FORM 10-K

SECURITIES AND EXCHANGE COMMISSION

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended May 31, 2004
Commission File No. 1-4714

SKYLINE CORPORATION

Securities registered pursuant to section 12 (b) of the Act:

Securities registered pursuant to section 12 (g) of the Act:

Title of Class

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

YES [X]          NO [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes [X]          No [  ]

The aggregate market value of the voting stock held by non-affiliates of registrant (6,818,780 shares) based on the closing price on the New York Stock Exchange on July 14, 2004 was $253,454,053.

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DOCUMENTS INCORPORATED BY REFERENCE:

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FORM 10-K
CROSS-REFERENCE INDEX

Certain information required to be included in this Form 10-K is also included in the registrant’s Proxy Statement used in connection with its 2004 Annual Meeting of Shareholders to be held on September 30, 2004 (“2004 Proxy Statement”). The following cross-reference index shows the page locations in the 2004 Proxy Statement of that information which is incorporated by reference into this Form 10-K and the page location in this Form 10-K of that information not incorporated by reference. All other sections of the 2004 Proxy Statement are not required in this Form 10-K and should not be considered a part hereof.

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FORM 10-K
CROSS-REFERENCE INDEX
(Continued)

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PART I

Item 1.

Business

		General Development of Business
		Skyline Corporation was originally incorporated in Indiana in 1959, as successor to a business founded in 1951. Skyline Corporation and its consolidated subsidiaries (the “Corporation”) design, produce and distribute manufactured housing (mobile homes and multi-sectional homes) and towable recreational vehicles (travel trailers, including park models and fifth wheels).
		The Corporation, which is one of the largest producers of manufactured homes in the United States, produced 7,723 manufactured homes in fiscal year 2004.
		The Corporation’s manufactured homes are marketed under a number of trademarks. They are available in lengths ranging from 34’ to 80’ and in singlewide widths from 12’ to 18’, doublewide widths from 20’ to 32’, and triplewide widths from 36’ to 42’.
		The Corporation’s recreational vehicles are sold under the “Nomad”, “Layton”, “Aljo”, and “Weekender” trademarks for travel trailers and fifth wheels.
		In fiscal year 2004, manufactured homes represented 72 percent of total sales, while recreational vehicles accounted for the remaining 28 percent. In the prior year, the sales dollars were 70 percent manufactured homes and 30 percent recreational vehicles. Additional financial data relating to these industry segments is included in Note 5, Industry Segment Information, in the Notes to Consolidated Financial Statements included in this document under Item 8.
		Narrative Description of Business
		Principal Markets
		The principal markets for manufactured homes are the suburban and rural areas of the continental United States. The principal buyers continue to be young married couples and senior citizens, but the market tends to broaden when conventional housing becomes more difficult to purchase and finance.
		The recreational vehicle market is made up of primarily vacationing families, retired couples traveling around the country and sports enthusiasts pursuing four-season hobbies.

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Item 1.

Business

		Method of Distribution
		The Corporation’s manufactured homes are distributed by approximately 370 dealers at 680 locations throughout the United States and recreational vehicles are distributed by approximately 260 dealers at 290 locations throughout the United States. These are generally not exclusive dealerships and it is believed that most dealers also sell products of other manufacturers.
		The Corporation provides the retail purchaser of its manufactured homes with a full fifteen-month warranty against defects in materials and workmanship. Recreational vehicles are covered by a two-year warranty. The warranties are backed by a corporate service department and an extensive field service system.
		The Corporation’s products are sold to dealers either through floor plan financing with various financial institutions or on a cash basis. Payments to the Corporation are made either directly by the dealer or by financial institutions, which have agreed to finance dealer purchases of the Corporation’s products. In accordance with industry practice, certain financial institutions which finance dealer purchases require the Corporation to execute repurchase agreements which provide that in the event a dealer defaults on its repayment of the financing, the Corporation will repurchase its products from the financing institution in accordance with a declining repurchase price schedule established by the Corporation. Any loss under these agreements is the difference between the repurchase cost and the resale value of the units repurchased. Further, the risk of loss is spread over numerous dealers. There have been no material losses related to repurchases in past years. Additional information regarding these repurchase agreements is included in Note 2, Contingencies, in the Notes to Consolidated Financial Statements included in this document under Item 8.
		Raw Materials and Supplies
		The Corporation is basically an assembler of components purchased from outside sources. The major components used by the Corporation are lumber, plywood, shingles, vinyl and wood siding, steel, aluminum, insulation, home appliances, furnaces, plumbing fixtures, hardware, floor coverings and furniture. The suppliers are many and range in size from large national companies to very small local companies. At the present time the Corporation is obtaining sufficient materials to fulfill its needs.
		Patents, Trademarks, Licenses, Franchises and Concessions
		The Corporation does not rely upon any terminable or nonrenewable rights such as patents, licenses or franchises under the trademarks or patents of others, in the conduct of any segment of its business.

