to acquireand develop key pieces of property for on-going resort activity.

·       Fluctuations in demand forour resort lots due to changing economic and other conditions.

Our overall gross margin may decline in future periodsto the extent that we increase the percentage of sales of lower gross margintowable products or if the mix of motor coaches we sell shifts to lower grossmargin units. In addition, a relatively small variation in the number ofrecreational vehicles we sell in any quarter can have a significant impact ontotal sales and operating results for that quarter.

Demand in the recreational vehicle industry generallydeclines during the winter months, while sales are generally higher during thespring and summer months. With the broader range of products we now offer,seasonal factors could have a significant impact on our operating results inthe future. Additionally, unusually severe weather conditions in certainmarkets could delay the timing of shipments from one quarter to another.

27

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We attempt to forecast orders for our productsaccurately and commence purchasing and manufacturing prior to receipt of suchorders. However, it is highly unlikely that we will consistently be able toaccurately forecast the timing, rate, and mix of orders. This aspect of ourbusiness makes our planning inexact and, in turn, affects our shipments, costs,inventories, operating results, and cash flow for any given quarter.

**THE RECREATIONAL VEHICLE INDUSTRY IS CYCLICAL ANDSUSCEPTIBLE TO SLOWDOWNS IN THE GENERAL ECONOMY**   Therecreational vehicle industry has been characterized by cycles of growth andcontraction in consumer demand, reflecting prevailing economic, demographic,and political conditions that affect disposable income for leisure-timeactivities. Our business is particularly influenced by cycle swings in theClass A market. While there has been strong secular demand for recreationalvehicles since the early 90’s, it has been driven by demand for towablerecreational products. Since 2004 there has been a notable divergence in growthrates between towable and motorized recreational vehicles.

Class A unit shipments peaked at approximately37,300 units in 1994 and declined to approximately 33,000 units in 1995. TheClass A segment then went on a steady climb and in 1999 recorded the highestyear, in recent history, of Class A shipments, approximately 49,400. Over thenext two years, motorhome shipments declined to 33,400 in 2001. Class Ashipments then rose for the next 3 years and in 2004 reached 46,300. Over the lasttwo years, however, shipments of Class A motorhomes have dropped, reaching apre-1994 level of 32,700 in 2006.

The towable segment moved through many of the samecyclical peaks and troughs historically. The shipment level peaked in 1994 at201,100, dropping-off to 192,200 in 1996 and then growing to 249,600 in 1999.Towable unit shipments suffered a two-year decline in 2000 and 2001, droppingto 207,600. Since then the market has expanded significantly reaching 334,600in 2006. Unlike the Class A market, the towables segment did notexperience a slow down over the last two years because manufacturers havesuccessfully introduced popular new models and the segment was significantlyaided by units sold to support the hurricane relief efforts in the Gulf Coast.

Our business is subject to the cyclical nature of thisindustry and principally the Class A segment. Some of the factors thatcontribute to this cyclicality include fuel availability and costs, interestrate levels, the level of discretionary spending, and availability of creditand overall consumer confidence. Increasing interest rates and fuel prices overthe last two years have adversely affected the Class A recreationalvehicle market. An extended continuation of these conditions would materiallyaffect our business, results of operations, and financial condition.

**WE RELY ON A RELATIVELY SMALL NUMBER OF DEALERSFOR A SIGNIFICANT PERCENTAGE OF OUR SALES**   Although ourproducts were offered by over 700 dealerships located primarily in the United Statesand Canada as of March 31, 2007, a significant percentage of our sales areconcentrated among a relatively small number of independent dealers. For thequarter ended March 31, 2007, sales to one dealer, Lazy Days RV Center,accounted for 10.3% of total sales compared to 9.2% of sales in the same periodended last year.  For quarters endedApril 1, 2006 and March 31, 2007,  salesto our 10 largest dealers, including Lazy Days RV Center, accounted for a totalof 36.1% and 35.4% of total sales, respectively. The loss of a significantdealer or a substantial decrease in sales by any of these dealers could have amaterial impact on our business, results of operations, and financialcondition.

**WE MAY HAVE TO REPURCHASE A DEALER’SINVENTORY OF OUR PRODUCTS IN THE EVENT THAT THE DEALER DOES NOT REPAY ITSLENDER**   As is common in the recreational vehicleindustry, we enter into repurchase agreements with the financing institutionsused by our dealers to finance their purchases of our products. Theseagreements require us to repurchase the dealer’s inventory in the event thatthe dealer defaults on its credit facility with its lender. Obligations underthese agreements vary from period to period, but totaled approximately $576.8million as of March 31, 2007, with approximately 5.5% concentrated with onedealer. If we were obligated to repurchase a significant number of units underany repurchase agreement, our business, operating results, and financialcondition could be adversely affected.

