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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)

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

For the fiscal year ended March 28, 2008

OR



| ̈ | 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)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ̈    No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.    Yes   ̈    No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  þ    No   ̈

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                                              |  |                             
|--------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈                    |  | Accelerated filer  þ        
|Non-accelerated filer   ̈                      |  | Smaller reporting company   ̈
|(Do not check if a smaller reporting company) |  |                             

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).    Yes   ̈    No  þ

The aggregate market value of the registrants common stock held by non-affiliates of the registrant as of September 28, 2007, was $125,600,342 based on the closing price on that date of the common stock as
quoted on the Nasdaq Stock Market. As of May 27, 2008, 22,851,865 shares of the registrants common stock were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants Proxy Statement relating to our Annual Meeting of
Shareholders to be held July 23, 2008 are incorporated by reference in Part III.









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TABLE OF CONTENTS



|                  |  |                                                                                                              |  |     
|----------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|                  |  |                                                                                                              |  | Page
|PART I            |  |                                                                                                              |  |     
|                  |  |                                                                                                             
|Item 1.           |  | Business                                                                                                     |  | 1   
|Item 1A.          |  | Risk Factors                                                                                                 |  | 10  
|Item 1B.          |  | Unresolved Staff Comments                                                                                    |  | 14  
|Item 2.           |  | Properties                                                                                                   |  | 15  
|Item 3.           |  | Legal Proceedings                                                                                            |  | 15  
|Item 4.           |  | Submission of Matters to a Vote of Security Holders                                                          |  | 16  
|                  |  |                                                                                                             
|PART II           |  |                                                                                                              |  |     
|                  |  |                                                                                                             
|Item 5.           |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 17  
|Item 6.           |  | Selected Financial Data                                                                                      |  | 19  
|Item 7.           |  | Managements Discussion and Analysis of Financial Condition and Results Of Operations                        |  | 20  
|Item 7A.          |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 31  
|Item 8.           |  | Financial Statements and Supplementary Data                                                                  |  | 32  
|Item 9.           |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 59  
|Item 9A.          |  | Controls and Procedures                                                                                      |  | 59  
|Item 9B.          |  | Other Information                                                                                            |  | 59  
|                  |  |                                                                                                             
|PART III          |  |                                                                                                              |  |     
|                  |  |                                                                                                             
|Item 10.          |  | Directors and Executive Officers of the Registrant                                                           |  | 61  
|Item 11.          |  | Executive Compensation                                                                                       |  | 61  
|Item 12.          |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 61  
|Item 13.          |  | Certain Relationships and Related Transactions                                                               |  | 61  
|Item 14.          |  | Principal Accountant Fees and Services                                                                       |  | 61  
|                  |  |                                                                                                             
|PART IV           |  |                                                                                                              |  |     
|                  |  |                                                                                                             
|Item 15.          |  | Exhibits and Financial Statement Schedules                                                                   |  | 62  
|                  | 
|Signatures        |  | 63                                                                                                          
|Index to Exhibits |  | 64                                                                                                          
|Certifications    |  |                                                                                                             



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PART I.



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

General

Founded in 1977, Palm Harbor Homes, Inc. and its subsidiaries (collectively, we or Palm Harbor) are a leading manufacturer and marketer of factory-built
homes in the United States. We market nationwide through vertically integrated operations, encompassing manufactured and modular housing, financing and insurance. At March 28, 2008, we operated 12 manufacturing facilities in seven states that
sell homes through 87 of our company-owned retail sales centers and builder locations and approximately 275 independent retail dealers, builders and developers. Through our subsidiary, CountryPlace Mortgage, Ltd. (CountryPlace), we currently offer
conforming mortgages to purchasers of factory-built homes sold by company-owned retail sales centers and certain independent retail dealers, builders and developers. The loans originated through CountryPlace are either held for our own investment
portfolio, sold to investors, or included as part of securitized financing transactions. We provide property and casualty insurance for owners of manufactured homes through our subsidiary, Standard Casualty Company (Standard).

Beginning in 1999, the manufactured housing industry entered a cyclical downturn as the result of the tightening of credit standards, limited retail and
wholesale financing availability, increased levels of repossessions, excessive retail inventory levels and manufacturing capacities. Industry shipments of manufactured homes were approximately 348,700 in calendar year 1999 and have decreased 72%
over the last eight years to a 45 year industry low of 96,000 in calendar year 2007. During this eight-year period, our manufactured housing shipments declined 75%.

Prior to 2006, increases in manufactured housing shipments to Florida, Arizona and California were the main factor in maintaining industry shipments at approximately 130,000 per year. In 2006, however, the
dynamics fueling increased manufactured housing demand in these states changed quickly. Site built homes in these states had experienced rapid price appreciation driven by high land cost. As such, the increase in speculative building resulted in
excess inventory. This caused prices to fall and buyers and sellers began to postpone their home buying decisions. It also greatly reduced the number of over age 55 buyers of manufactured housing since they typically must sell their site built home
to buy a manufactured home. For calendar year 2007, industry shipments to Florida, Arizona and California were down approximately 43%.

With the manufactured housing industry not showing signs of a near term recovery, we directed our focus to growth opportunities in the modular housing business. We entered the modular home business in June 2002 when we acquired Nationwide
Custom Homes (Nationwide). We also produce modular homes at four of our manufactured housing facilities. As a result of this planned strategy to grow our modular business, the number of modular homes we sold as a percentage of total factory-built
homes sold has increased from 8% in fiscal 2003 (when we acquired Nationwide) to 30% in fiscal 2008. However, the 2007 severe downturn in the overall housing market created by reduced financing options has produced an excess of site-built homes,
which are directly competitive with modular housing. Industry modular shipments for calendar year 2007 were approximately 32,300, a decrease of 16% over calendar year 2006. Our unit sales of modular homes decreased 12% in fiscal 2008 as compared to
fiscal 2007, while the average selling prices of our modular homes were higher.

Our business has also been adversely affected by the
deterioration of the credit markets that we depend on for warehouse lending for originations and securitizations of our loans. The adverse market conditions began in the sub-prime market and have extended to lenders and investors in other asset
classes, including factory built housing loans. CountryPlaces warehouse borrowing facility was originally scheduled to expire March 14, 2008; however, they negotiated an extension with the lender until April 30, 2008. During the
extension period, CountryPlace stopped taking applications for chattel loans and non-conforming mortgages but continued to originate conforming mortgage loans. On April 25, 2008, CountryPlace sold approximately $51.3 million of its warehoused
portfolio of chattel and mortgage loans without incurring a loss. Approximately $41.5 million of the



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proceeds were used to repay in full and terminate the warehouse borrowing facility scheduled to expire on April 30, 2008. The remainder of the proceeds
were used for general corporate purposes. CountryPlace will continue to originate and service conforming mortgages for our credit-worthy customers.

With these difficult market conditions worsening and no near-term signs of recovery for the factory-built housing industry, we have focused on executing three key strategies to improve our operating results. First, the Company plans to
increase revenues through an expanded product offering (including the less expensive manufactured and modular products introduced during the first quarter of fiscal 2008), enhanced marketing and advertising efforts, and expanded distribution
channels. Along with this, we will continue to identify ways to reduce our fixed costs and improve operating efficiencies. We will also focus on cash generation and conservation throughout our operations. In addition, we have amended certain debt
agreements subsequent to March 28, 2008 (see Liquidity and Capital Resources section for further details).

Business Segment Information

We operate principally in two segments: (1) factory-built housing, which includes manufactured housing, modular housing and retail
operations and (2) financial services, which includes finance and insurance. See Note 15 of Notes to Consolidated Financial Statements in Item 8 of this report for information on our net sales, income (loss) from operations,
identifiable assets, depreciation and amortization expense and capital expenditures by segment for fiscal 2008, 2007 and 2006.

Factory-Built Housing
Segment

Our factory-built housing operations consist of the production and sale of manufactured homes (HUD-code) and modular homes.
Our manufactured homes are constructed in accordance with the Federal Manufactured Home Construction and Safety Standards (HUD regulations) and our modular homes are built in accordance with state or local building codes.

The following table sets forth the total factory-built homes sold as well as the number of manufacturing facilities we operated for the fiscal years
indicated:



|                                                           |  |                   |  |               |  |               |  |               |  |              
|---------------------------------------------------------- |  | ----------------- |  | ------------- |  | ------------- |  | ------------- |  | -------------
|                                                           |  | Fiscal Year Ended
|                                                           |  | March 28,2008     |  | March 30,2007 |  | March 31,2006 |  | March 25,2005 |  | March 26,2004
|Factory-built homes sold:                                  |  |                   |  |               |  |               |  |               |  |              
|Single-section(1)                                          |  | 658               |  | 434           |  | 1,015         |  | 355           |  | 474          
|Multi-section                                              |  | 3,163             |  | 4,453         |  | 6,282         |  | 6,211         |  | 6,780        
|Modular                                                    |  | 1,628             |  | 1,850         |  | 1,614         |  | 1,382         |  | 962          
|                                                           |  |                   |  |               |  |               |  |               |  |              
|Total factory-built homes sold                             |  | 5,449             |  | 6,737         |  | 8,911         |  | 7,948         |  | 8,216        
|                                                           |  |                   |  |               |  |               |  |               |  |              
|Operating manufacturing facilities (at end of fiscal year) |  | 12                |  | 14            |  | 18            |  | 18            |  | 19           



|(1) | In the second quarter of fiscal 2006, the Federal Emergency Management Agency (FEMA) contracted with various factory-built housing homebuilders to produce and deliver manufactured
homes in connection with its Hurricane Katrina relief efforts. We contracted with FEMA to produce and deliver 583 single-section homes in fiscal 2006.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The number of operating manufacturing facilities decreased from 18 in fiscal 2006 to 14 in fiscal 2007 and to 12 in fiscal 2008. During fiscal 2007, we idled three less-than-efficient facilities (one was listed for
sale in fiscal 2008) and had one facility destroyed by fire. During fiscal 2008, we closed three less-than efficient facilities (one is idled and the other two are for sale) and reopened one previously idled facility in the fourth quarter as part of
our planned strategy to more effectively balance our manufacturing and distribution capacity with the current needs of the market. We did not recognize any impairment charges related to these plant closures as we had insurance appraisals supporting
their net book value.



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Products

We manufacture a broad range of single and multi-section manufactured and modular homes under various brand names and in a variety of floor plans and price ranges. While most of the homes we build are
multi-section/modular (88% in fiscal 2008), ranch-style homes, we also build single-section homes, split-level homes, cape cod style homes, two and three story homes and multi-family units such as apartments and duplexes. Most of the single-family
homes we produce contain two to five bedrooms, a living room, family room, dining room, kitchen and two or three bathrooms. Approximately 90% of the manufactured homes we produce are structurally or decoratively customized to the homebuyers
specifications. During fiscal 2008, the average retail sales price (excluding land) of our manufactured and modular homes was approximately $76,000 and $176,000, respectively.

Most factory-built homes come with central air conditioning and heating, a range, refrigerator and
carpeting. HUD-code homes also typically contain window treatments. Optional amenities, including washers, dryers, furniture packages and specialty cabinets, as well as features usually associated with site-built homes such as stone fireplaces,
ceramic tile floors, showers and countertops, computer rooms, master retreats, skylights, vaulted ceilings and whirlpool baths are also offered. We have a unique package of energy saving construction features referred to as EnerGmiser which includes, among other things, additional insulation to reduce heating and cooling costs, and which exceeds statutorily-mandated energy efficiency levels. We have been an ENERGY
STAR partner since 1997 and in March 2007, we were named by the U.S. Environmental Protection Agency (EPA) as a 2007 ENERGY STAR Partner of the Yearfor our outstanding contribution to reducing greenhouse gas emissions by building
energy-efficient homes. In February 2008, we received the U. S. Department of Energys (DOE) first Energy Smart label for the green home that we manufactured and displayed at the International Builders Show in Orlando, Florida.

We are constantly introducing new floor plans, decors, exteriors, features and accessories to appeal to changing trends in different regions of the
country. Our factory-built homes are designed and copyrighted after extensive field research and consumer feedback. We have developed engineering systems which, through the use of computer-aided technology, permit customization of homes and assist
with product development and enhancement.

The principal materials used in the construction of our factory-built homes are of the same
quality as those used by conventional site builders. These components include wood, wood products, gypsum wallboard, steel, fiberglass insulation, carpet, vinyl, fasteners, appliances, electrical items, windows and doors. We believe that the
materials used in the construction of our factory-built homes are readily available from a wide variety of suppliers and the loss of any single supplier would not have a material adverse effect on our business. The one supplier which accounted for
more than 5% of our total purchases during the fiscal year ended March 28, 2008 represented 9.9% of our total purchases. Prices of certain materials such as lumber, gypsum, steel and insulation can fluctuate significantly due to changes in
supply and demand. Although we and others in the industry typically have been able to pass higher material costs on to the consumer through price increases, such increases typically lag the escalation of material costs. No assurances can be made
that we will be able to pass these costs on in future years.

Our homes are constructed in indoor facilities, which have approximately
100,000 square feet of floor space and employ an average of 200 associates. Construction of our homes is performed in stages using an assembly-line process. HUD-code homes are constructed in one or more sections that is/are permanently attached to a
steel support chassis that allows the section to be moved through the facility and transported upon sale. The sections of many of the modular homes we produce are built on wooden floor systems and transported on carriers that are removed during
placement of the homes at the home site. The sections are then moved down a tracked path where various components such as floors, interior and exterior walls, ceiling, roof, and other purchased components are added and function testing is performed.
We currently complete a typical HUD-code home in approximately five days and a typical modular home in one to two weeks. We believe the efficiency of our process, protection from the weather, and favorable pricing of materials resulting from our
substantial purchasing power enables us to produce homes more quickly and often at a lower cost than a conventional site-built home of similar quality.



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The completed homes are transported by independent trucking companies to either the retail sales center
(stock orders) or to the customers site (retail sold orders). The transportation cost is borne by the independent retailer. At the home site, HUD-code homes are placed on the site, the interior and exterior seams are joined, utility hook-ups
are made and installation and finish-out services are provided. The industry practice is to have third parties hired by the retailer provide the installation and finish-out services. Our associates, rather than third parties, perform the
installation and finish out services on our homes. We believe our finish-out services ensure that our quality procedures are applied during the entire process and increase customer satisfaction, thereby providing us a competitive advantage. Modular
homes are typically set by a crane on the foundation, the roof is raised and the final seam of roof shingles along the ridges of the roofline is applied. Modular homes typically require a larger amount of work to be done on-site to complete the
homes.

The construction of our factory-built homes is based upon customer orders from retailers and independent dealers, builders and
developers. Since orders from retailers may be cancelled prior to production without penalty, we do not consider our order backlog to be a firm indication of future business; however, such cancellations do not often occur. Before scheduling homes
for production, customer deposits are received and availability of financing is confirmed with our customer and, with respect to independent dealers, their floor plan lender. As of May 27, 2008, our backlog of manufactured housing orders was
approximately $14.8 million, as compared to approximately $46.3 million as of May 29, 2007 and our backlog of modular housing orders as of May 27, 2008 was approximately $34.0 million, as compared to approximately $46.3 million as of
May 29, 2007.

Product Distribution

Our homes are sold through a distribution network consisting of retail sales centers we own and independent dealers, builders and developers. The following table sets forth the number of homes we sold through each of
these distribution channels, as well as the number of company-owned retail sales centers and independent dealers, builders and developers during the past three fiscal years:



|                                                            |  |               |  |               |  |              
|----------------------------------------------------------- |  | ------------- |  | ------------- |  | -------------
|                                                            |  | March 28,2008 |  | March 30,2007 |  | March 31,2006
|Factory-built homes sold by:                                |  |               |  |               |  |              
|Company-owned retail sales centers and builder locations(1) |  | 3,763         |  | 4,003         |  | 4,471        
|Independent dealers, builders and developers                |  | 1,686         |  | 2,734         |  | 4,440        
|                                                            |  |               |  |               |  |              
|Total                                                       |  | 5,449         |  | 6,737         |  | 8,911        
|                                                            |  |               |  |               |  |              
|Number of:                                                  |  |               |  |               |  |              
|Company-owned retail sales centers and builder locations    |  | 87            |  | 107           |  | 116          
|Independent dealers, builders and developers                |  | 275           |  | 350           |  | 350          
|                                                            |  |               |  |               |  |              
|Total                                                       |  | 362           |  | 457           |  | 466          
|                                                            |  |               |  |               |  |              



|(1) | Includes 583 homes sold to FEMA in fiscal 2006.
|--- | -----------------------------------------------

We
currently have 83 company-owned retail sales centers in 15 states and four company-owned builder locations in two states. A typical retail sales center consists of a manufactured home finished out as sales offices, and factory-built model homes of
various sizes, floor plans, features and prices. Many of our retail sales centers also sell used and repossessed homes. Customers may purchase one of the model homes or may order a home that will be built at one of our manufacturing facilities and
customized to meet their needs. Our typical builder location consists of a modular model home which serves as both a sales office and a design center which allows customers to select the floor plan and various amenities in their new home.

In addition to our company-owned retail sales centers and builder locations, we also distribute our factory-built homes through
independent dealers, builders and developers. Our independent dealer network consists of approximately 135 local dealers that principally market lifestyle communities. Our builder/developer network consists of approximately 140 builders and
developers who typically acquire and develop the land and set a



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foundation for the home. We transport the home to the site and the builder/developers contractors lift the home with a crane onto the foundation and
subsequently perform finish-out services. The builder/developer may also construct garages, patios, porches and other such additional add-ons.

Markets Served

During the fiscal year ended March 28, 2008, the percentage of our revenues by region was as follows:



|          |  |                                                                                                                                |  |                                |  
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------ | -
|Region    |  | Primary States                                                                                                                 |  | Percentage ofRevenue by Region |  
|Southeast |  | Florida, North Carolina, Alabama, Georgia, South Carolina, Mississippi, Tennessee, Virginia, West Virginia, Maryland, Delaware |  | 34                             | %
|Central   |  | Texas, Oklahoma, Arkansas, Louisiana                                                                                           |  | 40                             |  
|West      |  | New Mexico, Arizona, California, Colorado, Oregon, Washington, Montana, Nevada, Idaho                                          |  | 24                             |  
|Midwest   |  | Ohio, Indiana, Kentucky, Illinois                                                                                              |  | 2                              |  
|          |  |                                                                                                                                |  |                                |  
|          |  |                                                                                                                                |  | 100                            | %
|          |  |                                                                                                                                |  |                                |  

The two states which accounted for greater than 10% of our revenues were Texas and Florida with
approximately 31% and 14%, respectively, of total revenues.

Because the cost of transporting factory-built homes is significant, there is
a practical limit to the distance between a manufacturing facility and our retailers or home sites. The primary geographic market is within a 250-mile radius for a manufactured housing facility and within a one to two day drive for a modular housing
facility. Each of our manufactured housing facilities typically serves 30 to 70 retailers, and the facility sales staff maintains personal contact with each retailer, whether company-owned or independent. Our decentralized operations allow us to be
more responsive in addressing regional customer preferences of product innovation and home design.

Consumer Financing

Sales of factory-built homes are significantly affected by the availability and cost of consumer financing. There are three basic types of consumer
financing in the factory-built housing industry: chattel or personal property loans for purchasers of a home with no real estate involved (generally HUD-code homes); non-conforming mortgages for purchasers of the home and the land on which the home
is placed; and mortgage loans which comply with the requirements of Fannie Mae or Freddie Mac. The majority of modular homes are financed with conventional real estate mortgages. Beginning in mid-1999, loose credit standards for chattel loans led to
increased numbers of repossessions of manufactured homes and excessive inventory levels. The poor performance of manufactured home loan portfolios made it difficult for consumer finance companies in the industry to obtain long-term capital in the
asset-backed securitization market. As a result, many consumer finance companies curtailed their lending or exited the manufactured housing loan industry entirely. Since then, the lenders who remained in the business tightened their credit standards
and increased interest rates for chattel loans which reduced lending volumes and lowered sales volumes of manufactured homes.

