##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549


FORM 10-K


FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended March 25, 2005                                                    
|          
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission File Number 0-24268


PALM HARBOR HOMES, INC.


(Exact name of registrant as specified in our charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Florida                                                            |  | 59-1036634                              
|(State or Other Jurisdiction of
    Incorporation or Organization) |  | (I.R.S. Employer
    Identification No.)
|                                                                  
|15303 Dallas Parkway, Suite 800, Addison, Texas                    |  | 75001                                   
|(Address of Principal Executive Offices)                           |  | (Zip Code)                              

Registrants telephone number, including area code:


(972) 991-2422


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


None


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


Common Stock, par value $0.01 per share


(Title of Class)


þ o


o




þ o


DOCUMENTS INCORPORATED BY REFERENCE












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TABLE OF CONTENTS


|                                                   |  |                                                                                                                      |    |      |    | 
|-------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                                   |  |                                                                                                                      |    | Page |   
|                                                   |  |                                                                                                                      |    |      |   
|PART I                                            
|Item 1.                                            |  | Business                                                                                                             |    |      | 1  | 
|Item 2.                                            |  | Properties                                                                                                           |    |      | 8  | 
|Item 3.                                            |  | Legal Proceedings                                                                                                    |    |      | 9  | 
|Item 4.                                            |  | Submission of Matters to a Vote of Security
    Holders                                                              |    |      | 9  | 
|PART II                                           
|Item 5.                                            |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |    |      | 10 | 
|Item 6.                                            |  | Selected Financial Data                                                                                              |    |      | 11 | 
|Item 7.                                            |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |    |      | 12 | 
|Item 7A.                                           |  | Quantitative and Qualitative Disclosures
    about Market Risk                                                       |    |      | 23 | 
|Item 8.                                            |  | Financial Statements and Supplementary
    Data                                                                      |    |      | 24 | 
|Item 9.                                            |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |    |      | 42 | 
|Item 9A.                                           |  | Controls and Procedures                                                                                              |    |      | 42 | 
|PART III                                          
|Item 10.                                           |  | Directors and Executive Officers of the
    Registrant                                                               |    |      | 45 | 
|Item 11.                                           |  | Executive Compensation                                                                                               |    |      | 45 | 
|Item 12.                                           |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |    |      | 45 | 
|Item 13.                                           |  | Certain Relationships and Related
    Transactions                                                                   |    |      | 45 | 
|Item 14.                                           |  | Principal Accountant Fees and Services                                                                               |    |      | 45 | 
|PART IV                                           
|Item 15.                                           |  | Exhibits and Financial Statement
    Schedules                                                                       |    |      | 45 | 
|Signatures                                         |  |                                                                                                                      | 47 |     
|Index to Exhibits                                  |  |                                                                                                                      | 49 |     
|Certifications                                     |  |                                                                                                                      | 50 |     
|List of Subsidiaries                              
|Consent of Ernst & Young LLP                      
|Certification Pursuant to Rule 13a-14(a)/15d-14(a)
|Certification Pursuant to Rule 13a-14(a)/15d-14(a)
|Certification Pursuant to Section 906             
|Certification Pursuant to Section 906             





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##### Table of Contents






PART I.







|        |         
|------- | --------
|Item 1. | Business

General






Factory-Built Operations






|                                                           |                |      |        |       |      |  |       |       |  |  |       |       |  |      |       |       |  |  |       |       | 
|---------------------------------------------------------- | -------------- | ---- | ------ | ----- | ---- |  | ----- | ----- |  |  | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                                                           |                | 2001 |        |       | 2002 |  |       | 2003  |  |  | 2004  |       |  | 2005 |      
|                                                           |                |      |        |       |      |  |       |       |  |  |       |       |  |      |      
|Factory-built homes sold:                                  |                |      |        |       |      |  |       |       |  |  |       |       |  |      |       |       |  |  |       |      
|                                                           | Single-section |      |        | 2,166 |      |  |       | 1,473 |  |  |       | 727   |  |      |       | 474   |  |  |       | 355   | 
|                                                           | Multi-section  |      |        | 8,663 |      |  |       | 8,465 |  |  |       | 7,280 |  |      |       | 6,780 |  |  |       | 6,211 | 
|                                                           | Modular        |      |        |      |      |  |       |      |  |  |       | 670   |  |      |       | 962   |  |  |       | 1,382 | 
|                                                           |                |      |        |       |      |  |       |       |  |  |       |       |  |      |      
|Total factory-built homes sold                             |                |      | 10,829 |       |      |  | 9,938 |       |  |  | 8,677 |       |  |      | 8,216 |       |  |  | 7,948 |      
|                                                           |                |      |        |       |      |  |       |       |  |  |       |       |  |      |      
|Operating manufacturing facilities (at end of fiscal year) |                |      | 15     |       |      |  | 15    |       |  |  | 19    |       |  |      | 19    |       |  |  | 18    |      



1



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| |                   
| | ------------------
| | Manufactured Homes

tm tm tm tm




tm








2



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| |              
| | -------------
| | Modular Homes













| |       
| | ------
| | Retail



|                                                |  |           |       |  |           |  |       |           |  |  |       | 
|----------------------------------------------- |  | --------- | ----- |  | --------- |  | ----- | --------- |  |  | ----- | 
|                                                |  | March 28, |       |  | March 26, |  |       | March 25, | 
|                                                |  | 2003      |       |  | 2004      |  |       | 2005      | 
|                                                |  |           |       |  |           |  |       |           | 
|Factory-built homes sold by:                    |  |           |       |  |           |  |       |           |  |  |       | 
|Company-owned superstores and builder locations |  |           | 6,541 |  |           |  | 5,846 |           |  |  | 4,762 | 
|Independent dealers, builders and developers    |  |           | 2,136 |  |           |  | 2,370 |           |  |  | 3,186 | 
|                                                |  |           |       |  |           |  |       |           | 
|Total                                           |  |           | 8,677 |  |           |  | 8,216 |           |  |  | 7,948 | 
|                                                |  |           |       |  |           |  |       |           | 
|Number of:                                      |  |           |       |  |           |  |       |           |  |  |       | 
|Company-owned superstores and builder locations |  |           | 158   |  |           |  | 149   |           |  |  | 121   | 
|Independent dealers, builders and developers    |  |           | 300   |  |           |  | 275   |           |  |  | 375   | 
|                                                |  |           |       |  |           |  |       |           | 
|Total                                           |  |           | 458   |  |           |  | 424   |           |  |  | 496   | 
|                                                |  |           |       |  |           |  |       |           | 



3



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Independent Builders/ Developers




Markets Served




|          |  |                                                                                                                                                     |  |                   |      | 
|--------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---- | 
|          |  |                                                                                                                                                     |  | Percentage of     |     
|Region    |  | Primary States                                                                                                                                      |  | Revenue by Region |     
|          |  |                                                                                                                                                     |  |                   |     
|Southeast |  | Florida, North Carolina, Alabama, Georgia, South Carolina,
    Mississippi, Tennessee, Virginia, West Virginia, Maryland,
    Connecticut, Delaware |  |                   | 46%  | 
|Central   |  | Texas, Oklahoma, Arkansas, Louisiana                                                                                                                |  |                   | 24   | 
|West      |  | New Mexico, Arizona, California, Colorado, Oregon, Washington,
    Montana, Nevada, Idaho                                                           |  |                   | 27   | 
|Midwest   |  | Ohio, Michigan, Indiana, Kentucky, Illinois, Pennsylvania,
    Missouri                                                                             |  |                   | 3    | 
|          |  |                                                                                                                                                     |  |                   |     
|          |  |                                                                                                                                                     |  |                   | 100% | 
|          |  |                                                                                                                                                     |  |                   |     





Consumer Financing




4



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Insurance




Wholesale Financing






5



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Competition






Business Segment Information




Government Regulation






6



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Seasonality




7



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Associates




Website Access to Company Reports and Other Documents


www.palmharbor.com www.sec.gov









|        |           
|------- | ----------
|Item 2. | Properties



|               |  |              |  |               |      |  |              |  |             |             |  |  |         |    
|-------------- |  | ------------ |  | ------------- | ---- |  | ------------ |  | ----------- | ----------- |  |  | ------- | ---
|               |  |              |  | Commencement  |      |  |              |  | Approximate |            
|State          |  | City         |  | of Production |      |  | Owned/Leased |  |             | Square Feet | 
|               |  |              |  |               |      |  |              |  |             |             | 
|Alabama        |  | Boaz         |  |               | 1986 |  |              |  | Leased      |             |  |  | 97,683  |    
|               |  |              |  |               | 1993 |  |              |  | Leased      |             |  |  | 75,164  | (1)
|Arizona        |  | Tempe        |  |               | 1978 |  |              |  | Owned       |             |  |  | 103,500 |    
|               |  | Casa Grande  |  |               | 1997 |  |              |  | Owned       |             |  |  | 90,000  |    
|Florida        |  | Plant City   |  |               | 1981 |  |              |  | Owned       |             |  |  | 93,600  |    
|               |  |              |  |               | 1985 |  |              |  | Owned       |             |  |  | 87,200  |    
|Georgia        |  | Arabi        |  |               | 1999 |  |              |  | Owned       |             |  |  | 97,970  |    
|               |  | LaGrange     |  |               | 1996 |  |              |  | Owned       |             |  |  | 200,000 |    
|North Carolina |  | Albemarle    |  |               | 1994 |  |              |  | Owned       |             |  |  | 112,700 |    
|               |  | Siler City   |  |               | 1988 |  |              |  | Owned       |             |  |  | 91,200  |    
|               |  |              |  |               | 1996 |  |              |  | Leased      |             |  |  | 40,000  |    
|Ohio           |  | Sabina       |  |               | 1988 |  |              |  | Owned       |             |  |  | 85,000  |    
|Oregon         |  | Millersburg  |  |               | 1995 |  |              |  | Owned       |             |  |  | 168,650 |    
|Texas          |  | Austin       |  |               | 1981 |  |              |  | Owned       |             |  |  | 103,800 |    
|               |  | Burleson     |  |               | 1992 |  |              |  | Owned       |             |  |  | 77,000  | (1)
|               |  | Fort Worth   |  |               | 1993 |  |              |  | Owned       |             |  |  | 94,300  |    
|               |  | Buda         |  |               | 1993 |  |              |  | Owned       |             |  |  | 121,300 |    
|               |  |              |  |               | 1994 |  |              |  | Owned       |             |  |  | 88,275  |    
|Virginia       |  | Martinsville |  |               | 1969 |  |              |  | Owned       |             |  |  | 43,505  |    
|               |  |              |  |               | 1972 |  |              |  | Owned       |             |  |  | 148,346 |    
|               |  |              |  |               | 1974 |  |              |  | Owned       |             |  |  | 56,593  |    
|               |  |              |  |               | 1996 |  |              |  | Owned       |             |  |  | 75,262  |    






|    |                                                
|--- | -----------------------------------------------
|(1) | Production line was idled as of March 25, 2005.

