Overview

Established in 1974 as a truck body manufacturer, Supreme Industries, Inc., through its wholly-owned subsidiary Supreme Corporation, is one of the nation's leading manufacturers of specialized vehicles. Utilizing a nationwide direct sales and distribution network, as well as manufacturing and service facilities in 12 states across the continental United States, Supreme is able to meet the needs of customers across all of North America.

The Company engages principally in the production and sale of customized truck bodies, shuttle buses, and other specialty vehicles. Building on its expertise in providing both cargo and passenger transportation solutions, the Company's specialty vehicle offerings include products such as customized armored vehicles, homeland response vehicles, and luxury motor coaches. Through vertical integration and proprietary processes, the Company also supplies both internal and external customers with high quality fiberglass and fiberglass-reinforced components. The Company operates only in businesses related to its core competencies and currently has no plans to deviate from this strategy.

The Company and its product offerings are sensitive to various factors which include, but are not limited to, economic conditions, interest rate fluctuations, changes in governmental regulations, and the volatility in the supply chain of vehicle chassis. The Company's business is also affected by the availability and costs of certain raw materials that are significant components of its

product offerings. The Company's risk factors are disclosed in Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 29, 2007 and herein in Item 1A.

Supreme continues to feel the impact of the persistently slow economic environment and the unprecedented tight credit markets. Although we foresaw a difficult environment, the downturn has been far more severe than anticipated. In response to these recessionary-like conditions, we have been executing a strategy to navigate through these conditions and position the Company to emerge from the current cycle even stronger. First and foremost, we have taken and continue to take costs out of our business to right-size operations to fit the current market conditions. These annualized cost reductions totaled approximately $6.5 million and were minimally beneficial for the third quarter of 2008 but will contribute proportionally in the fourth quarter and will be fully realized in 2009. There is a strategic ongoing effort to identify and reduce costs to further combat the steep decline in our core business and motor home operations. We anticipate a minimum of $1.5 million of additional annualized cost reductions to be implemented during the fourth quarter of 2008. Our healthy bus business is helping to partially offset the significant downturn in the core dry freight truck markets.

The discussion herein should be read in conjunction with the unaudited consolidated financial statements and related notes thereto elsewhere in this document.

Results of Operations

Net Sales

Net sales for the three months ended September 27, 2008 decreased $6.4 million to $61.1 million compared to $67.5 million for the three months ended September 29, 2007. Net sales for the nine months ended September 27, 2008 decreased $27.3 million, to $212.3 million from $239.6 million for the nine months ended September 29, 2007. The decrease in net sales for the three and nine months ended September 27, 2008 was primarily related to our truck body sales, our largest product group, which declined by $8.5 million and $34.0 million, respectively. Our armored truck division experienced a decline in net sales of $2.6 million and $4.4 million for the three and nine months, respectively. Additionally, our Silver Crown division experienced a decrease in net sales for the three and nine months ended September 27, 2008 of $0.1 million and $1.4 million respectively. Partially offsetting these decreases was an increase in net sales by our StarTrans bus division to $20.7 million for the three months ended September 27, 2008 and $58.8 million for the nine months ended September 27, 2008 compared to $15.5 million for the three months ended September 29, 2007 and $46.6 million for the nine months ended September 29, 2007.

The following table presents the components of net sales and the changes from period to period:

                                     Three Months Ended                                            Nine Months Ended
                   September 27,      September 29,                             September 27,      September 29,
($000)                 2008               2007                Change                2008               2007                 Change
Specialized
vehicles:
Trucks            $        34,576    $        43,118    $ (8,542 )   (19.8 )%  $       130,976    $       164,984    $ (34,008 )    (20.6 )%
Buses                      20,721             15,524       5,197      33.5              58,844             46,574       12,270       26.3
Armored
vehicles                      932              3,572      (2,640 )   (73.9 )             4,197              8,614       (4,417 )    (51.3 )
Motorhomes                  2,827              2,990        (163 )    (5.5 )            10,413              8,992        1,421       15.8
                           59,056             65,204      (6,148 )    (9.4 )           204,430            229,164      (24,734 )    (10.8 )
Composites                  2,031              2,337        (306 )   (13.1 )             7,888             10,430       (2,542 )    (24.4 )
                  $        61,087    $        67,541    $ (6,454 )    (9.6 )%  $       212,318    $       239,594    $ (27,276 )    (11.4 )%