Some of our
customers obtain third-party construction financing, which allows for progress payments to be made to us at periodic intervals during the manufacturing, sale and closing process. This type of financing is primarily available to those customers
obtaining land/home and mortgage loans, which finance the land, home and improvements of a piece of real property. Such third-party construction financing through our customers is generally more advantageous to us in that the cash is received
earlier and can be used for various purposes.

Wholesale Financing

In accordance with factory-built housing industry practice, substantially all retailers finance a portion of their purchases of manufactured homes through wholesale floor plan financing arrangements. Under
a typical



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floor plan financing arrangement, a financial institution provides the retailer with a loan for the purchase price of the home and maintains a security
interest in the home as collateral. The financial institution which provides financing to the retailer customarily requires us to enter into a separate repurchase agreement with the financial institution under which we are obligated, upon default by
the retailer and under certain other circumstances, to repurchase the financed home at declining prices over the term of the repurchase agreement (which generally ranges from 12 to 18 months). The price at which we may be obligated to repurchase a
home under these agreements is based upon our original invoice price plus certain administrative and shipping expenses. Our obligation under these repurchase agreements ceases upon the purchase of the home by the retail customer.

The risk of loss under such repurchase agreements is mitigated by the fact that (i) approximately 69% of our homes are sold through our
company-owned stores for which no repurchase agreement exists; (ii) a majority of the homes we sell to independent dealers, builders and developers are pre-sold to specific retail customers; (iii) we monitor each dealers,
builders and retailers inventory position on a regular basis; (iv) sales of our manufactured homes are spread over a large number of dealers, builders and developers; (v) none of our independent dealers, builders and developers
accounted for more than 5% of our net sales in fiscal 2008; (vi) the price we are obligated to pay declines over time and (vii) we are, in most cases, able to resell homes repurchased from credit sources in the ordinary course of business
without incurring significant losses. We estimate that our potential obligations under such repurchase agreements were approximately $16.4 million as of March 28, 2008. During fiscal years 2008, 2007 and 2006, we did not incur any losses under
these repurchase agreements.

Beginning in fiscal 2000, lenient credit standards, which had facilitated increased industry-wide wholesale
shipments in previous years, tightened, resulting in declining wholesale shipments, declining margins and lower retail sales levels for most industry participants through fiscal 2008. During this time, several major floor plan lenders have exited
the wholesale financing business and a number of regional banks have either entered the retail financing business or increased their lending volumes.

Financial Services Segment

Finance

We provide financing to our customers on competitive terms through our subsidiary, CountryPlace. Through CountryPlace, we currently offer conforming
mortgages to purchasers of factory-built homes sold by company-owned retail sales centers and certain independent retail dealers, builders and developers. CountryPlace is an approved seller-servicer with Fannie Mae, and is approved by HUD to
originate FHA-insured mortgages under its Direct Endorsement program. CountryPlace does not participate in the sub-prime market. The loans originated through CountryPlace are held for our own investment portfolio, sold to investors, or included as
part of securitized financing transactions. CountryPlace also provides various loan origination and servicing functions for non-affiliated entities under contract. We believe that providing financing alternatives to our customers improves our
responsiveness to the financing needs of prospective purchasers and provides us with additional sources of loan origination and servicing earnings.

Loan Portfolio

All of CountryPlaces loan contracts held for investment, sold to investors, or included in securitized
financing transactions are fixed rate, simple interest contracts and have monthly scheduled payments of principal and interest. The scheduled payments for each simple interest contract would, if made on their respective due dates, result in a full
or nearly full amortization of the contract. The following is an analysis of the scheduled repayments of the loans in our portfolio (including the loans sold in April 2008) as of March 31, 2008 (in thousands):



|                                       |  |                  |   |                    |   |                  |  |       |         |  |   |        
|-------------------------------------- |  | ---------------- | - | ------------------ | - | ---------------- |  | ----- | ------- |  | - | -------
|                                       |  | Due within1 year |   | Due in1 to 5 years |   | Due after5 years |  | Total
|Scheduled repayments of consumer loans |  | $                | 4 |                    | $ | 748              |  | $     | 271,692 |  | $ | 272,444



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CountryPlaces policy is to place loans on nonaccrual status when either principal or interest is past due and
remains unpaid for 120 days or more. In addition, they place loans on nonaccrual status when there is a clear indication that the borrower has the inability or unwillingness to meet payments as they become due. At March 31, 2008,
CountryPlaces management was not aware of any potential problem loans that would have a material effect on loan delinquency or charge-offs. Loans are subject to continual review and are given managements attention whenever a problem
situation appears to be developing. The following table sets forth the amounts and categories of CountryPlaces non-performing loans and assets as of March 31, 2008 and March 31, 2007 (dollars in thousands):



|                                            |  |               |       |   |               |   |       |  
|------------------------------------------- |  | ------------- | ----- | - | ------------- | - | ----- | -
|                                            |  | March 31,2008 |       |   | March 31,2007 |  
|Non-performing loans:                       |  |               |       |   |               |   |       |  
|Loans accounted for on a nonaccrual basis   |  | $             | 75    |   |               | $ |      |  
|Accruing loans past due 90 days or more     |  |               | 2,195 |   |               |   | 809   |  
|Total nonaccrual and 90 days past due loans |  |               | 2,270 |   |               |   | 809   |  
|Percentage of total loans                   |  |               | 0.83  | % |               |   | 0.35  | %
|Other non-performing assets(1)              |  |               | 1,635 |   |               |   | 1,169 |  



|(1) | Consists of land acquired through foreclosure, which is carried at fair value less estimated selling expenses.
|--- | --------------------------------------------------------------------------------------------------------------

Loan contracts secured by collateral that is geographically concentrated could experience higher rates of delinquencies, default and foreclosure losses than loan
contracts secured by collateral that is more geographically dispersed. CountryPlace has loan contracts secured by factory-built homes located in the following key states as of March 31, 2008 and March 31, 2007:



|           |  |               |   |  |               |  
|---------- |  | ------------- | - |  | ------------- | -
|           |  | March 31,2008 |   |  | March 31,2007 |  
|Texas      |  | 41.0          | % |  | 42.1          | %
|Arizona    |  | 7.1           |   |  | 6.5           |  
|Florida    |  | 6.9           |   |  | 6.7           |  
|California |  | 2.9           |   |  | 2.7           |  

The states of California, Florida and Arizona, and to a lesser degree Texas, have experienced economic weakness
resulting from the decline in real estate values. The risks created by these concentrations have been considered by CountryPlaces management in the determination of the adequacy of the allowance for loan losses. No other states had
concentrations in excess of 10% of the principal balance of the consumer loans receivable as of March 31, 2008 or March 31, 2007. Management believes the allowance for loan losses is adequate to cover estimated losses at each balance sheet
date.

Insurance

We
offer property and casualty insurance as well as extended warranties for owners of manufactured homes through our subsidiary, Standard Casualty. Standard Casualty specializes in the manufactured housing industry, primarily serving the Texas,
Georgia, Arizona and New Mexico markets. In Texas, the policies are written through one affiliated managing general agent, which produces all premiums, except surety, though local agents, most of which are manufactured home dealers. All business
outside the state of Texas is written on a direct basis through local agents. There are approximately 150 active producing agents.

During
fiscal 2008, 91% of homeowners who purchased a home through our own retail superstores purchased extended warranties and 63% purchased property and casualty insurance. At the end of fiscal 2008, Standard Casualty had approximately 11,070 policies in
force.



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Competition

The factory-built housing industry is highly competitive at both the manufacturing and retail levels, with competition based upon several factors, including price, product features, reputation for service and quality, depth of field
inventory, promotion, merchandising and the terms of retail customer financing. In addition, manufactured and modular homes compete with new and existing site-built homes, as well as apartments, townhouses and condominiums. The efficiency of the
assembly-line process, protection from the weather and nationwide purchasing power enable us to produce a home in approximately one to two weeks and typically at a lower cost than a conventional site-built home of similar quality. We do not view any
of our competitors as being dominant market leaders in the industry, although some of our competitors possess substantially greater manufacturing, distribution and marketing resources than us.

Although many lenders to the factory-built housing industry have reduced their volume or gone out
of business, there are still competitors to CountryPlace in the markets where we do business. These competitors include national, regional and local banks, independent finance companies, mortgage brokers and mortgage banks. Although the market is
highly fragmented, especially for conforming mortgage products, chattel financing is consolidating among a few remaining national lenders: 21stMortgage Corporation, an affiliate of Clayton Homes, Inc. and Berkshire Hathaway, Inc.; and US Bank Manufactured Housing Finance. Each of these competitors is larger than CountryPlace and has access to substantially more capital at lower costs
than CountryPlace.

Government Regulation

Our factory-built homes are subject to a number of federal, state and local laws, codes and regulations. Construction of our manufactured homes is governed by the National Manufactured Housing Construction and Safety Standards Act of 1974,
as amended (the Home Construction Act). In 1976, the Department of Housing and Urban Development (HUD) issued regulations under the Home Construction Act establishing comprehensive national construction standards. The HUD regulations, known
collectively as the Federal Manufactured Home Construction and Safety Standards, cover all aspects of manufactured home construction, including structural integrity, fire safety, wind loads, thermal protection and ventilation. Such regulations
preempt conflicting state and local regulations on such matters, and are subject to continual change. Our manufacturing facilities and the plans and specifications of our manufactured homes have been approved by a HUD-certified inspection agency.
Further, an independent HUD-certified third-party inspector regularly reviews our manufactured homes for compliance with the HUD regulations during construction. Failure to comply with applicable HUD regulations could expose us to a wide variety of
sanctions, including mandated closings of our manufacturing facilities. We believe our manufactured homes meet or surpass all present HUD requirements. Our modular homes are subject to state and/or local codes with certification and regulation and
we believe our modular homes meet all state and/or local codes.

Manufactured and site-built homes are all typically built with some
products that contain formaldehyde resins. Since February 1985, HUD has regulated the allowable concentrations of formaldehyde in certain products used in manufactured homes and requires manufacturers to warn purchasers as to formaldehyde-associated
risks. The Environmental Protection Agency and other governmental agencies have in the past evaluated the effects of formaldehyde. We use materials in our manufactured homes that meet HUD standards for formaldehyde emissions and believe we comply
with HUD and other applicable government regulations in this regard.

The transportation of factory-built homes on highways is subject to
regulation by various federal, state and local authorities. Such regulations may prescribe size and road use limitations and impose lower than normal speed limits and various other requirements.

Our manufactured homes are subject to local zoning and housing regulations. In certain cities and counties in areas where our homes are sold, local
governmental ordinances and regulations have been enacted which restrict the placement of manufactured homes on privately-owned land or which require the placement of



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manufactured homes in manufactured home communities. Such ordinances and regulations may adversely affect our ability to sell homes for installation in
communities where they are in effect. A number of states have adopted procedures governing the installation of manufactured homes. Utility connections are subject to state and local regulation and must be complied with by the retailer or other
person installing the home. Our modular homes are also subject to local zoning regulations which govern the placement of homes.

Certain of
our warranties may be subject to the Magnuson-Moss Warranty Federal Trade Commission Improvement Act, which regulates the descriptions of warranties on products. The description and substance of our warranties are also subject to a variety of state
laws and regulations. A number of states require manufactured home producers to post bonds to ensure the satisfaction of consumer warranty claims.

A variety of laws affect the financing of the homes we manufacture. The Federal Consumer Credit Protection Act (Truth-in-Lending) and Regulation Z promulgated thereunder require written disclosure of information relating to such financing,
including the amount of the annual percentage rate and the finance charge. The Federal Fair Credit Reporting Act also requires certain disclosures to potential customers concerning credit information used as a basis to deny credit. The Federal Equal
Credit Opportunity Act and Regulation B promulgated thereunder prohibit discrimination against any credit applicant based on certain specified grounds. The Real Estate Settlement Procedures Act and Regulation X promulgated thereunder require certain
disclosures regarding the nature and costs of real estate settlements. The Federal Trade Commission has adopted or proposed various Trade Regulation Rules dealing with unfair credit and collection practices and the preservation of consumers
claims and defenses. Installment sales contracts eligible for inclusion in a Government National Mortgage Association program are subject to the credit underwriting requirements of the Federal Housing Association. A variety of state laws also
regulate the form of the installment sale contracts or financing documents and the allowable deposits, finance charge and fees chargeable pursuant to installment sale contracts or financing documents. Our sale of insurance products is subject to
various state insurance laws and regulations which govern allowable charges and other insurance practices.

Our operations are also subject
to federal, state and local laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. Governmental authorities have the power to enforce compliance with their
regulations, and violations may result in the payment of fines, the entry of injunctions or both. The requirements of such laws and enforcement policies have generally become more strict in recent years. Accordingly, we are unable to predict the
ultimate cost of compliance with environmental laws and enforcement policies. See Item 3. Legal Proceedings.

Palm
Harbors insurance operations are regulated by the state insurance boards where they underwrite their policies. Underwriting, premiums, investments and capital reserves are subject to the rules and regulations of these state agencies.

Cash deposits made by customers are classified as restricted cash in some states. As a result of continued governmental regulations
regarding consumer protection, more states are requiring deposits to be restricted cash. See Note 1 to the Consolidated Financial Statements.

Seasonality

Our business is seasonal. Generally we experience higher sales volume during the months of March through
October. Our sales are slower during the winter months and shipments can be delayed in areas of the country that experience harsh weather conditions.

Associates

Currently, we have approximately 2,900 associates. All of our associates are non-union. We have not experienced
any labor-related work stoppages and believe that our relationship with our associates is good.



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Website Access to Company Reports and Other Documents

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available
free of charge on our website at www.palmharbor.com as soon as reasonably practicable after such material is electronically filed with the SEC. Those reports are also available at the SECs website, www.sec.gov. You may read and
copy any materials we file with the SEC at the SECs Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Copies
of our annual report will be made available, free of charge, upon written request to our corporate secretary at our principal executive office.

We have adopted a code of conduct. A copy of our code of conduct is available at our website, www.palmharbor.com.



|Item 1A. | Forward-Looking Information/Risk Factors
|-------- | ----------------------------------------

Certain
statements contained in this annual report are forward-looking statements within the safe harbor provisions of the Securities Litigation Reform Act. Forward-looking statements give our current expectations or forecasts of future events and can be
identified by the fact that they do not relate strictly to historical or current facts. Investors should be aware that all forward-looking statements are subject to risks and uncertainties and, as a result of certain factors, actual results could
differ materially from these expressed in or implied by such statements. These risks include such assumptions, risks, uncertainties and factors associated with the following:

The factory-built housing industry is currently in a prolonged slump with no recovery in sight.

Historically, the factory-built housing industry has been highly cyclical and seasonal and has experienced wide fluctuations in aggregate sales. The factory-built housing industry is currently in a prolonged slump with no recovery in sight.
We are subject to volatility in operating results due to external factors beyond our control such as:



| |  |  | general economic and political conditions, including the effects of a prolonged U.S. or global economic downturn or recession;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | access to capital markets;
| | - |  | --------------------------



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



| |  |  | unemployment trends;
| | - |  | --------------------



| |  |  | the availability of retail home financing;
| | - |  | ------------------------------------------



| |  |  | the availability of wholesale financing;
| | - |  | ----------------------------------------



| |  |  | the availability of homeowners insurance in coastal markets;
| | - |  | -------------------------------------------------------------



| |  |  | housing supply and demand;
| | - |  | --------------------------



| |  |  | international tensions and hostilities;
| | - |  | ---------------------------------------



| |  |  | levels of consumer confidence;
| | - |  | ------------------------------



| |  |  | inventory levels;
| | - |  | -----------------



| |  |  | severe weather conditions; and
| | - |  | ------------------------------



| |  |  | regulatory and zoning matters.
| | - |  | ------------------------------

Sales in our industry are also seasonal in nature, with sales of homes traditionally being stronger in the spring, summer and fall months. The cyclical and seasonal nature of our business causes our net sales and operating results to
fluctuate and makes it difficult for management to forecast sales and profits in uncertain times. As a result of seasonal and cyclical downturns, results from any quarter should not be relied upon as being indicative of performance in future
quarters.



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We reduced our manufacturing capacity and distribution channels to effectively align with current and expected
regional demand to return the Company to profitability. If the economy continues to worsen, our return to profitability will be delayed.

During the fourth quarter of fiscal 2008, we closed three manufacturing plants and 18 retail sales centers to effectively align current and expected regional demand. We believe these measures will help us return to profitability in the next
6-12 months. If the U.S. economy continues to slow, financial markets continue to decline, and more layoffs occur nationally, our realignment will not return us to profitability and further cost savings measures will be required.

We face increased competition from site builders of residential housing, which may reduce our net sales.

Our homes compete with homes that are built on site. The sales of site built homes are declining, which is resulting in more site built homes being
available at lower prices. Appraisal values of site built homes are declining with greater availability of lower priced site built homes in the market. The increase in availability, along with the decreased price of site built homes, could make them
more competitive with our homes. As a result, the sales of our homes could decrease, which could negatively impact our results of operations.

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

Our retail customers who do
not use CountryPlace generally either pay cash or secure financing from third party lenders, which have been negatively affected by adverse loan experience. Several major lenders, which had previously provided financing for our customers, have
exited the manufactured housing finance business. Reduced availability of such financing is currently having an adverse effect on both the manufactured housing business and our home sales. Availability of financing is dependent on the lending
practices of financial institutions, financial markets, governmental policies and economic conditions, all of which are largely beyond our control. Quasi-governmental agencies such as FHA, Fannie Mae and Freddie Mac, which are important purchasers
of loans from financial institutions, have tightened standards relating to the manufactured housing loans that they will buy. Most states classify manufactured homes as personal property rather than real property for purposes of taxation and lien
perfection, and interest rates for manufactured homes are generally higher and the terms of the loans shorter than for site-built homes. There can be no assurance that affordable retail financing for manufactured homes will continue to be available
on a widespread basis. If third party financing were to become unavailable or were to be further restricted, this could have a material adverse effect on our results of operations.

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

CountryPlace makes loans to borrowers that it believes are creditworthy based on its credit guidelines. However, the ability of these customers to repay their loans may be affected by a number of factors, including,
but not limited to:



| |  |  | national, regional and local economic conditions (approximately 41% of our borrowers are in Texas);
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | --------------------------------------------

If customers do not repay their loans, CountryPlace may repossess or foreclose in order to liquidate its loan collateral and minimize losses. The homes and land securing the loan are subject to fluctuating market values, and proceeds
realized from liquidating repossessed or foreclosed property are highly susceptible to adverse movements in collateral values. Recent trends in general house price depreciation may exacerbate actual loss severities upon collateral liquidation beyond
those normally experienced by CountryPlace.



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Some of CountryPlaces loans may be illiquid and their value difficult to determine or realize.

Some of the loans CountryPlace has originated or may originate in the future may not have a liquid market, or the market may
contract rapidly in the future and the loans may become illiquid. Although CountryPlace offers loan products and prices its loans at levels that it believes are marketable at the time of credit application approval, market conditions for
mortgage-related loans have deteriorated rapidly and significantly recently. CountryPlaces ability to respond to changing market conditions is bound by credit approval and funding commitments it makes in advance of loan completion. In this
environment, it is difficult to predict the types of loan products and characteristics that may be susceptible to future market curtailments and tailor our loan offerings accordingly. As a result, no assurances can be given that the market value of
our loans will not decline in the future, or that a market will continue to exist for all of our loan products.

