Management Overview

We believe that Coast is one of the largest wholesale suppliers of replacement parts, supplies and accessories for recreational vehicles ("RVs") and boats in North America. We supply more than 12,000 products and serve more than 15,000 customers throughout the United States and Canada, from 13 regional distribution centers in the United States 4 regional distribution centers in Canada. Our sales are made to retail parts and supplies stores, service and repair establishments and new and used RV and boat dealers ("After-Market Customers").

Factors Generally Affecting Sales of RV and Boating Products

Our sales are affected primarily by (i) the usage of RVs and boats by the consumers to whom After-Market Customers sell our products, because such usage affects the consumers' needs for and purchases of replacement parts, repair services and supplies, and (ii) sales of new and used RVs and boats, because consumers often "accessorize" their RVs and boats at or shortly after the time of purchase.

The usage and the purchase, by consumers, of RVs and boats depend, in large measure, upon the extent of discretionary income available to consumers, their confidence about economic conditions (which affects their willingness to use and purchase RVs and boats) and the availability and the cost of credit that consumers often use to finance their purchases of RVs and boats. As a result, recessionary conditions and a tightening in the availability or increases in the costs of borrowings to consumers often lead to declines in the purchase and, to a lesser extent, in the usage, of RVs and boats. Additionally, increase in the prices and shortages in the supply of gasoline can lead to declines in the usage and purchases of RVs and boats, because these conditions increase the consumers' costs and the difficulties of using their RVs and boats. Weather conditions also can affect our operating results, because unusually severe or extended winter weather conditions can reduce the usage of RVs and boats for periods extending beyond the ordinary winter months or to regions that ordinarily encounter milder winter weather conditions and can cause period-to-period fluctuations in our sales and financial performance. As a result, our sales and operating results can be, and in the past have been, affected by recessionary economic conditions, tightening in the availability and increases in the costs of consumer and business financing, shortages in the supply and increases in the prices of gasoline and unusually adverse weather conditions. See "RISK FACTORS" in Item IA, in Part I, of this Report.

Overview of Fiscal 2008 Operating Results

The following table provides information comparing our results of operations in
the fiscal year ended December 31, 2008 to our results of operation in fiscal
2007 and fiscal 2006. Dollars are in thousands, except per share data.



                                                                    Year Ended December 31,
                                                                           Increase (Decrease)          Increase (Decrease)
                                     2008          2007        2006           2008 vs. 2007                2007 vs. 2006
                                    Amount        Amount      Amount       Amount        Percent        Amount        Percent
Net Sales                          $ 132,237     $ 164,293   $ 179,103   $   (32,056 )     (19.5 )%   $   (14,810 )      (8.3 )%
Gross profits                         24,612        30,715      33,602        (6,103 )     (19.9 )         (2,887 )      (8.6 )
Selling, general &
administrative expenses               26,559        28,065      27,160        (1,506 )      (5.4 )            905         3.3
Operating income (loss)               (1,947 )       2,650       6,442        (4,597 )    (173.5 )         (3,792 )     (58.8 )
Interest expense                       1,409         2,098       1,617          (689 )     (32.8 )            481        29.7
Earnings (loss) before income
taxes                                 (3,217 )         575       4,831        (3,792 )    (659.5 )         (4,256 )     (88.1 )
Income tax provision (benefit)        (1,378 )         360       1,858        (1,738 )    (482.8 )         (1,498 )     (80.6 )
Net earnings (loss)                   (1,839 )         215       2,973        (2,054 )    (955.3 )         (2,758 )     (92.8 )
Net earnings (loss) per
share-diluted                          (0.41 )        0.05        0.64         (0.46 )    (920.0 )          (0.59 )     (92.2 )

As the above table indicates, we incurred a loss from operations of $1.9 million and a net loss of $1.8 million in fiscal 2008. Those losses were due primarily to the worsening of the economic recession and the credit crisis in the United States during the second half of 2008, which adversely affected our net sales and our gross profits and more than offset costs savings we realized as a result of a cost reduction program we implemented beginning in the third quarter of 2008 in response to these conditions. Set forth below is a summary of the conditions and circumstances that led to the operating loss and net loss we incurred in 2008:

• Decrease in Net Sales. Net sales declined by $32.1 million, or 19.5%, in 2008 as compared to 2007, primarily as a result of reductions in purchases and in the usage by consumers of RVs and boats and, therefore, in their need for and their purchases of the products we sell, due to the worsening of the economic recession and a credit crisis that significantly reduced the availability of consumer credit. These conditions led to (i) a significant reduction in economic activity, (ii) sharp declines in the value of residential real estate which wiped out a substantial amount of the equity that many consumers had in their homes, (iii) sharp and rapid increases in unemployment, (iv) decreases in discretionary income, and (v) steep and rapid decreases in stock and bond prices which significantly reduced the retirement savings of many consumers, all of which combined to cause a significant decline in the confidence of consumers not only about the economy in general, but also about their own financial security and futures and led them to significantly curtail their spending, particularly during the second half of 2008. Also contributing to the decline in our net sales were sharp increases in gasoline prices, which affected the willingness of consumers to use their RVs and boats particularly during the second and third quarters of 2008.

• Gross Margin and Gross Profits. We were able to maintain our gross margin in 2008 at 18.6%, down only slightly from 18.7% in 2007, primarily as a result of (i) price increases implemented on selected products; (ii) the strengthening of the Canadian dollar during the first half of 2008, which enabled our Canadian subsidiary, which purchases products from suppliers in the United States, to improve its margins during that period, (iii) a change in the mix of products sold to a greater proportion of higher-margin products sourced from Asia and (iv) reductions in warehouse labor and other distribution costs. Nevertheless, gross profits declined by $6.1 million, or 19.9%, in 2008, as compared to 2007, due primarily to the decline in net sales in 2008.

• Operating Expenses. We implemented a program to reduce not only warehouse and other distribution costs, but also selling, general and administrative ("SG&A") expenses, beginning in the third quarter of 2008, when it became apparent that the economic recession had become more severe and would continue well into 2009. Among other things, we implemented staff reductions and a 10% across-the-board reduction in executive and management salaries. As a result, we were able to reduce SG&A expenses by $1.5 million, or 5.4%, in 2008, as compared to 2007. However, those costs savings were more than offset by the decrease in net sales and, as a result, as a percentage of net sales, such expenses increased to 20.1% in 2008 from 17.1% in 2007.

• Income Tax Benefit. Our net loss for 2008 reflects an income tax benefit of nearly $1.4 million, which resulted primarily from the pre-tax loss incurred in 2008. The amount of that income tax benefit was net of a non-cash charge recognized to establish a valuation allowance to reduce the amount of our deferred tax asset on our balance sheet (which consists of tax credit and tax loss carryforwards and tax deductions that are available to reduce taxes on income we generate in future years) to the amount of such income tax benefits we believe is fully realizable. See "-Critical Accounting Policies and Use of Estimates - Our Critical Accounting Policies - Deferred Tax Asset and Valuation Allowance" in this
Section below.

Outlook for 2009

The continued lack of available consumer and business credit and the worsening of and concerns and uncertainties among businesses and consumers regarding the ultimate severity and duration of the economic recession, have continued into 2009. We expect these economic and other conditions to continue to adversely affect the purchase and usage by consumers of RVs and boats and, therefore, their need for and purchases of the products that we sell, during 2009. Moreover, in the past few months, the Canadian dollar has weakened against the U.S. dollar, as Canada is also suffering through an economic recession and, as a result, our Canadian subsidiary is experiencing increases in its costs of products sold, thereby adversely affecting our consolidated operating results.

In addition, our bank loan agreement was recently amended, largely due to the tightening of available business credit and the impact of the economic recession on our operating results. That amendment reduces the maximum amount of borrowings we can obtain under our revolving bank credit line and increases the costs to us of such borrowings. These amendments also may adversely affect our net sales because we may not be able to purchase as much inventory of the products we sell, which could adversely affect our service levels to our customers, and we may have to tighten the credit that we can extend to our customers in connection with their purchases of products from us.

