Industry motor home sales slowed considerably in calendar 2005 from 2004’s record pace. However, it is anticipated that industry motor home shipments will post a much smaller decline in 2006 compared to 2005, with most of the continued weakness in the Class A segment. We believe that sales are being adversely affected by concerns about rising interest rates, volatile fuel prices and diminished home equity financings. For the calendar year through April, industry motor home retail sales were down 15.1 percent while we were down 20.4 percent. Our slight market share erosion is primarily concentrated in the Class C and high-line diesel segments. Our decline in Class C market share is primarily due to the fact that we do not currently participate in certain entry-level and perceived fuel-efficient product niches. As calendar 2006 continues, we expect to benefit from the recently introduced Terra/Fiesta LX low-end Class A gas product offering. In the Class C category, we are assessing potential plans for new products that could compete in the entry-level and fuel-efficient categories. Our inventories of finished goods continue to be at reasonable levels and production rates have been adjusted to support underlying retail sales.

Our travel trailer operations received an uplift from disaster relief orders throughout much of fiscal 2006, although this activity declined during the fourth quarter. Overall industry travel trailer retail sales were 1 percent higher through calendar April 2006 compared to the same period in the prior year. Our market share has deteriorated from 9.0 percent to 6.7 percent over this same period, generally as a result of less competitive product offerings and erosion in dealer confidence that have caused some contraction in our shelf space on dealers’ lots in certain markets.

Initiatives to reverse these trends are well underway and are expected to take effect over time. Our order backlogs for dealer business continue to be at significantly elevated levels compared to the prior year primarily due to good acceptance of new floor plans introduced late in model year 2006, early introduction of the model year 2007 Nitrous product line, the recent restructuring of the sales organization to a brand-specific focus, and, to a lesser extent, dealer inventory replenishment due to disaster relief activity. Most importantly, we are now well into our model year 2007 product launch. Our overall focus is to design each of our new products with the appropriate combination of features and benefits that will offer our customers the highest value relative to our competition. We will launch more than 40 completely new floor plans with 22 of those being fifth-wheel products, the market segment where we have the lowest market share. In addition, we will introduce 11 new brand extensions that target specific industry market segments that will help us participate in a broader market. As the new model introductions will be spread over an extended length of time, we do not anticipate immediate improvements to our volume and market share but believe, over the ensuing year, that as the new products gain favor with dealers and retail customers, we will regain shelf space and bolster our shipments.

In anticipation of future growth as well as to reduce plant manufacturing complexities, we reopened a travel trailer plant in Edgerton, Ohio, that is now operational and successfully produced a portion of the remaining FEMA trailer order during the fourth quarter. In the longer run, the additional production line will allow us to simplify the production at two neighboring plants as each will specialize in building trailers of a specific construction type. We believe that collectively, our initiatives will be rewarded over the longer term by improved shipments, higher margins and a recovery in market share. In light of the continued slow market for motor homes, however, we are closely monitoring current market conditions for travel trailers.

Our market share in folding trailers continues to improve and through April of the current calendar year, market share has increased to 43.6 percent from 39.3 percent for the same period in the prior year due to Fleetwood’s retail unit sales rising by 4.8 percent, compared to an industry decline of 5.6 percent. We continue to take significant actions to improve the cost structure and streamline manufacturing operations in the folding trailer business in response to the continued weakness in the overall industry segment. As this segment recovers, we will be well positioned to capitalize on the increased demand.

Quality processes continue to be overhauled for the entire RV business and, although improvements are already apparent in our finished products, the full financial benefits will only be realized over the longer term through lower warranty and service costs. We have renewed our focus on dealer development activities and have restructured our sales organizations to focus on individual brands and/or products in order to address the deterioration of our distribution network and help to ensure each of our products is being appropriately represented, especially travel trailers and East Coast Class C products.

Favorable demographics suggest sustainable growth will likely be realized for RVs at least through the end of the decade as baby boomers reach the age brackets that historically have accounted for the bulk of retail RV sales. Additionally, younger buyers are also becoming interested in the RV lifestyle. These conclusions receive strong support from the University of Michigan 2005 national survey of recreation vehicle owners, sponsored by the Recreation Vehicle Industry Association.