If CountryPlace is unable to develop
sources of long-term funding it may be unable to resume originating chattel and non-conforming mortgage loans.

In the past,
CountryPlace securitized loans as its primary source of long-term financing for chattel and non-conforming mortgages. CountryPlace used a warehouse borrowing facility to provide liquidity while aggregating loans prior to securitization. Because of
recent significant and continued deterioration in the asset securitization market, CountryPlace is presently unable to rely on warehouse financing for liquidity and can no longer plan to securitize its loans. As a result, CountryPlace has ceased
originating chattel and non-conforming mortgage loans for its own portfolio until it determines that a term financing market exists or can be developed for such products. At present, no such market exists, and no assurance can be given that one will
develop, or that asset securitization will again be viable term financing method for CountryPlace. Further, no assurance can be given that warehouse financing will be available with economically favorable terms and conditions.

If interest rates increase, the market value of loans held for investment and loans available for sale may be adversely affected.

Fixed rate loans originated by CountryPlace prior to long-term financing or sale to investors are exposed to the risk of increased interest rates between
the time of loan origination and term financing or sale. If interest rates for term financings or in the whole-loan market increase after loans are originated, the loans may suffer a decline in market value and our interest margin spreads could be
reduced. From time to time, CountryPlace has entered into interest rate swap agreements to hedge its exposure to such interest rate risk. However, CountryPlace does not always maintain hedges or hedge the entire balances of all loans. Furthermore,
interest rate swaps may be ineffective in hedging CountryPlaces exposure to interest rate risk.

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

Although CountryPlace has originated loans since 1995,
it has limited loan servicing and collections experience. In 2002, it implemented new systems to service and collect the portfolio of loans it originates. The management of CountryPlace has industry experience in managing, servicing and collecting
loan portfolios; however, many borrowers require notices and reminders to keep their loans current and to prevent delinquencies and foreclosures. If there is a substantial increase in the delinquency rate that results from improper servicing or loan
performance, the profitability and cash flow from the loan portfolio could be adversely affected and impair CountryPlaces ability to continue to originate and sell loans to investors.

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

We finance a portion of our new inventory at our retail sales centers through wholesale floor plan financing arrangements. Through these
arrangements, financial institutions provide us with a loan for the



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purchase price of the home. Since the beginning of the industry downturn in 1999, several major floor plan lenders have exited the floor plan financing
business. Although we currently have a floor plan facility with a financial institution totaling $70.0 million, there can be no assurance that we will continue to have access to such facility or that we will not be forced to reduce our new home
inventory at our retail sales centers.

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

In accordance with customary practice in the manufactured housing industry, we enter into repurchase agreements with various financial institutions
pursuant to which we agree, in the event of a default by an independent retailer in its obligation to these credit sources, to repurchase manufactured homes at declining prices over the term of the agreements, typically 12 to 18 months. The
difference between the gross repurchase price and the price at which the repurchased manufactured homes can then be resold, which is typically at a discount to the original sale price, is an expense to us. Thus, if we were obligated to repurchase a
large number of manufactured homes in the future, this would increase our costs, which could have a negative effect on our earnings. Tightened credit standards by lenders and more aggressive attempts to accelerate collection of outstanding accounts
with retailers could result in defaults by retailers and consequently repurchase obligations on our part may be higher than has historically been the case. During fiscal 2008, 2007 and 2006, we did not incur any losses under these repurchase
agreements.

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

We are dependent to a significant extent upon the efforts of our principal executive officer, Larry H. Keener, Chairman of the Board and Chief Executive
Officer. The loss of the services of our principal executive officer could have a material adverse effect upon our business, financial condition and results of operations. Our continued growth is also dependent upon our ability to attract and retain
additional skilled management personnel.

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

Approximately 52% of our outstanding common stock is beneficially owned or controlled by the estate of our Chairman Emeritus, Lee Posey, Sally Posey,
and Capital Southwest Corporation and its affiliates. As a result, these shareholders, acting together, are able to determine the outcome of elections of our directors and thereby control the management of our business.

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

Our results of operations can be affected by the pricing and availability of raw materials. In fiscal 2008, average prices of our raw materials decreased
2% compared to fiscal 2007. Average prices of our raw materials were flat in 2007 and increased 5% in 2006. Although we attempt to increase the sales prices of our homes in response to higher materials costs, such increases typically lag behind the
escalation of materials costs. Although lumber costs have moderated, three of the most important raw materials used in our operationslumber, gypsum wallboard and insulationhave experienced significant price fluctuations in the past
several fiscal years. Although we have not experienced any shortage of such building materials today, there can be no assurance that sufficient supplies of lumber, gypsum wallboard and insulation, as well as other materials, will continue to be
available to us on terms we regard as satisfactory.

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

If there is a significant increase in inflation in the future, it is unlikely that we will be able to increase our selling prices
to completely offset the significant increase in inflation and as a result, our operating results may be adversely affected.



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The manufactured housing industry is highly competitive and some of our competitors have stronger balance
sheets and cash flow, as well as greater access to capital, then we do. As a result of these competitive conditions, we may not be able to sustain past levels of sales or profitability.

The manufactured housing industry is highly competitive, with relatively low barriers to entry. Manufactured and modular homes compete with new
and existing site-built homes and to a lesser degree, with apartments, townhouses and condominiums. Competition exists at both the manufacturing and retail levels and is based primarily on price, product features, reputation for service and quality,
retailer promotions, merchandising and terms of consumer financing. Some of our competitors have substantially greater financial, manufacturing, distribution and marketing resources than we do. As a result of these competitive conditions, we may not
be able to sustain past levels of sales or profitability.

If our retail customers are unable to obtain insurance for factory-built homes, our
sales volume and results of operations may be adversely affected.

We sell our factory-built homes to retail customers located
throughout the United States including in coastal areas, such as Florida. In fiscal 2008, approximately 14% of our net sales were generated in Florida. Some of our retail customers in these areas have experienced difficulty obtaining insurance for
our factory-built homes due to adverse weather-related events in these areas, primarily hurricanes. If our retail customers face continued and increased difficulty in obtaining insurance for the homes we build, our sales volume and results of
operations may be adversely affected.

We are concentrated geographically, which could harm our business.

In fiscal 2008, approximately 31% of our net sales were generated in Texas and approximately 14% of our net sales were generated in Florida. A decline in
the demand for manufactured housing in Florida has already impacted our operations (see the Executive Overview section of Managements Discussion and Analysis for more details) and a decline in the economy of Texas could have a material adverse
effect on our results of operations as well.



|Item 1B. | Unresolved Staff Comments
|-------- | -------------------------

None.



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

The following table sets forth certain
information with respect to our properties:



|                                      |  |              |  |                       
|------------------------------------- |  | ------------ |  | ----------------------
|Location                              |  | Owned/Leased |  | ApproximateSquare Feet
|Operating Manufacturing Facilities    |  |              |  |                       
|Albemarle, North Carolina             |  | Owned        |  | 112,700               
|Arabi, Georgia                        |  | Owned        |  | 97,970                
|Austin, Texas (2 facilities)          |  | Owned        |  | 180,800               
|Buda, Texas                           |  | Owned        |  | 88,275                
|Fort Worth, Texas                     |  | Owned        |  | 121,300               
|Martinsville, Virginia (2 facilities) |  | Owned        |  | 131,855               
|Millersburg, Oregon                   |  | Owned        |  | 168,650               
|Plant City, Florida                   |  | Owned        |  | 87,200                
|Siler City, North Carolina            |  | Owned        |  | 91,200                
|                                      |  | Leased       |  | 40,000                
|Tempe, Arizona                        |  | Owned        |  | 103,500               
|                                      |  |             
|Idled Manufacturing Facilities        |  |              |  |                       
|Burleson, Texas(1)                    |  | Owned        |  | 94,300                
|Casa Grande, Arizona(2)               |  | Owned        |  | 90,000                
|LaGrange, Georgia(2)                  |  | Owned        |  | 200,000               
|Martinsville, Virginia                |  | Owned        |  | 43,505                
|Plant City, Florida                   |  | Owned        |  | 93,600                
|Sabina, Ohio(2)                       |  | Owned        |  | 85,000                
|                                      |  |             
|Component and Supply Facilities       |  |              |  |                       
|Martinsville, Virginia                |  | Owned        |  | 148,346               
|                                      |  |             
|Corporate Headquarters                |  |              |  |                       
|Addison, Texas                        |  | Leased       |  | 48,000                



|(1) | Facility was destroyed by fire on December 2, 2006.
|--- | ---------------------------------------------------

|(2) | Facility is permanently closed and listed for sale.
|--- | ---------------------------------------------------

We
currently own all of our manufacturing facilities (except one building in Siler City, NC which is leased) and substantially all of the machinery and equipment used in the facilities. We believe our facilities are adequately maintained and suitable
for the purposes for which they are used. Our capacity utilization rate was approximately 43% as of March 28, 2008.

In addition to
our production facilities, we own 28 properties upon which 21 of our active retail centers are located. The remaining active sales centers are leased under operating leases with lease terms generally ranging from monthly to eight years.



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

We are subject to various legal
proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect our financial position or results of operations.

In late 1992, we removed an underground storage tank formerly used to store gasoline from the site of our Tempe, Arizona manufacturing
facility. We worked in cooperation with the Arizona Department of Environmental Quality to assess and respond to gasoline related hydrocarbons detected in soil and groundwater at this site. We have closed the site and completed all the necessary
paperwork required by the EPA to settle the



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claim. Under certain circumstances, a state fund may be available to compensate responsible parties for petroleum releases from underground storage tanks.
Site characterization is complicated by the presence of contaminants associated with the Indian Bend Wash Area Superfund Site described below. The liability is not estimatable due to our inability to project whether any additional remediation is
necessary. At this time, we do not expect that the costs of any corrective action or assessments related to the tank will have a material adverse effect on our financial condition, results of operations or cash flows.

Our Tempe facility is partially located within a large area that has been identified by the EPA as the Indian Bend Wash Area Superfund Site. Under
federal law, certain persons known as potentially responsible parties (PRPs) may be held strictly liable on a joint and several basis for all cleanup costs and natural resource damages associated with the release of hazardous substances from a
facility. The average cost to clean up a site listed on the National Priorities List is over $30 million. The Indian Bend Superfund Site is listed on the National Priorities List. Groups of PRPs may include current owners and operators of a
facility, owners and operators of a facility at the time of disposal of hazardous substances, transporters of hazardous substance and those who arrange for the treatment or disposal of hazardous substances at a site. No government agency, including
the EPA, has indicated that we have been or will be named as a PRP or that we are otherwise responsible for the contamination present at the Indian Bend Superfund Site. In general, although no assurance can be given as to the future actions of
either the EPA or PRPs who may incur cleanup costs related to this site, we do not believe that our ownership of property partially located within the Indian Bend Superfund Site will have a material adverse effect on our financial condition, results
of operations or cash flows.

In 1994, we removed two underground storage tanks used to store petroleum substances from property we own in
Georgia. In November 2001, we received a letter from the Georgia Department of Natural Resources indicating no further action was necessary with respect to these storage tanks. The letter, however, did not preclude additional action by the State if
contaminants were found in adjoining properties. At this time, we do not expect that the costs of future assessment and corrective action related to the tanks will have a material adverse effect on our financial condition, results of operations or
cash flows.



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

No matter was submitted during the fourth quarter of the fiscal year covered by this Report to a vote of security holders, through the solicitation of proxies or otherwise.



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PART II.



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

Our common stock has been traded on the Nasdaq Stock Market under the symbol PHHM since July 31, 1995, the date on which we completed our
initial public offering. The following table sets forth, for the periods indicated, the high and low sales information per share of the common stock as reported on the Nasdaq Stock Market.



|               |  |      |       |     |   |      
|-------------- |  | ---- | ----- | --- | - | -----
|Fiscal 2008    |  | High |       | Low
|First Quarter  |  | $    | 15.98 |     | $ | 14.04
|Second Quarter |  |      | 15.95 |     |   | 12.36
|Third Quarter  |  |      | 14.42 |     |   | 10.23
|Fourth Quarter |  |      | 10.55 |     |   | 4.34 
|               |  |     
|Fiscal 2007    |  | High |       | Low
|First Quarter  |  | $    | 22.61 |     | $ | 17.14
|Second Quarter |  |      | 17.50 |     |   | 14.12
|Third Quarter  |  |      | 15.47 |     |   | 13.30
|Fourth Quarter |  |      | 14.92 |     |   | 12.60

On May 27, 2008, the last reported sale price of our common stock on the Nasdaq Stock Market
was $8.36. As of May 27, 2008, there were approximately 580 record holders of our common stock, and approximately 2,500 holders of the common stock overall based on an estimate of the number of individual participants represented by security
position listings.

We have never paid cash dividends on our common stock. Our board of directors intends to retain any future earnings we
generate to support operations and to finance expansion and does not intend to pay cash dividends on our common stock for the foreseeable future. The payment of cash dividends in the future will be at the discretion of the board of directors and
will depend upon a number of factors such as our earnings levels, capital requirements, financial condition and other factors deemed relevant by the board of directors. Future loan agreements may or may not restrict or prohibit the payment of
dividends.



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PERFORMANCE GRAPH

The following graph shows a comparison of cumulative total returns for us, the Standard & Poors MidCap 400 Composite Stock Index and our peer group, assuming the investment of $100 on March 31,
2003, and the reinvestment of dividends. The companies in our peer group are as follows: Cavalier Homes, Inc., Champion Enterprises, Inc., Fleetwood Enterprises, Inc., Liberty Homes, Inc. and Skyline Corporation.

There can be no assurance that our share performance will continue into the future with the same or similar trends depicted in the graph above. We will
not make or endorse any predictions as to future share performance.

LOGO



|* | $100 invested on 3/31/03 in stock or index-including reinvestment of dividends.
|- | -------------------------------------------------------------------------------

| | Fiscal year ending March 31.
| | ----------------------------



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##### Table of Contents

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

The following table sets
forth selected financial information regarding our financial position and operating results which has been extracted from our audited financial statements for the five fiscal years ended March 28, 2008. The information should be read in
conjunction with Item 7Managements Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and accompanying Notes in Item 8 of this report.



|                                                                                       |  |                                       |          |   |                         |   |         |                         |  |   |                         |   |  |                         |         |   |  |   |         |  
|-------------------------------------------------------------------------------------- |  | ------------------------------------- | -------- | - | ----------------------- | - | ------- | ----------------------- |  | - | ----------------------- | - |  | ----------------------- | ------- | - |  | - | ------- | -
|                                                                                       |  | Fiscal Year Ended                     |         
|                                                                                       |  | March 28,2008(52 weeks)               |          |   | March 30,2007(52 weeks) |   |         | March 31,2006(53 weeks) |  |   | March 25,2005(52 weeks) |   |  | March 26,2004(52 weeks) |        
|                                                                                       |  | (In thousands, except per share data) |         
|Statements of Operations:                                                              |  |                                       |          |   |                         |   |         |                         |  |   |                         |   |  |                         |         |   |  |   |         |  
|Net sales                                                                              |  | $                                     | 555,096  |   |                         | $ | 661,247 |                         |  | $ | 710,635                 |   |  | $                       | 610,538 |   |  | $ | 578,465 |  
|Cost of sales                                                                          |  |                                       | 421,371  |   |                         |   | 503,419 |                         |  |   | 525,023                 |   |  |                         | 455,960 |   |  |   | 427,826 |  
|                                                                                       |  |                                       |          |   |                         |   |         |                         |  |   |                         |   |  |                         |         |   |  |   |         |  
|Gross profit                                                                           |  |                                       | 133,725  |   |                         |   | 157,828 |                         |  |   | 185,612                 |   |  |                         | 154,578 |   |  |   | 150,639 |  
|Selling, general and administrative expenses                                           |  |                                       | 150,562  |   |                         |   | 160,016 |                         |  |   | 161,154                 |   |  |                         | 154,931 |   |  |   | 157,414 |  
|Goodwill impairment                                                                    |  |                                       | 78,506   |   |                         |   |        |                         |  |   |                        |   |  |                         |        |   |  |   |        |  
|                                                                                       |  |                                       |          |   |                         |   |         |                         |  |   |                         |   |  |                         |         |   |  |   |         |  
|Income (loss) from operations                                                          |  |                                       | (95.343  | ) |                         |   | (2,188  | )                       |  |   | 24,458                  |   |  |                         | (353    | ) |  |   | (6,775  | )
|Interest expense                                                                       |  |                                       | (18,654  | ) |                         |   | (15,695 | )                       |  |   | (11,739                 | ) |  |                         | (8,990  | ) |  |   | (5,566  | )
|Equity in earnings (loss) of limited partnership and Impairment charges                |  |                                       |         |   |                         |   | (4,709  | )                       |  |   | 574                     |   |  |                         | (763    | ) |  |   | 1,848   |  
|Interest income and other                                                              |  |                                       | 3,625    |   |                         |   | 4,901   |                         |  |   | 5,007                   |   |  |                         | 4,165   |   |  |   | 1,440   |  
|                                                                                       |  |                                       |          |   |                         |   |         |                         |  |   |                         |   |  |                         |         |   |  |   |         |  
|Income (loss) before income taxes                                                      |  |                                       | (110,372 | ) |                         |   | (17,691 | )                       |  |   | 18,300                  |   |  |                         | (5,941  | ) |  |   | (9,053  | )
|Income tax benefit (expense)                                                           |  |                                       | (13,890  | ) |                         |   | 6,126   |                         |  |   | (7,186                  | ) |  |                         | 2,118   |   |  |   | 3,036   |  
|                                                                                       |  |                                       |          |   |                         |   |         |                         |  |   |                         |   |  |                         |         |   |  |   |         |  
|Net income (loss)                                                                      |  | $                                     | (124,262 | ) |                         | $ | (11,565 | )                       |  | $ | 11,114                  |   |  | $                       | (3,823  | ) |  | $ | (6,017  | )
|                                                                                       |  |                                       |          |   |                         |   |         |                         |  |   |                         |   |  |                         |         |   |  |   |         |  
|Net income (loss) per common sharebasic and diluted                                   |  | $                                     | (5.44    | ) |                         | $ | (0.51   | )                       |  | $ | 0.49                    |   |  | $                       | (0.17   | ) |  | $ | (0.26   | )
|                                                                                       |  |                                       |          |   |                         |   |         |                         |  |   |                         |   |  |                         |         |   |  |   |         |  
|Weighted average common shares outstandingbasic and diluted                           |  |                                       | 22,852   |   |                         |   | 22,852  |                         |  |   | 22,831                  |   |  |                         | 22,832  |   |  |   | 22,857  |  
|                                                                                       |  |                                       |          |   |                        
|Balance Sheet Data (1):                                                                |  |                                       |          |   |                         |   |         |                         |  |   |                         |   |  |                         |         |   |  |   |         |  
|Total assets                                                                           |  | $                                     | 565,400  |   |                         | $ | 683,264 |                         |  | $ | 654,051                 |   |  | $                       | 571,980 |   |  | $ | 521,822 |  
|Convertible senior notes                                                               |  |                                       | 75,000   |   |                         |   | 75,000  |                         |  |   | 75,000                  |   |  |                         | 75,000  |   |  |   |        |  
|Warehouse revolving debt                                                               |  |                                       | 42,175   |   |                         |   | 12,045  |                         |  |   | 37,413                  |   |  |                         | 106,298 |   |  |   | 74,071  |  
|Securitized financings                                                                 |  |                                       | 165,430  |   |                         |   | 194,405 |                         |  |   | 105,379                 |   |  |                         |        |   |  |   |        |  
|Shareholders equity                                                                   |  |                                       | 126,575  |   |                         |   | 250,130 |                         |  |   | 263,024                 |   |  |                         | 252,907 |   |  |   | 256,053 |  
|                                                                                       |  |                                       |          |   |                        
|Operating Data (unaudited):                                                            |  |                                       |          |   |                         |   |         |                         |  |   |                         |   |  |                         |         |   |  |   |         |  
|Number of new factory-built homes sold(2)                                              |  |                                       | 5,449    |   |                         |   | 6,737   |                         |  |   | 8,911                   |   |  |                         | 7,948   |   |  |   | 8,216   |  
|Multi-section manufactured homes sold as a percentage of total manufactured homes sold |  |                                       | 83       | % |                         |   | 91      | %                       |  |   | 86                      | % |  |                         | 95      | % |  |   | 93      | %
|Modular homes sold as a percentage of total factory-built homes sold                   |  |                                       | 30       | % |                         |   | 27      | %                       |  |   | 18                      | % |  |                         | 17      | % |  |   | 12      | %
|Number of manufacturing facilities(1)                                                  |  |                                       | 12       |   |                         |   | 14      |                         |  |   | 18                      |   |  |                         | 18      |   |  |   | 19      |  
|Number of company-owned retail sales centers and builder locations(1)                  |  |                                       | 87       |   |                         |   | 107     |                         |  |   | 116                     |   |  |                         | 121     |   |  |   | 149     |  



|(1) | As of the end of the applicable period.
|--- | ---------------------------------------

|(2) | Includes 583 homes sold to FEMA in fiscal 2006.
|--- | -----------------------------------------------



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

Executive Overview

We are one of the nations leading manufacturers and marketers of
factory-built homes. We market nationwide through vertically integrated operations, encompassing manufactured and modular housing, financing and insurance. As of March 28, 2008, we operated 12 manufacturing facilities that sell homes through 87
company-owned retail sales centers and builder locations and approximately 275 independent retail dealers, builders and developers. Through our subsidiary, CountryPlace, we currently offer conforming mortgages to purchasers of factory-built homes
sold by company-owned retail sales centers and certain independent retail dealers, builders and developers. The loans originated through CountryPlace are either held for our own investment portfolio, sold to investors, or included as part of
securitized financing transactions. We also provide property and casualty insurance for owners of manufactured homes through our subsidiary, Standard Casualty.