8



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|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings














|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders



9



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PART II.







|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities



|               |  |      |       |  |     |   |       | 
|-------------- |  | ---- | ----- |  | --- | - | ----- | 
|Fiscal 2005    |  | High |       |  | Low |  
|               |  |      |       |  |     |  
|First Quarter  |  | $    | 24.07 |  |     | $ | 17.09 | 
|Second Quarter |  |      | 17.93 |  |     |   | 14.94 | 
|Third Quarter  |  |      | 17.55 |  |     |   | 14.03 | 
|Fourth Quarter |  |      | 16.91 |  |     |   | 13.93 | 

|               |  |      |       |  |     |   |       | 
|-------------- |  | ---- | ----- |  | --- | - | ----- | 
|Fiscal 2004    |  | High |       |  | Low |  
|               |  |      |       |  |     |  
|First Quarter  |  | $    | 20.24 |  |     | $ | 14.12 | 
|Second Quarter |  |      | 19.17 |  |     |   | 16.70 | 
|Third Quarter  |  |      | 19.59 |  |     |   | 16.55 | 
|Fourth Quarter |  |      | 24.04 |  |     |   | 16.22 | 





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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                                                                              |  |                                       |         |   |           |   |         |           |  |   |           |   |  |           |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | --------- | - | ------- | --------- |  | - | --------- | - |  | --------- | ------- | - |  | - | ------- | -
|                                                                                              |  | Fiscal Year Ended                     |        
|                                                                                              |  |                                       |        
|                                                                                              |  | March 30,                             |         |   | March 29, |   |         | March 28, |  |   | March 26, |   |  | March 25, |        
|                                                                                              |  | 2001                                  |         |   | 2002      |   |         | 2003(2)   |  |   | 2004      |   |  | 2005      |        
|                                                                                              |  |                                       |         |   |           |   |         |           |  |   |           |   |  |           |        
|                                                                                              |  | (In thousands, except per share data) |        
|Statement of Income:                                                                          |  |                                       |         |   |           |   |         |           |  |   |           |   |  |           |         |   |  |   |         |  
|Net sales                                                                                     |  | $                                     | 650,451 |   |           | $ | 627,380 |           |  | $ | 573,130   |   |  | $         | 578,465 |   |  | $ | 610,538 |  
|Cost of sales                                                                                 |  |                                       | 443,131 |   |           |   | 426,356 |           |  |   | 408,725   |   |  |           | 427,826 |   |  |   | 455,960 |  
|                                                                                              |  |                                       |         |   |           |   |         |           |  |   |           |   |  |           |        
|Gross profit                                                                                  |  |                                       | 207,320 |   |           |   | 201,024 |           |  |   | 164,405   |   |  |           | 150,639 |   |  |   | 154,578 |  
|Selling, general and administrative expenses                                                  |  |                                       | 165,896 |   |           |   | 168,171 |           |  |   | 157,474   |   |  |           | 157,414 |   |  |   | 154,931 |  
|                                                                                              |  |                                       |         |   |           |   |         |           |  |   |           |   |  |           |        
|Income (loss) from operations                                                                 |  |                                       | 41,424  |   |           |   | 32,853  |           |  |   | 6,931     |   |  |           | (6,775  | ) |  |   | (353    | )
|Interest expense                                                                              |  |                                       | (12,792 | ) |           |   | (8,377  | )         |  |   | (6,676    | ) |  |           | (5,566  | ) |  |   | (8,990  | )
|Equity in earnings (loss) of limited partnership                                              |  |                                       |        |   |           |   |        |           |  |   | 3,416     |   |  |           | 1,848   |   |  |   | (763    | )
|Other income                                                                                  |  |                                       | 7,279   |   |           |   | 6,450   |           |  |   | 1,458     |   |  |           | 1,440   |   |  |   | 4,165   |  
|                                                                                              |  |                                       |         |   |           |   |         |           |  |   |           |   |  |           |        
|Income (loss) before income taxes and cumulative effect of
    change in accounting principle |  |                                       | 35,911  |   |           |   | 30,926  |           |  |   | 5,129     |   |  |           | (9,053  | ) |  |   | (5,941  | )
|Income tax benefit (expense)                                                                  |  |                                       | (14,034 | ) |           |   | (11,478 | )         |  |   | (1,908    | ) |  |           | 3,036   |   |  |   | 2,118   |  
|                                                                                              |  |                                       |         |   |           |   |         |           |  |   |           |   |  |           |        
|Income (loss) before cumulative effect of change in accounting
    principle                  |  |                                       | 21,877  |   |           |   | 19,448  |           |  |   | 3,221     |   |  |           | (6,017  | ) |  |   | (3,823  | )
|Cumulative effect of change in accounting principle                                           |  |                                       | (2,048  | ) |           |   |        |           |  |   |          |   |  |           |        |   |  |   |        |  
|                                                                                              |  |                                       |         |   |           |   |         |           |  |   |           |   |  |           |        
|Net income (loss)                                                                             |  | $                                     | 19,829  |   |           | $ | 19,448  |           |  | $ | 3,221     |   |  | $         | (6,017  | ) |  | $ | (3,823  | )
|                                                                                              |  |                                       |         |   |           |   |         |           |  |   |           |   |  |           |        
|Net income (loss) per common share  basic and diluted                                        |  | $                                     | 0.87    |   |           | $ | 0.85    |           |  | $ | 0.14      |   |  | $         | (0.26   | ) |  | $ | (0.17   | )
|                                                                                              |  |                                       |         |   |           |   |         |           |  |   |           |   |  |           |        
|Weighted average common shares outstanding  basic                                            |  |                                       | 22,760  |   |           |   | 22,820  |           |  |   | 22,913    |   |  |           | 22,857  |   |  |   | 22,832  |  
|Weighted average common shares outstanding  diluted                                          |  |                                       | 22,772  |   |           |   | 22,820  |           |  |   | 22,913    |   |  |           | 22,857  |   |  |   | 22,832  |  
|Operating Data:                                                                               |  |                                       |         |   |           |   |         |           |  |   |           |   |  |           |         |   |  |   |         |  
|Number of new factory-built homes sold                                                        |  |                                       | 10,829  |   |           |   | 9,938   |           |  |   | 8,677     |   |  |           | 8,216   |   |  |   | 7,948   |  
|Multi-section manufactured homes sold as a percentage of total
    manufactured homes sold    |  |                                       | 80      | % |           |   | 85      | %         |  |   | 91        | % |  |           | 93      | % |  |   | 95      | %
|Number of manufacturing facilities(1)                                                         |  |                                       | 15      |   |           |   | 15      |           |  |   | 19        |   |  |           | 19      |   |  |   | 18      |  
|Number of company-owned superstores(1)                                                        |  |                                       | 145     |   |           |   | 151     |           |  |   | 153       |   |  |           | 144     |   |  |   | 117     |  
|Number of company-owned builder locations(1)                                                  |  |                                       |        |   |           |   |        |           |  |   | 5         |   |  |           | 5       |   |  |   | 4       |  

11



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|                         |  |                                       |         |  |           |   |         |           |  |   |           |  |  |           |         |  |  |   |         | 
|------------------------ |  | ------------------------------------- | ------- |  | --------- | - | ------- | --------- |  | - | --------- |  |  | --------- | ------- |  |  | - | ------- | 
|                         |  | Fiscal Year Ended                     |        
|                         |  |                                       |        
|                         |  | March 30,                             |         |  | March 29, |   |         | March 28, |  |   | March 26, |  |  | March 25, |        
|                         |  | 2001                                  |         |  | 2002      |   |         | 2003(2)   |  |   | 2004      |  |  | 2005      |        
|                         |  |                                       |         |  |           |   |         |           |  |   |           |  |  |           |        
|                         |  | (In thousands, except per share data) |        
|Balance Sheet Data(1):   |  |                                       |         |  |           |   |         |           |  |   |           |  |  |           |         |  |  |   |         | 
|Total assets             |  | $                                     | 468,368 |  |           | $ | 473,271 |           |  | $ | 482,567   |  |  | $         | 521,822 |  |  | $ | 571,980 | 
|Convertible senior notes |  |                                       |        |  |           |   |        |           |  |   |          |  |  |           |        |  |  |   | 75,000  | 
|Warehouse revolving debt |  |                                       |        |  |           |   |        |           |  |   | 15,135    |  |  |           | 74,071  |  |  |   | 106,298 | 
|Bonds payable            |  |                                       | 2,908   |  |           |   | 2,742   |           |  |   | 2,567     |  |  |           | 2,377   |  |  |   |        | 
|Shareholders equity     |  |                                       | 235,652 |  |           |   | 256,657 |           |  |   | 260,174   |  |  |           | 256,053 |  |  |   | 252,907 | 






|    |                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As of the end of the applicable period.                                                                                                                                                                                          
|   
|(2) | On June 7, 2002, we acquired Nationwide Custom Homes, Inc.,
    a manufacturer and marketer of modular homes. Nationwide
    contributed $51.2 million in revenues and $4.3 million
    in income from operations in fiscal 2003.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

Executive Overview












12



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Results of Operations




|                                                 |                                   |                   |       |      |           |  |       |           |    |  |       |      |   
|------------------------------------------------ | --------------------------------- | ----------------- | ----- | ---- | --------- |  | ----- | --------- | -- |  | ----- | ---- | --
|                                                 |                                   | Fiscal Year Ended |      
|                                                 |                                   |                   |      
|                                                 |                                   | March 28,         |       |      | March 26, |  |       | March 25, |   
|                                                 |                                   | 2003              |       |      | 2004      |  |       | 2005      |   
|                                                 |                                   |                   |       |      |           |  |       |           |   
|Net sales                                        |                                   |                   | 100.0 | %    |           |  | 100.0 | %         |    |  | 100.0 | %   
|Cost of sales                                    |                                   |                   | 71.3  |      |           |  | 74.0  |           |    |  | 74.7  |     
|                                                 |                                   |                   |       |      |           |  |       |           |   
|                                                 | Gross profit                      |                   |       | 28.7 |           |  |       | 26.0      |    |  |       | 25.3 |   
|Selling, general and administrative expenses     |                                   |                   | 27.5  |      |           |  | 27.2  |           |    |  | 25.4  |     
|                                                 |                                   |                   |       |      |           |  |       |           |   
|                                                 | Income (loss) from operations     |                   |       | 1.2  |           |  |       | (1.2      | )  |  |       | (0.1 | ) 
|Interest expense                                 |                                   |                   | (1.2  | )    |           |  | (1.0  | )         |    |  | (1.5  | )   
|Equity in earnings (loss) of limited partnership |                                   |                   | 0.6   |      |           |  | 0.3   |           |    |  | (0.1  | )   
|Other income                                     |                                   |                   | 0.3   |      |           |  | 0.3   |           |    |  | 0.7   |     
|                                                 |                                   |                   |       |      |           |  |       |           |   
|                                                 | Income (loss) before income taxes |                   |       | 0.9  |           |  |       | (1.6      | )  |  |       | (1.0 | ) 
|                                                 |                                   |                   |       |      |           |  |       |           |   
|Income tax benefit (expense)                     |                                   |                   | (0.3  | )    |           |  | 0.6   |           |    |  | 0.4   |     
|                                                 |                                   |                   |       |      |           |  |       |           |   
|                                                 | Net income (loss)                 |                   |       | 0.6  | %         |  |       | (1.0      | )% |  |       | (0.6 | )%
|                                                 |                                   |                   |       |      |           |  |       |           |   

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|                                                                              |  |                   |         |  |           |   |         |           |  |   |         | 
|----------------------------------------------------------------------------- |  | ----------------- | ------- |  | --------- | - | ------- | --------- |  | - | ------- | 
|                                                                              |  | Fiscal Year Ended |        
|                                                                              |  |                   |        
|                                                                              |  | March 28,         |         |  | March 26, |   |         | March 25, | 
|                                                                              |  | 2003              |         |  | 2004      |   |         | 2005      | 
|                                                                              |  |                   |         |  |           |   |         |           | 
|Homes sold through company-owned retail superstores and builder
    locations |  |                   | 6,541   |  |           |   | 5,846   |           |  |   | 4,762   | 
|Homes sold to independent dealers, builders and developers                    |  |                   | 2,136   |  |           |   | 2,370   |           |  |   | 3,186   | 
|Total new factory-built homes sold                                            |  |                   | 8,677   |  |           |   | 8,216   |           |  |   | 7,948   | 
|Average new manufactured home price  retail                                  |  | $                 | 63,000  |  |           | $ | 68,000  |           |  | $ | 73,000  | 
|Average new manufactured home price  wholesale                               |  | $                 | 41,000  |  |           | $ | 46,000  |           |  | $ | 55,000  | 
|Average new modular home price  retail                                       |  | $                 | 148,000 |  |           | $ | 146,000 |           |  | $ | 135,000 | 
|Average new modular home price  wholesale                                    |  | $                 | 64,000  |  |           | $ | 67,000  |           |  | $ | 71,000  | 
|Number of company-owned retail superstores at end of period                   |  |                   | 153     |  |           |   | 144     |           |  |   | 117     | 
|Number of company-owned builder locations at end of period                    |  |                   | 5       |  |           |   | 5       |           |  |   | 4       | 



| |                      
| | ---------------------
| | 2005 Compared to 2004

Net Sales.


