Our financial statements are prepared in accordance with U.S. generally accepted accounting principles. This requires us to make estimates and assumptions that affect the amounts reported in the financial statements and notes. We evaluate these estimates and assumptions on an ongoing basis and use historical experience factors and various other assumptions that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from these estimates under different assumptions or conditions.

The following is a list of the accounting policies that we believe reflect our more significant judgments and estimates, and that could potentially result in materially different results under different assumptions and conditions.

REVENUE RECOGNITION

Revenue for manufacturing operations is generally recorded when all of the following conditions have been met:

• an order for a product has been received from a dealer;
  
  
• written or verbal approval for payment has been received from the dealer’s flooring institution;
  
  
• a common carrier signs the delivery ticket accepting responsibility for the product as agent for the dealer; and
  
  
• the product is removed from Fleetwood’s property for delivery to the dealer who placed the order.

Most manufacturing sales are made on cash terms, with most dealers financing their purchases under flooring arrangements with banks or finance companies. Products are not ordinarily sold on consignment; dealers do not ordinarily have the right to return products; and dealers are typically responsible for interest costs to floorplan lenders. On average, we receive payments from floorplan lenders on products sold to independent dealers within 15 days of the invoice date.

For retail sales from Company-owned retail stores, sales revenue is recognized when the home has been delivered, set up and accepted by the consumer; risk of ownership has been transferred; and funds have been received either from the finance company or the homebuyer.

WARRANTY

Fleetwood provides customers of our products with a warranty covering defects in material or workmanship for periods ranging from one to two years, with longer warranties on certain structural components. We record a liability based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. Factors we use in estimating the warranty liability include a history of units sold to customers, the average cost incurred to repair a unit and a profile of the distribution of warranty expenditures over the warranty period. A significant increase in dealer shop rates, the cost of parts or the frequency of claims could have a material adverse impact on our operating results for the period or periods in which such claims or additional costs materialize.

INSURANCE RESERVES

Generally, we are self-insured for health benefit, workers’ compensation, products liability and personal injury insurance. Under these plans, liabilities are recognized for claims incurred (including those incurred but not reported), changes in the reserves related to prior claims and an administration fee. At the time a claim is filed, a liability is estimated to settle the claim. The liability for workers’ compensation claims is guided by state statute. Factors considered in establishing the estimated liability for products liability and personal injury claims are the nature of the claim, the geographical region in which the claim originated, loss history, severity of the claim, the professional judgment of our legal counsel, and inflation. Any material change in the aforementioned factors could have an adverse impact on our operating results. We maintain excess liability insurance with outside insurance carriers to minimize our risks related to catastrophic claims.

DEFERRED TAXES

Deferred tax assets and liabilities are determined based on temporary differences between income and expenses reported for financial reporting and tax reporting. We are required to record a valuation allowance to reduce our net deferred tax assets to the amount that we believe is more likely than not to be realized. In assessing the need for a valuation allowance, we historically have considered all positive and negative evidence, including scheduled reversals of deferred tax liabilities, prudent and feasible tax planning strategies, projected future taxable income and recent financial performance. Since we have had cumulative losses in recent years, the accounting guidance suggests that we should not look to future earnings to support the realizability of the net deferred tax asset. As a result, we concluded that a partial valuation allowance against our deferred tax asset was appropriate. Accordingly, in fiscal year 2003, the deferred tax asset was reduced by $28.4 million to $89.8 million with a corresponding adjustment to the provision for income taxes. The book value of the net deferred tax asset was supported by the availability of various tax strategies which, if executed, were expected to generate sufficient taxable income to realize the remaining asset. In the fourth quarter of fiscal 2004, we determined that available tax strategies were sufficient to support a deferred tax asset of $74.8 million, and we recorded an adjustment to the provision for income taxes of $15 million with a corresponding reduction to the asset. The primary reason for this reduction was an increase in the market value of our convertible preferred securities of Fleetwood Capital Trust I. An improved overall financial condition combined with upward movement in our stock price has contributed to a lower discount from par value and has diminished the magnitude of unrealized taxable gains in these securities. We continue to believe that the combination of all positive and negative factors will enable us to realize the full value of the deferred tax assets; however, it is possible that the extent and availability of tax planning strategies will change over time and impact this evaluation. One potentially beneficial development is that both the House and Senate have initially passed legislation that would allow a carryback of the Company’s $76 million net operating loss generated in the prior fiscal years. If the legislation becomes law without any significant change in the relevant provisions, the utilization of this net operating loss would generate a current federal refund of approximately $25 million. This along with any other aspects of the new law could result in an income statement benefit through a reduction in the required valuation allowance on the deferred tax asset. If, after future assessments of the realizability of our deferred tax assets, we determine an adjustment is required, we would record the provision or benefit in the period of such determination.