The tightening of credit standards, limited retail and wholesale financing availability, increased levels of repossessions, excessive retail inventory levels and manufacturing capacities caused the manufactured
housing industry to enter a cyclical downturn in mid-1999. Our fiscal 2008 results were heavily influenced by these difficult industry conditions. Industry shipments have continued to decline with calendar year 2007 manufactured housing shipments
down 18% from calendar year 2006 and the three significant (to both us and the industry) manufactured housing states of Florida, California and Arizona down a combined 43% and comprising 50% of the total national decline in shipments.

Industry modular shipments are down 16% for calendar year 2007 as compared to calendar year 2006. Modular sales accounted for approximately 36% of our
revenues in fiscal 2008. While average selling prices of modular homes were higher in fiscal 2008, unit sales were down 12% due to weaker housing demand trends. The severe downturn of the overall housing market created by a return to more prudent
lending practices has produced excess site-built inventory which is directly competitive with modular housing.

During the fourth quarter
of fiscal 2008, we closed our Sabina, Ohio, Casa Grande, Arizona and one of our Plant City, Florida manufacturing facilities as well as 18 under-performing retail sales centers to more effectively align our manufacturing capacity and distribution
channels with current and expected regional demand. In connection with these actions, we recorded restructuring charges totaling $8.3 million primarily related to facility closure costs. Of this $8.3 million, $2.9 million is included in cost of
sales and $5.4 million is included in selling, general and administrative expenses on our consolidated statement of operations. Also, as part of this restructuring, we listed three of our manufacturing facilities for sale. We expect to sell these
facilities during fiscal 2009. The carrying value of these facilities is included in assets held for sale on the consolidated balance sheets. No significant additional charges are expected to be incurred in connection with this restructuring.

The deterioration of the credit markets that we depend on for warehouse lending for originations and securitizations of our loans has also
impacted our business during fiscal 2008. CountryPlaces warehouse borrowing facility was originally scheduled to expire March 14, 2008; however, they negotiated an extension with the lender until April 30, 2008. During the extension
period, CountryPlace stopped taking applications for chattel loans and non-conforming mortgages but continued to originate conforming mortgage loans. On April 25, 2008, CountryPlace sold approximately $51.3 million of its warehoused portfolio
of chattel and mortgage loans without incurring a loss. Approximately $41.5 million of the proceeds were used to repay in full and terminate the warehouse borrowing facility scheduled to expire on April 30, 2008. CountryPlace will continue to
originate and service conforming mortgages for our credit-worthy customers.

With these difficult market conditions worsening and no
near-term signs of recovery for the factory-built housing industry, we have focused on executing three key strategies to improve our operating results. First, the Company plans to increase revenues through an expanded product offering (including the
less expensive manufactured and modular products introduced during the first quarter of fiscal 2008), enhanced marketing and advertising efforts, and expanded distribution channels. Along with this, we will continue to identify ways to



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reduce our fixed costs and improve operating efficiencies. We will also focus on cash generation and conservation throughout our operations. In addition, we
have amended certain debt agreements subsequent to March 28, 2008 (see Liquidity and Capital Resources section for further details).

Results of
Operations

The following table sets forth the items in our Statements of Operations as a percentage of net sales for the periods
indicated.



|                                                                                                |  |                   |         |    |               |   |         |               |  |   |         |  
|----------------------------------------------------------------------------------------------- |  | ----------------- | ------- | -- | ------------- | - | ------- | ------------- |  | - | ------- | -
|                                                                                                |  | Fiscal Year Ended |        
|                                                                                                |  | March 28,2008     |         |    | March 30,2007 |   |         | March 31,2006 | 
|Net sales                                                                                       |  |                   | 100.0   | %  |               |   | 100.0   | %             |  |   | 100.0   | %
|Cost of sales                                                                                   |  |                   | 75.9    |    |               |   | 76.1    |               |  |   | 73.9    |  
|                                                                                                |  |                   |         |    |               |   |         |               |  |   |         |  
|Gross profit                                                                                    |  |                   | 24.1    |    |               |   | 23.9    |               |  |   | 26.1    |  
|Selling, general and administrative expenses                                                    |  |                   | 27.1    |    |               |   | 24.2    |               |  |   | 22.7    |  
|Goodwill impairment                                                                             |  |                   | 14.2    |    |               |   |        |               |  |   |        |  
|                                                                                                |  |                   |         |    |               |   |         |               |  |   |         |  
|Income (loss) from operations                                                                   |  |                   | (17.2   | )  |               |   | (0.3    | )             |  |   | 3.4     |  
|Interest expense                                                                                |  |                   | (3.3    | )  |               |   | (2.4    | )             |  |   | (1.6    | )
|Equity in earnings (loss) of limited partnership and impairment charges                         |  |                   |        |    |               |   | (0.7    | )             |  |   | 0.1     |  
|Interest income and other                                                                       |  |                   | 0.7     |    |               |   | 0.7     |               |  |   | 0.7     |  
|                                                                                                |  |                   |         |    |               |   |         |               |  |   |         |  
|Income (loss) before income taxes                                                               |  |                   | (19.8   | )  |               |   | (2.7    | )             |  |   | 2.6     |  
|Income tax benefit (expense)                                                                    |  |                   | (2.5    | )  |               |   | 0.9     |               |  |   | (1.0    | )
|                                                                                                |  |                   |         |    |               |   |         |               |  |   |         |  
|Net income (loss)                                                                               |  |                   | (22.3   | )% |               |   | (1.8    | )%            |  |   | 1.6     | %
|                                                                                                |  |                   |         |    |               |   |         |               |  |   |         |  
|                                                                                                | 
|The following table summarizes certain key sales statistics as of and for the period indicated. |  |                   |         |    |              
|                                                                                                | 
|                                                                                                |  | Fiscal Year Ended |        
|                                                                                                |  | March 28,2008     |         |    | March 30,2007 |   |         | March 31,2006 | 
|Homes sold through company-owned retail sales centers and builder locations                     |  |                   | 3,763   |    |               |   | 4,003   |               |  |   | 4,471   |  
|Homes sold to independent dealers, builders and developers                                      |  |                   | 1,686   |    |               |   | 2,734   |               |  |   | 4,440   |  
|Total new factory-built homes sold                                                              |  |                   | 5,449   |    |               |   | 6,737   |               |  |   | 8,911   |  
|Average new manufactured home priceretail                                                      |  | $                 | 76,000  |    |               | $ | 79,000  |               |  | $ | 74,000  |  
|Average new manufactured home pricewholesale                                                   |  | $                 | 61,000  |    |               | $ | 66,000  |               |  | $ | 61,000  |  
|Average new modular home priceretail                                                           |  | $                 | 176,000 |    |               | $ | 165,000 |               |  | $ | 149,000 |  
|Average new modular home pricewholesale                                                        |  | $                 | 80,000  |    |               | $ | 80,000  |               |  | $ | 77,000  |  
|Number of company-owned retail sales centers and builder locations at end of period             |  |                   | 87      |    |               |   | 107     |               |  |   | 116     |  

The Companys fiscal year ends on the last Friday in March. Fiscal years 2008 and 2007 were
comprised of 52 weeks while fiscal year 2006 was comprised of 53 weeks. The additional week in fiscal 2006 is immaterial for separate discussion in the income statement categories below.

2008 Compared to 2007

Net Sales. Net sales decreased 16.1% to $555.1 million in
fiscal 2008 from $661.2 million in fiscal 2007. This decrease is primarily the result of a $111.6 million decrease in factory-built housing net sales offset by a $5.4 million increase in financial services net revenues. The decline in factory-built
housing net sales is primarily due to a 19.1% decrease in the total number of factory-built homes sold and decreases in the average retail and



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wholesale selling prices of new manufactured homes offset by an increase in the average retail selling price of a new modular home. The decrease in the total
number of factory-built homes sold is largely due to a 38.3% decrease in the homes sold to independent dealers, builders and developers, the majority of which related to shipments to the states of Florida, California and Arizona, which prior to 2006
were typically some of our most profitable states (see Executive Overview section above for more details). These states have been especially impacted by decreased manufactured home sales to manufactured housing retirement communities. The decrease
in the average retail and wholesale selling prices of new manufactured homes is the result of our new lower-priced products. The increase in the average selling prices of a new modular home is the result of customers purchasing larger modular homes.
The increase in financial services net revenues primarily reflects an increase in interest income resulting from an increase in consumer loans receivable as of March 31, 2008 as compared March 31, 2007.

Gross Profit. In fiscal 2008, gross profit decreased to $133.7 million, or 24.1% of net sales, from $157.8 million, or 23.9% of net sales
in fiscal 2007. Gross profit for the factory-built housing segment decreased to 19.7% of net sales in fiscal 2008 from 20.8% in fiscal 2007. Factory-built housing gross profit for fiscal 2008 includes $2.9 million in restructuring charges related to
closing 18 under-performing sales centers and 3 less than efficient plants and for fiscal 2007 includes $2.4 million in restructuring charges related to closing 13 sales centers and 2 plants in fiscal 2007. Excluding these charges, gross profit for
the factory-built housing segment would have been 20.3% in fiscal 2008 and 21.2% in fiscal 2007. This decrease was the result of a decline in the factory utilization rates coupled with continued pressure on our manufactured housing wholesale margins
in Florida, California and Arizona and offset by an increase in the internalization rate from 58% in fiscal 2007 to 64% in fiscal 2008. Gross profit for the financial services segment increased $4.9 million in fiscal 2008 primarily due to increased
interest income as explained above in the net sales section.

Selling, General and Administrative Expenses.Selling, general
and administrative expenses decreased to $150.6 million in fiscal 2008 as compared to $160.0 million in fiscal 2007. As a percentage of net sales, selling, general and administrative expenses increased to 27.1% for fiscal 2008 from 24.2% for fiscal
2007. Of this $9.5 million decrease, $12.4 million related to the factory-built housing segment and was offset by a $2.9 million increase in financial services (general corporate expenses were essentially flat with the prior year). Factory-built
housing expenses include $5.4 million in charges related to closing 18 under-performing sales centers and 3 less than efficient plants in fiscal 2008 and $3.7 million in restructuring charges related to closing 13 sales centers and 2 plants in
fiscal 2007. Excluding these charges, selling, general and administrative expenses for the factory-built housing segment decreased $14.0 million. This decrease is largely the result of the cost savings steps we put in place during fiscal 2007 plus a
reduction in performance based compensation costs and operating fewer manufacturing facilities and sales centers. Selling, general and administrative expenses related to the financial services segment increased due to a $1.5 million one-time
performance-based compensation payment. The payment was based on CountryPlace profitability from inception (2002) through 2007.

Goodwill Impairment.Goodwill impairment was $78.5 million for fiscal 2008. Due to the difficult market environment, particularly the recent fallout in the sub-prime market, and our recent losses, we determined that an interim
test to assess the recoverability of goodwill was necessary. With the assistance of an independent valuation firm, we performed an interim goodwill impairment analysis and concluded that the goodwill relating to our factory-built housing reporting
unit was impaired. As a result, during the second quarter of fiscal 2008, we recorded a non-cash impairment charge of $78.5 million related to our factory-built housing segment goodwill balance.

Interest Expense.Interest expense increased 18.9% to $18.7 million in fiscal 2008 as compared to $15.7 million in fiscal 2007. As a result
of the completion of CountryPlaces second securitization in March 2007, our interest expense on securitized financings increased $4.4 million and was offset by a $2.7 million decrease in interest expense on our warehouse revolving debt. Also,
interest expense on floor plan payable increased $0.8 million. The interest rate on the warehouse revolving debt and the floor plan payable is variable.



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Equity in Loss of Limited Partnership and Impairment Charges. Equity in loss of limited
partnership and impairment charges was zero in fiscal 2008 as compared to a $4.7 million loss in fiscal 2007. The $4.7 million loss in fiscal 2007 includes the write off of our investment in BSM of $4.4 million effective September 29, 2006. On
May 19, 2007, we executed an agreement to terminate our partnership with BSM effective June 7, 2007. Under the termination agreement, we have no further financial obligation to BSM.

Interest Income and Other. Interest income and other decreased 26.0% to $3.6 million in fiscal 2008 as compared to $4.9 million in fiscal
2007. The $1.3 million decrease was primarily the result of a $0.8 million decrease in interest and dividend income and a $0.4 million impairment charge on investment securities in fiscal 2008. The impairment on investment securities related to the
write down of an other-than-temporary loss on an available-for-sale investment security. Interest income in 2008 was also impacted by reduced rates of return.

Income Tax Benefit (Expense). Income tax expense was $13.9 million in fiscal 2008 as compared to a benefit of $6.1 million in fiscal 2007. Due to the difficult market environment, particularly the recent
fallout in the sub-prime market, and our recent losses, we reviewed the recoverability of our deferred tax assets. In fiscal 2008, we recorded a $31.1 million valuation allowance against all of our net deferred tax assets resulting in income tax
expense for fiscal 2008 of $13.9 million. In fiscal 2007, we recorded a $6.1 million benefit on our loss before income taxes of $17.7 million.

2007
Compared to 2006

Net Sales. Net sales decreased 6.9% to $661.2 million in fiscal 2007 from $710.6 in fiscal 2006.
This $49.4 million decrease in net sales is comprised of a $56.0 million decrease in factory-built housing net sales offset by a $6.6 million increase in financial services net sales. The decrease in factory-built housing net sales is the result of
$15.9 million, or 583 homes, sold to FEMA in fiscal 2006 and a 19.1% decrease in the number of factory-built homes sold (excluding FEMA business) offset by an increase in the average selling prices of new manufactured and modular homes. The 19.1%
decrease in total factory-built homes (excluding FEMA business) is largely due to a decrease in demand for HUD code homes in Florida, California and Arizona, which are typically some of our most profitable states (see Executive Overview section
above for more details). The average retail selling price of a new manufactured home increased 6.8% and a new modular home increased 10.7% while the average wholesale selling price of a new manufactured home increased 8.2% and a new modular home
increased 3.9%. These increases in average selling prices are the result of customers purchasing larger, more complex homes. The increase in financial services net sales of $6.6 million reflects an increase in interest income resulting from an
increase in consumer loans receivable, net from $167.5 million as of March 31, 2006 to $228.3 million as of March 30, 2007.

Gross Profit. In fiscal 2007, gross profit decreased to $157.8 million, or 23.9% of net sales, from $185.6 million, or 26.1% of net sales. Gross profit for the factory-built housing segment decreased from 23.9% of net sales in
fiscal 2006 to 20.8% in fiscal 2007. This decrease is partially due to $2.4 million in charges related to closing 13 under-performing sales centers and 2 less than efficient plants in the second and fourth quarters of fiscal 2007. Excluding these
charges, gross profit for the factory-built housing segment would have been 21.2%. The reduction in retail and wholesale deliveries in Florida, California and Arizona also contributed to the decrease in factory-built housing gross profit. Gross
profit for the financial services segment increased $4.9 million to 73.4% of net sales in fiscal 2007, up slightly from 73.1% of net sales in fiscal 2006. This increase is due to the increase in net sales as explained above.

Selling, General and Administrative Expenses.As a percentage of net sales, selling, general and administrative expenses increased to 24.2%
for fiscal 2007 from 22.7% for fiscal 2006. In dollars, selling, general and administrative expenses decreased to $160.0 million in fiscal 2007 as compared to $161.2 million in fiscal 2006. Of this $1.2 million decrease, $4.1 million related to the
factory-built housing segment and was offset by increases in general corporate expenses of $2.5 million and increases in financial services expenses of $0.5 million. Factory-built housing expenses also include $3.7 million in charges related to
closing 13 under-performing sales centers and 2 less than efficient plants in the second and fourth quarters of fiscal 2007.



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Excluding these charges, selling, general and administrative expenses for the factory-built housing segment decreased $7.8 million. This decrease is
primarily due to a reduction in performance based compensation costs, a reduction of 4 manufacturing facilities and 9 sales centers at March 30, 2007 as compared to March 31, 2006 as well as our ongoing cost savings efforts. The increase
in general corporate expenses is due primarily to increases in advertising costs and various other administrative expenses.

Interest
Expense.Interest expense increased 33.7% to $15.7 million in fiscal 2007 as compared to $11.7 million in fiscal 2006. This was primarily due to a $2.4 million increase in interest expense on the warehouse revolving debt, a $1.0 million
increase in interest expense on the securitized financing and a $0.8 million increase in interest expense on floor plan payable. Both the interest rates on the warehouse revolving debt and the floor plan payable are variable.

Impairment of Limited Partnership and Equity in Earnings (Loss) of Limited Partnership.During the second quarter of fiscal 2007, we filed
a petition for dissolution of our partnership with BSM. The investment in BSM of $4.4 million as of September 2006 was written off effective September 29, 2006. Effective May 18, 2007, we have reached an agreement with BSM to terminate the
partnership. As part of the agreement, we have both agreed to mutual releases of all prior claims, counterclaims and causes of action. We have not recorded any equity in BSMs earnings (losses) since the second quarter when we wrote off our
investment.

Interest Income and Other. Interest income and other remained relatively flat at $4.9 million in fiscal 2007 as
compared to $5.0 million in fiscal 2006. Interest income and other decreased primarily due to $1.5 million earned on a real estate investment in fiscal 2006 and was offset by a $1.0 million increase in interest and dividend income and a $0.3 million
gain on the sale of available-for-sale investments in fiscal 2007.