We attribute the decrease in our truck product sales to the continued industry-wide decline in the retail truck market which began in early 2007 and the prevailing expectation is that it will continue well into 2009. Additionally, we were negatively impacted in the first half of the year by the cancellation of approximately $2.6 million of orders from a major fleet customer due to the disruption in the supply of General Motors ("GM") chassis resulting from a labor dispute between the United Auto Workers and GM's axle supplier. This labor dispute was settled in the second quarter although returning to normal conditions was further delayed by a second labor strike against a chassis delivery provider which has since been resolved. The disruption adversely affected our profitability and resulted in excess inventory carrying costs for both our fleet and retail business during the first half of 2008.

We anticipate the decrease in our truck business activity will create pent-up demand and we are poised to capitalize on the eventual expected recovery. However, we anticipate that our core products in particular will experience highly competitive pricing conditions well into 2009. Our new redesigned Signature Van Body is expected to help our competitiveness in this considerably diminished market in that it enables easier and less expensive construction, improved inventory turns, and reduced lead-time required to deliver the finished product. Our progress on the redesign remains on schedule with production set to begin during the fourth quarter of 2008.

Our StarTrans bus division continues to experience strong demand resulting from increased use of mass transit due to the volatility of fuel prices. The Company has recently added bus production capacity in Pennsylvania and Indiana to meet customer demand.

Our total sales backlog was $64.9 million at September 27, 2008 compared to $72.6 million at September 29, 2007.

Cost of sales and gross profit

Gross profit decreased by $1.9 million, or 26.0%, to $5.4 million for the three months ended September 27, 2008 compared to $7.3 million for the three months ended September 29, 2007. For the nine months ended September 27, 2008, gross profit decreased by $7.0 million or 25.5%, to $20.4 million compared to $27.4 million for the nine months ended September 29, 2007. We anticipated a difficult environment very early in the year, however the conditions worsened during the third quarter and we implemented a modified strategy to right-size our operations in the form of annualized cost reductions.

The following table presents the components of cost of sales as a percentage of net sales and the changes from period to period:

                                  Three Months Ended                            Nine Months Ended
                      September 27,    September 29,    Percent     September 27,    September 29,    Percent
                          2008             2007          Change         2008             2007          Change
Material                       59.0 %           55.8 %       3.2 %           57.9 %           57.3 %       0.6 %
Direct labor                   13.6             14.1        -0.5             13.9             13.7         0.2
Overhead                       15.7             16.2        -0.5             15.8             15.1         0.7
Delivery                        2.8              3.0        -0.2              2.8              2.5         0.3
Cost of sales                  91.1             89.1         2.0             90.4             88.6         1.8
Gross profit                    8.9 %           10.9 %      -2.0 %            9.6 %           11.4 %      -1.8 %

Material- Material cost as a percentage of net sales increased for the three months and nine months ended September 29, 2008 when compared to corresponding periods in 2007. The change in the material percentage for the three and nine months is primarily related to higher raw material costs, product mix and higher freight costs resulting from escalating fuel prices. Our change in product mix relates to our bus division, which has a higher material percentage, and accounted for a greater percentage of our net sales in the quarter and year-to-date in comparison to the same periods in 2007.