Our strategic goals for 2009 are to capture additional market share in order to offset declines in net sales attributable to these difficult economic conditions, and to improve our gross margin, despite these conditions, primarily by continuing to increase our sales of proprietary products and other foreign sourced products. In addition, in response to this difficult economic climate, we are continuing to reduce our SG&A expenses by implementing additional staff reductions and negotiating price concessions from our suppliers. As a result, we believe that we can achieve a modest improvement in our operating results in 2009, as compared to 2008, assuming that economic and market conditions in the United States and Canada stabilize and the availability of credit to businesses and consumers increases. On the other hand, if such conditions do not begin to improve in 2009, it may become necessary for us to take additional cost-cutting measures, which could include the closing of one or more of our distribution centers.

However, due to the risks in the economy and in our business and the uncertainties that exist regarding future economic and market conditions, it is not possible to predict with any degree of accuracy whether we will succeed in achieving our goals for 2009. See "RISK FACTORS" in Item 1A of Part I of this Report for a discussion of some of those risks and uncertainties.

Critical Accounting Policies and Use of Estimates

General

In accordance with accounting principles generally accepted in the United States of America ("GAAP"), we record most of our assets at the lower of cost or fair value. In the case of some of our assets, principally accounts receivable, inventories and deferred income taxes, we make adjustments to their cost or fair values to arrive at what we expect to be able to collect on outstanding accounts receivables, the amounts for which we expect to be able to sell our inventories and the amount of available tax loss and credit carryforwards and deductions that we will be able to use to reduce our future income tax liability. Those adjustments are made on the basis of a number of different factors, including judgments or assumptions we make regarding economic and market conditions and trends and their impact on our financial performance, and those judgments and assumptions are, in turn, based on current information available to us. If those conditions or trends were to change in ways that we did not expect, then based on our assessment of how those changes will affect the prospects for realizing the values at which we have recorded these assets, we may be required, pursuant to GAAP, to further adjust the carrying values at which we record these assets for financial reporting purposes. Any resulting downward adjustments are commonly referred to as "write-downs" of the assets affected by the changed conditions.

It is our practice to establish reserves or allowances against which we are able to charge any such downward adjustments or "write-downs" to these assets. Examples include an allowance established for uncollectible accounts receivable (sometimes referred to as "bad debt reserves"), an allowance for inventory obsolescence and a valuation allowance against our deferred tax asset to the extent necessary to reduce its carrying value to the amount of that asset that we believe we are likely to be able to use to reduce our income tax liability in future periods. The amounts at which those allowances are established and maintained are based on our historical experience and also on our assumptions and judgments about economic or market conditions or trends and any other factors that could affect the values at which we had recorded such assets. Those allowances are periodically increased to replenish the allowances following write-downs of uncollectible accounts or to take account of increased risks due to changes in economic or market conditions or trends. Increases in the allowances are effectuated by charges to income or increases in expense in our statement of operations in the periods when those allowances are increased. As a result, our judgments or assumptions about market and economic conditions or trends and about their effects on our financial performance can and will affect not only the amounts at which we record these assets on our balance sheet, but also our results of operations.

The decisions as to the timing of (i) adjustments or write-downs of this nature and (ii) the increases we make to our reserves, also require subjective evaluations or assessments about the effects and duration of changes in economic or market conditions or trends. For example, it is difficult to predict whether events or changes in economic or market conditions, such as economic slowdowns or a recession, or increasing gasoline prices or interest rates, will be of short or long-term duration, and it is not uncommon for it to take some time after the onset of such changes for their full effects on our business to be recognized. Therefore, management makes such estimates based upon the information available at that time and reevaluates and adjusts its reserves and allowances for potential write-downs on a quarterly basis.

Under GAAP, most businesses also must make estimates or judgments regarding the periods during which sales are recorded and also the amounts at which they are recorded. Those estimates and judgments will depend on such factors as the steps or actions that a business must take to complete a sale of products to or to perform services for a customer and the circumstances under which a customer would be entitled to return the products or reject or adjust the payment for the services rendered to it. Additionally, in the case of a business that grants its customers contractual rights to return products sold to them, GAAP requires that a reserve or allowance be established for product returns by

means of a reduction in the amount at which its sales are recorded based primarily on the nature, extensiveness and duration of those rights and historical return experience.