**OUR ACCOUNTS RECEIVABLE BALANCE IS SUBJECT TO RISK**   Wesell our product to dealers who are predominantly located in the United Statesand Canada. The terms and conditions of payment are a combination of open tradereceivables and commitments from dealer floor plan lending institutions. Forour RV dealers, terms are net 30 days for units that are financed by a thirdparty lender. Terms of open trade receivables are granted by us, on a verylimited basis, to dealers who have been subjected to evaluative creditprocesses conducted by us. For open receivables, terms vary from net 30 days tonet 180 days, depending on the specific agreement. Agreements for payment termsbeyond 30 days generally require additional collateral, as well as securityinterest in the inventory sold. As of March 31, 2007, total trade receivableswere $88.4 million, with approximately $63.9 million, or 72.3% of theoutstanding accounts receivable balance concentrated among floor plan lenders.The remaining $24.5 million of trade receivables were concentratedsubstantially all with one dealer. For resort lot customers, funds are requiredat the time of closing.

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

**WE DEPEND ON SINGLE OR LIMITED SOURCES TO PROVIDEUS WITH CERTAIN IMPORTANT COMPONENTS THAT WE USE IN THE PRODUCTION OF OURPRODUCTS**   A number of important components for ourproducts are purchased from a single or a limited number of sources. Theseinclude chassis from Workhorse and Ford for gas motor coaches and dieselchassis from our newly formed joint venture with International Truck and EngineCorporation.  The joint venture sourcesturbo diesel engines from Cummins and Caterpillar, substantially alltransmissions from Allison and axles from Dana.   We have no long-term supply contracts withthese suppliers or their distributors, and we cannot be certain that thesesuppliers will be able to meet our future requirements. Consequently, theCompany has periodically been placed on allocation of these and other key components.The last significant allocation occurred in 1997 from Allison, and in 1999 fromFord. An extended delay or interruption in the supply of any components that weobtain from a single supplier or from a limited number of suppliers couldadversely affect our business, results of operations, and financial condition.

**OUR INDUSTRY IS VERY COMPETITIVE. WE MUST CONTINUETO INTRODUCE NEW MODELS AND NEW FEATURES TO REMAIN COMPETITIVE**   Themarket for our products is very competitive. We currently compete with a numberof manufacturers of motor coaches, fifth wheel trailers, and travel trailers.Some of these companies have greater financial resources than we have andextensive distribution networks. These companies, or new competitors in theindustry, may develop products that customers in the industry prefer over ourproducts.

We believe that the introduction of new products andnew features is critical to our success. Delays in the introduction of newmodels or product features, quality problems associated with theseintroductions, or a lack of market acceptance of new models or features couldaffect us adversely. For example, unexpected costs associated with modelchanges have affected our gross margin in the past. Further, new productintroductions can divert revenues from existing models and result in fewersales of existing products.

**OUR PRODUCTS COULD FAIL TO PERFORM ACCORDINGTO SPECIFICATIONS OR PROVE TO BE UNRELIABLE, CAUSING DAMAGE TO OUR CUSTOMERRELATIONSHIPS AND OUR REPUTATION AND RESULTING IN LOSS OF SALES**   Ourcustomers require demanding specifications for product performance andreliability. Because our products are complex and often use advancedcomponents, processes and techniques, undetected errors and design flaws mayoccur. Product defects result in higher product service, warranty and replacementcosts and may cause serious damage to our customer relationships and industryreputation, all of which would negatively affect our sales and business.

**OUR BUSINESS IS SUBJECT TO VARIOUS TYPES OFLITIGATION, INCLUDING PRODUCT LIABILITY AND WARRANTY CLAIMS**   Weare subject to litigation arising in the ordinary course of our business,typically for product liability and warranty claims that are common in therecreational vehicle industry. While we do not believe that the outcome of anypending litigation, net of insurance coverage, will materially adversely affectour business, results of operations, or financial condition, we cannot provideassurances in this regard because litigation is an inherently uncertainprocess.*

To date, we have been successful in obtaining productliability insurance on terms that we consider acceptable. The terms of thepolicy contain a self-insured retention amount of $500,000 per occurrence, witha maximum annual aggregate self-insured retention of $3.0 million. Overallproduct liability insurance, including umbrella coverage, is available to amaximum amount of $100.0 million for each occurrence, as well as in theaggregate. We cannot be certain we will be able to obtain insurance coverage inthe future at acceptable levels or that the costs of such insurance will bereasonable. Further, successful assertion against us of one or a series oflarge uninsured claims, or of a series of claims exceeding our insurancecoverage, could have a material adverse effect on our business, results ofoperations, and financial condition.