Raw material costs, particularly for aluminum, steel, and petroleum-based products, have continued to increase. We have attempted to address the unavoidable raw material cost increases by increasing the price of our products, to the limited extent that our highly competitive markets have permitted. We have also strived to reduce the manufacturing costs through the use of technology (i.e., robotics, innovative materials, etc.), lean manufacturing and improved processes. We announced price increases of 3.0% and 5.0% in March and June, respectively, on all core truck product lines. Our StarTrans bus division implemented price increases of 2.5% and 3.0% effective in January and June, respectively. These ongoing efforts as well as product diversification and the introduction of our Signature Van Body, should help us to mitigate the effect of rising raw material costs.

Direct Labor - Direct labor as a percentage of net sales decreased for the three months and increased for the nine months ended September 27, 2008 when compared to corresponding periods in 2007. The improvement in the direct labor percentage for the third quarter was due to product mix as it relates to our bus division, which has a lower labor percentage, and accounted for a greater percentage of our net sales. Additionally, price increases in the bus and truck divisions had the effect of reducing the overall labor percentage. The slight increase in the direct labor percentage for the nine months was the result of inefficiencies resulting from the labor strikes (as discussed previously), timing of fleet customer buying patterns and the normal startup costs of additional production lines to fulfill fleet orders. Additionally, in the first half of the year, our StarTrans bus division experienced an increase in its labor percentage due to employee training costs associated with one of our regional plant's bus production line start-up costs. The expanded capacity will improve plant utilization while accelerating delivery to satisfy our strong bus backlog.

Overhead- Overhead as a percentage of net sales decreased for the three months and increased for the nine months ended September 27, 2008 when compared to corresponding periods in 2007. The decrease for the quarter is primarily related to

reductions in our group health expense, lower payroll costs and fewer repairs and maintenance. During 2007, the Company implemented changes to its group health insurance plan design in an effort to control claim costs and these changes are now benefiting the current year. For the nine months, the increase in the overhead percentage was due to the fixed nature of certain expenses that do not fluctuate when sales volume changes. Additionally, the Company was unfavorably impacted in the first quarter by higher utility costs as a result of an unusually cold winter in the Northeast and Midwest. We continue to focus on reducing expenses and managing our overhead cost structure based on our level of sales volume achieved during the first nine months of the year.

Delivery- Delivery as a percentage of net sales decreased for the three months and increased for the nine months ended September 27, 2008 when compared to corresponding periods in 2007. The Company continues to research and utilize more cost-effective delivery methods to reduce the adverse impact of higher fuel costs. We will continue to attempt to pass on the higher costs despite competitive pricing pressures in the marketplace.

Selling, general and administrative expenses

Selling, general and administrative ("G&A") expenses increased by $0.2 million, or 3.0%, to $6.8 million for the three months ended September 27, 2008 compared to $6.6 million for the three months ended September 29, 2007. For the nine months ended September 27, 2008, selling and G&A expenses decreased by $0.3 million, 1.4%, to $20.8 million compared to $21.1 million for the nine months ended September 29, 2007. The following table presents selling and G&A expenses as a percentage of net sales and the changes from period to period:

                                  Three Months Ended                            Nine Months Ended
                      September 27,    September 29,    Percent     September 27,    September 29,    Percent
                          2008             2007          Change         2008             2007          Change
Selling expenses                4.6 %            3.6 %       1.0 %            3.8 %            3.3 %       0.5 %
G&A expenses                    6.5              6.1         0.4              6.0              5.5         0.5
Total                          11.1 %            9.7 %       1.4 %            9.8 %            8.8 %       1.0 %

Selling expenses - Selling expenses increased by $0.4 million, or 16.7%, to $2.8 million for the three months ended September 27, 2008 from $2.4 million for the three months ended September 29, 2007. For the nine months ended September 27, 2008, selling expenses remained constant with the prior period at $8.0 million. For the quarter, selling expenses increased due to less cooperative marketing credits the Company received from chassis manufacturers. These credits, determined solely by programs established by the chassis manufacturers, are used to offset marketing and promotional expenses. For the three and nine months, the Company invested in training costs, literature, promotion and advertising expenses resulting from the anticipated fourth quarter roll out of our re-designed core truck body named our "Signature Van Body." Additionally, both periods experienced a decrease in commission expense resulting from the reduced sales volume in 2008 when compared to 2007.