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Item 1.

Business

		Seasonal Fluctuations
		While the Corporation maintains production of manufactured homes and recreational vehicles throughout the year, seasonal fluctuations in sales do occur. Sales and production of manufactured homes are affected by winter weather conditions at the Corporation’s northern plants. Recreational vehicle sales are generally higher in the spring and summer months than in the fall and winter months.
		Inventory
		The Corporation does not build significant inventories of either finished goods or raw materials. In addition, there are no significant inventories sold on consignment.
		Dependence Upon Individual Customers
		The Corporation does not rely upon any single dealer for a significant percentage of its business in any industry segment.
		Backlog
		The Corporation does not consider the existence and extent of backlog to be significant in its business. The Corporation’s production is based on a relatively short manufacturing cycle and dealers’ orders, which continuously fluctuate. As such, the existence of backlog is not significant at any given date and does not typically provide a reliable indication of the status of the Corporation’s business.
		Government Contracts
		The Corporation has had no significant government contracts during the past three years.
		Competitive Conditions
		The manufactured housing and recreational vehicle industries are highly competitive, with particular emphasis on price and features offered. The Corporation’s competitors are numerous, ranging from multi-billion dollar corporations to relatively small and specialized manufacturers.

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Item 1.

Business

		Competitive Conditions, continued
		In the recent years the manufactured housing industry has been in a recession caused primarily by restrictive retail financing, overall economic uncertainty and global tensions. The following chart illustrates the recession’s effect on industry shipments as reported by the Manufacturing Housing Institute (by calendar year):

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Item 1.

Business

		Competitive Conditions, continued
		As noted in the chart, the industry shipped approximately 131,000 homes in calendar year 2003. In the same period, the Corporation shipped 7,760 units for a 5.9 percent market share. In calendar year 2002, approximately 168,500 homes were shipped by the industry. In that period, the Corporation shipped 8,711 homes for a 5.2 percent market share.
		The recreational vehicle industry shipped 377,800 units in calendar year 2003 compared to 378,700 units in calendar year 2002. The following table shows the Corporation’s competitive position in the recreational vehicle product lines it sells.

		Both the manufactured housing and recreational vehicle segments of the Corporation’s business are dependent upon the availability of financing to dealers and retail financing. Consequently, increases in interest rates and/or tightening of credit through governmental action or otherwise have adversely affected the Corporation’s business in the past and may do so in the future.
		The Corporation considers it impossible to predict the future occurrence, duration or severity of cost or availability problems in financing either manufactured homes or recreational vehicles. To the extent that they occur, such public concerns will affect sales of the Corporation’s products.
		Regulation
		The manufacture, distribution and sale of manufactured homes and recreational vehicles are subject to government regulations in both the United States and Canada, at federal, state or provincial and local levels.

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Item 1.

Business

		Environmental Quality
		The Corporation believes that compliance with federal, state and local requirements respecting environmental quality will not require any material capital expenditures for plant or equipment modifications which would adversely affect earnings.
		Other Regulations
		The U.S. Department of Housing and Urban Development (HUD) has set national manufactured home construction and safety standards and implemented recall and other regulations since 1976. The National Mobile Home Construction and Safety Standards Act of 1974, as amended, under which such standards and regulations are promulgated, prohibits states from establishing or continuing in effect any manufactured home standard that is not identical to the federal standards as to any covered aspect of performance. Implementation of these standards and regulations involves inspection agency approval of manufactured home designs, plant and home inspection by states or other HUD-approved third parties, manufacturer certification that the standards are met, and possible recalls if they are not or if homes contain safety hazards.
		HUD has promulgated rules requiring producers of manufactured homes to utilize wood products certified by their suppliers to meet HUD’s established limits on formaldehyde emissions, and to place in each home written notice to prospective purchasers of possible adverse reaction from airborne formaldehyde in the homes. These rules are designated as preemptive of state regulation.
		Some components of manufactured homes may also be subject to Consumer Product Safety Commission standards and recall requirements. In addition, the Corporation has voluntarily subjected itself to third party inspection of all of its products nationwide in order to further assure the Corporation, its dealers, and customers of compliance with established standards.
		Manufactured homes and recreational vehicles may be subject to the Magnuson-Moss Warranty – Federal Trade Commission Improvement Act, which regulates warranties on consumer products. The Corporation believes that its existing warranties meet all requirements of the Act.
		The transportation and placement (in the case of manufactured homes) of the Corporation’s products are subject to state highway use regulations and local ordinances which control the size of units that may be transported, the roads to be used, speed limits, hours of travel, and allowable locations for manufactured homes and parks.