Gross Profit.


Selling, General and Administrative Expenses.


Interest Expense.


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Equity in Earnings (Loss) of Limited Partnership.


Other Income.




| |                      
| | ---------------------
| | 2004 Compared to 2003

Net Sales.


Gross Profit.


Selling, General and Administrative Expenses.


Interest Expense.


15



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Equity in Earnings of Limited Partnership.


Other Income.




| |                                
| | -------------------------------
| | Liquidity and Capital Resources











16



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17



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| |                                                                   
| | ------------------------------------------------------------------
| | Contractual Obligations and Commitments (dollars in
    thousands)



|                                   |                          |                        |         |           |        |   |         |         |  |     |       |   |       |         |       |   |  |   |        |        | 
|---------------------------------- | ------------------------ | ---------------------- | ------- | --------- | ------ | - | ------- | ------- |  | --- | ----- | - | ----- | ------- | ----- | - |  | - | ------ | ------ | 
|                                   |                          | Payments Due by Period |        
|                                   |                          |                        |        
|                                   |                          |                        |         | Less Than |        |   | 1-3     |         |  | 4-5 |       |   | After |        
|                                   |                          | Total                  |         |           | 1 Year |   |         | Years   |  |     | Years |   |       | 5 Years |      
|                                   |                          |                        |         |           |        |   |         |         |  |     |       |   |       |         |      
|Floor plan payable                 |                          | $                      | 30,888  |           |        | $ | 30,888  |         |  | $   |      |   |       | $       |      |   |  | $ |       |       
|Debt obligations                   |                          |                        |         |           |        |   |         |         |  |     |       |   |       |         |       |   |  |   |        |       
|                                   | Warehouse revolving debt |                        |         | 106,298   |        |   |         | 106,298 |  |     |       |  |       |         |       |  |  |   |        |       | 
|                                   | Convertible senior notes |                        |         | 75,000    |        |   |         |        |  |     |       |  |       |         |       |  |  |   |        | 75,000 | 
|Operating lease obligations        |                          |                        | 17,588  |           |        |   | 4,658   |         |  |     | 4,467 |   |       |         | 3,075 |   |  |   | 5,388  |       
|                                   |                          |                        |         |           |        |   |         |         |  |     |       |   |       |         |      
|Total contractual cash obligations |                          | $                      | 229,774 |           |        | $ | 141,844 |         |  | $   | 4,467 |   |       | $       | 3,075 |   |  | $ | 80,388 |       
|                                   |                          |                        |         |           |        |   |         |         |  |     |       |   |       |         |      

|                             |  |                                            |        |  |           |   |        |       |  |   |       |  |  |         |   |  |  |   |   | 
|---------------------------- |  | ------------------------------------------ | ------ |  | --------- | - | ------ | ----- |  | - | ----- |  |  | ------- | - |  |  | - | - | 
|                             |  | Amount of Commitment Expiration Per Period |       
|                             |  |                                            |       
|                             |  | Total                                      |        |  |          
|                             |  | Amounts                                    |        |  | Less Than |   |        | 1-3   |  |   | 4-5   |  |  | Over    |  
|                             |  | Committed                                  |        |  | 1 Year    |   |        | Years |  |   | Years |  |  | 5 Years |  
|                             |  |                                            |        |  |           |   |        |       |  |   |       |  |  |         |  
|Repurchase obligations(1)    |  | $                                          | 19,255 |  |           | $ | 17,879 |       |  | $ | 1,376 |  |  | $       |  |  |  | $ |  | 
|Letters of credit(2)         |  |                                            | 12,280 |  |           |   | 12,280 |       |  |   |      |  |  |         |  |  |  |   |  | 
|                             |  |                                            |        |  |           |   |        |       |  |   |       |  |  |         |  
|Total commercial commitments |  | $                                          | 31,535 |  |           | $ | 30,159 |       |  | $ | 1,376 |  |  | $       | 0 |  |  | $ | 0 | 
|                             |  |                                            |        |  |           |   |        |       |  |   |       |  |  |         |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We have contingent repurchase obligations outstanding at
    March 25, 2005 which have a finite life but are replaced as
    we continue to sell our manufactured homes to dealers under
    repurchase agreements with financial institutions. Our losses
    related to these contingent repurchase obligations were $69,000,
    $6,000 and $65,000 during fiscal 2003, 2004, and 2005,
    respectively. For additional information on our repurchase
    obligations, see critical accounting policies 
    reserve for repurchase obligations.
|   
|(2) | We have provided letters of credit to providers of certain of
    our insurance policies. While the current letters of credit have
    a finite life, they are subject to renewal at different amounts
    based on the requirements of the insurance carriers. We have
    recorded insurance expense based on anticipated losses related
    to these policies as is customary in the industry.                                                                                                                                                    



| |                             
| | ----------------------------
| | Critical Accounting Policies





Impairment of Intangible Assets (Goodwill).


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Recovery of Deferred Tax Asset.


Revenue recognition.


Warranties.


Reserve for Repurchase Obligations.


Allowance for Loan Losses.




| |                              
| | -----------------------------
| | New Accounting Pronouncements



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| |                                          
| | -----------------------------------------
| | Forward-Looking Information/ Risk Factors





| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Financing for our retail customers may be limited, which
    could affect our sales volume.





| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If CountryPlace is unable to securitize its loans, it will be
    required to seek other sources of long term funding, which
    funding may not be available.



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| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | If CountryPlace is unable to adequately and timely service
    its loans, it may adversely affect its results of operations.





| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | If CountryPlaces customers are unable to repay their
    loans, CountryPlace may be adversely affected.





| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | national, regional and local economic conditions;                               
|
| |  | changes or continued weakness in specific industry segments;                    
|
| |  | natural hazard risks affecting the region in which the borrower
    resides; and
|
| |  | employment, financial or life circumstances.                                    





| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | Reduced availability of wholesale financing may adversely
    affect our inventory levels of new homes.





| |                                                                                       
| | --------------------------------------------------------------------------------------
| | Our repurchase agreements with floor plan lenders could
    result in increased costs.



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| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | Increased prices and unavailability of raw materials could
    have a material adverse effect on us.





| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | We are dependent on our principal executive officer and the
    loss of his service could adversely affect us.





| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | We are controlled by two shareholders, who may determine the
    outcome of all elections.





| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | If inflation increases, we may not be able to offset
    inflation through increased selling prices.









| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | Our business is highly cyclical and there may be significant
    fluctuations in our quarterly results.





| |   |                                           
| | - | ------------------------------------------
| |  | the level and stability of interest rates;

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| |   |                                                                 
| | - | ----------------------------------------------------------------
| |  | unemployment trends;                                            
|
| |  | the availability of retail financing;                           
|
| |  | the availability of wholesale financing;                        
|
| |  | housing supply and demand;                                      
|
| |  | industry availability of used or repossessed manufactured homes;
|
| |  | international tensions and hostilities;                         
|
| |  | levels of consumer confidence;                                  
|
| |  | inventory levels;                                               
|
| |  | regulatory and zoning matters; and                              
|
| |  | changes in general economic conditions.                         





| |                                                                       
| | ----------------------------------------------------------------------
| | We are concentrated geographically, which could harm our
    business.








|         |                                                              
|-------- | -------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosure About Market
    Risk









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|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm












Internal Control-Integrated Framework




| |                      
| | ---------------------
| | /s/ Ernst & Young LLP





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Palm Harbor Homes, Inc. and Subsidiaries


