Overview

We are a leading producer of factory-built housing in the United States and western Canada. As of January 3, 2009, we operated 21 homebuilding facilities in 14 states in the U.S. and five facilities in three provinces in western Canada. As of January 3, 2009, our homes were sold through more than 1,600 independent sales centers, builders, and developers across the U.S. and western Canada. Approximately 725 of our independent retailer locations were members of our Champion Home Centers ("CHC") retail distribution network. As of January 3, 2009, our homes were also sold through 14 Company-owned sales offices in California. We are also a leading modular builder in the United Kingdom, where we operate five manufacturing facilities and construct steel-framed modular buildings for use as prisons, military accommodations, hotels and residential units, among other applications.

We made one acquisition during both 2008 and 2007 and three acquisitions during 2006. These acquisitions were part of our strategy to grow and diversify our revenue base with a focus on increasing our modular homebuilding presence in the U.S. and to seek factory-built construction opportunities outside of the U.S. Results of operations for these acquisitions are included in our consolidated results for periods subsequent to their respective acquisition dates.

On February 29, 2008, we acquired 100% of the capital stock of U.K. based ModularUK Building Systems Limited ("ModularUK") for a nominal initial cash payment and the assumption of approximately $4.2 million of debt. ModularUK is located in East Yorkshire, U.K. and is a producer of steel-framed modular buildings serving the healthcare, education and commercial sectors. The results of operations of ModularUK are included in our results from operations and in our international segment for periods subsequent to its acquisition date.

On December 21, 2007, we acquired substantially all of the assets and the business of SRI Homes Inc., ("SRI") for cash payments of approximately $96.2 million, a note payable of $24.5 million (CAD) (approximately $24.5 million USD at acquisition date) and assumption of the operating liabilities of the business. SRI is a leading producer of homes in western Canada that operates three manufacturing plants in the provinces of Alberta, British Columbia and Saskatchewan. The results of operations of SRI are included in our results from operations and in our manufacturing segment for periods subsequent to its acquisition date.

On April 7, 2006, we acquired 100% of the capital stock of U.K. based Calsafe Group (Holdings) Limited and its operating subsidiary Caledonian Building Systems Limited ("Caledonian"), for approximately $100 million in cash, plus potential contingent purchase price up to approximately $6.4 million and additional potential contingent consideration to be paid over four years. Caledonian and ModularUK together with their five manufacturing facilities in the U.K. comprise our international manufacturing segment (the "international segment").

On July 31, 2006, we acquired certain of the assets and the business of North American Housing Corp. and an affiliate ("North American") for approximately $31 million in cash plus assumption of certain operating liabilities. North American is a modular homebuilder that operates manufacturing facilities in Virginia. On March 31, 2006, we acquired 100% of the membership interests of Highland Manufacturing Company, LLC ("Highland"), a manufacturer of modular and HUD-code homes that operates one plant in Minnesota, for cash consideration of approximately $23 million. North American and Highland are included in our manufacturing segment.

Adverse conditions have existed in the manufactured housing industry and the broader housing market in the U.S. for several years, including limited availability of consumer financing, excess inventories of new and pre-owned homes, increasing foreclosure rates and pressure on selling prices. Our manufacturing and retail segments continue to be affected by these challenging conditions in the U.S. Since the beginning of 2006 we have closed twelve U.S. manufacturing plants, including three plants in 2008, and reduced headcount at most of our operating plants. Since the beginning of 2007 our retail operations in California have reduced the number of sales centers operated by three and reduced inventories by approximately 17%, excluding the effects of inventory write downs. During the third and fourth quarters of 2008, as the credit crisis deepened, conditions in the housing and financial markets worsened and negatively impacted the overall economy in the U.S. and elsewhere. These conditions led to lower sales throughout our U.S. operations for the year ended January 3, 2009. As a result of falling home prices and competitive conditions in the California housing market, in 2008 we wrote down our retail inventories of park spaces and homes by $14.1 million, including $6.3 million in the fourth quarter of 2008. In addition, since October 2008 we have reduced our corporate office headcount by 53 positions, or over 40%, and curtailed or eliminated

various marketing and information technology projects and other expenditures, resulting in projected annualized cost savings of approximately $13 million.