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Item 1.

Business

		Other Regulations, continued
		The Corporation’s travel trailers continue to be subject to safety standards and recall and other regulations promulgated by the U.S. Department of Transportation under the National Traffic and Motor Vehicle Safety Act of 1966 and the Transportation Recall Enhancement, Accountability and Documentation (TREAD) Act, as well as state laws and regulations.
		The Corporation’s operations are subject to the Federal Occupational Safety and Health Act, and are routinely inspected thereunder.
		The corporation is also subject to many state manufacturer licensing and bonding requirements, and to dealer day in court requirements in some states.
		The Sarbanes-Oxley Act of 2002 has introduced many new requirements applicable to the company regarding corporate governance and reporting. Section 404 of the Act requires management to report on the Corporation’s internal controls over financial reporting. The Corporation may devote substantial time and cost during fiscal year 2005 to ensure compliance. Management is making every effort to comply with Section 404 in a timely fashion.
		Number of Employees
		The Corporation employs approximately 2,700 people at the present time.
		Available Information
		The Corporation makes available, free of charge, through the Investors section of its internet website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as practicable after such material is electronically filed or furnished to the Securities Exchange Commission. The Corporation’s internet address is http://www.skylinecorp.com.

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Item 2.

Properties

The Corporation owns its corporate offices and design facility, which are located in Elkhart, Indiana.

The Corporation’s 22 manufacturing facilities, all of which are owned, are as follows:

		The above facilities range in size from approximately 50,000 square feet to approximately 160,000 square feet. In November 2003 the Corporation idled its manufacturing housing facility in Mocksville, North Carolina. This property’s net book value is not significant to the assets of the Corporation.
		It is extremely difficult to determine the unit productive capacity of the Corporation because of the ever-changing product mix.
		The Corporation believes that its plant facilities, machinery and equipment are well maintained and are in good operating condition.

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Item 3.

Legal Proceedings

Neither the Corporation nor any of its subsidiaries is a party to any pending legal proceedings which could have a material effect on operations.

Item 4.

Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of fiscal year ended May 31, 2004.

PART II

Item 5.

Market for the Registrant’s Common Stock and Related Stockholder Matters

Skyline Corporation (SKY) is traded on the New York Stock Exchange. A quarterly cash dividend of 18 cents ($0.18) per share was paid in fiscal 2004 and 2003. At May 31, 2004, there were approximately 1,100 holders of record of Skyline Corporation common stock. A quarterly summary of the market price is listed for the fiscal years ended May 31, 2004 and 2003.

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Item 6.

Selected Financial Data

Dollars in thousands except per share data

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Overview

The Corporation sells manufactured housing and towable recreational vehicle products to independent dealers located throughout the United States. To better serve the needs of its dealers, the Corporation has twenty-two manufacturing facilities in eleven states. Manufactured housing and recreational vehicles are sold to dealers either through floor plan financing with various financial institutions or on a cash basis.

Sales in both business segments are affected by the strength of the U.S. economy, interest rate levels, consumer confidence and the availability of wholesale and retail financing. The manufactured housing segment is currently affected by an industry recession. This recession, caused primarily by restrictive retail financing, economic uncertainty and global tensions, is resulting in industry sales to be the lowest in decades. In the recreational vehicle segment, the Corporation sells travel trailers, fifth wheels and park models. Industry sales of travel trailers and fifth wheels have seen steady growth in recent years.

Despite the recession in the manufactured housing industry, demand for multi-section homes is increasing. This product is often sold as part of a land-home package and is financed with a conventional mortgage. Multi-section homes have an appearance similar to site-built homes and are notably less expensive. During fiscal 2004, the Corporation capitalized on the increased demand for multi-section homes by expanding manufacturing capabilities. Twelve manufacturing housing facilities obtained approval to produce modular homes, which will extend existing product offerings.