LEGAL PROCEEDINGS

We are regularly involved in legal proceedings in the ordinary course of our business. Because of the uncertainties related to the outcome of the litigation and range of loss on cases other than breach of warranty, we are generally unable to make a reasonable estimate of the liability that could result from an unfavorable outcome. In other cases, including products liability (discussed above) and personal injury cases, we prepare estimates based on historical experience, the professional judgment of our legal counsel, and other assumptions that we believe are reasonable. As additional information becomes available, we reassess the potential liability related to pending litigation and revise our estimates. Such revisions and any actual liability that greatly exceeds our estimates could materially impact our results of operations and financial position.

REPURCHASE COMMITMENTS

Producers of recreational vehicles and manufactured housing customarily enter into repurchase agreements with lending institutions that provide wholesale floorplan financing to independent dealers. Our agreements generally provide that, in the event of a default by a dealer in its obligation to these credit sources, we will repurchase product. With most repurchase agreements, our obligation ceases when the amount for which we are contingently liable to the lending institution has been outstanding for more than 12, 18 or 24 months, depending on the terms of the agreement. The contingent liability under these agreements approximates the outstanding principal balance owed by the dealer for units subject to the repurchase agreement less any scheduled principal payments waived by the lender. Although the maximum potential contingent repurchase liability approximated $148 million for inventory at manufactured housing dealers and $644 million for inventory at RV dealers as of April 25, 2004, the risk of loss is reduced by the potential resale value of any products that are subject to repurchase, and is spread over numerous dealers and financial institutions. The gross repurchase obligation will vary depending on the season and the level of dealer inventories. Typically, the fiscal third quarter repurchase obligation will be greater than other periods due to high dealer inventories. The RV repurchase obligation is significantly more than the manufactured housing obligation due to a higher average cost per motor home and more units in dealer inventories. Past losses under these agreements have not been significant and lender repurchase demands have been funded out of working capital. In the past three fiscal years we have had the following repurchase activity:

(AMOUNTS IN MILLIONS, EXCEPT UNITS)			2004				2003			2002
Units			177				182			417
Repurchase amount		$	3.7			$	4.4		$	10.5
Loss recognized		$	0.6			$	—		$	2.1

The combination of an improved RV market and positive acceptance of our new motor home products has been reflected in increased market share and higher production rates, resulting in significantly improved motor home earnings compared with the past two years. The travel trailer division introduced new products covering 60 percent of its model line-up at the national trade show in December 2002. The new products were well received, as evidenced by the double-digit percentage sales growth since introduction. However, due to the breadth of change in terms of the number of models, content and resulting complexities, the impact of the new products on manufacturing efficiencies negatively affected the operating results in the last half of fiscal year 2003 and in fiscal 2004. We anticipate more normalized operational efficiencies in the future. We expect the strong RV market to continue in fiscal 2005. However, increasing interest rates, high gas prices and global tensions may impact consumer confidence and curtail recent growth trends.

Conditions in the manufactured housing market have been in decline since 1999, and further deteriorated in calendar year 2003. Competition from repossessed homes, more stringent lending standards, relatively high retail interest rates for manufactured housing and the shortage of retail financing have adversely affected the industry. These conditions were aggravated by the exit of several consumer lenders in calendar 2002, and as a result there has been a reduction in the volume of loans being written, particularly in the chattel, or home-only, portion of the business, related largely to single-section homes.

In late 2002, Conseco and Oakwood Homes, which at the time were two of the major providers of retail financing to the manufactured housing industry, filed for bankruptcy protection and effectively withdrew from this market. Subsequently, Conseco and Oakwood aggressively liquidated their inventories of repossessed homes, which depressed demand and pricing for new homes even further. We expect the industry will benefit in the future from these accelerated efforts to liquidate repossessed homes, thereby reducing the competition with new homes. In fact, there are indications that inventories of foreclosed homes are declining. However, we expect we will continue to be challenged by the overhang of repossessions in the near term. In the meantime, industry home shipments for calendar year 2003 were lower than in any year since 1962. As a result of these conditions, over the past three years there have been significant industry manufacturing and retail capacity reductions.

We expect that the operating environment for manufactured housing will stabilize in fiscal 2005, but will continue to be challenging. New national lenders have begun providing manufactured housing retail financing, although in limited amounts and using conservative underwriting practices. Depending on the extent of the financing actually resulting from these and other developments, combined with financing made available through Fleetwood’s own HomeOne Credit Corp. finance subsidiary, it is anticipated that manufactured housing industry conditions could begin to moderate in future months. Recent industry shipments appear to support a stabilization of the wholesale market.

For fiscal 2005, we expect to achieve improved profitability in the RV Group and the wholesale division of the Housing Group, although we still expect to incur an operating loss at our retail division. Due largely to continued strength in our RV business, we expect to be profitable for the full fiscal year.