Management's Discussion and Analysis of
Results of Operations and Financial Condition

Business Outlook
The Company expects that fiscal 2001 results will be adversely affected by the continuing weakness in the manufactured housing market, which has been impacted by industry-wide excess inventory levels and a restrictive financing environment. The speed at which the current inventory imbalance is resolved will depend in large part on developments in the retail financing area. With respect to the recreational vehicle business, relatively full dealer inventories and rising interest rates are currently having a negative impact on wholesale factory shipments, despite a reasonably healthy level of retail demand. Because of these conditions, the Company's fiscal 2001 first quarter RV results will be adversely affected. A significant softening in RV retail market demand would aggravate the current dealer inventory condition, which would likely prolong any downturn.

2000 Compared to 1999
Consolidated Results: Earnings for fiscal year 2000 declined 22 percent to $83.5 million or $2.41 per diluted share compared to $107.1 million and $2.94 per share for the prior year. The earnings contraction mainly reflects reduced profits from the Company’s housing business as a result of weakening demand for manufactured housing. An increase in non-operating expenses also contributed to the earnings decline.
    Consolidated operating income fell 15 percent to $162 million compared to $190 million in fiscal 1999, largely as a result of an 18 percent decrease in combined housing profits from manufacturing and retail operations. A five percent decrease in recreational vehicle earn-ings and a significant increase in health insurance costs also reduced operating income.
    Revenues for fiscal 2000 rose six percent to an all-time high of $3.71 billion compared to $3.49 billion in fiscal 1999. This revenue growth resulted from healthy sales of recreational vehicles and the continuing expansion of the Company’s retail housing business.
    Gross profit margin for fiscal 2000 rose to 22.2 percent from 21.6 percent last year, primarily due to the favorable effect of the growing retail housing business. The retail operation generally carries higher gross margins, and there is a positive impact on the consolidated gross profit percentage with the addition of retail gross profits combined with the elimination of intercompany manufacturing sales to retail. Manufacturing gross margin actually declined slightly from 20.9 percent to 20.6 percent of sales as a result of lower recreational vehicle margins.
    Operating expenses rose 17 percent to $661 million, and also increased as a percentage of sales from 16.1 percent to 17.8 percent. The rapidly expanding retail housing business accounted for about $60 million or 62 percent of the increase in operating costs in fiscal 2000. Selling expenses rose 11 percent to $309 million, with the retail housing operation accounting for about 40 percent of the increase. Higher selling costs were incurred in manufacturing operations for
sales promotion and product warranty and service. General and administrative expenses of $352 million were up 23 percent, primarily due to the addition of $52 million in retail costs, which represented about 78 percent of the overall increase. The increase attributable to manufacturing was primarily due to higher costs for employee health benefits, casualty insurance and RV product development activities. Most of the rise in the “Corporate and other” operating loss as shown in the business segment information was attributable to the cost increases in health benefits and casualty insurance. As a percentage of sales, selling expenses increased from 8.0 percent to 8.3 percent and general and administrative expenses rose from 8.2 percent to 9.5 percent.
    Non-operating items totaled a net expense of $20.6 million compared to net expense of $11.4 million a year ago. The increase was mainly caused by a 33 percent reduction in investment income and a $4.5 million increase in interest expense on retail inventory floor plan financing. Investment income was lower because of reduced cash balances available for investment purposes. The rise in interest expense on inventory financing largely reflects the growth in retail inventories associated with the expansion of retail operations.
    The Company’s effective income tax rate rose from 40.1 percent in fiscal 1999 to 41.0 percent in the current year. The increase primarily reflects the impact of the amortization of goodwill recorded in conjunction with retail acquisitions, which is not deductible for tax purposes. The impact of the higher tax rate on earnings per share amounted to approximately three cents per share.

Manufactured Housing: Factory sales of manufactured housing declined seven percent to $1.45 billion from last year’s record $1.56 billion. Sales figures include intercompany sales to the Company’s retail housing division of $298 million in fiscal 2000 and $179 million in 1999. Factory shipments for the year were off 10 percent to 59,458 homes.
    Weak market conditions in the manufactured housing industry reduced sales volume and factory operating efficiencies. Industry wholesale shipments to retailers have been declining since May 1999, mainly as a result of too much manufacturing and retail capacity and excess inventories in the retail sector. The imbalance between supply and demand has been exacerbated by unfavorable developments in the financing area. During the past year, lenders have increased credit standards and down payment requirements for retail buyers. These actions and higher interest rates have prevented many potential buyers from purchasing manufactured homes.
    Operating income for the housing group declined 17 percent in fiscal 2000 to $69.4 million due to the lower sales volume. Gross profit margin improved slightly from 22.5 percent to 22.7 percent of sales, mainly as a result of modest selling price increases and stable raw material costs. Operating income is net of intercompany profit eliminated in consolidation, which amounted to $14.4 million in fiscal 2000 and $16.0 million in 1999. As a percentage of sales, operating income in fiscal 2000 was 4.8 percent compared to 5.4 percent in the prior year.

Recreational Vehicles: RV revenues in fiscal 2000 were up 11 percent to a record $1.91 billion. As a result of a healthy market environment, all three RV divisions posted record sales. Motor home sales increased 13 percent to a new high of $1.20 billion, as shipments rose nine percent to 16,294 units. Towable RV products also performed well in fiscal 2000, with travel trailer sales rising seven percent to $590 million and folding trailer sales also increasing seven percent to $124 million. Travel trailer shipments were up nine percent to 41,936 units, while folding trailer unit volume increased three percent to 21,890.
    RV operating income in fiscal 2000 was $104.1 million, off five percent from last year’s record $109.9 million. As a percentage of sales, operating income fell from 6.4 percent to 5.4 percent due to lower gross profit margins and higher selling costs. Gross margins were adversely affected by changes in product mix within the motor home and travel trailer divisions, reflecting increased sales of competitively-priced products with lower profit margins. This mainly reflects a decision by the Company to expand its product offerings to include lower-priced entry-level travel trailers and Class C motor homes, both of which represent a significant and growing part of the market. The rise in RV selling expenses was mainly driven by higher product warranty costs for all RV divisions and motor home sales promotion programs.

Supply Operations: Revenue for the Company’s supply group rose 15 percent to $50 million in fiscal 2000, up from $44 million in fiscal 1999. The increase mainly reflects higher sales from fiberglass manufacturing operations. Operating income of $20.5 million in fiscal 2000 was up 26 percent from the prior year as a result of the higher fiberglass sales, as well as volume increases related to imported parts and components.

Retail Housing Operations: Fleetwood’s retail housing division recorded revenues of $592 million in fiscal 2000 on the sale of 14,528 homes. This compares with $332 million and 8,255 homes in the prior year. Operating income, before interest expense on inventory floor plan financing, declined to $3.8 million from $4.9 million in fiscal 1999. Although sales volume improved with the continuing expansion in the number of retail outlets, profits were constrained by the challenging market environment and higher operating costs. As expected, higher operating costs were incurred for new store openings and the building of infrastructure and systems for this new business. The retail business commenced operations in fiscal 1999, and has grown rapidly to 243 retail sales centers as of April 30, 2000. Interest expense for inventory financing, a non-operating expense, increased to $10.8 million in fiscal 2000 from $6.3 million in the prior year.