Excluding homes sold to FEMA in 2006 and 2005, annual industry shipments of HUD-code homes averaged 109,500 homes during the last five years as compared to 373,000 homes in 1998. Industry shipments of HUD-code homes totaled 81,900 homes in 2008, a decline of 14.5% from 95,800 homes in 2007, and the lowest annual volume in 50 years. Industry shipments of modular homes in the U.S. for the first 9 months of 2008 totaled 17,100 homes, a 30.8% reduction from shipments in the comparable period of 2007. Our total shipments of homes in the U.S. in 2008 were down 33.8% from shipments in 2007. Meanwhile, our manufacturing segment's Canadian operations, with the acquisition of SRI, enjoyed strong sales volumes and relatively high levels of unfilled orders during the first half of 2008. However, incoming order rates and sales volume weakened in Canada during the second half of the year. Total homes sold in Canada in 2008, including those produced in the U.S., increased 42.5% over the number sold in 2007, while homes sold by our Canadian operations increased 61.4% over the number sold in 2007.

Our international segment experienced a strong first half in 2008 with revenues totaling $181 million driven by prison projects with a significant amount of site-work. Second half sales volume declined to $99 million, following substantial completion of many of the prison projects and a weakening economy in the U.K. that was impacted by the global credit crisis. International segment income in 2008 of $16.3 million was 6% lower than in 2007. Segment income in 2007 was reduced by $6.4 million of expense in connection with the earn out provisions of the 2006 Caledonian acquisition while 2008 included no such earn out expense. This decline in segment income before earn out expense was driven primarily by higher general and administrative expenses.

Our loss before income taxes for the year ended January 3, 2009 was $52.0 million versus income of $3.9 million in 2007. Compared to 2007, our 2008 manufacturing segment income declined $27.1 million or nearly 67% on a 23% decline in sales despite the inclusion of SRI. Results in 2008 also included $10.7 million of restructuring charges, primarily in the manufacturing segment, retail inventory write downs totaling $14.1 million and foreign currency transaction losses of $10.5 million related to intercompany loans. Results in 2007 included manufacturing segment restructuring charges totaling $3.8 million, a loss on debt retirement of $4.5 million and a compensation charge of $6.4 million in the international segment as a result of a contingent purchase price or "earn out" arrangement related to the acquisition of Caledonian.

Effective September 27, 2008, we provided a valuation allowance for 100% of our U.S. deferred tax assets, resulting in a non-cash tax charge of approximately $150.8 million in the third quarter and $164.5 million for the full year.

In February 2008, our manufacturing facility in Henry, TN was destroyed by fire. The net book value of plant, equipment and inventory of the Henry plant at February 2, 2008 was approximately $3.3 million. We are fully insured through our property insurance coverage, subject to a $250,000 deductible. In August 2008, we commenced operations in a leased facility in Dresden, TN, as a temporary replacement of the destroyed plant.

We continue to focus on matching our factory-built housing manufacturing capacity to industry and local market conditions and improving or eliminating under-performing manufacturing facilities. We continually review our manufacturing capacity and will make further adjustments as deemed necessary.

Results of Operations

Consolidated Results


                                                                                            08 vs 07         07 vs 06
                                          2008              2007             2006           % Change         % Change
                                                   (Dollars in thousands)

Net sales
Manufacturing segment                  $   727,331       $   941,945      $ 1,195,834             (23 )%           (21 )%
International segment                      279,641           280,814           90,717               -              210 %
Retail segment                              36,521            73,406          117,397             (50 )%           (37 )%
Less: intercompany                         (10,300 )         (22,700 )        (39,300 )           (55 )%           (42 )%

Total net sales                        $ 1,033,193       $ 1,273,465      $ 1,364,648             (19 )%            (7 )%

Gross margin                           $   126,508       $   189,864      $   217,616             (33 )%           (13 )%
Selling, general and administrative
expenses                                   130,756           158,142          154,534             (17 )%             2 %
Restructuring charges                       10,683             3,780            1,200             183 %            215 %
Foreign currency transaction losses
(gains)                                     10,536            (1,008 )              -               -                -
Amortization of intangible assets            9,251             5,727            3,941              62 %             45 %

Operating (loss) income                    (34,718 )          23,223           57,941            (249 )%           (60 )%
Loss on debt retirement                        608             4,543              398             (87 )%          1041 %
Interest expense, net                       16,692            14,731           14,446              13 %              2 %

(Loss) income before income taxes      $   (52,018 )     $     3,949      $    43,097               -              (91 )%