The recreational vehicle segment is witnessing a shift in consumer demand for both metal-sided products and products with bonded fiberglass exteriors. The Corporation is positioning itself to take advantage of the expanding towable recreational vehicle segment in which it competes.

Results of Operations - Fiscal 2004 Compared to Fiscal 2003

Sales and Unit Shipments
(Dollars in thousands)

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Results of Operations - Fiscal 2004 Compared to Fiscal 2003, continued

Manufactured housing unit sales continue to be affected by difficult market conditions, restrictive retail financing, economic uncertainty and increased global tensions. Average sales per unit increased due to a product mix shift toward multi-section homes, representing 80.2 percent of total unit sales in fiscal 2004 versus 76.6 percent in fiscal 2003.

Two factors caused the decline in recreational vehicle sales. Demand for towable metal-sided recreational vehicles shifted toward product with price points lower than those historically offered by the Corporation. This shift in demand began in the third quarter of fiscal year 2003. Sales were affected by a timing issue in introducing the new 2004 product line, which addressed this shift in demand. In addition, the market is dictating a higher priced bonded fiberglass exterior. The Corporation currently offers a limited number of models with similar exteriors. The following table shows the Corporation’s competitive position in the recreational vehicle product lines it sells relative to the recreational vehicle industry.

Cost of Sales
(Dollars in thousands)

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Results of Operations - Fiscal 2004 Compared to Fiscal 2003, continued

The percentage increase in cost of sales for recreational vehicles is the result of a product mix shift toward lower margin models. Cost of sales for both segments was negatively affected in the fourth quarter of fiscal 2004 by an unprecedented increase in the cost of lumber, lumber-related materials and steel.

Selling and Administrative Expenses
(Dollars in thousands)

Operating Earnings
(Dollars in thousands)

Operating earnings for manufactured housing increased due to increased sales of higher margin multi-section homes. Operating earnings for recreational vehicles declined primarily due to an overall decrease in sales, and sales of lower margin products. General corporate expenses increased primarily due to a change in valuation of the Corporation’s liability for post-retirement benefits offered to certain employees.

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Interest Income
(Dollars in thousands)

Interest income is directly related to the amount available for investment and the prevailing yields of U.S. Government Securities.

Results of Operations - Fiscal 2003 Compared to Fiscal 2002

Sales and Unit Shipments

(Dollars in thousands)

Manufactured housing sales were affected by difficult market conditions, restrictive retail financing, economic uncertainty and increased global tensions.

The increase in recreational vehicle sales was a reflection of an industry-wide improvement in market conditions for towable recreational vehicles. This trend began in early calendar year 2002. There was, however, a softening of demand in the Corporation’s fourth quarter of fiscal 2003. This softening was due to consumers purchasing metal-sided products with price points lower than those historically offered by the Corporation. Sales for that period totaled $31,762,000 versus $36,527,000 from the prior year.

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Results of Operations - Fiscal 2003 Compared to Fiscal 2002, continued

Cost of Sales

(Dollars in thousands)

As a percentage of segment sales, manufactured housing cost of sales increased as a result of certain manufacturing expenses being fixed and semi-fixed during a period of declining sales.

Recreational vehicle cost of sales, as a percentage of segment sales, increased slightly due to a shift in model mix.

Selling and Administrative Expenses

(Dollars in thousands)

The decrease was due to a reduction in expenses for group health insurance, legal services and bonuses for certain administrative employees.

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Results of Operations - Fiscal 2003 Compared to Fiscal 2002, continued

Operating Earnings
(Dollars in thousands)

Earnings for manufactured housing declined due to the continuation of difficult market conditions noted above. Recreational vehicle operating earnings decreased due to increased cost of sales as noted above. General corporate expenses declined due to a reduction in bonuses paid to certain administrative employees.

Interest Income
(Dollars in thousands)

Interest income is directly related to the amount available for investments and the prevailing yields of U.S. Government Securities.

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Liquidity and Capital Resources
(Dollars in thousands)

The Corporation’s policy is to invest in U.S. Government Securities when cash exceeds immediate operating requirements. Cash and U.S. Treasury Bills declined primarily as a result of a $3,300,000 prepayment to a new carrier for workers compensation insurance. The payment consists of anticipated administrative expenses as well as an amount the carrier believes will be needed to fund worker compensation claims over the next twelve months. Current assets exclusive of cash and U.S. Treasury Bills increased due to this payment. In addition, accounts receivable increased $3,798,000 as a result of sales for May 2004 being greater than May 2003 sales.