The manufactured housing market has experienced a steep decline that began in 1999 before beginning to stabilize at or near a 40-year low in 2003. Competition from repossessed homes, as well as relatively high retail interest rates, more stringent lending standards and a shortage of retail financing for manufactured housing have adversely affected the industry. Overall, the industry appears to have stabilized, but market conditions by region are mixed. Traditional manufactured housing markets, such as Texas, the Midwest and parts of the Southeast, have performed poorly in the last several years, although they too appear to have stabilized more recently. Industry shipments increased by 11.7 percent in calendar 2005, but were essentially flat excluding sales of homes that were built to FEMA specifications for disaster relief. Industry shipments of units for disaster relief in the last two months of calendar
2005 caused our market share to decline from 17.6 percent to 16.3 percent for that year. The sale of the Company’s retail operations resulted in a $51 million decline in sales from fiscal 2005 to fiscal 2006. Of the 121 stores that were sold in August 2005, approximately 50 stores were immediately closed by the buyer. Sales lost as a result of closed stores totaled $34 million and sales to stores that remained open decreased by $17 million. The closure of 50 retail stores and reduced purchases by the remaining operating stores will continue to impact the Company’s sales volume and market share until the closed outlets are fully replaced or augmented. We also had fewer sales this year, as compared to fiscal 2005, through non-traditional channels, primarily to national operators of manufactured home communities.

Disaster relief orders from government agencies kept plants near capacity through the end of the calendar year, but current demand in the Gulf Coast region has been lower than anticipated as residents wait for the completion of clean-up efforts, insurance reimbursements and floodplain determinations. The sale of our network of Company-owned stores, which had a high concentration in these regions, may impact our ability to participate in any upswing in these areas until we are able to fully rebuild our distribution network. Some markets in the West, typically those that were less affected by high repossession levels and retail financing losses, remain healthy, but appear to be less robust in recent months than they were previously. The outlook in remaining areas continues to be uncertain. We are encouraged, however, by the excellent reviews our new regionally designed homes are receiving from dealers and consumers alike, although dealers have been generally slow to add to inventory by stocking our new models until existing inventory is sold.

Inventories of foreclosed homes have continued to decline; however, we expect to continue to compete with sales of repossessed homes in weaker geographical areas in the near term. Lenders continue to provide manufactured housing retail financing in limited amounts and use stringent underwriting practices and higher interest rates than for a mortgage on a traditional site-built home. Availability of financing has stabilized and may even be showing some signs of modest improvement. Depending on the extent of the financing actually generated, it is anticipated that manufactured housing industry conditions should improve, albeit slowly. We will continue to pursue other opportunities to supplement our business, such as increasing emphasis on modular homes and sales to community and park operators, land developers and the military. Longer-term demand for affordable housing is expected to grow as a result of the rebuilding requirements in the Gulf States, greater numbers of baby boomers reaching retirement age and the escalating cost of site-built homes and conventional mortgage interest rates. Improvements in engineering and design continue to position manufactured homes as a viable option in meeting the demands for affordable housing in new markets, such as suburban tracts and military sites, as well as in existing markets such as rural areas and manufactured housing communities and parks.

Following the sale of our retail housing and financial services businesses during fiscal 2006, the shift in focus back to our core manufacturing operations is essentially complete. At the same time, regions and individual manufacturing facilities have been given greater autonomy regarding product and operational decisions. We believe that our current or soon to be introduced products for all areas of our business are feature-rich, innovative and price competitive. As a result, we generally expect to improve our market position over the course of the next fiscal year. Restructuring actions to date have resulted in a more cost-effective management structure with a greater emphasis on sustainable profitability. However, sluggish industry demand for motor homes and manufactured housing, combined with temporary parts shortages on some of our new travel trailer models, will place additional pressure on first quarter earnings and, as a result, we currently expect to be below breakeven at the operating income line.