Income Tax Benefit (Expense). Income tax benefit is $6.1
million in fiscal 2007 as compared to expense of $7.2 million in fiscal 2006. This is the result of a pretax loss of $17.7 million in fiscal 2007 versus pretax earnings of $18.3 million in fiscal 2006. The effective tax rate was 34.6% in fiscal 2007
compared to 39.3% in fiscal 2006.

Liquidity and Capital Resources

Cash and cash equivalents totaled $28.2 million at March 28, 2008, down from $44.3 million at March 30, 2007. Net cash used in operating
activities was $32.8 million in fiscal 2008 as compared to $87.7 million in fiscal 2007. The $54.8 million decrease in cash used is primarily due to changes in net cash used to originate consumer loans for investment and is offset by changes in
trade receivables, restricted cash and accounts payable and accrued expenses.

Net cash used in investing activities was $0.2 million in
fiscal 2008 as compared to $2.4 million in fiscal 2007. This $2.2 million increase is due to $3.0 million of insurance proceeds received for the property, plant and equipment at our Burleson facility which was destroyed by a fire, a $2.1 million
decrease in net cash related to purchasing and selling investment securities and a $1.8 million payment to the minority interest holders of CountryPlace to purchase the remaining 20% of the company. These increases are offset by a $3.2 million
decrease in net purchases of property, plant and equipment.

Net cash provided by financing activities was $16.9 million in fiscal 2008 as
compared to $69.4 million in fiscal 2007. Of this $52.4 million decrease, $118.0 million is the result of us receiving proceeds from a securitization in 2007 offset by a $65.6 million increase in proceeds from warehouse revolving debt and floor plan
payable.

We have an agreement with a financial institution for a $70.0 million floor plan facility expiring March 30, 2009. The
advance rate for the facility is 90% of manufacturers invoice. This facility is used to finance a portion of the new home inventory at our retail sales centers and is secured by new home inventory and a portion of receivables from financial
institutions. The interest rate on the facility is prime (5.25% at March 28, 2008) plus 0.6% or prime plus 1.0% to 3.0% for aged units, of which we have none financed as of March 28, 2008. In



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May 2007, the agreement was amended to revise the covenants which must be maintained in order for us to borrow against the facility. The amended
covenants require us to comply with a loan to collateral value, as defined, of 50% and minimum liquidity amount, as defined, of $30.0 million. As of March 28, 2008, the loan to collateral value, as reported, was 57% and, therefore, we were not
in compliance with the covenant. If either of the covenants are not met, we must then comply with minimum inventory turns of 2.75, tangible net worth of $125.0 million and operating cash flow of negative $75.0 million. As of March 28, 2008, the
tangible net worth, as reported, was $114.2 million and, therefore, we were not in compliance with the covenant. We received a waiver for non-compliance through March 28, 2008 and executed an amendment to the agreement effective June 1,
2008. The amendment extends the agreement to March 31, 2011, changes interest rate to LIBOR plus 3.75% and alters certain covenant levels (loan to collateral value is increased to 60% for quarter one of fiscal 2009 and is gradually reduced to
50% by fiscal year end, tangible net worth is reduced to $110.0 million for quarter one of fiscal 2009 and is gradually increased to $115.0 by fiscal year-end, and fiscal 2009 operating cash flow is increased to $15.0 million). We had $59.4 million
and $43.6 million outstanding under these floor plan credit facilities at March 28, 2008 and March 30, 2007, respectively.

On
May 5, 2004, we issued $65.0 million aggregate principal amount of 3.25% Convertible Senior Notes due 2024 (the Notes) in a private, unregistered offering. Interest on the Notes is payable semi-annually in May and November. On
June 8, 2004, the initial purchaser of the Notes exercised its option to purchase an additional $10.0 million aggregate principal amount of the Notes. On September 15, 2004, for the benefit of the Note holders, the Company filed a shelf
registration statement covering resales of the Notes and the shares of our common stock issuable upon the conversion of the Notes. The Notes are senior, unsecured obligations and rank equal in right of payment to all of our existing and future
unsecured and senior indebtedness. The note holders may require us to repurchase all or a portion of their notes for cash on May 15, 2011, May 15, 2014 and May 15, 2019 at a repurchase price equal to 100% of the principal amount
of the notes to be repurchased plus accrued and unpaid interest, if any. Each $1,000 in principal amount of the Notes is convertible, at the option of the holder, at a conversion price of $25.92, or 38.5803 shares of our common stock upon the
satisfaction of certain conditions and contingencies. For fiscal years 2008, 2007 and 2006, the effect of converting the senior notes to 2,894,000 shares of common stock was anti-dilutive, and, therefore, was not considered in determining diluted
earnings per share.

On July 12, 2005, we, through CountryPlace, completed our initial securitization (2005-1) for
approximately $141.0 million of loans, which was funded by issuing bonds totaling approximately $118.4 million. The bonds were issued in four different classes: Class A-1 totaling $36.3 million with a coupon rate of 4.23%; Class A-2
totaling $27.4 million with a coupon rate of 4.42%; Class A-3 totaling $27.3 million with a coupon rate of 4.80%; and Class A-4 totaling $27.4 million with a coupon rate of 5.20%. Maturity of the bonds is at varying dates beginning in 2006
through 2015 and were issued with an expected weighted average maturity of 4.66 years. The proceeds from the securitization were used to repay approximately $115.7 million of borrowings on our warehouse revolving debt with the remaining proceeds
being used for general corporate purposes, including future origination of new loans. For accounting purposes, this transaction was structured as a securitized borrowing.

On March 22, 2007, we, through CountryPlace, completed our second securitization (2007-1) for approximately $116.5 million of loans (including approximately $10.4 million of pre-funded loans to be
originated in the future) which was funded by issuing bonds totaling approximately $101.9 million. The bonds were issued in four classes: Class A-1 totaling $28.9 million with a coupon rate of 5.484%; Class A-2 totaling $23.4 million with
a coupon rate of 5.232%; Class A-3 totaling $24.5 million with a coupon rate of 5.593%; and Class A-4 totaling $25.1 million with a coupon rate of 5.846%. Maturity of the bonds is at varying dates beginning in 2008 through 2017 and were
issued with an expected weighted average maturity of 4.86 years. The proceeds from the securitization were used to repay approximately $97.1 million of borrowings on our warehouse revolving debt with the remaining proceeds being used for general
corporate purposes, including future origination of new loans. For accounting purposes, this transaction was also structured as a securitized borrowing.



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CountryPlace had an agreement with a financial institution for a $150.0 million warehouse borrowing
facility to fund loans originated by CountryPlace. The facility was collateralized by specific consumer loans receivable pledged to the facility. The advance against the outstanding principle balance of eligible consumer loan receivables was 88% and
draws could be made at an 80% advance rate against land-home loans in various stages of completion. The advance rates were subject to market value adjustments. The interest rate was LIBOR (2.8125% at March 31, 2008) plus 1.25%. CountryPlace had
outstanding borrowings under the warehouse facility of $42.2 million as of March 31, 2008 and $12.0 million as of March 31, 2007. The facility was originally scheduled to expire March 14, 2008; however, CountryPlace negotiated an
extension with the lender until April 30, 2008. During the extension period, the interest rate was increased to LIBOR plus 3.00% and the advance rate, affected for market value adjustments, was reduced to 60%. CountryPlace stopped taking
applications for chattel and non-conforming mortgage loans but continued to originate conforming mortgage loans during the extension period. On April 25, 2008, CountryPlace sold approximately $51.3 million of its warehoused portfolio of chattel
and mortgage loans. Approximately $41.5 million of the proceeds were used to repay in full and terminate the warehouse borrowing facility scheduled to expire on April 30, 2008. CountryPlace is currently considering alternatives for short-term
and long-term financing of its loan portfolio, including construction financing for mortgage loans. Until such financing is arranged, we will continue to advance funds to CountryPlace.

Upon completion of the 2007-1 securitization, CountryPlace extinguished its interest rate swap agreement on its variable rate debt which was used to
hedge against an increase in variable interest rates. CountryPlace recorded the hedge instrument at fair value as of the end of each fiscal quarter with the effective offsetting portion of the hedge being recorded as a component of accumulated other
comprehensive income (loss), net of tax, and the ineffective portion, if any, of the hedge being recorded in our consolidated statement of operations. Upon extinguishment of the hedge, CountryPlace recorded a loss of $1.0 million, net of tax, for
the change in fair value to other comprehensive income (loss), which is amortized to interest expense over the life of the loans. There was no significant ineffectiveness.

CountryPlace currently intends to originate conforming mortgage loans for sale to Fannie Mae and other investors. CountryPlace plans to retain the
associated servicing rights. In addition, CountryPlace plans to continue holding its remaining portfolio of chattel, non-conforming mortgages for investment on a long-term basis. CountryPlace makes loans to borrowers that it believes are credit
worthy based on its credit guidelines. However, originating and holding loans for investment subjects CountryPlace to more credit and interest rate risk than originating loans for resale. The ability of customers to repay their loans may be affected
by a number of factors and if customers do not repay their loans, the profitability and cash flow of the loan portfolio would be adversely affected and we may incur additional loan losses.

At present, asset-backed and mortgage-backed securitization markets are effectively closed to CountryPlace and other manufactured housing lenders, and no
assurances can be made that a securitization or other term financing market will be available to CountryPlace in the future. At such time in the future that any securitization or other term financing market re-emerges, CountryPlace intends to resume
originating chattel and non-conforming mortgages for its investment portfolio. While we believe CountryPlace will be able to obtain liquidity through sales of conforming mortgages to Fannie Mae and other investors, no assurances can be made that
these investors will continue to purchase loans secured by manufactured homes, or that CountryPlace will successfully complete transactions on acceptable terms and conditions, if at all.

We believe that the proceeds from floor plan financing, conforming mortgage sales, and any other available borrowing alternatives will be adequate to
support our working capital needs, and currently planned capital expenditure needs for the foreseeable future. However, we intend to focus on cash generation and conservation through our operations to help support these cash needs as well. Because
future cash flows and the availability of financing will depend on a number of factors, including prevailing economic and financial conditions, business, credit market conditions, and other factors beyond our control, no assurances can be given in
this regard.



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Contractual Obligations(dollars in thousands)

The following tables summarize our contractual obligations, including interest, at March 28, 2008. For additional information related to these
obligations, see the Notes to Consolidated Financial Statements.



|                                |  |                        |         |                 |   |          |  |          |        |              |   |        |  |   |        
|------------------------------- |  | ---------------------- | ------- | --------------- | - | -------- |  | -------- | ------ | ------------ | - | ------ |  | - | -------
|                                |  | Payments Due by Period
|                                |  | Total                  |         | Less than1 year |   | 1-3years |  | 4-5years |        | After 5years
|Floor plan payable(1)           |  | $                      | 62,840  |                 | $ | 62,840   |  | $        |       |              | $ |       |  | $ |       
|Debt obligations                |  |                        |         |                 |   |          |  |          |        |              |   |        |  |   |        
|Warehouse revolving debt(5)     |  |                        | 42,706  |                 |   | 42,706   |  |          |       |              |   |       |  |   |       
|Convertible senior notes(4)     |  |                        | 115,219 |                 |   | 2,438    |  |          | 7,312  |              |   | 4,875  |  |   | 100,594
|Securitized financing 2005-1(1) |  |                        | 101,255 |                 |   | 14,328   |  |          | 23,419 |              |   | 16,260 |  |   | 47,248 
|Securitized financing 2007-1(1) |  |                        | 103,789 |                 |   | 19,139   |  |          | 28,106 |              |   | 16,528 |  |   | 40,016 
|Repurchase obligations(2)       |  |                        | 16,386  |                 |   | 9,109    |  |          | 7,277  |              |   |       |  |   |       
|Letters of credit(3)            |  |                        | 13,322  |                 |   | 13,322   |  |          |       |              |   |       |  |   |       
|Operating lease obligations     |  |                        | 14,105  |                 |   | 5,426    |  |          | 6,314  |              |   | 2,235  |  |   | 130    
|                                |  |                        |         |                 |   |          |  |          |        |              |   |        |  |   |        
|Total contractual obligations   |  | $                      | 469,622 |                 | $ | 169,308  |  | $        | 72,428 |              | $ | 39,898 |  | $ | 187,988
|                                |  |                        |         |                 |   |          |  |          |        |              |   |        |  |   |        



|(1) | Interest is calculated by applying contractual interest rates to 2008 fiscal year-end balances.
|--- | -----------------------------------------------------------------------------------------------

|(2) | We have contingent repurchase obligations outstanding at March 28, 2008 which have a finite life but are replaced as we continue to sell our factory-built homes to dealers
under repurchase agreements with financial institutions. We did not incur any losses related to these contingent repurchase obligations during fiscal 2008, 2007 and 2006.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The note holders may require us to repurchase all or a portion of their notes for cash on May 15, 2011, May 15, 2014 and May 15, 2019 at a repurchase price equal
to 100% of the principal amount of the notes to be repurchased plus accrued and unpaid interest, if any.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | The warehouse revolving debt facility was repaid in full and terminated in April, 2008.
|--- | ---------------------------------------------------------------------------------------

Critical Accounting Policies

Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates and judgments on historical experience and on various
other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies,
among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Impairment of Intangible Assets (Goodwill) and Other Long-Lived Assets. In assessing the recoverability of our intangible assets and other long-lived assets on an annual basis, we must make assumptions regarding estimated
future cash flows and other factors to determine the fair value of the respective assets. Due to the difficult market environment, particularly the recent fallout in the sub-prime market, and the continued decline in shipments to Florida, California
and Arizona, and our recent losses, we determined that an interim test to assess goodwill for impairment was necessary. With the assistance of an independent valuation firm, we completed this analysis in the second quarter of fiscal 2008.



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In analyzing the potential impairment of goodwill, SFAS No. 142 prescribes a two-step process that
begins with the estimation of the fair value of the reporting units. If the results of the first step indicate that impairment potentially exists, the second step is performed to measure the amount of the impairment, if any. Impairment is determined
to exist when the estimated fair value of goodwill is less than its carrying value.

For the first step, in accordance with SFAS
No. 142 and with the assistance of an independent valuation firm, we estimated the fair value of our factory-built housing reporting unit utilizing the estimated present values of future cash flows of the reporting unit, and other market based
assessments of fair value for the reporting unit. Based on the results of the first step of the analysis, we concluded that the fair value of our factory-built housing reporting unit was less than its carrying value and, accordingly, that the second
step of the analysis was necessary to determine the amount of goodwill impairment. For the second step, in accordance with SFAS No. 142 and with the assistance of an independent valuation firm, we allocated the estimated fair value of our
factory-built housing reporting unit to various assets and liabilities to determine the fair value of its goodwill. This process primarily involved estimating the difference between the carrying value and fair value of our property, plant and
equipment, intangibles and inventories. Based on the results of the second step of our analysis, we concluded the goodwill relating to our factory-built housing reporting unit was fully impaired. As a result, in the second quarter of fiscal 2008, we
recorded a non-cash impairment charge of $78.5 million related to our factory-built housing segment goodwill balance.

Recovery of
Deferred Tax Asset.Deferred tax assets and liabilities are determined based on temporary differences between the financial statement amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse. To the extent we believe it is more likely than not that some portion or all of our deferred tax assets will not be realized prior to expiration, we are required to establish a valuation allowance against
that portion of our deferred tax assets. The determination of valuation allowances involves significant management judgment and is based upon the evaluation of both positive and negative evidence, including our best estimates of anticipated taxable
profits in the various jurisdictions with which the deferred tax assets are associated. Changes in events or expectations could result in significant adjustments to the valuation allowances and material changes to our provision for income taxes.

As a result of the continued difficult market environment, particularly the recent fallout in the sub-prime market, and our losses for the
cumulative three-year historical period, we reviewed our deferred tax assets to determine whether a valuation allowance was necessary. After considering both positive and negative evidence, based primarily upon our recent losses, we recognized a
$31.9 million valuation allowance against all of our net deferred tax assets which resulted in us recording an income tax provision of approximately $13.9 million for fiscal 2008. If, after future considerations of positive and negative evidence
related to the recoverability of our deferred tax assets, we determine a lesser allowance is required, we would record a reduction to income tax expense and the valuation allowance in the period of such determination.

Revenue recognition. Retail sales of manufactured homes and certain single story modular homes, including shipping charges, are recognized
when a down payment is received, the customer enters into a legally binding sales contract, title has transferred and the home is accepted by the customer, delivered and permanently located at the customers site. Additionally, for retail sales
of all multi-story modular homes, Nationwide modular homes, and manufactured homes in which we serve as the general contractor with respect to virtually all aspects of the sale and construction process, sales are not recognized until after final
consumer closing. Transportation costs, unless borne by the retail customer or independent retailer, are included in the cost of sales.

Warranties. We provide the retail homebuyer a one-year limited warranty covering defects in material or workmanship in home structure, plumbing and electrical systems. We record a liability for estimated future warranty costs
relating to homes sold, based upon our assessment of historical experience factors. Factors we use in the estimation of the warranty liability include historical warranty experience related to the actual number of calls and the average cost per
call. Although we maintain reserves for such claims based on our assessments as described above, which to date have been adequate, there can be no assurance that warranty expense levels will



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remain at current levels or that such reserves will continue to be adequate. A large number of warranty claims exceeding our current warranty expense levels
could have a material effect on our results of operations and liquidity.

Transfers of Financial Assets. CountryPlace has
completed two securitizations of manufactured housing loan receivables since the second quarter of fiscal 2006. The securitizations were accounted for as financings, which use the portfolio method of accounting in accordance with FASB Statement of
Financial Accounting Standards, or SFAS, No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, where (1) loan contracts are securitized and
accounted for as borrowings; (2) interest income is recorded over the life of the loans using the interest method; (3) the loan contracts receivable and the securitization debt (asset-backed certificates) remain on
CountryPlaces balance sheet; and (4) the related interest margin is reflected in the income statement. This accounting has been utilized since July 12, 2005, the date of issue of the Companys initial securitized financing.
The securitizations include provisions for removal of accounts by CountryPlace that preclude sale accounting of the securitizations under SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.

The structure of CountryPlaces securitizations have no effect on the ultimate amount of profit and cash flow
recognized over the life of the loan contracts, except to the extent of surety fees and premiums, trustee fees, backup servicer fees, and securitization issuance costs. However, the structure does affect the timing of cash receipts.

CountryPlace services the loan contracts under pooling and servicing agreements with the securitization trusts. CountryPlace also retains interests in
subordinate classes of securitization bonds that provide over-collateralization credit enhancement to senior certificate holders and are subject to risk of loss of interest payments and principal. As is common in securitizations, CountryPlace
is also liable for customary representations. We guarantee certain aspects of CountryPlaces performance as the servicer under the 2005-1 securitization pooling and servicing agreement.

Allowance for Loan Losses.The allowance for loan losses reflects CountryPlaces judgment of the probable loss exposure on
their loan portfolio as of the end of the reporting period. CountryPlaces loan portfolio is comprised of loans related primarily to factory-built Palm Harbor homes. The allowance for loan losses is developed at a portfolio level and not
allocated to specific individual loans or to impaired loans. A range of probable losses is calculated after giving consideration to, among other things, the composition of the loan portfolio, including historical loss experience by static pool,
expected probable losses based on industry knowledge of losses for a given range of borrower credit scores, the composition of the portfolio by credit score and seasoning, and recent loss experience. CountryPlace then makes a determination of the
best estimate within the range of loan losses.

The accrual of interest is discontinued when either principal or interest is more than 120
days past due. In addition, loans are placed on nonaccrual status when there is a clear indication that the borrower has the inability or unwillingness to meet payments as they become due. Payments received on nonaccrual loans are applied first to
accrued interest and then to principal. Impaired loans, or portions thereof, are charged off when deemed uncollectible. As of March 31, 2008, CountryPlace management was not aware of any potential problem loans that would have a material effect
on loan delinquency or charge-offs.