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**IN ORDER TO BE SUCCESSFUL, WE MUST ATTRACT, RETAINAND MOTIVATE MANAGEMENT PERSONNEL AND OTHER KEY EMPLOYEES, AND OUR FAILURE TODO SO COULD HAVE AN ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS**   TheCompany’s future prospects depend upon retaining and motivating key managementpersonnel, including Kay L. Toolson, the Company’s Chairman and Chief ExecutiveOfficer, and John W. Nepute, the Company’s President. The loss of one or moreof these key management personnel could adversely affect the Company’sbusiness. The prospects of the Company also depend in part on its ability toattract and retain highly skilled engineers and other qualified technical,manufacturing, financial, managerial, and marketing personnel. Competition forsuch personnel is intense, and there can be no assurance that the Company willbe successful in attracting and retaining such personnel.

**OUR RECENT GROWTH HAS PUT PRESSURE ON THECAPABILITIES OF OUR OPERATING, FINANCIAL, AND MANAGEMENT INFORMATION SYSTEMS**   Inthe past few years, we have significantly expanded the complexity of ourbusiness. As a result, our management personnel have assumed additionalresponsibilities. The increase in complexity over a relatively short period oftime has put pressure on our operating, financial, and management informationsystems. If we continue to expand, such growth would put additional pressure onthese systems and may cause such systems to malfunction or to experiencesignificant delays.

**WE MAY EXPERIENCE UNEXPECTED PROBLEMS ANDEXPENSES ASSOCIATED WITH OUR MANUFACTURING EQUIPMENT AUTOMATION PLAN**   Aswe continue 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.

The expansion intonew machinery and equipment technologies involves risks, including thefollowing:

·       We must rely on timelyperformance by contractors, subcontractors, and government agencies, whose performancewe may be unable to control.

·       The development of newprocesses involves costs associated with new machinery, training of employees,and compliance with environmental, health, and other government regulations.

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

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

**WEMAY EXPERIENCE UNEXPECTED PROBLEMS AND EXPENSES ASSOCIATED WITH OURENTERPRISE RESOURCE PLANNING SYSTEM (ERP) IMPLEMENTATION**   During2006, we began to implement a new ERP system and will be subject to certainrisks including the following:

·       We must rely on timelyperformance by contractors whose performance we may be unable to control.

·       The implementation couldresult in significant and unexpected increases in our operating expenses andcapital expenditures, particularly if the project takes longer than we expect.

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

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

·       We could require extendedwork hours from our employees and use temporary outside resources, resulting inincreased expenses, to resolve any software configuration issues or to processtransactions manually until issues are resolved.

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

·       The project could disruptour operations if the transition to the ERP system creates new or unexpected difficultiesor if the system does not perform as expected.

**OUR STOCK PRICE HAS HISTORICALLY FLUCTUATED ANDMAY CONTINUE TO 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, thestocks of many recreational vehicle companies have experienced price and volumefluctuations which have not necessarily been directly related to the companies’operating performance, and the market price of our Common Stock couldexperience similar fluctuations.

**Item 6.  Exhibits**
| 10.3.1 | Form of 1993 Stock Plan Performance Share Agreement.                                                                                                                              |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                              |
| 10.3.2 | Form of 1993 Stock Plan Restricted Stock Unit  Agreement for Kay L. Toolson and John W. Nepute.                                                                         |
|   |                                                                                                                                                                              |
| 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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**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:     |   May 10, 2007 |                             |       | /s/ P. Martin Daley |   |   |
|       |                     | P. Martin Daley                  |       |                |
|       |                     | Vice President and               |       |                |
|       |                     | Chief Financial Officer (Duly    |       |                |
|       |                     | Authorized Officer and Principal |       |                |
|       |                     | Financial Officer)               |       |                |
|            |                          |                                  |            |                     |  |  |

 

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**EXHIBITS INDEX**
| Exhibit    | ** ** | ** **                                                                                                                                                                        |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Description of Document**                                                                                                                                                       |
|       |       |                                                                                                                                                                              |
| 10.3.1     |       | Form of 1993 Stock Plan Performance Share Agreement.                                                                                                                              |
|       |       |                                                                                                                                                                              |
| 10.3.2     |       | Form of 1993 Stock Plan Restricted Stock Unit  Agreement for Kay L. Toolson and John W. Nepute.                                                                                   |
|       |       |                                                                                                                                                                              |
| 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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