Consolidated Balance Sheets


|                                           |                                                                                     |                                                                     |         |         |           |   |         |         |     | 
|------------------------------------------ | ----------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ------- | ------- | --------- | - | ------- | ------- | --- | 
|                                           |                                                                                     | March 26,                                                           |         |         | March 25, |  
|                                           |                                                                                     | 2004                                                                |         |         | 2005      |  
|                                           |                                                                                     |                                                                     |         |         |           |  
|                                           |                                                                                     | (In thousands)                                                      |        
|ASSETS                                    
|Cash and cash equivalents                  |                                                                                     | $                                                                   | 50,760  |         |           | $ | 46,197  |        
|Restricted cash                            |                                                                                     |                                                                     | 4,926   |         |           |   | 15,352  |        
|Investments                                |                                                                                     |                                                                     | 21,126  |         |           |   | 21,516  |        
|Trade receivables                          |                                                                                     |                                                                     | 48,801  |         |           |   | 52,311  |        
|Loans held for investment, net             |                                                                                     |                                                                     | 96,698  |         |           |   | 132,400 |        
|Inventories                                |                                                                                     |                                                                     | 113,799 |         |           |   | 128,420 |        
|Prepaid expenses and other assets          |                                                                                     |                                                                     | 14,307  |         |           |   | 14,234  |        
|Deferred tax assets, net                   |                                                                                     |                                                                     | 10,352  |         |           |   | 11,720  |        
|Property, plant and equipment, at cost:    |                                                                                     |                                                                     |         |         |           |   |         |        
|                                           | Land and improvements                                                               |                                                                     |         | 35,969  |           |   |         | 35,535  |    
|                                           | Buildings and improvements                                                          |                                                                     |         | 63,818  |           |   |         | 61,386  |    
|                                           | Machinery and equipment                                                             |                                                                     |         | 63,402  |           |   |         | 62,534  |    
|                                           | Construction in progress                                                            |                                                                     |         | 2,472   |           |   |         | 1,324   |    
|                                           |                                                                                     |                                                                     |         |         |           |  
|                                           |                                                                                     |                                                                     | 165,661 |         |           |   | 160,779 |        
|                                           | Accumulated depreciation                                                            |                                                                     |         | (83,114 | )         |   |         | (89,455 | )  
|                                           |                                                                                     |                                                                     |         |         |           |  
|                                           |                                                                                     |                                                                     | 82,547  |         |           |   | 71,324  |        
|Goodwill, net                              |                                                                                     |                                                                     | 78,506  |         |           |   | 78,506  |        
|                                           |                                                                                     |                                                                     |         |         |           |  
|Total assets                               |                                                                                     | $                                                                   | 521,822 |         |           | $ | 571,980 |        
|                                           |                                                                                     |                                                                     |         |         |           |  
|                                          
|LIABILITIES AND SHAREHOLDERS EQUITY      
|Accounts payable                           |                                                                                     | $                                                                   | 46,103  |         |           | $ | 30,319  |        
|Accrued liabilities                        |                                                                                     |                                                                     | 59,149  |         |           |   | 76,568  |        
|Floor plan payable                         |                                                                                     |                                                                     | 84,069  |         |           |   | 30,888  |        
|Warehouse revolving debt                   |                                                                                     |                                                                     | 74,071  |         |           |   | 106,298 |        
|Convertible senior notes                   |                                                                                     |                                                                     |        |         |           |   | 75,000  |        
|Bonds payable                              |                                                                                     |                                                                     | 2,377   |         |           |   |        |        
|                                           |                                                                                     |                                                                     |         |         |           |  
|                                           | Total liabilities                                                                   |                                                                     |         | 265,769 |           |   |         | 319,073 |    
|Commitments and contingencies              |                                                                                     |                                                                     |         |         |           |   |         |        
|Shareholders equity                       |                                                                                     |                                                                     |         |         |           |   |         |        
|                                           | Preferred stock, $.01 par value                                                     |                                                                     |         |         |           |   |         |         |    
|                                           |                                                                                     | Authorized shares  2,000,000                                       |         |         |           |   |         |         |     | 
|                                           |                                                                                     | Issued and outstanding shares  none                                |         |         |          |   |         |         |    | 
|                                           | Common stock, $.01 par value                                                        |                                                                     |         |         |           |   |         |         |    
|                                           |                                                                                     | Authorized shares  50,000,000                                      |         |         |           |   |         |         |     | 
|                                           |                                                                                     | Issued shares  23,807,879 at March 26, 2004 and
    March 25, 2005 |         |         | 239       |   |         |         | 239 | 
|                                           | Additional paid-in capital                                                          |                                                                     |         | 54,149  |           |   |         | 54,149  |    
|                                           | Retained earnings                                                                   |                                                                     |         | 217,563 |           |   |         | 213,740 |    
|                                           | Accumulated other comprehensive income                                              |                                                                     |         | 767     |           |   |         | 1,214   |    
|                                           |                                                                                     |                                                                     |         |         |           |  
|                                           |                                                                                     |                                                                     | 272,718 |         |           |   | 269,342 |        
|                                           | Less treasury shares  970,417 at March 26, 2004,
    and 985,362 at March 25, 2005 |                                                                     |         | (16,057 | )         |   |         | (16,359 | )  
|Unearned compensation                      |                                                                                     |                                                                     | (608    | )       |           |   | (76     | )      
|                                           |                                                                                     |                                                                     |         |         |           |  
|Total shareholders equity                 |                                                                                     |                                                                     | 256,053 |         |           |   | 252,907 |        
|                                           |                                                                                     |                                                                     |         |         |           |  
|Total liabilities and shareholders equity |                                                                                     | $                                                                   | 521,822 |         |           | $ | 571,980 |        
|                                           |                                                                                     |                                                                     |         |         |           |  



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Palm Harbor Homes, Inc. and Subsidiaries


Consolidated Statements of Operations


|                                                                   |  |                                       |         |   |           |   |         |           |  |   |         |  
|------------------------------------------------------------------ |  | ------------------------------------- | ------- | - | --------- | - | ------- | --------- |  | - | ------- | -
|                                                                   |  | Year Ended                            |        
|                                                                   |  |                                       |        
|                                                                   |  | March 28,                             |         |   | March 26, |   |         | March 25, | 
|                                                                   |  | 2003                                  |         |   | 2004      |   |         | 2005      | 
|                                                                   |  |                                       |         |   |           |   |         |           | 
|                                                                   |  | (In thousands, except per share data) |        
|Net sales                                                          |  | $                                     | 573,130 |   |           | $ | 578,465 |           |  | $ | 610,538 |  
|Cost of sales                                                      |  |                                       | 408,725 |   |           |   | 427,826 |           |  |   | 455,960 |  
|Selling, general and administrative expenses                       |  |                                       | 157,474 |   |           |   | 157,414 |           |  |   | 154,931 |  
|                                                                   |  |                                       |         |   |           |   |         |           | 
|Income (loss) from operations                                      |  |                                       | 6,931   |   |           |   | (6,775  | )         |  |   | (353    | )
|Interest expense                                                   |  |                                       | (6,676  | ) |           |   | (5,566  | )         |  |   | (8,990  | )
|Equity in earnings (loss) of limited partnership                   |  |                                       | 3,416   |   |           |   | 1,848   |           |  |   | (763    | )
|Other income                                                       |  |                                       | 1,458   |   |           |   | 1,440   |           |  |   | 4,165   |  
|                                                                   |  |                                       |         |   |           |   |         |           | 
|Income (loss) before income taxes                                  |  |                                       | 5,129   |   |           |   | (9,053  | )         |  |   | (5,941  | )
|Income tax benefit (expense)                                       |  |                                       | (1,908  | ) |           |   | 3,036   |           |  |   | 2,118   |  
|                                                                   |  |                                       |         |   |           |   |         |           | 
|Net income (loss)                                                  |  | $                                     | 3,221   |   |           | $ | (6,017  | )         |  | $ | (3,823  | )
|                                                                   |  |                                       |         |   |           |   |         |           | 
|Net income (loss) per common share  basic and diluted             |  | $                                     | 0.14    |   |           | $ | (0.26   | )         |  | $ | (0.17   | )
|                                                                   |  |                                       |         |   |           |   |         |           | 
|Weighted average common shares outstanding  basic and
    diluted |  |                                       | 22,913  |   |           |   | 22,857  |           |  |   | 22,832  |  
|                                                                   |  |                                       |         |   |           |   |         |           | 



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Palm Harbor Homes, Inc. and Subsidiaries


Consolidated Statements of Shareholders Equity


|                          |                                   |                                                              |            |   |            |   |     |             |   |       |               |   |                 |        |         |        |          |   |       |        |        |   |              |         |         |       |         |      |        |   |        |   |       |   |         |        |        |  
|------------------------- | --------------------------------- | ------------------------------------------------------------ | ---------- | - | ---------- | - | --- | ----------- | - | ----- | ------------- | - | --------------- | ------ | ------- | ------ | -------- | - | ----- | ------ | ------ | - | ------------ | ------- | ------- | ----- | ------- | ---- | ------ | - | ------ | - | ----- | - | ------- | ------ | ------ | -
|                          |                                   |                                                              |            |   |            |   |     | Accumulated |   |       |               |   |                 |        |        
|                          |                                   | Common Stock                                                 |            |   | Additional |   |     |             |   | Other |               |   | Treasury Shares |        |         |        |          |  
|                          |                                   |                                                              |            |   | Paid-In    |   |     | Retained    |   |       | Comprehensive |   |                 |        |         |        | Unearned |   |       |       
|                          |                                   | Shares                                                       |            |   | Amount     |   |     | Capital     |   |       | Earnings      |   |                 | Income |         |        | Shares   |   |       | Amount |        |   | Compensation |         |         | Total |        
|                          |                                   |                                                              |            |   |            |   |     |             |   |       |               |   |                 |        |         |        |          |   |       |        |        |   |              |         |         |       |        
|                          |                                   | (In thousands, except share data)                            |           
|Balance at March 29, 2002 |                                   |                                                              | 23,807,879 |   |            | $ | 239 |             |   | $     | 54,149        |   |                 | $      | 220,359 |        |          | $ | 1,939 |        |        |   | (858,507     | )       |         | $     | (14,169 | )    |        | $ | (5,860 | ) |       | $ | 256,657 |       
|                          | Comprehensive income              |                                                              |            |   |            |   |     |             |   |       |               |   |                 |        |         |        |          |   |       |        |        |   |              |         |         |       |         |      |        |   |        |   |       |   |         |        |       
|                          |                                   | Net income                                                   |            |   |           |   |     |             |  |       |               |   |                |        |         |        | 3,221    |   |       |        |       |   |              |         |        |       |         |      |       |   |        |   |      |   |         |        | 3,221  |  
|                          |                                   | Realization of gains on interest only strips                 |            |   |           |   |     |             |  |       |               |   |                |        |         |        |         |   |       |        | (1,939 | ) |              |         |        |       |         |      |       |   |        |   |      |   |         |        | (1,939 | )
|                          |                                   | Unrealized gain on securities available-for-sale, net of tax |            |   |           |   |     |             |  |       |               |   |                |        |         |        |         |   |       |        | 195    |   |              |         |        |       |         |      |       |   |        |   |      |   |         |        | 195    |  
|                          |                                   |                                                              |            |   |            |   |     |             |   |       |               |   |                 |        |         |        |          |   |       |        |        |   |              |         |         |       |        
|                          | Total comprehensive income        |                                                              |            |  |            |   |     |            |   |       |               |  |                 |        |         | 3,221  |          |   |       | 1,744  |        |   |              |        |         |       |         |     |        |   |        |  |       |   |         | 1,477  |       
|                          | Treasury shares purchased, net    |                                                              |            |  |            |   |     |            |   |       |               |  |                 |        |         |       |          |   |       |       |        |   |              | (12,518 | )       |       |         | (228 | )      |   |        |  |       |   |         | (228   | )     
|                          | Long-Term Incentive Plan          |                                                              |            |   |            |   |     |             |   |       |               |   |                 |        |         |        |          |   |       |        |        |   |              |         |         |       |         |      |        |   |        |   |       |   |         |        |       
|                          |                                   | Terminations                                                 |            |   |           |   |     |             |  |       |               |   |                |        |         |        |         |   |       |        |       |   |              |         | (77,532 | )     |         |      | (1,260 | ) |        |   | 1,260 |   |         |        |       |  
|                          |                                   | Provision                                                    |            |   |           |   |     |             |  |       |               |   |                |        |         |        |         |   |       |        |       |   |              |         |        |       |         |      |       |   |        |   | 2,463 |   |         |        | 2,463  |  
|                          |                                   |                                                              |            |   |            |   |     |             |   |       |               |   |                 |        |         |        |          |   |       |        |        |   |              |         |         |       |        
|Balance at March 28, 2003 |                                   |                                                              | 23,807,879 |   |            |   | 239 |             |   |       | 54,149        |   |                 |        | 223,580 |        |          |   | 195   |        |        |   | (948,557     | )       |         |       | (15,657 | )    |        |   | (2,137 | ) |       |   | 260,369 |       
|                          | Comprehensive income              |                                                              |            |   |            |   |     |             |   |       |               |   |                 |        |         |        |          |   |       |        |        |   |              |         |         |       |         |      |        |   |        |   |       |   |         |        |       
|                          |                                   | Net loss                                                     |            |   |           |   |     |             |  |       |               |   |                |        |         |        | (6,017   | ) |       |        |       |   |              |         |        |       |         |      |       |   |        |   |      |   |         |        | (6,017 | )
|                          |                                   | Unrealized gain on securities available-for-sale, net of tax |            |   |           |   |     |             |  |       |               |   |                |        |         |        |         |   |       |        | 572    |   |              |         |        |       |         |      |       |   |        |   |      |   |         |        | 572    |  
|                          |                                   |                                                              |            |   |            |   |     |             |   |       |               |   |                 |        |         |        |          |   |       |        |        |   |              |         |         |       |        
|                          | Total comprehensive income (loss) |                                                              |            |  |            |   |     |            |   |       |               |  |                 |        |         | (6,017 | )        |   |       | 572    |        |   |              |        |         |       |         |     |        |   |        |  |       |   |         | (5,445 | )     
|                          | Long-Term Incentive Plan          |                                                              |            |   |            |   |     |             |   |       |               |   |                 |        |         |        |          |   |       |        |        |   |              |         |         |       |         |      |        |   |        |   |       |   |         |        |       
|                          |                                   | Shares granted                                               |            |   |           |   |     |             |  |       |               |   |                |        |         |        |         |   |       |        |       |   |              |         | 9,463   |       |         |      | 156    |   |        |   | (156  | ) |         |        |       |  
|                          |                                   | Terminations                                                 |            |   |           |   |     |             |  |       |               |   |                |        |         |        |         |   |       |        |       |   |              |         | (31,323 | )     |         |      | (556   | ) |        |   | 556   |   |         |        |       |  
|                          |                                   | Provision                                                    |            |   |           |   |     |             |  |       |               |   |                |        |         |        |         |   |       |        |       |   |              |         |        |       |         |      |       |   |        |   | 1,129 |   |         |        | 1,129  |  
|                          |                                   |                                                              |            |   |            |   |     |             |   |       |               |   |                 |        |         |        |          |   |       |        |        |   |              |         |         |       |        
|Balance at March 26, 2004 |                                   |                                                              | 23,807,879 |   |            |   | 239 |             |   |       | 54,149        |   |                 |        | 217,563 |        |          |   | 767   |        |        |   | (970,417     | )       |         |       | (16,057 | )    |        |   | (608   | ) |       |   | 256,053 |       
|                          | Comprehensive income              |                                                              |            |   |            |   |     |             |   |       |               |   |                 |        |         |        |          |   |       |        |        |   |              |         |         |       |         |      |        |   |        |   |       |   |         |        |       
|                          |                                   | Net loss                                                     |            |   |           |   |     |             |  |       |               |   |                |        |         |        | (3,823   | ) |       |        |       |   |              |         |        |       |         |      |       |   |        |   |      |   |         |        | (3,823 | )
|                          |                                   | Unrealized loss on securities available-for-sale, net of tax |            |   |           |   |     |             |  |       |               |   |                |        |         |        |         |   |       |        | (683   | ) |              |         |        |       |         |      |       |   |        |   |      |   |         |        | (683   | )
|                          |                                   | Change in fair value of interest rate hedge, net of tax      |            |   |           |   |     |             |  |       |               |   |                |        |         |        |         |   |       |        | 1,130  |   |              |         |        |       |         |      |       |   |        |   |      |   |         |        | 1,130  |  
|                          |                                   |                                                              |            |   |            |   |     |             |   |       |               |   |                 |        |         |        |          |   |       |        |        |   |              |         |         |       |        
|                          | Total comprehensive income (loss) |                                                              |            |  |            |   |     |            |   |       |               |  |                 |        |         | (3,823 | )        |   |       | 447    |        |   |              |        |         |       |         |     |        |   |        |  |       |   |         | (3,376 | )     
|                          | Long-Term Incentive Plan          |                                                              |            |   |            |   |     |             |   |       |               |   |                 |        |         |        |          |   |       |        |        |   |              |         |         |       |         |      |        |   |        |   |       |   |         |        |       
|                          |                                   | Shares granted                                               |            |   |           |   |     |             |  |       |               |   |                |        |         |        |         |   |       |        |       |   |              |         | 5,363   |       |         |      | 112    |   |        |   | (112  | ) |         |        |       |  
|                          |                                   | Terminations                                                 |            |   |           |   |     |             |  |       |               |   |                |        |         |        |         |   |       |        |       |   |              |         | (20,308 | )     |         |      | (414   | ) |        |   | 414   |   |         |        |       |  
|                          |                                   | Provision                                                    |            |   |           |   |     |             |  |       |               |   |                |        |         |        |         |   |       |        |       |   |              |         |        |       |         |      |       |   |        |   | 230   |   |         |        | 230    |  
|                          |                                   |                                                              |            |   |            |   |     |             |   |       |               |   |                 |        |         |        |          |   |       |        |        |   |              |         |         |       |        
|Balance at March 25, 2005 |                                   |                                                              | 23,807,879 |   |            | $ | 239 |             |   | $     | 54,149        |   |                 | $      | 213,740 |        |          | $ | 1,214 |        |        |   | (985,362     | )       |         | $     | (16,359 | )    |        | $ | (76    | ) |       | $ | 252,907 |       
|                          |                                   |                                                              |            |   |            |   |     |             |   |       |               |   |                 |        |         |        |          |   |       |        |        |   |              |         |         |       |        