Delinquency performance for loans receivable in California, Florida and Arizona suggests the effects
of declining house prices in these states in general has had no discernable effect to date on performance of CountryPlaces loans receivable portfolio. There were no accounts in Arizona past due 61 or more days as of March 31, 2008. The
delinquency rate for California chattel loans is comprised of a single loan with a receivable balance of $127,789, representing less than 0.05% of the total loans receivable portfolio. Although the delinquency rate of Florida land/home loans
receivable is almost triple the rate of the total portfolio, this delinquency is comprised entirely of three loans with total loans receivable balance of $451,248. These three Florida loans represent less than 0.16% of the total loans receivable
portfolio. Delinquency performances for Texas remain well within the average delinquency rates of the total portfolio.



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Recent deteriorating performance of mortgage loans in general in these states has been driven, in large
part, by product features (such as adjustable rates, interest-only payments, payment options, etc.) that have a high propensity to induce payment shock or negative equity, and underwriting practices which relied on the expectation of continuous
house price. CountryPlaces underwriting practices and risk management policies have been based on an assumption that the manufactured home collateral would depreciate, rather than appreciate, in value over the life of the loan. Accordingly,
its credit standards are based on both the borrowers capacity to repay the loan as scheduled, and the borrowers history of satisfying repayment obligations. As a result, CountryPlace management believes the portfolio is less susceptible
to defaults due to adjustable interest rate resets, and default losses due to house price depreciation have always been considered in determining the Companys allowance for loan losses.

Allowance for loan losses as of March 31, 2008 was $9.0 million, or approximately 3.2% of the $284.2 million total consumer loans receivable and
construction advances balance. CountryPlace management believes this allowance, in conjunction with its planned periodic provision for credit losses, is adequate for expected loan losses, considering the geographic and loan-type concentrations of
the portfolio expected overall future credit losses, and recent delinquency experience by geographic area and type of loan collateral.

Inventory Valuation. Inventory consists of raw material and finished goods (factory-built homes). We carry very little land held for development and we do not purchase options to acquire land inventory.

Each quarter we assess the recoverability of our inventory by comparing the carrying amount to its estimated net realizable value. Our raw materials
consist of home building materials and supplies and turn approximately 3 times per month. Our finished goods consist of homes completed under customer order (30%) and homes available for purchase at our retail sales centers (70%). We evaluate
the recoverability of our finished homes by comparing our inventory cost to our estimated sales price, less costs to sell. We estimate our sales price by product type (HUD code and modular). Approximately 40% of our inventory is located in Texas,
where the manufactured housing business has not experienced the same declines as California and Florida. Historically, the amount of our inventory valuation adjustments has been immaterial. We are not aware of any trends or other factors that are
reasonably likely to result in valuation adjustments in future periods. These valuations are significantly impacted by estimated average selling prices, average sales rates and product type. Our quarterly assessments reflect managements
estimates, which we believe are reasonable. However, based on the general economic conditions, future results could differ materially from managements judgments and estimates.

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement No. 123 (revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R requires that the compensation cost relating to share-based payment transactions, including grants of employee stock
options, be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS 123R permits entities to use any option-pricing model that meets the fair value objective in the
statement. We adopted SFAS 123R in the first quarter of fiscal 2007. The adoption of the standard did not have a material impact on our consolidated financial position or results of operations.

On March 31, 2007, we adopted FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. FIN 48,
an interpretation of Statement of Financial Accounting Standard 109, Accounting for Income Taxes, clarifies the accounting and disclosure requirements for uncertainty in tax positions as defined by the standard. In connection with the
adoption of FIN 48, we have analyzed its filing positions in all significant jurisdictions where it is required to file income tax returns for the open tax years in such jurisdictions. We have identified as major tax jurisdictions, as defined, its
federal income tax return and its state income tax return in states in which we operate. Our federal income tax returns for the years subsequent to March 26, 2004, remain subject to examination. Our income tax returns in major state income tax
jurisdictions remain subject to



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examination for various periods subsequent to March 28, 2003. We currently believe that all significant filing positions are highly certain and that,
more likely than not, all of our significant income tax filing positions and deductions would be sustained. Therefore, we have no significant reserves for uncertain tax positions and no adjustments to such reserves were required upon the adoption of
FIN 48. If interest and penalties are assessed, interest costs will be recognized in interest expense and penalties will be recognized in operating expenses.

In September 2006, the FASB issued Statement 157, Fair Value Measurements (FAS 157). This statement clarifies the definition of fair value; the methods used to measure fair value, and requires
expanded financial statement disclosures about fair value measurements for assets and liabilities. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We do not expect the adoption of the
standard to have a material impact on our consolidated financial position or results of operations. However, we will need to expand our disclosures in the future about the factors used to determine fair market value of our financial instruments.

In February 2007, the FASB issued Statement 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS
159). This statement allows companies to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value in an effort to mitigate volatility in earnings without
having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of the standard will not have a material impact on our consolidated financial position or results of
operations.



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

We are exposed to market risks related to fluctuations in interest rates on our variable rate debt, which consists primarily of our liabilities under retail floor plan financing arrangements. For variable interest rate obligations, changes
in interest rates generally do not impact fair market value, but do affect future earnings and cash flows. Assuming our level of variable rate debt as of March 28, 2008 is held constant, each one percentage point increase in interest rates
occurring on the first day of the year would result in an increase in interest expense for the coming year of approximately $0.6 million.

CountryPlace is exposed to market risk related to the accessibility and terms of long-term financing of its loans. In the past, CountryPlace accessed the asset-backed securities market to provide term financing of its chattel and
non-conforming mortgage originations. On July 12, 2005, CountryPlace successfully completed its initial securitized financing of approximately $141.0 million of loans. On March 22, 2007, CountryPlace completed a second securitized
financing of approximately $116.5 million of loans (including approximately $10.4 million of pre-funded loans to be originated in the future). At present, asset-backed and mortgage-backed securitization markets are effectively closed to CountryPlace
and other manufactured housing lenders. Accordingly, it is unlikely that CountryPlace can continue to securitize its loan originations as a means to obtain long-term funding. This inability to continue to securitize its loans caused CountryPlace to
discontinue origination of chattel loans and non-conforming mortgages until other sources of funding are available.

We are also exposed to
market risks related to our fixed rate consumer loans receivable balances and our convertible senior notes. For fixed rate loans receivable, changes in interest rates do not change future earnings and cash flows from the receivables. However,
changes in interest rates could affect the fair market value of the loan portfolio. Assuming CountryPlaces level of loans held for investment as of March 31, 2008 is held constant, a 10% increase in average interest rates would decrease
the fair value of CountryPlaces portfolio by approximately $2.7 million. Excluding the $51.3 million of loans held for sale that CountryPlace sold subsequent to March 31, 2008, a 10% increase in average interest rates would decrease the
fair value of CountryPlaces portfolio by approximately $1.4 million. For our fixed rate convertible senior notes, changes in interest rates could affect the fair market value of the related debt. Assuming the amount of convertible senior notes
as of March 28, 2008 is held constant, a 10% decrease in interest rates would increase the fair value of the notes by approximately $1.5 million.



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

Report
of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Palm Harbor Homes, Inc.

We have audited the accompanying consolidated balance sheets of Palm Harbor Homes,
Inc. and subsidiaries as of March 28, 2008 and March 30, 2007, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the three years in the period ended March 28, 2008. These
financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Palm Harbor Homes, Inc. and subsidiaries at March 28, 2008 and March 30, 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 28, 2008,
in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, in
fiscal 2007 the Company changed its method of accounting for share-based compensation as required by Statement of Financial Accounting Standards No. 123 (R), Share-Based Payment.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Palm Harbor Homes, Inc.s
internal control over financial reporting as of March 28, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated June 2,
2008 expressed an unqualified opinion thereon.

/s/Ernst & Young LLP

Dallas, Texas

June 2, 2008



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##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands)



|                                                                               |  |               |         |   |               |   |         |  
|------------------------------------------------------------------------------ |  | ------------- | ------- | - | ------------- | - | ------- | -
|                                                                               |  | March 28,2008 |         |   | March 30,2007 |  
|Assets                                                                         |  |               |         |   |               |   |         |  
|Cash and cash equivalents                                                      |  | $             | 28,206  |   |               | $ | 44,292  |  
|Restricted cash                                                                |  |               | 25,487  |   |               |   | 43,469  |  
|Investments                                                                    |  |               | 22,442  |   |               |   | 21,832  |  
|Trade receivables                                                              |  |               | 31,616  |   |               |   | 33,978  |  
|Consumer loans receivable, net (including $51,300 of loans sold in April 2008) |  |               | 267,636 |   |               |   | 228,289 |  
|Inventories                                                                    |  |               | 123,294 |   |               |   | 138,690 |  
|Assets held for sale                                                           |  |               | 7,532   |   |               |   | 179     |  
|Prepaid expenses and other assets                                              |  |               | 9,478   |   |               |   | 19,203  |  
|Deferred tax assets, net                                                       |  |               |        |   |               |   | 14,579  |  
|Property, plant and equipment, at cost:                                        |  |               |         |   |               |   |         |  
|Land and improvements                                                          |  |               | 29,562  |   |               |   | 33,124  |  
|Buildings and improvements                                                     |  |               | 44,268  |   |               |   | 56,731  |  
|Machinery and equipment                                                        |  |               | 53,564  |   |               |   | 63,804  |  
|Construction in progress                                                       |  |               | 3,658   |   |               |   | 1,603   |  
|                                                                               |  |               |         |   |               |   |         |  
|                                                                               |  |               | 131,052 |   |               |   | 155,262 |  
|Accumulated depreciation                                                       |  |               | (84,050 | ) |               |   | (95,015 | )
|                                                                               |  |               |         |   |               |   |         |  
|                                                                               |  |               | 47,002  |   |               |   | 60,247  |  
|Goodwill                                                                       |  |               | 2,707   |   |               |   | 78,506  |  
|                                                                               |  |               |         |   |               |   |         |  
|Total assets                                                                   |  | $             | 565,400 |   |               | $ | 683,264 |  
|                                                                               |  |               |         |   |               |   |         |  

See accompanying Notes to Consolidated Financial Statements.



33



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Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share data)



|                                                                        |  |               |         |   |               |   |         |  
|----------------------------------------------------------------------- |  | ------------- | ------- | - | ------------- | - | ------- | -
|                                                                        |  | March 28,2008 |         |   | March 30,2007 |  
|Liabilities and Shareholders Equity                                    |  |               |         |   |               |   |         |  
|Accounts payable                                                        |  | $             | 26,641  |   |               | $ | 22,715  |  
|Accrued liabilities                                                     |  |               | 70,212  |   |               |   | 85,366  |  
|Floor plan payable                                                      |  |               | 59,367  |   |               |   | 43,603  |  
|Warehouse revolving debt                                                |  |               | 42,175  |   |               |   | 12,045  |  
|Securitized financings                                                  |  |               | 165,430 |   |               |   | 194,405 |  
|Convertible senior notes                                                |  |               | 75,000  |   |               |   | 75,000  |  
|                                                                        |  |               |         |   |               |   |         |  
|Total liabilities                                                       |  |               | 438,825 |   |               |   | 433,134 |  
|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 28, 2008 and March 30, 2007           |  |               | 239     |   |               |   | 239     |  
|Additional paid-in capital                                              |  |               | 54,108  |   |               |   | 53,907  |  
|Retained earnings                                                       |  |               | 89,027  |   |               |   | 213,289 |  
|Treasury stock956,014 at March 28, 2008, and 956,086 at March 30, 2007 |  |               | (15,896 | ) |               |   | (15,896 | )
|Accumulated other comprehensive loss                                    |  |               | (903    | ) |               |   | (1,409  | )
|                                                                        |  |               |         |   |               |   |         |  
|Total shareholders equity                                              |  |               | 126,575 |   |               |   | 250,130 |  
|                                                                        |  |               |         |   |               |   |         |  
|Total liabilities and shareholders equity                              |  | $             | 565,400 |   |               | $ | 683,264 |  
|                                                                        |  |               |         |   |               |   |         |  

See accompanying Notes to Consolidated Financial Statements.



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##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)



|                                                                        |  |                         |          |   |                         |   |         |                         |  |   |         |  
|----------------------------------------------------------------------- |  | ----------------------- | -------- | - | ----------------------- | - | ------- | ----------------------- |  | - | ------- | -
|                                                                        |  | Year Ended              |         
|                                                                        |  | March 28,2008(52 weeks) |          |   | March 30,2007(52 weeks) |   |         | March 31,2006(53 weeks) | 
|Net sales                                                               |  | $                       | 555,096  |   |                         | $ | 661,247 |                         |  | $ | 710,635 |  
|Cost of sales                                                           |  |                         | 421,371  |   |                         |   | 503,419 |                         |  |   | 525,023 |  
|Selling, general and administrative expenses                            |  |                         | 150,562  |   |                         |   | 160,016 |                         |  |   | 161,154 |  
|Goodwill impairment                                                     |  |                         | 78,506   |   |                         |   |        |                         |  |   |        |  
|                                                                        |  |                         |          |   |                         |   |         |                         |  |   |         |  
|Income (loss) from operations                                           |  |                         | (95,343  | ) |                         |   | (2,188  | )                       |  |   | 24,458  |  
|Interest expense                                                        |  |                         | (18,654  | ) |                         |   | (15,695 | )                       |  |   | (11,739 | )
|Equity in earnings (loss) of limited partnership and impairment charges |  |                         |         |   |                         |   | (4,709  | )                       |  |   | 574     |  
|Interest income and other                                               |  |                         | 3,625    |   |                         |   | 4,901   |                         |  |   | 5,007   |  
|                                                                        |  |                         |          |   |                         |   |         |                         |  |   |         |  
|Income (loss) before income taxes                                       |  |                         | (110,372 | ) |                         |   | (17,691 | )                       |  |   | 18,300  |  
|Income tax benefit (expense)                                            |  |                         | (13,890  | ) |                         |   | 6,126   |                         |  |   | (7,186  | )
|                                                                        |  |                         |          |   |                         |   |         |                         |  |   |         |  
|Net income (loss)                                                       |  | $                       | (124,262 | ) |                         | $ | (11,565 | )                       |  | $ | 11,114  |  
|                                                                        |  |                         |          |   |                         |   |         |                         |  |   |         |  
|Net income (loss) per common sharebasic and diluted                    |  | $                       | (5.44    | ) |                         | $ | (0.51   | )                       |  | $ | 0.49    |  
|                                                                        |  |                         |          |   |                         |   |         |                         |  |   |         |  
|Weighted average common shares outstandingbasic and diluted            |  |                         | 22,852   |   |                         |   | 22,852  |                         |  |   | 22,831  |  
|                                                                        |  |                         |          |   |                         |   |         |                         |  |   |         |  

See accompanying Notes to Consolidated Financial Statements.



35



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##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Statements of Shareholders Equity

(In thousands, except share
data)



|                                                              |  |              |  |                          |     |  |                  |        |        |                               |   |          |                |  |       |        |   |  |          |   |  |   |         |   |  |   |          |  
|------------------------------------------------------------- |  | ------------ |  | ------------------------ | --- |  | ---------------- | ------ | ------ | ----------------------------- | - | -------- | -------------- |  | ----- | ------ | - |  | -------- | - |  | - | ------- | - |  | - | -------- | -
|                                                              |  | Common Stock |  | AdditionalPaid-InCapital |     |  | RetainedEarnings |        |        | AccumulatedOtherIncome (Loss) |   |          | Treasury Stock |  |       |        |  
|                                                              |  | Shares       |  | Amount                   |     |  |                  |        | Shares |                               |   | Amount   |                |  | Total |       
|Balance at March 25, 2005                                     |  | 23,807,879   |  | $                        | 239 |  | $                | 54,073 |        |                               | $ | 213,740  |                |  | $     | 1,214  |   |  | (985,362 | ) |  | $ | (16,359 | ) |  | $ | 252,907  |  
|Comprehensive income                                          |  |              |  |                          |     |  |                  |        |        |                               |   |          |                |  |       |        |   |  |          |   |  |   |         |   |  |   |          |  
|Net income                                                    |  |             |  |                          |    |  |                  |       |        |                               |   | 11,114   |                |  |       |       |   |  |         |   |  |   |        |   |  |   | 11,114   |  
|Unrealized loss on available-for-sale investments, net of tax |  |             |  |                          |    |  |                  |       |        |                               |   |         |                |  |       | (9     | ) |  |         |   |  |   |        |   |  |   | (9       | )
|Change in fair value of interest rate hedge, net of tax       |  |             |  |                          |    |  |                  |       |        |                               |   |         |                |  |       | (1,091 | ) |  |         |   |  |   |        |   |  |   | (1,091   | )
|                                                              |  |              |  |                          |     |  |                  |        |        |                               |   |          |                |  |       |        |   |  |          |   |  |   |         |   |  |   |          |  
|Total comprehensive income (loss)                             |  |             |  |                          |    |  |                  |       |        |                               |   | 11,114   |                |  |       | (1,100 | ) |  |         |   |  |   |        |   |  |   | 10,014   |  
|Stock awards                                                  |  |              |  |                          |     |  |                  |        |        |                               |   |          |                |  |       |        |   |  |          |   |  |   |         |   |  |   |          |  
|Shares granted                                                |  |             |  |                          |    |  |                  | (159   | )      |                               |   |         |                |  |       |       |   |  | 8,723    |   |  |   | 159     |   |  |   |         |  
|Terminations                                                  |  |             |  |                          |    |  |                  |       |        |                               |   |         |                |  |       |       |   |  |         |   |  |   |        |   |  |   |         |  
|Provision                                                     |  |             |  |                          |    |  |                  | 103    |        |                               |   |         |                |  |       |       |   |  |         |   |  |   |        |   |  |   | 103      |  
|                                                              |  |              |  |                          |     |  |                  |        |        |                               |   |          |                |  |       |        |   |  |          |   |  |   |         |   |  |   |          |  
|Balance at March 31, 2006                                     |  | 23,807,879   |  |                          | 239 |  |                  | 54,017 |        |                               |   | 224,854  |                |  |       | 114    |   |  | (976,639 | ) |  |   | (16,200 | ) |  |   | 263,024  |  
|Comprehensive loss                                            |  |              |  |                          |     |  |                  |        |        |                               |   |          |                |  |       |        |   |  |          |   |  |   |         |   |  |   |          |  
|Net loss                                                      |  |             |  |                          |    |  |                  |       |        |                               |   | (11,565  | )              |  |       |       |   |  |         |   |  |   |        |   |  |   | (11,565  | )
|Unrealized loss on available-for-sale investments, net of tax |  |             |  |                          |    |  |                  |       |        |                               |   |         |                |  |       | (528   | ) |  |         |   |  |   |        |   |  |   | (528     | )
|Amortization of interest rate hedge                           |  |             |  |                          |    |  |                  |       |        |                               |   |         |                |  |       | (995   | ) |  |         |   |  |   |        |   |  |   | (995     | )
|                                                              |  |              |  |                          |     |  |                  |        |        |                               |   |          |                |  |       |        |   |  |          |   |  |   |         |   |  |   |          |  
|Total comprehensive loss                                      |  |             |  |                          |    |  |                  |       |        |                               |   | (11,565  | )              |  |       | (1,523 | ) |  |         |   |  |   |        |   |  |   | (13,088  | )
|Stock awards                                                  |  |              |  |                          |     |  |                  |        |        |                               |   |          |                |  |       |        |   |  |          |   |  |   |         |   |  |   |          |  
|Shares granted                                                |  |             |  |                          |    |  |                  | (304   | )      |                               |   |         |                |  |       |       |   |  | 20,553   |   |  |   | 304     |   |  |   |         |  
|Terminations                                                  |  |             |  |                          |    |  |                  |       |        |                               |   |         |                |  |       |       |   |  |         |   |  |   |        |   |  |   |         |  
|Provision                                                     |  |             |  |                          |    |  |                  | 194    |        |                               |   |         |                |  |       |       |   |  |         |   |  |   |        |   |  |   | 194      |  
|                                                              |  |              |  |                          |     |  |                  |        |        |                               |   |          |                |  |       |        |   |  |          |   |  |   |         |   |  |   |          |  
|Balance at March 30, 2007                                     |  | 23,807,879   |  |                          | 239 |  |                  | 53,907 |        |                               |   | 213,289  |                |  |       | (1,409 | ) |  | (956,086 | ) |  |   | (15,896 | ) |  |   | 250,130  |  
|Comprehensive loss                                            |  |              |  |                          |     |  |                  |        |        |                               |   |          |                |  |       |        |   |  |          |   |  |   |         |   |  |   |          |  
|Net loss                                                      |  |             |  |                          |    |  |                  |       |        |                               |   | (124,262 | )              |  |       |       |   |  |         |   |  |   |        |   |  |   | (124,262 | )
|Unrealized gain on available-for-sale investments, net of tax |  |             |  |                          |    |  |                  |       |        |                               |   |         |                |  |       | 398    |   |  |         |   |  |   |        |   |  |   | 398      |  
|Amortization of interest rate hedge                           |  |             |  |                          |    |  |                  |       |        |                               |   |         |                |  |       | 108    |   |  |         |   |  |   |        |   |  |   | 108      |  
|                                                              |  |              |  |                          |     |  |                  |        |        |                               |   |          |                |  |       |        |   |  |          |   |  |   |         |   |  |   |          |  
|Total comprehensive loss                                      |  |             |  |                          |    |  |                  |       |        |                               |   | (124,262 | )              |  |       | 506    |   |  |         |   |  |   |        |   |  |   | (123,756 | )
|Stock awards                                                  |  |              |  |                          |     |  |                  |        |        |                               |   |          |                |  |       |        |   |  |          |   |  |   |         |   |  |   |          |  
|Shares granted                                                |  |             |  |                          |    |  |                  |       |        |                               |   |         |                |  |       |       |   |  |         |   |  |   |        |   |  |   |         |  
|Terminations                                                  |  |             |  |                          |    |  |                  |       |        |                               |   |         |                |  |       |       |   |  | 72       |   |  |   |        |   |  |   |         |  
|Provision                                                     |  |             |  |                          |    |  |                  | 201    |        |                               |   |         |                |  |       |       |   |  |         |   |  |   |        |   |  |   | 201      |  
|                                                              |  |              |  |                          |     |  |                  |        |        |                               |   |          |                |  |       |        |   |  |          |   |  |   |         |   |  |   |          |  
|Balance at March 28, 2008                                     |  | 23,807,879   |  | $                        | 239 |  | $                | 54,108 |        |                               | $ | 89,027   |                |  | $     | (903   | ) |  | (956,014 | ) |  | $ | (15,896 | ) |  | $ | 126,575  |  
|                                                              |  |              |  |                          |     |  |                  |        |        |                               |   |          |                |  |       |        |   |  |          |   |  |   |         |   |  |   |          |  