As a percent of net sales
Gross margin                                  12.2 %            14.9 %           15.9 %
SG&A                                          12.7 %            12.4 %           11.3 %
Operating (loss) income                       (3.4 %)            1.8 %            4.2 %
(Loss) income before income taxes             (5.0 %)            0.3 %            3.2 %

Consolidated results of operations 2008 versus 2007 analysis

Consolidated net sales for the year ended January 3, 2009 decreased $240.3 million from the comparable period of 2007 due to lower manufacturing and retail segment sales, despite the inclusion of SRI in 2008. International segment sales in 2008, measured in British pounds, increased 6.6% over sales in 2007, but due to changes in exchange rates, sales are down slightly as expressed in U.S. dollars in 2008.

Gross margin for the year ended January 3, 2009 decreased $63.4 million from 2007 primarily as a result of lower sales in the manufacturing segment, excluding SRI, lower retail segment sales and the $14.1 million write-down of inventory in the retail segment. These decreases were partially offset by gross margin from SRI in 2008. Selling, general and administrative expenses ("SG&A") for the year ended January 3, 2009 decreased $27.4 million from 2007, due to lower SG&A at the manufacturing segment, excluding SRI, resulting from decreased sales and fewer plants in operation and lower SG&A at the retail segment and in general corporate expenses. These SG&A reductions were partially offset by the SG&A at SRI.

Restructuring charges are discussed below in the section titled "Restructuring Charges". Interest expense, net is discussed below in the section titled "Interest Income and Interest Expense".

Foreign currency transaction gains and losses are related to intercompany loans between certain of our U.S. and foreign subsidiaries that are expected to be repaid and result from the effects of changes in exchange rates on loans that are denominated in Canadian dollars and British pounds.

Amortization expense for the year ended January 3, 2009 increased $3.5 million from the comparable period of 2007 due to amortization expense related to intangible assets from the SRI acquisition, partially offset by the effects

of foreign exchange rate changes on amortizable intangible assets in the U.K. The loss on debt retirement in 2008 is primarily due to the prepayment of $13.1 million and $10.4 million of borrowings under the Sterling Term Loan and the Term Loan, respectively. The loss on debt retirement in 2007 was primarily due to the early redemption of $75.6 million of our Senior Notes due 2009 (the "Senior Notes").

The inclusion of SRI's results for the year ended January 3, 2009 contributed sales and operating income to our consolidated results for the period. On a proforma basis, assuming we had owned SRI as of the beginning of 2007, consolidated net sales and operating income for the year ended December 29, 2007, would have been $1,375.2 million and $41.8 million, respectively.

Consolidated results of operations 2007 versus 2006 analysis

Consolidated net sales for 2007 decreased $91.2 million from 2006 primarily due to lower sales volumes from the manufacturing and retail segments, partially offset by a $190.1 million increase in sales at our international segment. Consolidated net sales for 2007 included a full year of sales from the 2006 acquisitions whereas sales in 2006 included only five months of sales for North American and nine months of sales for Caledonian and Highland. In 2006, manufacturing segment results also included non-recurring sales of approximately $23.0 million to FEMA.

Gross margin for 2007 decreased $27.8 million versus the comparable period in 2006 primarily as a result of lower gross margin in the manufacturing and retail segments due to lower sales, which was partially offset by increased gross margin from higher sales in the international segment. A large portion of the decreased manufacturing segment gross margin occurred in the first and fourth quarters of 2007. In the first quarter of 2007 the manufacturing segment saw a significant reduction in sales and gross margin versus the first quarter of 2006 resulting from low incoming order rates and levels of unfilled orders driven by difficult housing market conditions in the U.S. and weather conditions in many parts of the country and non-recurring FEMA sales in 2006. Our U.S. plants operated at only 44% of capacity in the first quarter and 50% of capacity in the fourth quarter of 2007, resulting in manufacturing inefficiencies and lower coverage of fixed costs.

SG&A for 2007 increased slightly compared to 2006 primarily as a result of incremental SG&A from full year results of the 2006 acquisitions and the effects of higher sales in the international segment, partially offset by reduced variable SG&A in the manufacturing and retail segments due to lower sales. Additionally, in 2007 the international segment SG&A included a compensation charge of $6.4 million related to a contingent purchase price or "earn out" arrangement for the acquisition of Caledonian. In 2007, SG&A was reduced by net gains of $1.2 million, primarily from the sale of two idle plants. In 2006, SG&A was reduced by net gains of $4.7 million, primarily from the sale of investment property and five idle plants.