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Palm Harbor Homes, Inc. and Subsidiaries


Consolidated Statements of Cash Flows


|                                                                                 |                                                                                                       |                                                  |                                        |        |           |         |         |           |        |         |         |         |        |         |  
|-------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ------------------------------------------------ | -------------------------------------- | ------ | --------- | ------- | ------- | --------- | ------ | ------- | ------- | ------- | ------ | ------- | -
|                                                                                 |                                                                                                       | Year Ended                                       |                                       
|                                                                                 |                                                                                                       |                                                  |                                       
|                                                                                 |                                                                                                       | March 28,                                        |                                        |        | March 26, |         |         | March 25, |       
|                                                                                 |                                                                                                       | 2003                                             |                                        |        | 2004      |         |         | 2005      |       
|                                                                                 |                                                                                                       |                                                  |                                        |        |           |         |         |           |       
|                                                                                 |                                                                                                       | (In thousands)                                   |                                       
|Operating Activities                                                             |                                                                                                       |                                                  |                                        |        |           |         |         |           |        |         |         |        
|Net income (loss)                                                                |                                                                                                       | $                                                | 3,221                                  |        |           | $       | (6,017  | )         |        | $       | (3,823  | )      
|                                                                                 | Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activities |                                                  |                                        |        |           |         |         |           |        |         |         |         |       
|                                                                                 |                                                                                                       | Depreciation and amortization                    |                                        |        | 13,798    |         |         |           | 14,167 |         |         |         | 12,805 |        
|                                                                                 |                                                                                                       | Provision for credit losses                      |                                        |        | 1,409     |         |         |           | 2,076  |         |         |         | 2,652  |        
|                                                                                 |                                                                                                       | Deferred income taxes                            |                                        |        | 1,055     |         |         |           | (1,879 | )       |         |         | (2,017 | )      
|                                                                                 |                                                                                                       | (Gain) loss on disposition of assets             |                                        |        | 515       |         |         |           | (439   | )       |         |         | 913    |        
|                                                                                 |                                                                                                       | (Gain) loss on investments                       |                                        |        | 1,002     |         |         |           | (114   | )       |         |         |       |        
|                                                                                 |                                                                                                       | Provision for Long-Term Incentive Plan           |                                        |        | 2,463     |         |         |           | 1,129  |         |         |         | 230    |        
|                                                                                 |                                                                                                       | Equity in (earnings) loss of limited partnership |                                        |        | (3,416    | )       |         |           | (1,848 | )       |         |         | 763    |        
|                                                                                 |                                                                                                       | Changes in operating assets and liabilities:     |                                        |        |           |         |         |           |        |         |         |         |        |        
|                                                                                 |                                                                                                       |                                                  | Restricted cash                        |        |           | (4,484  | )       |           |        | (442    | )       |         |        | (10,426 | )
|                                                                                 |                                                                                                       |                                                  | Trade receivables                      |        |           | 11,357  |         |           |        | 17,545  |         |         |        | (3,510  | )
|                                                                                 |                                                                                                       |                                                  | Loans originated for investment        |        |           | (32,859 | )       |           |        | (77,090 | )       |         |        | (59,156 | )
|                                                                                 |                                                                                                       |                                                  | Principal payments on loans originated |        |           | 1,649   |         |           |        | 10,451  |         |         |        | 20,802  |  
|                                                                                 |                                                                                                       |                                                  | Inventories                            |        |           | 12,214  |         |           |        | 1,954   |         |         |        | (14,621 | )
|                                                                                 |                                                                                                       |                                                  | Prepaid expenses and other assets      |        |           | 4,694   |         |           |        | (620    | )       |         |        | 1,580   |  
|                                                                                 |                                                                                                       |                                                  | Accounts payable and accrued expenses  |        |           | 2,866   |         |           |        | 14,741  |         |         |        | 2,674   |  
|                                                                                 |                                                                                                       |                                                  |                                        |        |           |         |         |           |       
|                                                                                 | Cash provided by (used in) operations                                                                 |                                                  |                                        | 15,484 |           |         |         | (26,386   | )      |         |         | (51,134 | )     
|Loans originated for resale                                                      |                                                                                                       |                                                  | (63,670                                | )      |           |         |        |           |        |         |        |        
|Sale of loans                                                                    |                                                                                                       |                                                  | 64,998                                 |        |           |         |        |           |        |         |        |        
|                                                                                 |                                                                                                       |                                                  |                                        |        |           |         |         |           |       
|Net cash provided by (used in) operating activities                              |                                                                                                       |                                                  | 16,812                                 |        |           |         | (26,386 | )         |        |         | (51,134 | )      
|Investing Activities                                                             |                                                                                                       |                                                  |                                        |        |           |         |         |           |        |         |         |        
|Business acquired, net of cash acquired                                          |                                                                                                       |                                                  | (31,789                                | )      |           |         |        |           |        |         |        |        
|Investment in limited partnership                                                |                                                                                                       |                                                  | (3,000                                 | )      |           |         |        |           |        |         |        |        
|Distributions from investment in limited partnership                             |                                                                                                       |                                                  | 1,525                                  |        |           |         | 1,850   |           |        |         |        |        
|Purchases of property, plant and equipment, net of proceeds from
    disposition |                                                                                                       |                                                  | (6,407                                 | )      |           |         | (2,552  | )         |        |         | (1,131  | )      
|Purchases of investments                                                         |                                                                                                       |                                                  | (5,470                                 | )      |           |         | (8,337  | )         |        |         | (6,567  | )      
|Sales of investments                                                             |                                                                                                       |                                                  | 10,532                                 |        |           |         | 12,215  |           |        |         | 5,104   |        
|                                                                                 |                                                                                                       |                                                  |                                        |        |           |         |         |           |       
|Net cash provided by (used in) investing activities                              |                                                                                                       |                                                  | (34,609                                | )      |           |         | 3,176   |           |        |         | (2,594  | )      
|Financing Activities                                                             |                                                                                                       |                                                  |                                        |        |           |         |         |           |        |         |         |        
|Net payments on floor plan payable                                               |                                                                                                       |                                                  | (20,540                                | )      |           |         | (30,368 | )         |        |         | (53,181 | )      
|Net proceeds from warehouse revolving debt                                       |                                                                                                       |                                                  | 15,135                                 |        |           |         | 58,936  |           |        |         | 32,227  |        
|Proceeds from convertible senior notes, net of issuance costs                    |                                                                                                       |                                                  |                                       |        |           |         |        |           |        |         | 72,496  |        
|Principal payments on bonds payable                                              |                                                                                                       |                                                  | (175                                   | )      |           |         | (190    | )         |        |         | (2,377  | )      
|Net purchases of treasury stock                                                  |                                                                                                       |                                                  | (228                                   | )      |           |         |        |           |        |         |        |        
|                                                                                 |                                                                                                       |                                                  |                                        |        |           |         |         |           |       
|Net cash provided by (used in) financing activities                              |                                                                                                       |                                                  | (5,808                                 | )      |           |         | 28,378  |           |        |         | 49,165  |        
|Net increase (decrease) in cash and cash equivalents                             |                                                                                                       |                                                  | (23,605                                | )      |           |         | 5,168   |           |        |         | (4,563  | )      
|Cash and cash equivalents at beginning of year                                   |                                                                                                       |                                                  | 69,197                                 |        |           |         | 45,592  |           |        |         | 50,760  |        
|                                                                                 |                                                                                                       |                                                  |                                        |        |           |         |         |           |       
|Cash and cash equivalents at end of year                                         |                                                                                                       | $                                                | 45,592                                 |        |           | $       | 50,760  |           |        | $       | 46,197  |        
|                                                                                 |                                                                                                       |                                                  |                                        |        |           |         |         |           |       
|Supplemental disclosures of cash flow information:                               |                                                                                                       |                                                  |                                        |        |           |         |         |           |        |         |         |        
|Cash paid (received) during the year for:                                        |                                                                                                       |                                                  |                                        |        |           |         |         |           |        |         |         |        
|                                                                                 | Interest                                                                                              |                                                  | $                                      | 6,257  |           |         | $       | 5,362     |        |         | $       | 7,841   |       
|                                                                                 | Income taxes                                                                                          |                                                  | $                                      | 361    |           |         | $       | 230       |        |         | $       | (2,496  | )     