See accompanying Notes to Consolidated Financial Statements.



36



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##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)



|                                                                                    |  |               |          |   |               |   |         |               |  |   |         |  
|----------------------------------------------------------------------------------- |  | ------------- | -------- | - | ------------- | - | ------- | ------------- |  | - | ------- | -
|                                                                                    |  | March 28,2008 |          |   | March 30,2007 |   |         | March 31,2006 | 
|Operating Activities                                                                |  |               |          |   |               |   |         |               |  |   |         |  
|Net income (loss)                                                                   |  | $             | (124,262 | ) |               | $ | (11,565 | )             |  | $ | 11,114  |  
|Adjustments to reconcile net income (loss) to net cash used in operating activities |  |               |          |   |               |   |         |               |  |   |         |  
|Depreciation and amortization                                                       |  |               | 8,130    |   |               |   | 9,263   |               |  |   | 11,072  |  
|Provision for credit losses                                                         |  |               | 3,572    |   |               |   | 3,790   |               |  |   | 3,407   |  
|Deferred income taxes                                                               |  |               | 14,476   |   |               |   | (1,181  | )             |  |   | 600     |  
|Goodwill impairment                                                                 |  |               | 78,506   |   |               |   |        |               |  |   |        |  
|Impairment of investment securities                                                 |  |               | 432      |   |               |   |        |               |  |   |        |  
|Impairment of PP&E                                                                  |  |               | 582      |   |               |   |        |               |  |   |        |  
|(Gain) loss on disposition of assets                                                |  |               | (623     | ) |               |   | 1,677   |               |  |   | (2,446  | )
|Gain on sale of investments                                                         |  |               | (359     | ) |               |   | (345    | )             |  |   |        |  
|Provision for long-term incentive plan                                              |  |               | 201      |   |               |   | 194     |               |  |   | 103     |  
|Proceeds from business interruption insurance                                       |  |               | 3,300    |   |               |   |        |               |  |   |        |  
|Equity in (earnings) loss of limited partnership and impairment charges             |  |               |         |   |               |   | 4,709   |               |  |   | (574    | )
|Changes in operating assets and liabilities:                                        |  |               |          |   |               |   |         |               |  |   |         |  
|Restricted cash                                                                     |  |               | 17,982   |   |               |   | (16,869 | )             |  |   | (11,248 | )
|Trade receivables                                                                   |  |               | 2,362    |   |               |   | 16,575  |               |  |   | 90      |  
|Consumer loans originated for investment or sale                                    |  |               | (78,925  | ) |               |   | (92,676 | )             |  |   | (59,164 | )
|Principal payments on consumer loans originated                                     |  |               | 36,006   |   |               |   | 28,063  |               |  |   | 21,925  |  
|Inventories                                                                         |  |               | 15,396   |   |               |   | 10,878  |               |  |   | (21,148 | )
|Prepaid expenses and other assets                                                   |  |               | 9,065    |   |               |   | (12,464 | )             |  |   | (1,971  | )
|Accounts payable and accrued expenses                                               |  |               | (18,677  | ) |               |   | (27,721 | )             |  |   | 28,210  |  
|                                                                                    |  |               |          |   |               |   |         |               |  |   |         |  
|Net cash used in operating activities                                               |  |               | (32,836  | ) |               |   | (87,672 | )             |  |   | (20,030 | )
|                                                                                    |  |               |         
|Investing Activities                                                                |  |               |          |   |               |   |         |               |  |   |         |  
|Purchase of minority interest                                                       |  |               | (1,800   | ) |               |   |        |               |  |   |        |  
|Purchase of property, plant and equipment, net of proceeds from disposition         |  |               | (1,326   | ) |               |   | (4,541  | )             |  |   | (1,437  | )
|Insurance proceeds received for property, plant and equipment                       |  |               | 3,000    |   |               |   |        |               |  |   |        |  
|Purchases of investments                                                            |  |               | (7,258   | ) |               |   | (10,824 | )             |  |   | (9,564  | )
|Sales of investments                                                                |  |               | 7,215    |   |               |   | 12,962  |               |  |   | 6,334   |  
|                                                                                    |  |               |          |   |               |   |         |               |  |   |         |  
|Net cash used in investing activities                                               |  |               | (169     | ) |               |   | (2,403  | )             |  |   | (4,667  | )
|                                                                                    |  |               |         
|Financing Activities                                                                |  |               |          |   |               |   |         |               |  |   |         |  
|Net proceeds from floor plan payable                                                |  |               | 15,764   |   |               |   | 5,695   |               |  |   | 7,020   |  
|Net proceeds (payments) from warehouse revolving debt                               |  |               | 30,130   |   |               |   | (25,368 | )             |  |   | (68,885 | )
|Proceeds from securitized financings, net of transaction costs                      |  |               |         |   |               |   | 101,476 |               |  |   | 117,838 |  
|Payments on securitized financing                                                   |  |               | (28,975  | ) |               |   | (12,450 | )             |  |   | (12,459 | )
|                                                                                    |  |               |          |   |               |   |         |               |  |   |         |  
|Net cash provided by financing activities                                           |  |               | 16,919   |   |               |   | 69,353  |               |  |   | 43,514  |  
|Net increase (decrease) in cash and cash equivalents                                |  |               | (16,086  | ) |               |   | (20,722 | )             |  |   | 18,817  |  
|Cash and cash equivalents at beginning of year                                      |  |               | 44,292   |   |               |   | 65,014  |               |  |   | 46,197  |  
|                                                                                    |  |               |          |   |               |   |         |               |  |   |         |  
|Cash and cash equivalents at end of year                                            |  | $             | 28,206   |   |               | $ | 44,292  |               |  | $ | 65,014  |  
|                                                                                    |  |               |          |   |               |   |         |               |  |   |         |  
|Supplemental disclosures of cash flow information:                                  |  |               |          |   |               |   |         |               |  |   |         |  
|Cash paid (received) during the year for:                                           |  |               |          |   |               |   |         |               |  |   |         |  
|Interest                                                                            |  | $             | 18,434   |   |               | $ | 14,972  |               |  | $ | 10,637  |  
|Income taxes                                                                        |  | $             | (8,752   | ) |               | $ | 2,954   |               |  | $ | 7,845   |  
|Non-cash transactions:                                                              |  |               |          |   |               |   |         |               |  |   |         |  
|Loans transferred to repossessed assets                                             |  | $             | 1,206    |   |               | $ | 909     |               |  | $ | 692     |  

See accompanying Notes to Consolidated Financial Statements.



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Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements



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

Principles of
consolidation

The consolidated financial statements include the accounts of Palm Harbor Homes, Inc. and its wholly owned subsidiaries
(the Company). CountryPlace Mortgage, Ltd. (CountryPlace) was 80% owned by the Company until February 15, 2008 when the Company purchased the remaining 20% from the minority interest holders (see Note 17 for further
details of this transaction). All significant intercompany transactions and balances have been eliminated in consolidation. Headquartered in Addison, Texas, the Company markets factory-built homes nationwide through vertically integrated operations,
encompassing factory-built housing, financing and insurance.

Preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from the estimates and assumptions
used by management in preparation of the consolidated financial statements.

General Business Environment

The tightening of credit standards, limited retail and wholesale financing availability, increased levels of repossessions, excessive retail inventory
levels and manufacturing capacities caused the manufactured housing industry to enter a cyclical downturn in mid-1999. The Companys fiscal 2008 results were heavily influenced by these difficult industry conditions. Industry shipments have
continued to decline with calendar year 2007 manufactured housing shipments down 18% from calendar year 2006 and the three significant (to both the Company and the industry) manufactured housing states of Florida, California and Arizona down a
combined 43% and comprising 50% of the total national decline in shipments.

Industry modular shipments are down 16% for calendar year 2007
as compared to calendar year 2006. Modular sales accounted for 36% of the Companys revenues in fiscal 2008. While average selling prices of modular homes were higher in fiscal 2008, unit sales were down 12% due to weaker housing demand trends.
The severe downturn of the overall housing market created by a return to more prudent lending practices has produced excess site-built inventory which is directly competitive with modular housing.

During the fourth quarter of fiscal 2008, the Company closed its Sabina, Ohio, Casa Grande, Arizona and one of its Plant City, Florida manufacturing
facilities as well as 18 under-performing retail sales centers to more effectively align its manufacturing capacity and distribution channels with current and expected regional demand. In connection with these actions, the Company recorded
restructuring charges totaling $8.3 million primarily related to facility closure costs. Of this $8.3 million, $2.9 million is included in cost of sales and $5.4 million is included in selling, general and administrative expenses on the
Companys consolidated statement of operations. Also, as part of this restructuring, the Company listed three of its manufacturing facilities for sale. The Company expects to sell these facilities during fiscal 2009. The carrying value of these
facilities is included in assets held for sale on the consolidated balance sheets. No significant additional charges are expected to be incurred in connection with this restructuring.

The deterioration of the credit markets that the Company depends on for warehouse lending for originations and securitizations of CountryPlaces
loans has also impacted its business during fiscal 2008. CountryPlaces warehouse borrowing facility was originally scheduled to expire March 14, 2008; however, they negotiated an extension with the lender until April 30, 2008. During
the extension period, CountryPlace stopped taking applications for chattel loans and non-conforming mortgages but continued to originate conforming mortgage



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Notes to Consolidated Financial Statements (continued)



loans. On April 25, 2008, CountryPlace sold approximately $51.3 million of its warehoused portfolio of chattel and mortgage loans without incurring a
loss. Approximately $41.5 million of the proceeds were used to repay in full and terminate the warehouse borrowing facility scheduled to expire on April 30, 2008. CountryPlace will continue to originate and service conforming mortgages for our
credit-worthy customers.

With these difficult market conditions worsening and no near-term signs of recovery for the factory-built housing
industry, the Company has focused on executing three key strategies to improve its operating results. First, the Company plans to increase revenues through an expanded product offering (including the less expensive manufactured and modular products
introduced during the first quarter of fiscal 2008), enhanced marketing and advertising efforts, and expanded distribution channels. Along with this, the Company will continue to identify ways to reduce its fixed costs and improve operating
efficiencies. The Company is also focusing on cash generation and conservation throughout its operations. In addition, the Company has amended certain debt agreements subsequent to March 28, 2008 (see Notes 5 and 6 for further details).

Year End

The Companys fiscal
year ends on the last Friday in March. Fiscal years 2008 and 2007 were comprised of 52 weeks while fiscal year 2006 was comprised of 53 weeks.

The Companys financial services subsidiaries fiscal year ends on different dates than the Companys. CountryPlaces fiscal year ends on March 31 and Standard Casualtys (Standard) fiscal year ends on the last
day of February.

Revenue recognition

Retail sales of manufactured homes and certain single story modular homes, including shipping charges, are recognized when a down payment is received, the customer enters into a legally binding sales contract, title has transferred and the
home is accepted by the customer, delivered and permanently located at the customers site. Additionally, for retail sales of all multi-story modular homes, Nationwide modular homes, and manufactured homes in which the Company serves as the
general contractor with respect to virtually all aspects of the sale and construction process, sales are not recognized until after final consumer closing. Transportation costs, unless borne by the retail customer or independent retailer, are
included in cost of sales.

Interest income on consumer loans receivable is recognized as net sales on an accrual basis. When CountryPlace
determines that a loan held for investment is partially or fully uncollectible, the estimated loss is charged against the allowance for loan losses. Recoveries on losses previously charged to the allowance are credited to the allowance at the time
the recovery is collected. Loan origination fees and certain direct loan origination costs are deferred and amortized into net sales over the contractual life of the loan using the interest method.

Most of the homes sold to independent retailers are financed through standard industry arrangements which include repurchase agreements (see Note 11).
The Company extends credit in the normal course of business under normal trade terms and its receivables are subject to normal industry risk.

Premium income from insurance policies is recognized on an as earned basis. Premium amounts collected are amortized into net sales over the life of the policy. Policy acquisition costs are also amortized as cost of sales over the life of
the policy.



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Notes to Consolidated Financial Statements (continued)



Cash and cash equivalents

Cash and cash equivalents are all liquid investments with maturities of three months or less when purchased.

Restricted
cash

Restricted cash consists of the following (in thousands):



|                                                                                                                              |  |               |        |               |   |       
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | ------------- | - | ------
|                                                                                                                              |  | March 28,2008 |        | March 30,2007
|Cash pledged as collateral for outstanding insurance programs and surety bonds                                                |  | $             | 13,778 |               | $ | 15,487
|Cash related to customer deposits held in trust accounts                                                                      |  |               | 5,107  |               |   | 10,772
|Cash related to CountryPlace customers principal and interest payments on the loans that are in the warehouse or
securitized |  |               | 6,602  |               |   | 6,825 
|Cash related to CountryPlace pre-funded loans                                                                                 |  |               |       |               |   | 10,385
|                                                                                                                              |  |               |        |               |   |       
|                                                                                                                              |  | $             | 25,487 |               | $ | 43,469
|                                                                                                                              |  |               |        |               |   |       

Consumer loans receivable

Consumer loans receivable consists of manufactured housing loans (held for investment, held for sale or securitized) and construction advances on non-conforming mortgages less allowances for loan losses and deferred
financing costs, net of amortization. Loans held for an investment and loans securitized are stated at the aggregate remaining unpaid principal balances. Loans held for sale are recoded at the lower of cost or market on an aggregate basis. Interest
income is recognized based upon the unpaid principal amount outstanding.

During the fourth quarter of 2008, the Company transferred $51.3
million of loans held for investment to loans held for sale at the lower of cost or fair market value. These loans were sold in April, 2008. See Note 4 for more information.

Loan origination costs are deferred and amortized over the estimated life of the portfolio and amortized using the effective interest method.

Allowance for loan losses

The allowance for loan
losses reflects CountryPlaces judgment of the probable loss exposure on their loan portfolio as of the end of the reporting period. CountryPlaces loan portfolio is comprised of loans related primarily to factory-built Palm Harbor homes.
The allowance for loan losses is developed at a portfolio level and not allocated to specific individual loans or to impaired loans. A range of probable losses is calculated after giving consideration to, among other things, the composition of the
loan portfolio, including historical loss experience by static pool, expected probable losses based on industry knowledge of losses for a given range of borrower credit scores, the composition of the portfolio by credit score and seasoning, and
recent loss experience. CountryPlace then makes a determination of the best estimate within the range of loan losses.

The accrual of
interest is discontinued when either principal or interest is more than 120 days past due. In addition, loans are placed on nonaccrual status when there is a clear indication that the borrower has the inability or unwillingness to meet payments as
they become due. Payments received on nonaccrual loans are applied first to accrued interest and then to principal. Impaired loans, or portions thereof, are charged off when deemed uncollectible. As of March 31, 2008, CountryPlace management
was not aware of any potential problem loans that would have a material effect on loan delinquency or charge-offs.



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Notes to Consolidated Financial Statements (continued)



Delinquency performance for loans receivable in California, Florida and Arizona suggests the effects
of declining house prices in these states in general has had no discernable effect to date on performance of CountryPlaces loans receivable portfolio. There were no accounts in Arizona past due 61 or more days as of March 31, 2008. The
delinquency rate for California chattel loans is comprised of a single loan with a receivable balance of $127,789, representing less than 0.05% of the total loans receivable portfolio. Although the delinquency rate of Florida land/home loans
receivable is almost triple the rate of the total portfolio, this delinquency is comprised entirely of three loans with total loans receivable balance of $451,248. These three Florida loans represent less than 0.16% of the total loans receivable
portfolio. Delinquency performances for Texas remain well within the average delinquency rates of the total portfolio.

Recent
deteriorating performance of mortgage loans in general in these states has been driven, in large part, by product features (such as adjustable rates, interest-only payments, payment options, etc.) that have a high propensity to induce payment shock
or negative equity, and underwriting practices which relied on the expectation of continuous house price appreciation. CountryPlaces underwriting practices and risk management policies have been based on an assumption that the manufactured
home collateral would depreciate, rather than appreciate, in value over the life of the loan. Accordingly, its credit standards are based on both the borrowers capacity to repay the loan as scheduled, and the borrowers history of
satisfying repayment obligations. As a result, CountryPlace management believes the portfolio is less susceptible to defaults due to adjustable interest rate resets, and default losses due to house price depreciation have always been considered in
determining the Companys allowance for loan losses.