G&A expenses - General and administrative expenses decreased by $0.1 million, or 2.4%, to $4.0 million for the three months ended September 27, 2008 from $4.1 million

for the three months ended September 29, 2007. For the nine months ended September 27, 2008, general and administrative expenses decreased by $0.3 million, or 2.3%, to $12.8 million from $13.1 million for the nine months ended September 29, 2007. The decrease in general and administrative expenses was primarily due to lower incentive compensation accruals as a result of the decrease in pretax income. Additionally, we incurred one-time professional fees during 2007 related to complying with the requirements of the Sarbanes-Oxley Act of 2002.

Other income

Other income remained constant at $0.2 million for the three months ended September 27, 2008 compared to the corresponding period in 2007. For the nine months ended September 27, 2008, other income increased by $0.3 million to $0.7 million compared to the corresponding period in 2007. Other income consisted of rental income, gain on sale of assets, and other miscellaneous income received by the Company through its various business activities.

Interest expense

Interest expense was $0.5 million (0.8% of net sales) for the three months ended September 27, 2008 compared to $0.5 million (0.7% of net sales) for the three months ended September 29, 2007. For the nine months ended September 27, 2008, interest expense was $1.6 million (0.8% of net sales) compared to $1.9 million (0.8% of net sales) for the nine months ended September 29, 2007. The decrease in bank interest expense reflects lower prevailing interest rates coupled with lower working capital requirements related to the lower sales volume.

Income taxes

The Company's effective income tax rate was (63.5)% for the three months ended September 27, 2008, compared to 32.0% for the three months ended September 29, 2007. For the nine months ended September 27, 2008, the effective income tax rate was (86.0) % compared to 30.9% for the nine months ended September 29, 2007. The estimated effective income tax rate for both periods was favorably impacted by tax benefits associated with the Company's wholly-owned captive insurance subsidiary, additional manufacturing tax deductions allowed under the 2004 American Jobs Creation Act, federal alternative fuel tax credits, and research and development tax credits. The substantially lower estimated pretax income for fiscal 2008 will result in a tax benefit position for the Company. The effective income tax rate for the previous year ended December 29, 2007 was 22.9%.

Net income and earnings per share

Net income (loss) decreased by $0.9 million to $(0.6) million (-1.0% of net sales) for the three months ended September 27, 2008, from $0.3 million (0.4% of net sales) for the three months ended September 29, 2007. For the nine months ended September 27, 2008, net income (loss) decreased by $3.5 million to $(0.2) million (-0.0% of net sales) compared to $3.3 million (1.4% of net sales) for the nine months ended September 29, 2007. The following table presents basic and diluted earnings per share and the changes from period to period:

                                     Three Months Ended                                  Nine Months Ended
                        September 27,      September 29,                   September 27,      September 29,
                            2008               2007           Change           2008               2007           Change

Liquidity and Capital Resources

The Company's cash management system and revolving line of credit have been designed to maintain zero cash balances and, accordingly, excess cash generated from operations is utilized to reduce borrowings.

Operating activities

Operating activities provided $4.3 million of cash for the nine months ended September 27, 2008 compared to cash provided of $18.7 million for the nine months ended September 29, 2007. For the nine months of 2008, operating cash was favorably impacted by an $8.0 million reduction in accounts receivable and a $1.0 million decrease in inventory offset by a $6.2 million decrease in accounts payable. Net income, adjusted for depreciation and amortization, provided cash flows from operating activities totaling $2.9 million and $6.5 million in nine months of 2008 and 2007, respectively.

Investing activities

Cash used in investing activities was $3.1 million for the nine months ended September 27, 2008 compared to $3.0 million for the nine months ended September 29, 2007. Capital expenditures were $2.8 million during the first nine months of 2008 and consisted principally of investments in replacement equipment. For the remainder of 2008, the Company plans to invest primarily in replacement equipment.