In making our estimates and assumptions we follow GAAP and accounting practices applicable to our business that we believe will enable us to make fair and consistent estimates of the carrying value of those assets and to establish adequate reserves or allowances for downward adjustments in those values that we may have to make in future periods.

Our Critical Accounting Policies

Set forth below is a summary of the accounting policies that we believe are material to an understanding of our financial condition and results of operations that are discussed below.

Revenue Recognition and the Allowance for Product Returns. We recognize revenue from the sale of a product upon its shipment to the customer. Shipping and handling costs that are billed to our customers are included in revenue in accordance with EITF No. 00-10. We provide our customers with limited rights to return products that we sell to them. We establish an allowance for potential returns that reduces the amounts of our reported sales. We estimate the allowance based on historical experience with returns of like products and current economic and market conditions and trends, which can affect the level at which customers submit product returns.

Accounts Receivable and the Allowance for Doubtful Accounts. In the normal course of our business we extend 30 day payment terms to our customers and, due to the seasonality of our business, during late fall and winter we sometimes grant payment terms of longer duration to those of our customers that have good credit records. We regularly review our customers' accounts and estimate the amount of, and establish an allowance for, uncollectible amounts or receivables in each reporting period. The amount of the allowance is based on several factors, including the age of unpaid amounts, a review of significant past due accounts, and current economic and market trends that can affect the ability of customers to keep their accounts current. Estimates of uncollectible amounts are reviewed periodically to determine if the allowance should be increased, and any increases are recorded in the accounting period in which the events that require such increases become known. For example, if the financial condition of some of our customers or economic or market conditions were to deteriorate, adversely affecting their ability to make payments to us on a timely basis, increases in the allowance may be required. Since the allowance is increased or replenished by recording a charge which is included in, and has the effect of increasing, selling, general and administrative expenses, an increase in the allowance will reduce income in the period when the increase is recorded.

Inventory and Reserve for Excess, Slow-Moving and Obsolete Inventory. We are a wholesale distributor, and not a manufacturer of products and, therefore, all of our inventory consists of finished goods. Inventories are valued at the lower of cost (first-in, first-out) or net realizable value and that value is reduced by an allowance for excess and slowing-moving or obsolete inventories. The amount of the allowance is determined on the basis of historical experience with different product lines, estimates or assumptions concerning future economic and market conditions and estimates of future sales. If there is an economic downturn or a decline in sales, causing inventories of some product lines to accumulate, it may become necessary to increase the allowance. Other factors that can require increases in the allowance or inventory write downs are reductions in pricing or introduction of new or competitive products by manufacturers; however, due to the relative maturity of the markets in which the Company operates, usually these are not significant factors. Increases in this allowance also will cause a decline in operating results as such increases are effectuated by charges against income. Our reserves for excess and obsolete inventory declined in absolute dollars to $2,341,000 at December 31, 2008 from $2,570,000 at December 31, 2007. However, the reserves at December 31, 2008 grew as a percentage of total inventories to approximately 7.5% from approximately 5.7% at December 31, 2007 as a result of (i) a decrease in our total inventories to $30.7 million at December 31, 2008 from $45.0 million at December 31, 2007 and (ii) a decision to leave the reserves substantially unchanged despite that decrease due primarily to the economic recession and the credit crisis which have led to lower demand for and a slowing of sales of the products we sell.

Deferred Tax Asset and Valuation Allowance. We record as a "deferred tax asset" on our balance sheet an amount equal to the tax credit and tax loss carryforwards and tax deductions ("tax benefits") that are available to us to offset or reduce our income tax liability in future periods. Under applicable federal and state income tax laws and regulations, such tax benefits will expire if not used within specified periods of time to reduce income taxes on taxable income that