Results in 2007 included amortization expense of $5.7 million compared to $3.9 million in 2006, as a result of recording a full year of amortization of intangible assets relating to the 2006 and 2005 acquisitions. The loss on debt retirement in 2007 was primarily due to the early redemption of $75.6 million of our Senior Notes due 2009.

In comparing 2007 consolidated results to 2006 results, net sales and operating income for the 2006 acquisitions were included in 2006 consolidated results based on their respective acquisition dates and not for an entire year. On a proforma basis, assuming we had owned these acquisitions during the entire year ended December 30, 2006, consolidated net sales and operating income in 2007 would have decreased by 11% and 65%, respectively, versus the prior year proforma amounts, as compared to decreases of 7% and 60%, respectively, reported in the table above.

Restructuring Charges

During 2008, we incurred charges totaling $11.0 million from the closure of two U.S. manufacturing plants, the restructuring of the manufacturing segment, which included the elimination of two regional offices, and the reduction of our corporate headcount by 45 positions. Restructuring charges in 2008 totaling $10.7 million consisted of fixed asset impairment charges of $7.0 million and severance costs of $3.7 million. Other plant closing charges in the period, which are included in cost of sales, consisted of $0.3 million for the write down of closed plant inventories. Of the total charges, $1.1 million of the severance costs are included in general corporate expenses and $9.9 million of the costs and charges are included in the results of the manufacturing segment.

During 2008, we paid $3.1 million of accrued restructuring costs. As of January 3, 2009, accrued but unpaid restructuring costs totaled $1.0 million and consisted of severance costs totaling $0.9 million and warranty costs totaling $0.1 million.

During 2007, we incurred charges totaling $4.9 million from the closure of two U.S. homebuilding plants. Restructuring charges totaling $3.8 million consisted of fixed asset impairment charges of $2.0 million and severance costs totaling $1.8 million. Other plant closing charges that are included in cost of sales consisted of inventory write downs of $0.6 million and additional warranty accruals of $0.5 million. During 2006, we recorded restructuring charges for the closure of one U.S. manufacturing plant consisting of a $1.2 million fixed asset impairment charge. Also in 2006, the accrual for closed plant warranty costs was reduced by $1.0 million due to favorable experience for plants previously closed. See additional discussion of restructuring charges in Note 6 of "Notes to Consolidated Financial Statements" in Item 8 of this Report.

Impairment Tests for Goodwill

For the years ended January 3, 2009, December 29, 2007 and December 30, 2006, we performed our annual impairment tests for goodwill in the fourth quarter of each year and concluded no impairment existed for the carrying value of goodwill.

(Loss) income before income taxes

The segment components of (loss) income before income taxes are as follows:

                                                  % of                               % of                              % of
                                 2008         Related Sales         2007         Related Sales        2006         Related Sales
                                                           (Dollars in thousands)

Manufacturing segment income   $  13,054                1.8%      $  40,106                4.3%     $  81,600                6.8%
International segment income      16,266                5.8%         17,393                6.2%         5,634                6.2%
Retail segment (loss) income     (18,163 )             (49.7 )%       1,911                2.6%         7,636                6.5%
General corporate expenses       (26,788 )                          (31,799 )                         (32,488 )
Amortization of intangible
assets                            (9,251 )                           (5,727 )                          (3,941 )
Foreign currency translation
(losses) gains                   (10,536 )                            1,008                                 -
Loss on debt retirement             (608 )                           (4,543 )                            (398 )
Interest expense, net            (16,692 )                          (14,731 )                         (14,446 )
Intercompany profit
elimination                          700                                331                              (500 )

(Loss) income before income
taxes                          $ (52,018 )              (5.0 )%   $   3,949                0.3%     $  43,097                3.2%

Segment results, general corporate expenses, interest expense, net, and income taxes are discussed below. Amortization of intangible assets, foreign currency transaction losses, loss on debt retirement and restructuring are discussed above.