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Palm Harbor Homes, Inc. and Subsidiaries


Notes to Consolidated Financial Statements




|   |                                           
|-- | ------------------------------------------
|1. | Summary of Significant Accounting Policies



| |                            
| | ---------------------------
| | Principles of consolidation







| |                    
| | -------------------
| | Revenue recognition











| |                                            
| | -------------------------------------------
| | Residual interests and recourse obligations



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##### Table of Contents









| |                                    
| | -----------------------------------
| | Fair value of financial instruments





| |                          
| | -------------------------
| | Cash and cash equivalents





| |                
| | ---------------
| | Restricted cash





| |                          
| | -------------------------
| | Loans held for investment





| |                          
| | -------------------------
| | Allowance for loan losses





| |            
| | -----------
| | Investments





| |            
| | -----------
| | Inventories



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| |                              
| | -----------------------------
| | Property, plant and equipment





| |         
| | --------
| | Goodwill





| |           
| | ----------
| | Warranties





| |               
| | --------------
| | Start-up costs





| |             
| | ------------
| | Income taxes





| |                                       
| | --------------------------------------
| | Accumulated other comprehensive income





| |                  
| | -----------------
| | Reclassifications



31



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##### Table of Contents









| |                              
| | -----------------------------
| | New Accounting Pronouncements





32



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##### Table of Contents









|   |                                  
|-- | ---------------------------------
|2. | Investment in limited partnership



|                                                    |                                           |           |        |         |           |   |        |        | 
|--------------------------------------------------- | ----------------------------------------- | --------- | ------ | ------- | --------- | - | ------ | ------ | 
|                                                    |                                           | March 26, |        |         | March 25, |  
|                                                    |                                           | 2004      |        |         | 2005      |  
|                                                    |                                           |           |        |         |           |  
|Cash                                                |                                           | $         | 1,481  |         |           | $ | 807    |       
|Receivable for mortgage notes assigned to investors |                                           |           | 98,784 |         |           |   | 87,456 |       
|Other current assets                                |                                           |           | 1,351  |         |           |   | 4,172  |       
|Property, plant and equipment, net                  |                                           |           | 753    |         |           |   | 683    |       
|Other assets                                        |                                           |           | 103    |         |           |   | 175    |       
|                                                    |                                           |           |        |         |           |  
|                                                    | Total assets                              |           | $      | 102,472 |           |   | $      | 93,293 | 
|                                                    |                                           |           |        |         |           |  
|Warehouse revolving debt                            |                                           | $         | 91,942 |         |           | $ | 85,168 |       
|Other current liabilities                           |                                           |           | 2,993  |         |           |   | 2,047  |       
|Debt obligations                                    |                                           |           | 4      |         |           |   | 66     |       
|Partnership capital                                 |                                           |           | 7,533  |         |           |   | 6,012  |       
|                                                    |                                           |           |        |         |           |  
|                                                    | Total liabilities and partnership capital |           | $      | 102,472 |           |   | $      | 93,293 | 
|                                                    |                                           |           |        |         |           |  

|                  |  |                  |        |  |            |   |        |            |  |   |        |  
|----------------- |  | ---------------- | ------ |  | ---------- | - | ------ | ---------- |  | - | ------ | -
|                  |  | Ten Months Ended |        |  | Year Ended |   |        | Year Ended | 
|                  |  | March 28,        |        |  | March 26,  |   |        | March 25,  | 
|                  |  | 2003             |        |  | 2004       |   |        | 2005       | 
|                  |  |                  |        |  |            |   |        |            | 
|Revenues          |  | $                | 27,991 |  |            | $ | 47,710 |            |  | $ | 37,138 |  
|Net income (loss) |  |                  | 6,831  |  |            |   | 3,696  |            |  |   | (1,521 | )



|   |            
|-- | -----------
|3. | Inventories



|                               |  |           |         |  |           |   |         | 
|------------------------------ |  | --------- | ------- |  | --------- | - | ------- | 
|                               |  | March 26, |         |  | March 25, |  
|                               |  | 2004      |         |  | 2005      |  
|                               |  |           |         |  |           |  
|Raw materials                  |  | $         | 10,113  |  |           | $ | 12,704  | 
|Work in process                |  |           | 5,025   |  |           |   | 6,248   | 
|Finished goods  factory-built |  |           | 2,920   |  |           |   | 4,069   | 
|Finished goods  retail        |  |           | 95,741  |  |           |   | 105,399 | 
|                               |  |           |         |  |           |  
|                               |  | $         | 113,799 |  |           | $ | 128,420 | 
|                               |  |           |         |  |           |  



|   |            
|-- | -----------
|4. | Investments



33



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|   |                               
|-- | ------------------------------
|5. | Loans held for investment, net



|                                 |  |           |         |   |           |   |         |  
|-------------------------------- |  | --------- | ------- | - | --------- | - | ------- | -
|                                 |  | March 26, |         |   | March 25, |  
|                                 |  | 2004      |         |   | 2005      |  
|                                 |  |           |         |   |           |  
|Loans held for investment, gross |  | $         | 103,096 |   |           | $ | 141,660 |  
|Less: Financed loan points       |  |           | (2,766  | ) |           |   | (3,895  | )
|Less: Allowance for loan losses  |  |           | (3,632  | ) |           |   | (5,365  | )
|                                 |  |           |         |   |           |  
|Loans held for investment, net   |  | $         | 96,698  |   |           | $ | 132,400 |  
|                                 |  |           |         |   |           |  





|                                               |  |           |       |   |           |   |       |           |  |   |       |  
|---------------------------------------------- |  | --------- | ----- | - | --------- | - | ----- | --------- |  | - | ----- | -
|                                               |  | March 28, |       |   | March 26, |   |       | March 25, | 
|                                               |  | 2003      |       |   | 2004      |   |       | 2005      | 
|                                               |  |           |       |   |           |   |       |           | 
|Allowance for loan losses, beginning of period |  | $         | 438   |   |           | $ | 2,013 |           |  | $ | 3,632 |  
|Provision for credit losses                    |  |           | 2,039 |   |           |   | 2,076 |           |  |   | 2,652 |  
|Loans charged off, net of recoveries           |  |           | (464  | ) |           |   | (457  | )         |  |   | (919  | )
|                                               |  |           |       |   |           |   |       |           | 
|Allowance for loan losses, end of period       |  | $         | 2,013 |   |           | $ | 3,632 |           |  | $ | 5,365 |  
|                                               |  |           |       |   |           |   |       |           | 



|   |                   
|-- | ------------------
|6. | Floor plan payable



34



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|   |                 
|-- | ----------------
|7. | Debt obligations



|                                   |  |           |        |  |           |   |         | 
|---------------------------------- |  | --------- | ------ |  | --------- | - | ------- | 
|                                   |  | March 26, |        |  | March 25, |  
|                                   |  | 2004      |        |  | 2005      |  
|                                   |  |           |        |  |           |  
|Convertible senior notes           |  | $         |       |  |           | $ | 75,000  | 
|Warehouse revolving debt           |  |           | 74,071 |  |           |   | 106,298 | 
|Economic development revenue bonds |  |           | 2,377  |  |           |   |        | 
|                                   |  |           |        |  |           |  
|                                   |  | $         | 76,448 |  |           | $ | 181,298 | 
|                                   |  |           |        |  |           |  









35



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|                    |  |        |         | 
|------------------- |  | ------ | ------- | 
|Fiscal Year         |  | Amount |        
|                    |  |        |        
|2006                |  | $      | 106,298 | 
|2007                |  |        |        | 
|2008                |  |        |        | 
|2009                |  |        |        | 
|2010 and thereafter |  |        | 75,000  | 
|                    |  |        |        
|                    |  | $      | 181,298 | 
|                    |  |        |        





|   |                    
|-- | -------------------
|8. | Accrued liabilities



|                                                         |  |           |        |  |           |   |        | 
|-------------------------------------------------------- |  | --------- | ------ |  | --------- | - | ------ | 
|                                                         |  | March 26, |        |  | March 25, |  
|                                                         |  | 2004      |        |  | 2005      |  
|                                                         |  |           |        |  |           |  
|Salaries, wages and benefits                             |  | $         | 14,795 |  |           | $ | 15,427 | 
|Accrued expenses on homes sold, including warranty costs |  |           | 13,818 |  |           |   | 18,134 | 
|Customer deposits                                        |  |           | 14,184 |  |           |   | 19,071 | 
|Sales incentives                                         |  |           | 4,587  |  |           |   | 6,901  | 
|Other                                                    |  |           | 11,765 |  |           |   | 17,035 | 
|                                                         |  |           |        |  |           |  
|                                                         |  | $         | 59,149 |  |           | $ | 76,568 | 
|                                                         |  |           |        |  |           |  