Various factors contributed to the increase in current liabilities. Accounts payable increased $1,786,000 due to a greater amount of sales for May 2004 versus May 2003. Income taxes payable decreased $1,620,000 due to the timing of tax payments at May 31, 2004 versus May 31, 2003.

Other deferred liabilities increased $1,162,000 primarily as a result of a change in valuation of the Corporation’s liability for post-retirement benefits offered to certain employees.

Capital expenditures totaled $1,928,000 for fiscal 2004 compared to $1,523,000 in the previous year. Capital expenditures during this period were made primarily to replace or refurbish machinery, equipment and facilities in addition to improving manufacturing efficiencies.

The cash provided by operating activities, along with current cash and other short-term investments, is expected to be adequate to fund any capital expenditures and treasury stock purchases during the year. Historically, the Corporation’s financing needs have been met through funds generated internally.

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Contractual Obligations and Commitments

The following table summarizes the Corporation’s contractual obligation for operating lease agreements as of May 31, 2004 (dollars in thousands):

     The following table summarizes the Corporation’s commitments for repurchase agreements as of May 31, 2004 (dollars in thousands):

Additional information regarding the nature of the repurchase agreements and the operating leases is in Note 2 to the Notes to the Consolidated Financial Statements. During fiscal 2004, the Corporation did not experience any losses on the sale of repurchased units, while incurring losses of $50,000 and $179,000 during fiscal years 2003 and 2002, respectively.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires the Corporation to make certain estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. Estimates are periodically evaluated using historical experience and various other factors believed to be reasonable under the circumstances. Actual results could differ from these estimates. The following accounting policies are considered to require significant estimates:

Product Warranties

As referenced in Note 1 of the Notes to Consolidated Financial Statements, manufactured homes are sold with a fifteen-month warranty and recreational vehicles are sold with a two-year warranty. Estimated warranty costs are accrued at the time of sale based upon sales, historical experience and management’s judgment regarding anticipated rates of warranty claims. Significant changes in these factors could have a material adverse impact on future results of operations.

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Critical Accounting Policies, continued

Workers’ Compensation Insurance

The Corporation is insured for expenses associated with workers’ compensation. Costs are accrued based on estimates of future medical claims provided by the carrier that insures the Corporation. Accruals are made up to a specified limit per individual injured and for an aggregate limit determined by the carrier.

Health Insurance

As referenced in Note 4 of the Notes to Consolidated Financial Statements, the Corporation utilizes insurance companies and a third party administrator in offering health insurance coverage to its employees. Costs of claims incurred but not paid are accrued based on past claims experience and relevant trend factors provided by the insurance companies and the third party administrator.

Other Matters

The provisions for federal income taxes in each year approximates the statutory rate and for state income taxes reflects current state rates effective for the period based upon activities within the taxable entities.

The consolidated financial statements included in this report reflect transactions in the dollar values in which they were incurred and, therefore, do not attempt to measure the impact of inflation. The Corporation believes that inflation has not had a material effect on its operations during fiscal years 2003 and 2002. During fourth quarter of fiscal year 2004, the Corporation experienced significant increases in the cost of lumber, lumber-related materials and steel. Although the Corporation was unable to recover all of the increases in that quarter, on a long-term basis it has demonstrated an ability to adjust selling prices in reaction to changing costs due to inflation.

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Forward Looking Information

Certain statements in this report are considered forward looking as indicated by the Private Securities Litigation Reform Act of 1995. These statements involve uncertainties that may cause actual results to materially differ from expectations as of the report date. These uncertainties include but are not limited to:

•

Cyclical nature of the manufactured housing and recreational vehicle industries

•

General or seasonal weather conditions affecting sales

•

Potential periodic inventory adjustments by independent retailers

•

Availability of wholesale and retail financing

•

Interest rate levels

•

Impact of inflation

•

Cost of labor and raw materials

•

Competitive pressures on pricing and promotional costs

•

Catastrophic events impacting insurance costs

•

Consumer confidence and economic uncertainty

•

Market demographics

•

Management’s ability to attract and retain executive officers and key personnel

•

Increased global tensions, market disruption resulting from a terrorist or other attack and any armed conflict involving the United States.