we generate during those periods. Accordingly, the ability to fully use our deferred tax asset depends on the amount of taxable income that we are able to generate during those time periods. At least once each year, we make estimates of future taxable income that we believe we are likely to generate during those future periods. If we conclude, on the basis of those estimates and the aggregate amount of the tax benefits available to us, that it is more likely than not that we will be able to fully utilize those tax benefits prior to their expiration, we recognize the deferred tax asset in full on our balance sheet. On the other hand, if we conclude on the basis of those estimates and the aggregate amount of the tax benefits available to us that it is more likely that than not that we will be unable to utilize those tax benefits in their entirety prior to their expiration, then, we would establish (or increase any existing) valuation allowance to reduce the deferred tax asset on our balance sheet to the amount that we believe we will be able to utilize, by recognizing a non-cash charge that would have the effect of increasing the provision, or reducing any credit, for income taxes that would be recorded in our statement of operations. During 2008 we became eligible for a targeted jobs tax credit that had the effect of significantly increasing the amount of our deferred tax asset. Due primarily to that increase in tax benefits, however, we determined that as of December 31, 2008 it was no longer more likely than not that we would be able to fully utilize our deferred tax asset. Accordingly, at December 31, 2008 we established a valuation allowance primarily related to a targeted jobs tax credit to reduce the deferred tax asset on our balance sheet to approximately $3.0 million.

Long-Lived Assets. Long-lived assets are reviewed for possible impairment at least annually or if and when events or changes in circumstances indicate the carrying amount of any of those assets may not be recoverable in full, based on standards established by SFAS No. 142, by comparing the fair value of the long-lived asset to its carrying amount.

Foreign Currency Translation. The financial position and results of operations of our foreign subsidiaries are measured using local currency as the functional currency. Assets and liabilities of each foreign subsidiary are translated into U.S. dollars at the rate of exchange in effect at the end of each reporting period. Revenues and expenses of our foreign subsidiaries are translated into U.S. dollars at the average exchange rate for the reporting period. Foreign currency translation gains and losses not impacting cash flows are credited to or charged against other comprehensive earnings. Foreign currency translation gains and losses arising from cash transactions are credited to or charged against current earnings.

Stock Based Compensation. We adopted the provisions of Financial Accounting Standards Board Statement ("SFAS") 123R, Share-Based Payment ("SFAS 123R") effective on January 1, 2006. This statement establishes accounting standards for recording in a company's financial statements transactions in which an entity exchanges its equity instruments for goods or services. In the case of the Company, SFAS 123R applies primarily to transactions in which we obtain employee services for share-based payments, such as the options issued under our stock incentive plans. SFAS 123R provides for, and we elected to adopt, the modified prospective method for applying SFAS 123R. Under that method, we began recognizing compensation costs on January 1, 2006 for the fair value of (i) all share based award grants made on or after such date, and (ii) the portion of pre-existing awards for which the requisite service had not been rendered as of January 1, 2006, in each case based on the grant-date fair value of those awards calculated under SFAS 123R for pro forma disclosures. Our stock option compensation expense in the years ended December 31, 2008 and 2007 totaled $231,000 and $214,000, respectively.

Warranty Costs. We generally do not independently warrant the products that we distribute. Instead, the manufacturers of the products that we distribute warrant the products and allow us to return defective products, including those that have been returned to us by our customers. However, we began selling a line of portable and standby generators under a product supply arrangement which obligates us to provide warranty services for these products and to share the costs of providing those services with the manufacturer. The duration of the warranty period for these products is 24 months following the sale of the product to a retail customer. We established warranty reserves for these products of $418,000 and $553,000 at December 31, 2008 and 2007, respectively. In the event that the assumptions or estimates on which the amount of the reserves were determined later prove to be incorrect due to increases in the number or the dollar amounts of the warranty claims we receive, it could become necessary for us to increase the reserve by means of a charge to our income. Increases in sales of these products in the future also may require us to increase our warranty reserve from time to time.

Recent Accounting Pronouncements

Fair Value Measurement of Financial Assets and Liabilities. The Company adopted SFAS No. 157, "Fair Value Measurements" ("SFAS 157") on January 1, 2008. SFAS 157 applies primarily to financial assets and liabilities that are measured and reported on a fair value basis. It requires new disclosures regarding those fair value measurements that are designed to enable the reader of financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine

fair values. More specifically, SFAS 157 requires that assets and liabilities carried at fair value to be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities;

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data; and

Level 3: Unobservable inputs that are not corroborated by market data.

. . .