SECTION: RV PRODUCTS AND MARKET  

MARKET SHARE LEADERS
ALL MOTOR HOMES (Class A, Class C) TRAVEL TRAILERS (Conventional and Fifth Wheel)
     WINNEBAGO 17.9%  
     THOR30.8%  
     FLEETWOOD17.5%  
     FOREST RIVER16.2%  
     MONACO12.9%  
     JAYCO8.8%  
     THOR12.5%  
     FLEETWOOD8.7%  
     COACHMEN9.5%  
     MONACO4.9%  

MOTOR HOMES: Class A Only (Diesel & Gas)
FOLDING TRAILERS
     FLEETWOOD20.3%  
     FLEETWOOD38.0%  
     MONACO 18.0%  
     FOREST RIVER 17.3%  
     WINNEBAGO 16.4%  
     STARCRAFT11.7%  
     THOR9.7%  
     JAYCO11.5%  
     COACHMEN7.9%  
     COACHMEN9.9%  

 
Source: Statistical Surveys Inc., Year-End 2005 Statistics
ANTICIPATING INCREASING DEMAND
     The RV industry has enjoyed some excellent years of late, and we believe that there are many more to follow. In calendar year 2005, the RV industry recorded its fourth consecutive year of shipment growth: manufacturers shipped 384,400 units with a total value of $11.5 billion.
     According to independent studies sponsored by the Recreation Vehicle Industry Association, a strong upward trend in overall RV sales is expected to continue at least throughout this decade, based on demographic data and surveys on consumer sentiment regarding future RV use.
     Conventional travel trailers provided most of the increase in 2005, with many having been utilized as emergency shelter in the Gulf Coast. In fact, during the year, the percentage of towables to motor homes shifted for the first time in 10 years—84 percent of all RV shipments were towables, up from a consistent 80 percent.
     Recent instability in fuel prices and rising interest rates have caused hesitancy on the part of some prospective RV customers, particularly in the motor home segment. Our experience with past industry cycles suggests that a market slump such as this will give rise to pent-up demand that ultimately will convert to increased sales once fuel prices stabilize.

WEATHERING MARKET CHALLENGES
     Fuel prices, interest rates, and other industry factors impacted Fleetwood's entire 2006 fiscal year. Our sales were $1.61 billion in fiscal 2006, off 3 percent compared with the prior year, and the Group operated just slightly above breakeven. Although all of our competitors faced these same challenges, some fared better than others, particularly those that have been better represented in travel trailers and in entry-level segments. Our market share is strongest in the Class A motor home industry segment, which had sharply declining shipments throughout the period, and in folding trailers, which experienced the third consecutive down year in 2005.

LEVERAGING PRODUCT INNOVATION
     While Fleetwood's market share held steady at 17.5 percent, our motor home division, which is heavily weighted toward the larger Class A models, experienced an 11 percent sales decline from the prior year.
     The division introduced its patent-pending full-wall slide technology in three of its diesel coaches—Discovery, Providence, and Excursion—during the year. The full-wall slide eliminates the "bottle-neck" that is common in the interior of motor homes with multiple slide-outs. Since their introduction, the new floor plans have accounted for 30 percent of the sales of those diesel models, and more than 35 percent of the high-end gasoline-powered Pace Arrow. Other diesel and gasoline products will be introduced with this popular enhancement soon.
     We celebrated the 20th anniversary of the Bounder with a special edition of the "motor home that really works," which led to improved market share in this, one of our best-selling brands. At the same time, we're just beginning to leverage our full-body paint capacity over a broader array of products, which gives us an advantage over our competition. The early-summer launch of the new LX editions of our entry-level Terra and Fiesta was well timed, as low-end gasoline products are currently outperforming high-end units. Terra and Fiesta have already gained market share year to date, and we've now added full-body paint and pass-through storage at very competitive prices.

FILLING SPECIFIC CONSUMER NEEDS
     Our travel trailer division achieved a sharp improvement in results in fiscal 2006, fueled by a refocused team, new product launches, and our participation in the Gulf Coast disaster relief efforts. Sales improved 15 percent over the prior year, which led to a $42 million improvement in operating results.
     Fleetwood built more than 10,000 emergency living units (ELUs) in response to the devastating hurricanes. This production occurred during parts of the second and fourth fiscal quarters and the entire third quarter, providing additional volume and profitability. The efficiencies associated with the production of a large number of nearly identical units for FEMA reinforced our view that we need to continue to simplify the product mix at each of our travel trailer plants. In recent years, an overly complex product mix has resulted in inefficient operations and relatively high warranty costs. A plant in Edgerton, Ohio, was reopened in February, initially to build ELUs and subsequently to assume the manufacture of certain products from two neighboring plants so that all three plants could more efficiently build a focused lineup of products.
     In the past, the prices of many of our models missed their market niche. Since late April, we have been introducing our new 2007 travel trailers, which are designed specifically to address the price/value issue.
     Lightweight and "toy hauler" products are currently the fastest growing niches in travel trailers. Fleetwood introduced several products early in the '07 model year to compete in these market segments. The all-new "ultra-light" Pegasus and Orbit models start at less than 3,000 pounds, and each is available in 11 different floor plans. We also have two new toy hauler lines, the lightweight Nitrous and entry-level Redline, both of which have many of the same features as our popular GearBox models. We paid special attention to the flooring and ramp construction to support heavy loads, and the available décors appeal to a wide range of tastes and uses.

GAINING POSITIVE MARKET RECOGNITION
     Our folding trailer division builds affordable RVs for an important entry-level niche. Over the past few years, however, this division has faced some difficult operational and financial hurdles, including a severe market contraction. Since early in the 2006 calendar year, however, the folding trailer market has shown signs of recovery, and by May shipments were up almost

2007 NITROUS HYPERLITE
11 percent year over year. At the same time, Fleetwood's retail market share increased to 45.4 percent in the first calendar quarter from 41.1 percent in the comparable quarter of the prior year. The division narrowed its operating loss and is successfully working to reduce its labor and administrative costs and improve its warranty experience.
      Meanwhile, our folding trailer products continue to see broad acceptance from customers and industry experts. The 2006 Highlander Niagara and Sequoia folding trailers were selected as "Best Buys" in the May/June issue of Consumer Digest magazine. According to the publication, the 2006 Highlander Series led the pack when its equipment, durability, and price point were compared to similar models in the folding trailer segment.