DEVELOPING DISTINCTIVE, MARKETABLE PRODUCTS
     We strive to develop products that target areas of greatest sales and profit potential within our industries. For each product and price niche, it is our intention to participate in the broadest part of the market. When we analyzed our product mix based on this objective, we found overlapping products and products that were on the fringes of some price points. This was especially true in travel trailers and motor homes, where we have repositioned many of our brands to better compete with other manufacturers and mitigate competition within our own product lines.
     Historically, our RVs have had distinct "personalities," which in some cases had become confused or lost. To remedy this issue, we are reestablishing what differentiates one product line from another, so that our customers can more easily identify the product that suits their lifestyles and tastes. This differentiation also helps our dealers sell a product line more profitably against other dealers in the same market area who have a similar product, but a different target audience. Our new products in all segments are better positioned for the current market, with a focus on lighter-weight construction, improved fuel efficiency, and increased affordability.
     We have long prided ourselves on the functionality of our products. For example, in motor homes, our full-wall slide-out technology provides the opportunity to use floor plan space in new and more efficient ways. We are capitalizing on this and our best-in-class full-body paint capability by offering these features on additional products.
     In the Housing Group, targeting areas of greatest sales and profit potential manifests itself in a different way. Previously, we developed a national product that provided manufactured housing communities, in particular, with consistent housing options for their nationwide operations. These products, however, were not sufficiently responsive to regional differences in housing preferences across the country. To remedy this, we have moved housing design responsibility to our three regions. Now, in addition to providing national floor plans and décors, we provide numerous regional or even local variations.

YIELDING ENCOURAGING, IMPROVED RESULTS
     Our plan has resulted in financial progress in both our operations and our capital structure. We reduced operating costs by $33.1 million during fiscal 2006. Comparing the past two fiscal years on a quarter-by-quarter basis provides an encouraging contrast: results deteriorated throughout 2005, but generally improved each quarter in 2006 as we implemented our restructuring initiatives.
     For the full year, consolidated revenues from continuing operations increased 2 percent in fiscal 2006 to $2.43 billion from $2.37 billion. Fleetwood's loss from continuing operations narrowed sharply to $6.1 million from $72.6 million in fiscal 2005. The net loss for fiscal 2006 also was reduced significantly to $28.4 million from a net loss of $161.5 million in the prior year.
     RV sales declined 3 percent from 2005 to $1.61 billion from $1.66 billion. The RV Group ended the year slightly above breakeven with $0.2 million in operating income, which represented substantial progress from the operating loss of $39.2 million in fiscal 2005. Our Housing Group revenues for fiscal 2006 rose 1 percent to $795.6 million from $785.5 million in the prior year, and the segment earned $38.8 million in operating income, six times the income of $6.4 million in fiscal 2005.

     We have focused our attention and resources on progressing toward consistent, sustainable profitability. We showed marked improvement during the year for many reasons. Most notably, we better controlled RV finished goods inventories, which resulted in fewer, more targeted sales incentives compared to the prior year; we improved labor efficiencies and reduced selling expenses and service and warranty costs, particularly in the Housing Group; and both groups benefited from the revenue and earnings boost provided by producing emergency shelter units for disaster relief.
     In response to the hurricanes in the Gulf Coast region, our travel trailer division produced 10,600 emergency living units (ELUs) and our Housing Group produced 3,000 houses. All were built to FEMA specifications. These products were designed as temporary shelter and therefore cause little or no market overhang. The majority of the $210 million FEMA order was completed during our third quarter, which allowed us to turn in best-ever results for that seasonally slow quarter.
     Our traditional markets remained predictably slow in the third quarter due to winter weather and the holidays. Our fourth quarter is usually positively influenced by the spring selling season, although this year the normal seasonal bounce was subdued. Motor home sales were particularly affected by an apparent softness in consumer confidence, most likely stemming from volatile fuel prices and rising interest rates, as well as dealers' desire to moderate inventory levels in this period of uncertainty.
     Manufactured housing sales were also slow during the latter part of fiscal 2006, and in Fleetwood's case, the year-over-year comparisons were particularly disappointing. Two primary factors contributed to the decline. First, in divesting our retail operations, we sold our largest customer. Subsequently, 50 of the 135 stores were closed, and inventory at the remaining locations was reduced. Our relationship with this dealer organization remains strong, but we need to replace many of the closed retail operations with new independent retailers. Secondly, we had enjoyed a substantial share of business among large national manufactured housing community operators, where volume was unusually high during calendar 2005. This business did not materialize this year.
     Early in fiscal 2006, we consolidated two manufactured housing plants where we had excess capacity: one in Texas and one in Georgia. We later added two manufacturing locations. A leased plant in Perris, California, is building homes for the Southern California, Nevada, and Arizona markets. We also reopened our Edgerton, Ohio, travel trailer plant and rehired many of the experienced people who previously worked at that facility, providing for a very quick and efficient start up.