Financing activities

Financing activities used $2.4 million for the nine months ended September 27, 2008 compared to cash used of $16.9 million for the nine months ended September 29, 2007. The lower levels of financing activities for the nine months of 2008 occurred as a result of the decrease in accounts receivable levels. The Company also received $248,000 and $745,000 from the exercise of stock options for the nine months of 2008 and 2007, respectively. The Company paid cash dividends of nine and one-half cents per share, or $2.5 million, for each of the first and second quarters of 2008 and a declared a two percent stock dividend on its outstanding Class A and Class B stock in the third quarter. For 2007, the Company paid cash dividends of nine and one-half cents per share for each of the three quarters, totaling $3.6 million. Due to the present industry conditions, the Board of Directors has decided to initiate a stock dividend program replacing cash dividend distributions. The Board intends to continue this stock dividend program until industry conditions improve and cash dividends can be resumed. Future dividends are necessarily subject to business conditions, the Company's financial position and requirements for working capital, property, plant, and equipment expenditures and other corporate purposes.

The Company amended its existing credit agreement to extend the maturity date to October 31, 2009. Certain debt covenants have been modified to provide temporary relief to the Company during the current economic downturn and the Company expects to remain in compliance with the modified covenants. The Company is working with its lender to extend the credit facility with the expectation that the credit facility will remain classified as long-term debt, although no assurance can be given that this will occur. (See Item 1A. RISK FACTORS) The credit facility is expected to provide sufficient liquidity to meet the Company's financing needs and is secured by trade accounts receivable and a portion of inventories.

Critical Accounting Policies and Estimates

Management's discussion and analysis of its financial position and results of operations are based upon the Company's consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The Company's significant accounting policies are discussed in Note 1 of the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 29, 2007. In management's opinion, the Company's critical accounting policies include revenue recognition, allowance for doubtful accounts, excess and obsolete inventories, inventory relief, accrued insurance, and accrued warranty.

Revenue Recognition- The Company generally recognizes revenue when the unit is shipped to the customer. Revenue on certain customer requested bill and hold transactions is recognized after the customer is notified that the products have been completed according to customer specifications, have passed all of the Company's quality control inspections, and are ready for delivery based on established delivery terms.

Allowance for Doubtful Accounts - The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial conditions of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required which would adversely affect our future operating results.

Excess and Obsolete Inventories - The Company must make estimates regarding the future use of raw materials and finished products and provide for obsolete or slow-moving inventories. If actual product life cycles, product demand, and/or market conditions are less favorable than those projected by management, additional inventory write-downs may be required which would adversely affect future operating results.

Inventory Relief - For monthly and quarterly financial reporting, cost of sales is recorded and inventories are relieved by the use of standard bills of material adjusted for scrap and other estimated factors affecting inventory relief. Because of our large and diverse product line and the customized nature of each order, it is difficult to place full reliance on the bills of material for accurate relief of inventories. Although the Company continues to refine the process of creating accurate bills of materials, manual adjustments (which are based on estimates) are necessary in an effort to provide correct relief of inventories for products sold. The calculations to estimate costs not captured in the bill of materials take into account the customized nature of products,

historical inventory relief percentages, scrap variances, and other factors which could impact inventory relief.

Accrued Insurance- The Company has a self-insured retention against product liability claims with insurance coverage over and above the retention. The Company is also self-insured for a portion of its employee medical benefits and workers' compensation. Product liability claims are routinely reviewed by the Company's insurance carrier, and management routinely reviews other self-insurance risks for purposes of establishing ultimate loss estimates. In addition, management must determine estimated liability for claims incurred but not reported. Such estimates, and any subsequent changes in estimates, may result in adjustments to our operating results in the future.

The Company utilizes a wholly-owned small captive insurance company to insure certain of its business risks. Certain risks, traditionally self-insured by the . . .