36



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##### Table of Contents









|   |             
|-- | ------------
|9. | Income taxes



|                                   |         |           |       |     |           |   |        |           |   |   |        |      |  
|---------------------------------- | ------- | --------- | ----- | --- | --------- | - | ------ | --------- | - | - | ------ | ---- | -
|                                   |         | March 28, |       |     | March 26, |   |        | March 25, |  
|                                   |         | 2003      |       |     | 2004      |   |        | 2005      |  
|                                   |         |           |       |     |           |   |        |           |  
|Current                            |         |           |       |     |           |   |        |           |   |   |        |     
|                                   | Federal |           | $     | 433 |           |   | $      | (1,544    | ) |   | $      | (484 | )
|                                   | State   |           |       | 420 |           |   |        | 387       |   |   |        | 383  |  
|Deferred                           |         |           | 1,055 |     |           |   | (1,879 | )         |   |   | (2,017 | )   
|                                   |         |           |       |     |           |   |        |           |  
|Total income tax expense (benefit) |         | $         | 1,908 |     |           | $ | (3,036 | )         |   | $ | (2,118 | )   
|                                   |         |           |       |     |           |   |        |           |  



|                               |                                         |                                |        |       |           |   |        |       |        | 
|------------------------------ | --------------------------------------- | ------------------------------ | ------ | ----- | --------- | - | ------ | ----- | ------ | 
|                               |                                         | March 26,                      |        |       | March 25, |  
|                               |                                         | 2004                           |        |       | 2005      |  
|                               |                                         |                                |        |       |           |  
|Deferred tax assets            |                                         |                                |        |       |           |   |        |      
|                               | Warranty reserves                       |                                | $      | 141   |           |   | $      | 315   |       
|                               | Accrued liabilities                     |                                |        | 4,919 |           |   |        | 4,207 |       
|                               | Inventory                               |                                |        | 2,699 |           |   |        | 2,164 |       
|                               | Unrecognized income                     |                                |        | 268   |           |   |        |      |       
|                               | Property and equipment                  |                                |        | 3,701 |           |   |        | 3,381 |       
|                               | State net operating loss carryforward   |                                |        |      |           |   |        | 694   |       
|                               | Federal net operating loss carryforward |                                |        |      |           |   |        | 1,670 |       
|                               | Other                                   |                                |        | 2,657 |           |   |        | 3,073 |       
|                               |                                         |                                |        |       |           |  
|                               |                                         | Total deferred tax assets      |        |       | 14,385    |   |        |       | 15,504 | 
|Deferred tax liabilities       |                                         |                                |        |       |           |   |        |      
|                               | Tax benefits purchased                  |                                |        | 685   |           |   |        | 349   |       
|                               | Other                                   |                                |        | 3,348 |           |   |        | 3,435 |       
|                               |                                         |                                |        |       |           |  
|                               |                                         | Total deferred tax liabilities |        |       | 4,033     |   |        |       | 3,784  | 
|                               |                                         |                                |        |       |           |  
|Net deferred income tax assets |                                         | $                              | 10,352 |       |           | $ | 11,720 |      
|                               |                                         |                                |        |       |           |  







37



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|                             |                                          |           |       |     |           |   |        |           |   |   |        |     |  
|---------------------------- | ---------------------------------------- | --------- | ----- | --- | --------- | - | ------ | --------- | - | - | ------ | --- | -
|                             |                                          | March 28, |       |     | March 26, |   |        | March 25, |  
|                             |                                          | 2003      |       |     | 2004      |   |        | 2005      |  
|                             |                                          |           |       |     |           |   |        |           |  
|Tax at statutory rate        |                                          | $         | 1,795 |     |           | $ | (3,169 | )         |   | $ | (2,079 | )  
|Increases (decreases)        |                                          |           |       |     |           |   |        |           |   |   |        |    
|                             | State taxes  net of federal tax benefit |           |       | 273 |           |   |        | 26        |   |   |        | 24  |  
|                             | Tax exempt interest                      |           |       | (84 | )         |   |        | (77       | ) |   |        | (83 | )
|                             | Other                                    |           |       | (76 | )         |   |        | 184       |   |   |        | 20  |  
|                             |                                          |           |       |     |           |   |        |           |  
|Income tax expense (benefit) |                                          | $         | 1,908 |     |           | $ | (3,036 | )         |   | $ | (2,118 | )  
|                             |                                          |           |       |     |           |   |        |           |  
|Effective tax rate           |                                          |           | 37.2  | %   |           |   | (33.5  | )%        |   |   | (35.6  | )% 
|                             |                                          |           |       |     |           |   |        |           |  





|    |                     
|--- | --------------------
|10. | Shareholders equity





|    |                         
|--- | ------------------------
|11. | Long-Term Incentive Plan







|    |              
|--- | -------------
|12. | Employee plan



38



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|    |                              
|--- | -----------------------------
|13. | Commitments and contingencies



|                    |  |        |        | 
|------------------- |  | ------ | ------ | 
|Fiscal Year         |  | Amount |       
|                    |  |        |       
|2006                |  | $      | 4,658  | 
|2007                |  |        | 2,424  | 
|2008                |  |        | 2,043  | 
|2009                |  |        | 1,716  | 
|2010 and thereafter |  |        | 6,747  | 
|                    |  |        |       
|                    |  | $      | 17,588 | 
|                    |  |        |       









|    |             
|--- | ------------
|14. | Other income



39



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|    |                             
|--- | ----------------------------
|15. | Business segment information



|                                                 |                            |            |         |         |           |   |         |           |   |   |         |         |  
|------------------------------------------------ | -------------------------- | ---------- | ------- | ------- | --------- | - | ------- | --------- | - | - | ------- | ------- | -
|                                                 |                            | Year Ended |        
|                                                 |                            |            |        
|                                                 |                            | March 28,  |         |         | March 26, |   |         | March 25, |  
|                                                 |                            | 2003       |         |         | 2004      |   |         | 2005      |  
|                                                 |                            |            |         |         |           |   |         |           |  
|Net sales                                        |                            |            |         |         |           |   |         |           |   |   |         |        
|                                                 | Factory-built housing      |            | $       | 554,613 |           |   | $       | 557,111   |   |   | $       | 582,723 |  
|                                                 | Financial services         |            |         | 18,517  |           |   |         | 21,354    |   |   |         | 27,815  |  
|                                                 |                            |            |         |         |           |   |         |           |  
|                                                 |                            | $          | 573,130 |         |           | $ | 578,465 |           |   | $ | 610,538 |        
|                                                 |                            |            |         |         |           |   |         |           |  
|Income (loss) from operations                    |                            |            |         |         |           |   |         |           |   |   |         |        
|                                                 | Factory-built housing      |            | $       | 11,650  |           |   | $       | 2,269     |   |   | $       | 2,962   |  
|                                                 | Financial services         |            |         | 6,237   |           |   |         | 7,767     |   |   |         | 13,083  |  
|                                                 | General corporate expenses |            |         | (10,956 | )         |   |         | (16,811   | ) |   |         | (16,398 | )
|                                                 |                            |            |         |         |           |   |         |           |  
|                                                 |                            | $          | 6,931   |         |           | $ | (6,775  | )         |   | $ | (353    | )      
|                                                 |                            |            |         |         |           |   |         |           |  
|Interest expense                                 |                            | $          | (6,676  | )       |           | $ | (5,566  | )         |   | $ | (8,990  | )      
|Equity in earnings (loss) of limited partnership |                            |            | 3,416   |         |           |   | 1,848   |           |   |   | (763    | )      
|Other income                                     |                            |            | 1,458   |         |           |   | 1,440   |           |   |   | 4,165   |        
|                                                 |                            |            |         |         |           |   |         |           |  
|Income (loss) before income taxes                |                            | $          | 5,129   |         |           | $ | (9,053  | )         |   | $ | (5,941  | )      
|                                                 |                            |            |         |         |           |   |         |           |  
|Identifiable assets                              |                            |            |         |         |           |   |         |           |   |   |         |        
|                                                 | Factory-built housing      |            | $       | 287,947 |           |   | $       | 256,209   |   |   | $       | 209,651 |  
|                                                 | Financial services         |            |         | 86,993  |           |   |         | 152,101   |   |   |         | 193,001 |  
|                                                 | Other                      |            |         | 107,627 |           |   |         | 113,512   |   |   |         | 169,328 |  
|                                                 |                            |            |         |         |           |   |         |           |  
|                                                 |                            | $          | 482,567 |         |           | $ | 521,822 |           |   | $ | 571,980 |        
|                                                 |                            |            |         |         |           |   |         |           |  
|Depreciation and amortization                    |                            |            |         |         |           |   |         |           |   |   |         |        
|                                                 | Factory-built housing      |            | $       | 13,030  |           |   | $       | 12,543    |   |   | $       | 10,686  |  
|                                                 | Financial services         |            |         | 118     |           |   |         | 966       |   |   |         | 1,257   |  
|                                                 | Other                      |            |         | 650     |           |   |         | 658       |   |   |         | 862     |  
|                                                 |                            |            |         |         |           |   |         |           |  
|                                                 |                            | $          | 13,798  |         |           | $ | 14,167  |           |   | $ | 12,805  |        
|                                                 |                            |            |         |         |           |   |         |           |  
|Capital expenditures                             |                            |            |         |         |           |   |         |           |   |   |         |        
|                                                 | Factory-built housing      |            | $       | 5,773   |           |   | $       | 2,387     |   |   | $       | 1,083   |  
|                                                 | Financial services         |            |         | 452     |           |   |         | 165       |   |   |         | 29      |  
|                                                 | Other                      |            |         | 182     |           |   |         |          |   |   |         | 19      |  
|                                                 |                            |            |         |         |           |   |         |           |  
|                                                 |                            | $          | 6,407   |         |           | $ | 2,552   |           |   | $ | 1,131   |        
|                                                 |                            |            |         |         |           |   |         |           |  
|Net sales for financial services consists of:    |                            |            |         |         |           |   |         |           |   |   |         |        
|                                                 | Insurance                  |            | $       | 11,840  |           |   | $       | 13,145    |   |   | $       | 13,982  |  
|                                                 | Finance                    |            |         | 6,677   |           |   |         | 8,209     |   |   |         | 13,833  |  
|                                                 |                            |            |         |         |           |   |         |           |  
|                                                 |                            | $          | 18,517  |         |           | $ | 21,354  |           |   | $ | 27,815  |        
|                                                 |                            |            |         |         |           |   |         |           |  

40



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|    |                                     
|--- | ------------------------------------
|16. | Accrued product warranty obligations



|                           |                               |                  |       |         |  
|-------------------------- | ----------------------------- | ---------------- | ----- | ------- | -
|                           |                               | Accrued Warranty |      
|                           |                               | Obligation       |      
|                           |                               |                  |      
|Reserves at March 29, 2002 |                               | $                | 6,583 |        
|                           | Net warranty expense provided |                  |       | 11,721  |  
|                           | Cash warranty payments        |                  |       | (13,961 | )
|                           |                               |                  |      
|Reserves at March 28, 2003 |                               |                  | 4,343 |        
|                           | Net warranty expense provided |                  |       | 13,835  |  
|                           | Cash warranty payments        |                  |       | (14,170 | )
|                           |                               |                  |      
|Reserves at March 26, 2004 |                               |                  | 4,008 |        
|                           | Net warranty expense provided |                  |       | 16,654  |  
|                           | Cash warranty payments        |                  |       | (15,256 | )
|                           |                               |                  |      
|Reserves at March 25, 2005 |                               | $                | 5,406 |        
|                           |                               |                  |      



|    |                                     
|--- | ------------------------------------
|17. | Quarterly financial data (unaudited)