SUBSTANTIALLY IMPROVING OUR BALANCE SHEET
     Our balance sheet was significantly strengthened during the year by the progress in our operations; the disposition of FRC, HomeOne, and four idle facilities; and a private placement of shares of our common stock. We raised $66 million in that equity offering in November 2005, allowing us to pay $58.8 million in accrued interest, which had been deferred for 17 quarters, on our 6% convertible trust preferred securities (CTPS). Our total debt, including accrued interest, declined by $158.5 million from the end of fiscal 2005. At the end of fiscal 2006, overall short-term borrowings under the credit facility were a modest $2.5 million, versus $55 million at the end of the prior year. Cash and marketable securities grew by $100 million over the same period to $146 million, inventories decreased by $56 million, and shareholders' equity increased by $45 million. Subsequent to the end of the year, the Company purchased $50 million in par value of the 6% CTPS for $31 million, which, after deferred costs and taxes, boosted shareholders' equity by approximately $15 million.
     As of the beginning of fiscal 2007, the Company has a net operating loss carryforward of $287 million, which can be applied to future profits to reduce Federal income taxes and benefit our recovery.

PLANNING FOR FUTURE PROSPERITY
     Our outlook for fiscal 2007 is clouded somewhat by recent manufactured housing and RV market trends. Traditional markets have not been as robust as we had hoped they would be at this stage of our recovery. We continue to work on strengthening our balance sheet and reducing our cost structure. Even in a slow market, we intend to increase market share, more effectively manage capacity utilization, and enhance operating margins. We are also developing additional products to fill the current demand for more efficient and affordable RVs and we are exploring additional opportunities in the modular housing business.
     We believe that demand for affordable, quality manufactured homes has only been sidetracked by a difficult financing environment, combined with relatively lax requirements for site-built lending and a steady supply of apartments at reasonable rates. All, or any, of these factors may change in the not-too-distant future, which would improve our affordability advantage. We are also confident that we will participate in the rebuilding effort in the Gulf Coast area once the current obstacles are cleared away. Debris, pending insurance claims, and delays in government decisions on building requirements are all holding up the Gulf Coast reconstruction. Manufactured housing has long been a well-accepted permanent housing choice in the Southeast, and factory-built homes are likely to be one of the few practical solutions to the sheer number of homes that need to be replaced.
     Thus far in the current calendar year, motor home sales have been disappointing due to consumer concerns about interest rates and fuel prices. We have reason to believe that this is a temporary situation, as demographic trends and consumer studies continue to point to robust sales for years to come. We are using this lull in the market to ensure that we're ready with solid products for the resurgence. Early reaction to new products and indications that our shipment market share is increasing suggest that we are on the right track.
     Because our RV dealer inventories remain at reasonable levels, an increase in retail sales would quickly manifest itself in increased demand at the wholesale level. A new motor home may be the epitome of discretionary spending—it's a purchase that is easily delayed but seldom abandoned. Over the years, we've seen sales dip in times of uncertainty, only to sharply rebound when circumstances stabilize. Independent studies show that interest in RVs is stronger than ever, just as baby boomers are surging into the prime age range for RV use. We are also encouraged by the interest in RVs shown by young families.

CONFIDENTLY EFFECTING CHANGE
     We are determined to improve our revenues by participating in new markets as well as existing markets with increasing demand, and growing our market share in both of our industries. We intend to continue to enhance our margins by means of better capacity utilization, a lower cost structure, improved product engineering, reduced warranty costs, and more effective sales and marketing.
     These are exciting as well as challenging times to be at Fleetwood. I hope that, as an existing or potential shareholder, you can also sense the excitement. We appreciate your patience as we effect Fleetwood's turnaround. I also thank our associates, our dealers, the hundreds of thousands of Fleetwood owners, our suppliers, and our lenders for their support and belief in the Company—all of which are essential to our success.

ELDEN L. SMITH
President and CEO