Manufacturing segment sales to the retail segment and related manufacturing profits are included in the manufacturing segment. Retail segment results include retail profits from the sale of homes to consumers but do not include any manufacturing segment profits associated with the homes sold. Intercompany transactions between the operating segments are eliminated in consolidation, including intercompany profit in inventory, which represents the amount of manufacturing segment gross margin in Champion-produced inventory at the retail segment.

Manufacturing Segment

We evaluate the performance of our manufacturing segment based on income before
interest, income taxes, amortization of intangible assets, foreign currency
transaction gains and losses on intercompany indebtedness and general corporate
expenses. Results of the manufacturing segment for the years ended January 3,
2009, December 29, 2007 and December 30, 2006 are summarized as follows:


                                                                                        08 vs 07        07 vs 06
                                                                                            %               %
                                           2008           2007            2006           Change          Change

Manufacturing segment net sales (in
thousands)                               $ 727,331      $ 941,945      $ 1,195,834            (23 )%          (21 )%
Manufacturing segment income (in
thousands)                               $  13,054      $  40,106      $    81,600            (67 )%          (51 )%
Manufacturing segment margin%                  1.8 %          4.3 %            6.8 %
HUD-code home shipments                      6,399          9,971           15,341            (36 )%          (35 )%
U.S. modular home and unit shipments         2,507          3,670            4,574            (32 )%          (20 )%
Canadian home shipments                      2,332          1,637            1,132             42 %            45 %
Other shipments                                168             68               79            147 %           (14 )%

Total homes and units sold                  11,406         15,346           21,126            (26 )%          (27 )%
Floors sold                                 20,177         29,233           40,521            (31 )%          (28 )%
Multi-section mix                               68 %           77 %             80 %
Average unit selling price, excluding
delivery                                 $  56,100      $  55,100      $    51,800              2 %             6 %
Manufacturing facilities at year end            26             29               30

Manufacturing segment 2008 versus 2007 analysis

Manufacturing net sales for the year ended January 3, 2009 decreased 23% from net sales in the year ended December 29, 2007 primarily driven by a reduction in the number of homes we sold due to seven plant closures in the U.S. since the beginning of 2007, the loss of our Henry, TN plant from a fire in February 2008 and lower sales at the same plants operated a year ago. Partially offsetting these decreases was the inclusion in 2008 of sales from SRI. Average manufacturing selling prices increased in 2008 as compared to 2007 as a result of product mix, including the impact of higher priced SRI homes. In July 2008 a plant was temporarily reopened in Topeka, IN to fill the large seasonal backlog in the Midwest. This plant was idled again at the end of October 2008. In August 2008 we commenced operations in a leased facility in Dresden, TN as a temporary replacement for the Henry, TN plant that was lost to a fire in February 2008. In December 2008, we temporarily idled a plant in Boones Mill, VA. Overall, difficult U.S. housing market conditions continued throughout 2008 and resulted in lower sales volumes at most of our plants.

Manufacturing segment income for the year ended January 3, 2009 decreased 67% from the year ended December 29, 2007 primarily from lower sales at our same plants operating a year ago and charges totaling $9.3 million in the first quarter of 2008 resulting from the announced closure of two manufacturing facilities and two regional offices. Partially offsetting these decreases were the inclusion of income from SRI and plant cost reduction initiatives including headcount reductions. Market conditions during the period resulted in low levels of unfilled orders at most of our plants and production inefficiencies caused by under utilized factory capacity. Our plants operated at 43% of capacity for the year ended January 3, 2009 compared to 54% for the year ended December 29, 2007. Results for year ended December 29, 2007 included charges totaling $4.7 million for the closure of two plants and a net gain of $0.6 million, primarily from the sale of one idle plant.

The plant closures announced in the first quarter of 2008 included one in Oregon and one in Indiana. Operations at the closed Indiana plant were consolidated at our other Indiana homebuilding complex. The Indiana closure was the final of four plants at a complex where the other three plants had been previously idled. Charges for the plant closures in the first quarter of 2008 totaling $9.3 million consisted of fixed asset impairment charges of $7.0 million, severance costs totaling $2.0 million and an inventory write-down of $0.3 million. Severance costs

included certain payments required under the Worker Adjustment and Retraining Notification Act and were related to the termination of approximately 330 employees consisting of substantially all employees at the Oregon plant and those terminated as a result of the Indiana plant closure and consolidation of operations. During the year ended December 29, 2007 we closed one plant in Pennsylvania and our one remaining plant in Alabama. The plant closings in 2007 . . .