Index to Consolidated Financial Statements

All other schedules are omitted because they are not applicable or the required information is show in the financial statements or notes thereto.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Skyline Corporation

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings and retained earnings, and of cash flows present fairly, in all material respects, the financial position of Skyline Corporation and its subsidiaries at May 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Chicago, Illinois
June 17, 2004

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Skyline Corporation and Subsidiary Companies

Consolidated Balance Sheets
May 31, 2004 and 2003
(Dollars in thousands)

The accompanying notes are a part of the consolidated financial statements.

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Skyline Corporation and Subsidiary Companies

Consolidated Balance Sheets
May 31, 2004 and 2003
(Dollars in thousands)

The accompanying notes are a part of the consolidated financial statements.

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Skyline Corporation and Subsidiary Companies

Consolidated Statements of Earnings and Retained Earnings
For the Years Ended May 31, 2004, 2003 and 2002
(Dollars in thousands, except per share data)

The accompanying notes are a part of the consolidated financial statements.

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Skyline Corporation and Subsidiary Companies

Consolidated Statements of Cash Flows
For the Years Ended May 31, 2004, 2003 and 2002
Increase (Decrease) in Cash
(Dollars in thousands)

The accompanying notes are a part of the consolidated financial statements.

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Skyline Corporation and Subsidiary Companies

Consolidated Statements of Cash Flows, continued
For the Years Ended May 31, 2004, 2003 and 2002
Increase (Decrease) in Cash
(Dollars in thousands)

The accompanying notes are a part of the consolidated financial statements.

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Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements

NOTE 1 Nature of Operations and Accounting Policies

Nature of operations—Skyline Corporation designs, manufactures and sells at wholesale both a broad line of single and multi-section manufactured homes and a large selection of towable recreational vehicle models. Both product lines are sold through numerous independent dealers throughout the United States who often utilize floor plan financing arrangements with lending institutions.

The following is a summary of the accounting policies that have a significant effect on the consolidated financial statements.

Basis of presentation—The consolidated financial statements include the accounts of Skyline Corporation and all of its subsidiaries (the “Corporation”), each of which is wholly-owned. All intercompany transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Revenue recognition—Substantially all of the Corporation’s products are made to order. Revenue is recognized upon shipment.

Freight billed to customers is considered sales revenue, and the related freight costs are cost of sales. Volume based rebates paid to dealers are classified as a reduction of sales revenue.

Consolidated statements of cash flows—For purposes of the statements of cash flows, investments in U. S. Treasury Bills are included as investing activities. The Corporation’s cash flows from operating activities were reduced by income taxes paid of $5,884,000, $4,079,000 and $8,870,000 in 2004, 2003 and 2002, respectively.

Inventory—Inventories are stated at cost, determined under the first-in, first-out method, which is not in excess of market. Physical inventory counts are taken at the end of each reporting quarter.

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Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements

NOTE 1 Nature of Operations and Accounting Policies, continued

Total inventories for the periods presented consisted of (dollars in thousands):

Property, plant and equipment—Property, plant and equipment is stated at cost. Depreciation is computed over the estimated useful lives of the assets using the straight-line method for financial statement reporting and accelerated methods for income tax purposes. Estimated useful lives for significant classes of property, plant and equipment are as follows: Building and improvements 10 to 30 years; Machinery and equipment 5 to 15 years.

Investments—The Corporation invests in United States Government Securities. These securities are typically held until maturity or reasonable proximity to maturity and are therefore classified as held-to-maturity and carried at amortized cost.

The carrying value of U.S. Treasury Bills, which approximates their fair market value, totaled $141,611,000 and $145,721,000 at May 31, 2004 and 2003, respectively. These securities mature within one year. The Corporation does not have any other financial instruments which have market values differing from recorded values.

Warranty—The Corporation provides the retail purchaser of its manufactured homes with a fifteen-month warranty against defects in design, materials and workmanship. Recreational vehicles are covered by a two-year warranty. The warranties are backed by a corporate service department and an extensive field service system. Estimated warranty costs are accrued at the time of sale based upon current sales, historical experience and management’s judgment regarding anticipated rates of warranty claims. The adequacy of the recorded warranty liability is periodically assessed and the amount is adjusted as necessary.

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Skyline Corporation and Subsidiary Companies

Notes to Consolidated Financial Statements

Note 1 Nature of Operations and Accounting Policies, continued

A reconciliation of accrued warranty and related expenses is as follows (dollars in thousands):

Income taxes—The difference between the Corporation’s statutory federal income tax rate and the effective income tax rate is due primarily to state income taxes as follows (dollars in thousands):