|                                 |                                               |                                       |   |         |         |  |   |         |   |  |         |         |   |       |   |         |   |  |   |         |  
|-------------------------------- | --------------------------------------------- | ------------------------------------- | - | ------- | ------- |  | - | ------- | - |  | ------- | ------- | - | ----- | - | ------- | - |  | - | ------- | -
|                                 |                                               | First                                 |   |         | Second  |  |   | Third   |   |  | Fourth  |         |   |      
|                                 |                                               | Quarter                               |   |         | Quarter |  |   | Quarter |   |  | Quarter |         |   | Total |  
|                                 |                                               |                                       |   |         |         |  |   |         |   |  |         |         |   |       |  
|                                 |                                               | (In thousands, except per share data) |  
|Fiscal Year Ended March 26, 2004 |                                               |                                       |   |         |         |  |   |         |   |  |         |         |   |       |   |         |   |  |   |        
|                                 | Net sales                                     |                                       | $ | 155,899 |         |  | $ | 148,547 |   |  | $       | 144,215 |   |       | $ | 129,804 |   |  | $ | 578,465 |  
|                                 | Gross profit                                  |                                       |   | 40,377  |         |  |   | 39,134  |   |  |         | 36,628  |   |       |   | 34,500  |   |  |   | 150,639 |  
|                                 | Income (loss) from operations                 |                                       |   | 82      |         |  |   | 59      |   |  |         | (3,535  | ) |       |   | (3,381  | ) |  |   | (6,775  | )
|                                 | Net income (loss)                             |                                       |   | 812     |         |  |   | 515     |   |  |         | (4,132  | ) |       |   | (3,212  | ) |  |   | (6,017  | )
|                                 | Earnings (loss) per share  basic and diluted |                                       | $ | 0.04    |         |  | $ | 0.02    |   |  | $       | (0.18   | ) |       | $ | (0.14   | ) |  | $ | (0.26   | )
|Fiscal Year Ended March 25, 2005 |                                               |                                       |   |         |         |  |   |         |   |  |         |         |   |       |   |         |   |  |   |        
|                                 | Net sales                                     |                                       | $ | 157,751 |         |  | $ | 150,453 |   |  | $       | 154,624 |   |       | $ | 147,710 |   |  | $ | 610,538 |  
|                                 | Gross profit                                  |                                       |   | 40,619  |         |  |   | 38,508  |   |  |         | 36,509  |   |       |   | 38,942  |   |  |   | 154,578 |  
|                                 | Income (loss) from operations                 |                                       |   | 3,082   |         |  |   | (1,397  | ) |  |         | (5,030  | ) |       |   | 2,992   |   |  |   | (353    | )
|                                 | Net income (loss)                             |                                       |   | 1,051   |         |  |   | (2,219  | ) |  |         | (4,647  | ) |       |   | 1,992   |   |  |   | (3,823  | )
|                                 | Earnings (loss) per share  basic and diluted |                                       | $ | 0.05    |         |  | $ | (0.10   | ) |  | $       | (0.20   | ) |       | $ | 0.09    |   |  | $ | (0.17   | )

41



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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Managements Evaluation of Disclosure Controls and
Procedures




Managements Report on Internal Control over Financial
Reporting






Internal
Control  Integrated Framework


42



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##### Table of Contents







| |                                                                    
| | -------------------------------------------------------------------
| | /s/ Larry H. Keener                                                
| |                                                                    
| | Larry H. Keener                                                    
| | Chairman, President and Chief Executive Officer                    
|
| | /s/ Kelly Tacke                                                    
| |                                                                    
| | Kelly Tacke                                                        
| | Vice President  Finance, Chief Financial Officer
    and Secretary

43



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##### Table of Contents



Report of Independent Registered Public Accounting Firm on


Internal Control over Financial Reporting






Internal Control  Integrated Framework














| |                      
| | ---------------------
| | /s/ Ernst & Young LLP





44



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PART III.







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant










|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services






PART IV.







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

Financial Statements




Financial Statement Schedules




45



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Index to Exhibits


|        |     |             |  |                                                                                                                                                                                                                                                
|------- | --- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|No.     |     | Description
|        |     |            
|        | 3   | .1          |  | Amended and Restated Articles of Incorporation (Incorporated by
    reference to Exhibit 3.1 to the Registrants
    Registration Statement on Form S-1, Registration
    No. 33-79164).                                                       
|        | 3   | .2          |  | Articles of Amendment (Incorporated by reference to
    Exhibit 3.2 to the Registrants Registration Statement
    on Form S-1, Registration No. 33-79164).                                                                                    
|        | 3   | .3          |  | Restated Bylaws (Incorporated by reference to Exhibit 3.3
    to the Registrants Registration Statement on
    Form S-1, Registration No. 33-79164).                                                                                          
|        | 4   | .1          |  | Form of Common Stock Certificate (Incorporated by reference to
    Exhibit 4.1 to the Registrants Registration Statement
    on Form S-1, Registration No. 33-79164).                                                                         
|        | 10  | .1          |  | Associate Stock Purchase Plan (Incorporated by reference to
    Exhibit 10.2 to the Registrants Registration
    Statement on Form S-1, Registration No. 33-97676).                                                                           
|        | 10  | .2          |  | Form of Indemnification Agreement between the Company and each
    of our directors and certain officers (Incorporated by reference
    to Exhibit 10.4 to the Registrants Registration
    Statement on Form S-1, Registration No. 33-79164).
|        | 10  | .3          |  | Compensation Agreement between the Company and Lee Posey
    (Incorporated by reference to Exhibit 10.7 to the
    Registrants Registration Statement on Form S-1,
    Registration No. 33-79164).                                            
|        | 10  | .4          |  | Amended and Restated Amendment to Compensation Agreement between
    the Company and Lee Posey (Incorporated by reference to
    Exhibit 10.6 to the Registrants Registration
    Statement on Form S-1, Registration No. 33-97676).          
|        | *21 | .1          |  | List of Subsidiaries.                                                                                                                                                                                                                          
|        | *23 | .1          |  | Consent of Ernst & Young LLP, Independent Registered
    Public Accounting Firm.                                                                                                                                                               
|        | 24  | .1          |  | Power of Attorney (included on the signature page of the Report).                                                                                                                                                                              
|        | *31 | .1          |  | Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a)
    of the Securities Exchange Act, as amended, by Larry H. Keener.                                                                                                                
|        | *31 | .2          |  | Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a)
    of the Securities Exchange Act, as amended, by Kelly Tacke.                                                                                                                    
|        | *32 | .1          |  | Certification pursuant to section 906 of the Sarbanes-Oxley
    Act of 2002 by Larry H. Keener.                                                                                                                                                
|        | *32 | .2          |  | Certification pursuant to section 906 of the Sarbanes-Oxley
    Act of 2002 by Kelly Tacke.                                                                                                                                                    






|  |               
|- | --------------
|* | Filed herewith







46



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SIGNATURES






| |                                        
| | ---------------------------------------
| | PALM HARBOR HOMES, INC.                
|
| | /s/ Larry H. Keener                    
| | _______________________________________
| | Larry H. Keener, Chairman of the Board 





|                                                         |  |                                                                                                                      |  |              |  | 
|-------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | 
|Signatures                                               |  | Title                                                                                                                |  | Date        
|                                                         |  |                                                                                                                      |  |             
|                                                        
|/s/ Larry H. KeenerLarry
    H. Keener                   |  | Chairman of the Board and Director, Chief Executive Officer and
    President (Principal Executive Officer)          |  | June 6, 2005
|                                                        
|/s/ Kelly TackeKelly
    Tacke                           |  | Vice President  Finance,
    Chief Financial Officer and Secretary
    (Principal Financial and Accounting Officer) |  | June 6, 2005
|                                                        
|/s/ Lee PoseyLee
    Posey                               |  | Chairman Emeritus and Director                                                                                       |  | June 6, 2005
|                                                        
|/s/ William R. ThomasWilliam
    R. Thomas               |  | Director                                                                                                             |  | June 6, 2005
|                                                        
|/s/ Walter D. Rosenberg, Jr.Walter
    D. Rosenberg, Jr. |  | Director                                                                                                             |  | June 6, 2005
|                                                        
|/s/ Frederick R. MeyerFrederick
    R. Meyer             |  | Director                                                                                                             |  | June 6, 2005
|                                                        
|/s/ John H. WilsonJohn
    H. Wilson                     |  | Director                                                                                                             |  | June 6, 2005

47



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##### Table of Contents



|                                           |  |          |  |              |  | 
|------------------------------------------ |  | -------- |  | ------------ |  | 
|Signatures                                 |  | Title    |  | Date        
|                                           |  |          |  |             
|                                          
|/s/ A. Gary ShillingA.
    Gary Shilling   |  | Director |  | June 6, 2005
|                                          
|/s/ Jerry D. MalloneeJerry
    D. Mallonee |  | Director |  | June 6, 2005

48



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INDEX TO EXHIBITS


|         |     |             |  |                                                                                                                                                                                                                                                
|-------- | --- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |     |            
|No.      |     | Description
|         |     |            
|         | 3   | .1          |  | Amended and Restated Articles of Incorporation (Incorporated by
    reference to Exhibit 3.1 to the Registrants
    Registration Statement on Form S-1, Registration
    No. 33-79164).                                                       
|         | 3   | .2          |  | Articles of Amendment (Incorporated by reference to
    Exhibit 3.2 to the Registrants Registration Statement
    on Form S-1, Registration No. 33-79164).                                                                                    
|         | 3   | .3          |  | Restated Bylaws (Incorporated by reference to Exhibit 3.3
    to the Registrants Registration Statement on
    Form S-1, Registration No. 33-79164).                                                                                          
|         | 4   | .1          |  | Form of Common Stock Certificate (Incorporated by reference to
    Exhibit 4.1 to the Registrants Registration Statement
    on Form S-1, Registration No. 33-79164).                                                                         
|         | 10  | .1          |  | Associate Stock Purchase Plan (Incorporated by reference to
    Exhibit 10.2 to the Registrants Registration
    Statement on Form S-1, Registration No. 33-97676).                                                                           
|         | 10  | .2          |  | Form of Indemnification Agreement between Palm Harbor and each
    of our directors and certain officers (Incorporated by reference
    to Exhibit 10.4 to the Registrants Registration
    Statement on Form S-1, Registration No. 33-79164).
|         | 10  | .3          |  | Compensation Agreement between the Company and Lee Posey
    (Incorporated by reference to Exhibit 10.7 to the
    Registrants Registration Statement on Form S-1,
    Registration No. 33-79164).                                            
|         | 10  | .4          |  | Amended and Restated Amendment to Compensation Agreement between
    the Company and Lee Posey (Incorporated by reference to
    Exhibit 10.6 to the Registrants Registration
    Statement on Form S-1, Registration No. 33-97676).          
|         | *21 | .1          |  | List of Subsidiaries.                                                                                                                                                                                                                          
|         | *23 | .1          |  | Consent of Ernst & Young LLP, Independent Registered
    Public Accounting Firm.                                                                                                                                                               
|         | 24  | .1          |  | Power of Attorney (included on the signature page of the Report).                                                                                                                                                                              
|         | *31 | .1          |  | Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a)
    of the Securities Exchange Act, as amended, by Larry H. Keener.                                                                                                                
|         | *31 | .2          |  | Certification pursuant to Rule 13a-14(a) and Rule 15d-14(a)
    of the Securities Exchange Act, as amended, by Kelly Tacke.                                                                                                                    
|         | *32 | .1          |  | Certification pursuant to section 906 of the Sarbanes-Oxley
    Act of 2002 by Larry H. Keener.                                                                                                                                                
|         | *32 | .2          |  | Certification pursuant to section 906 of the Sarbanes-Oxley
    Act of 2002 by Kelly Tacke.                                                                                                                                                    






|  |               
|- | --------------
|* | Filed herewith