Allowance for loan losses as of March 31, 2008 was $9.0 million, or
approximately 3.2% of the $284.2 million total consumer loans receivable and construction advances balance. CountryPlace management believes this allowance is adequate for expected loan losses, considering the geographic and loan-type concentrations
of the portfolio, expected overall future credit losses, and recent delinquency experience by geographic area and type of loan collateral.

Transfers of
Financial Assets

CountryPlace has completed two securitizations of manufactured housing loan receivables since the second quarter of
fiscal 2006. The securitizations were accounted for as financings, which use the portfolio method of accounting in accordance with FASB Statement of Financial Accounting Standards, or SFAS, No. 91, Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, where (1) loan contracts are securitized and accounted for as borrowings; (2) interest income is recorded over the life of the loans using
the interest method; (3) the loan contracts receivable and the securitization debt (asset-backed certificates) remain on CountryPlaces balance sheet; and (4) the related interest margin is reflected in the income statement.
This accounting has been utilized since July 12, 2005, the date of issue of the Companys initial securitized financing. The securitizations include provisions for removal of accounts by CountryPlace that preclude sale accounting of
the securitizations under SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.

The structure of CountryPlaces securitizations have no effect on the ultimate amount of profit and cash flow recognized over the life of the loan contracts, except to the extent of surety fees and premiums, trustee fees, backup
servicer fees, and securitization issuance costs. However, the structure does affect the timing of cash receipts.

CountryPlace services
the loan contracts under pooling and servicing agreements with the securitization trusts. CountryPlace also retains interests in subordinate classes of securitization bonds that provide over-collateralization credit enhancement to senior certificate
holders and are subject to risk of loss of interest



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Notes to Consolidated Financial Statements (continued)



payments and principal. As is common in securitizations, CountryPlace is also liable for customary representations. The Company guarantees certain
aspects of CountryPlaces performance as the servicer under the 2005-1 securitization pooling and servicing agreement.

Investment Securities

Management determines the appropriate classification of its investment securities at the time of purchase. The Companys investments
include marketable debt and equity securities that are held as available-for-sale. All investments classified as available-for-sale are recorded at fair value with any unrealized gains and losses reported in accumulated other comprehensive income
(loss), net of tax. Realized gains and losses from the sale of securities are determined using the specific identification method.

Management regularly makes an assessment to determine whether a decline in value of an individual security is other-than-temporary. The Company considers the following factors when making its assessment: (1) the Companys ability
and intent to hold the investment to maturity, or a period of time sufficient to allow for a recovery in market value; (2) whether it is probable that the Company will be able to collect the amounts contractually due; and (3) whether any
decision has been made to dispose of the investment prior to the balance sheet date. Investments on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the loss recorded in earnings
(losses).

Inventories

Raw materials
inventories are valued at the lower of cost (first-in, first-out method which approximates actual cost) or market. Finished goods are valued at the lower of cost or market, using the specific identification method.

Each quarter the Company assesses the recoverability of its inventory by comparing the carrying amount to its estimated net realizable value. Raw
materials consist of home building materials and supplies and turn approximately 3 times per month. Finished goods consist of homes completed under customer order (30%) and homes available for purchase at the Companys retail sales centers
(70%). The Company evaluates the recoverability of its finished homes by comparing its inventory cost to its estimated sales price, less costs to sell. The sales price is estimated by product type (HUD code and modular). Approximately 40% of the
Companys inventory is located in Texas, where the manufactured housing business has not experienced the same declines as California and Florida. Historically, the amount of its inventory valuation adjustments has been immaterial. Management is
not aware of any trends or other factors that are reasonably likely to result in valuation adjustments in future periods. These valuations are significantly impacted by estimated average selling prices, average sales rates and product type. The
quarterly assessments reflect managements estimates, which management believes are reasonable. However, based on the general economic conditions, future results could differ materially from managements judgments and estimates.

Property, plant and equipment

Property, plant and equipment are carried at cost. Depreciation is calculated using the straight-line method over the assets estimated useful lives. Leasehold improvements are amortized using the straight-line method over the shorter
of the lease period or the improvements useful lives. Estimated useful lives for significant classes of assets are as follows: Land Improvements 10-15 years, Buildings and Improvements 3-30 years, and Machinery and Equipment 2-10 years. The
Company had depreciation expense of $7.1 million, $8.4 million and $9.7 million in fiscal 2008, 2007 and 2006, respectively. Repairs and maintenance are expensed as incurred. The recoverability of property, plant and equipment is evaluated whenever
events or changes in circumstances



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Notes to Consolidated Financial Statements (continued)



indicate that the carrying amount of the assets may not be recoverable, primarily based on estimated selling price, appraised value or projected undiscounted
cash flows. The Company recorded impairment charges of $0.6 million in fiscal 2008 for the land on which two of its closed retail sales centers in the Midwest were located. The Company did not record any impairment charges in fiscal 2007 or 2006.

Goodwill

Goodwill represents the
excess of purchase price over net assets acquired. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company tested goodwill annually for potential impairment by reporting unit as of the first day of its
fourth fiscal quarter or more frequently if an event occurred or circumstances changed that indicated the remaining balance of goodwill may not be recoverable. All of the Companys goodwill related to its factory-built housing reporting unit.
Due to the difficult market environment, particularly the recent fallout in the sub-prime market, and the continued decline in shipments to Florida, California and Arizona, and the Companys recent losses, the Company determined that an interim
test to assess goodwill for impairment was necessary. The Company, with the assistance of an independent valuation firm, completed its interim goodwill impairment analysis during the second quarter ended September 28, 2007.

In analyzing the potential impairment of goodwill, SFAS No. 142 prescribes a two-step process that begins with the estimation of the fair value of
the reporting units. If the results of the first step indicate that impairment potentially exists, the second step is performed to measure the amount of the impairment, if any. Impairment is determined to exist when the estimated fair value of
goodwill is less than its carrying value.

For the first step, the Company, in accordance with SFAS No. 142 and with the assistance of
an independent valuation firm, estimated the fair value of its factory-built housing reporting unit utilizing the estimated present values of future cash flows of the reporting unit, and other market based assessments of fair value for the reporting
unit. Based on the results of the first step of the analysis, the Company concluded that the fair value of its factory-built housing reporting unit was less than its carrying value and, accordingly, that the second step of the analysis was necessary
to determine the amount of goodwill impairment. For the second step, the Company, in accordance with SFAS No. 142 and with the assistance of an independent valuation firm, allocated the estimated fair value of its factory-built housing
reporting unit to various assets and liabilities to determine the fair value of its goodwill. This process primarily involved estimating the difference between the carrying value and fair value of the Companys property, plant and equipment,
intangibles and inventories. Based on the results of the second step of the Companys analysis, the Company concluded the goodwill relating to its factory-built housing reporting unit was fully impaired. As a result, during the three months
ended September 28, 2007, the Company recorded a non-cash impairment charge of $78.5 million related to its factory-built housing segment goodwill balance.

Goodwill recorded at March 30, 2008 relates to the Companys minority interest purchase in February, 2008.

Warranties

Products are warranted against manufacturing defects for a period of one year commencing at the time of sale to
the retail customer. Estimated costs relating to product warranties are provided at the date of sale.

Income taxes

Deferred tax assets and liabilities are determined based on temporary differences between the financial statement amounts and the tax bases of assets and
liabilities using enacted tax rates in effect in the years in which



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Notes to Consolidated Financial Statements (continued)



the differences are expected to reverse. To the extent the Company believes it is more likely than not that some portion or all of its deferred tax assets
will not be realized prior to expiration, it is required to establish a valuation allowance against that portion of the deferred tax assets. The determination of valuation allowances involves significant management judgments and is based upon the
evaluation of both positive and negative evidence, including the Companys best estimates of anticipated taxable profits in the various jurisdictions with which the deferred tax assets are associated. Changes in events or expectations could
result in significant adjustments to the valuation allowances and material changes to the Companys provision for income taxes.

As a
result of the continued difficult market environment, particularly the recent fallout in the sub-prime market, and the Companys losses for the cumulative three-year historical period, the Company reviewed its deferred tax assets to determine
whether a valuation allowance was necessary. After considering both positive and negative evidence, based primarily upon its recent losses, the Company recognized a valuation allowance of $31.9 million against all of its net deferred tax assets
which resulted in the Company recording an income tax provision of approximately $13.8 million for fiscal 2008. If, after future considerations of positive and negative evidence related to the recoverability of its deferred tax assets, the Company
determines a lesser allowance is required, it would record a reduction to income tax expense and the valuation allowance in the period of such determination.

Interest Income and Other

Interest income and other is comprised primarily of interest income totaling $3.0 million, $4.4
million and $3.4 million in fiscal 2008, 2007 and 2006, respectively, and other income of $0.6 million, $0.5 million and $1.7 million in fiscal 2008, 2007 and 2006, respectively. In fiscal 2008, other income consists primarily of a gain on the sale
of available-for-sale investments of $0.4 million and income earned on a real estate investment of $0.3 million and is offset by $0.4 million of impairment on an available-for-sale investment. In fiscal 2007, other income consisted primarily of a
gain on the sale of available-for-sale investments of $0.3 million and in fiscal 2006, other income consisted primarily of income earned on a real estate investment of $1.5 million.

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income (loss) is
presented net of income taxes and is comprised of unrealized gains and losses on available-for-sale investments and changes in fair value of an interest rate hedge.

Reclassifications

The land held for resale account in the prior years financial statements was
reclassified to assets held for sale from prepaid expenses and other assets to conform to the current year presentation. Certain fixed asset accounts in the prior year financial statements were reclassified to machinery and equipment from
investments to conform to the current year presentation. Certain income tax accounts in the prior year financial statement were reclassified to prepaid expenses and other assets from accrued liabilities to conform to the current year presentation.
These reclassifications had no effect on previously reported earnings, shareholders equity, or cash flows.

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (revised 2004), Share-Based Payment
(SFAS 123R). SFAS 123R requires that the compensation cost relating to share-based payment transaction, including grants of employee stock options, be recognized in financial statements.



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Notes to Consolidated Financial Statements (continued)



That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS 123R permits entities to use any option-pricing model
that meets the fair value objective in the statement. The Company adopted SFAS 123R in the first quarter of fiscal 2007. The adoption of the standard did not have a material impact on its consolidated financial position or results of operations.

On March 31, 2007, the Company adopted FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in
Income Taxes. FIN 48, an interpretation of Statement of Financial Accounting Standard 109, Accounting for Income Taxes, clarifies the accounting and disclosure requirements for uncertainty in tax positions as defined by the
standard. In connection with the adoption of FIN 48, the Company has analyzed its filing positions in all significant jurisdictions where it is required to file income tax returns for the open tax years in such jurisdictions. The Company has
identified as major tax jurisdictions, as defined, its federal income tax return and its state income tax return in states in which the Company operates. The Companys federal income tax returns for the years subsequent to March 26, 2004,
remain subject to examination. The Companys income tax returns in major state income tax jurisdictions remain subject to examination for various periods subsequent to March 28, 2003. The Company currently believes that all significant
filing positions are highly certain and that, more likely than not, all of its significant income tax filing positions and deductions would be sustained. Therefore, the Company has no significant reserves for uncertain tax positions and no
adjustments to such reserves were required upon the adoption of FIN 48. If interest and penalties are assessed, interest costs will be recognized in interest expense and penalties will be recognized in operating expenses.

In September 2006, the FASB issued Statement 157, Fair Value Measurements(FAS 157). This statement clarifies the definition of fair
value; the methods used to measure fair value, and required expanded financial statement disclosures about fair value measurement for assets and liabilities. FAS 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Company does not expect the adoption of the standard to have a material impact on its consolidated financial position or results of operations. However, the Company will need to expand its disclosures in the future about
the factors used to determine fair market value of its financial instruments.

In February 2007, the FASB issued Statement 159, The Fair
Value Option for Financial Assets and Financial Liabilities (FAS 159). This statement allows companies to choose to measure many financial instruments and certain other items at fair value that are not currently required to be
measured at fair value in an effort to mitigate volatility in earnings without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of the standard will not
have a material impact on the Companys consolidated financial position or results of operations.



|2. | Inventories
|-- | -----------

Inventories consist of the following
(in thousands):



|                          |  |               |         |               |   |        
|------------------------- |  | ------------- | ------- | ------------- | - | -------
|                          |  | March 28,2008 |         | March 30,2007
|Raw materials             |  | $             | 10,111  |               | $ | 12,083 
|Work in process           |  |               | 6,730   |               |   | 10,403 
|Finished goods at factory |  |               | 2,146   |               |   | 2,606  
|Finished goods at retail  |  |               | 104,307 |               |   | 113,598
|                          |  |               |         |               |   |        
|                          |  | $             | 123,294 |               | $ | 138,690
|                          |  |               |         |               |   |        



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Notes to Consolidated Financial Statements (continued)



|3. | Investments
|-- | -----------

The following tables summarize the
Companys available-for-sale investment securities as of March 28, 2008 and March 30, 2007 (in thousands):



|                                 |  |                |        |                      |   |                       |  |   |           |   |  |   |       
|-------------------------------- |  | -------------- | ------ | -------------------- | - | --------------------- |  | - | --------- | - |  | - | ------
|                                 |  | March 28, 2008
|                                 |  | AmortizedCost  |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | FairValue
|U.S. Government Agencies         |  | $              | 25     |                      | $ |                      |  | $ |          |   |  | $ | 25    
|States and political subdivision |  |                | 10,205 |                      |   | 37                    |  |   | (114      | ) |  |   | 10,128
|Mortgage-backed securities       |  |                | 3,648  |                      |   | 109                   |  |   | (10       | ) |  |   | 3,747 
|Corporate debt securities        |  |                | 1,265  |                      |   | 5                     |  |   | (4        | ) |  |   | 1,266 
|Marketable equity securities     |  |                | 7,402  |                      |   | 148                   |  |   | (274      | ) |  |   | 7,276 
|                                 |  |                |        |                      |   |                       |  |   |           |   |  |   |       
|Total                            |  | $              | 22,545 |                      | $ | 299                   |  | $ | (402      | ) |  | $ | 22,442
|                                 |  |                |        |                      |   |                       |  |   |           |   |  |   |       



|                                 |  |                |        |                      |   |                       |  |   |           |   |  |   |       
|-------------------------------- |  | -------------- | ------ | -------------------- | - | --------------------- |  | - | --------- | - |  | - | ------
|                                 |  | March 30, 2007
|                                 |  | AmortizedCost  |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | FairValue
|U.S. Government Agencies         |  | $              | 35     |                      | $ |                      |  | $ |          |   |  | $ | 35    
|States and political subdivision |  |                | 10,262 |                      |   | 20                    |  |   | (129      | ) |  |   | 10,153
|Mortgage-backed securities       |  |                | 3,738  |                      |   | 24                    |  |   | (14       | ) |  |   | 3,748 
|Corporate debt securities        |  |                | 1,285  |                      |   |                      |  |   | (26       | ) |  |   | 1,259 
|Marketable equity securities     |  |                | 7,248  |                      |   | 418                   |  |   | (1,029    | ) |  |   | 6,637 
|                                 |  |                |        |                      |   |                       |  |   |           |   |  |   |       
|Total                            |  | $              | 22,568 |                      | $ | 462                   |  | $ | (1,198    | ) |  | $ | 21,832
|                                 |  |                |        |                      |   |                       |  |   |           |   |  |   |       

The following table shows the gross unrealized losses and fair value, aggregated by investment
category and length of time that individual securities have been in a continuous unrealized loss position at March 28, 2008 (in thousands):



|                                 |  |                     |       |            |                     |      |            |       |            |       |  |            |     |            |  |   |       |  |   |      |  
|-------------------------------- |  | ------------------- | ----- | ---------- | ------------------- | ---- | ---------- | ----- | ---------- | ----- |  | ---------- | --- | ---------- |  | - | ----- |  | - | ---- | -
|                                 |  | Less than 12 months |       |            | 12 Months or Longer |      |            | Total |           
|                                 |  | Fair Value          |       | UnrealLoss |                     |      | Fair Value |       | UnrealLoss |       |  | Fair Value |     | UnrealLoss | 
|States and political subdivision |  | $                   | 4,450 |            | $                   | (114 | )          |       | $          |      |  | $          |    |            |  | $ | 4,450 |  | $ | (114 | )
|Mortgage-backed securities       |  |                     |      |            |                     |     |            |       |            | 90    |  |            | (10 | )          |  |   | 90    |  |   | (10  | )
|Corporate debt securities        |  |                     |      |            |                     |     |            |       |            | 754   |  |            | (4  | )          |  |   | 754   |  |   | (4   | )
|Marketable equity securities     |  |                     | 1,602 |            |                     | (260 | )          |       |            | 303   |  |            | (14 | )          |  |   | 1,905 |  |   | (274 | )
|                                 |  |                     |       |            |                     |      |            |       |            |       |  |            |     |            |  |   |       |  |   |      |  
|Total                            |  | $                   | 6,052 |            | $                   | (374 | )          |       | $          | 1,147 |  | $          | (28 | )          |  | $ | 7,199 |  | $ | (402 | )
|                                 |  |                     |       |            |                     |      |            |       |            |       |  |            |     |            |  |   |       |  |   |      |  



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Notes to Consolidated Financial Statements (continued)



The following table shows the gross unrealized losses and fair value, aggregated by investment
category and length of time that individual securities have been in a continuous unrealized loss position at March 30, 2007 (in thousands):



|                                 |  |                     |       |            |                     |      |            |       |            |        |  |            |        |            |  |   |        |  |   |        |  
|-------------------------------- |  | ------------------- | ----- | ---------- | ------------------- | ---- | ---------- | ----- | ---------- | ------ |  | ---------- | ------ | ---------- |  | - | ------ |  | - | ------ | -
|                                 |  | Less than 12 months |       |            | 12 Months or Longer |      |            | Total |           
|                                 |  | Fair Value          |       | UnrealLoss |                     |      | Fair Value |       | UnrealLoss |        |  | Fair Value |        | UnrealLoss | 
|U.S. Government Agencies         |  | $                   |      |            | $                   |     |            |       | $          | 35     |  | $          |       |            |  | $ | 35     |  | $ |       |  
|States and political subdivision |  |                     | 1,054 |            |                     | (5   | )          |       |            | 7,407  |  |            | (123   | )          |  |   | 8,461  |  |   | (128   | )
|Mortgage-backed securities       |  |                     | 498   |            |                     | (2   | )          |       |            | 828    |  |            | (13    | )          |  |   | 1,326  |  |   | (15    | )
|Corporate debt securities        |  |                     |      |            |                     |     |            |       |            | 1,259  |  |            | (32    | )          |  |   | 1,259  |  |   | (32    | )
|Marketable equity securities     |  |                     | 930   |            |                     | (104 | )          |       |            | 2,871  |  |            | (924   | )          |  |   | 3,801  |  |   | (1,028 | )
|                                 |  |                     |       |            |                     |      |            |       |            |        |  |            |        |            |  |   |        |  |   |        |  
|Total                            |  | $                   | 2,482 |            | $                   | (111 | )          |       | $          | 12,400 |  | $          | (1,092 | )          |  | $ | 14,882 |  | $ | (1,203 | )
|                                 |  |                     |       |            |                     |      |            |       |            |        |  |            |        |            |  |   |        |  |   |        |  

At March 28, 2008, there were a total of five debt and equity securities that were in
unrealized loss positions greater than 12 months and 34 debt and equity securities that were in unrealized loss positions less than 12 months. The Company does not believe these unrealized losses are other-than-temporary as (1) the
Company has the ability and intent to hold the investments to maturity, or a period of time sufficient to allow for a recovery in market value; (2) it is not probable that the Company will be unable to collect the amounts contractually due; and
(3) no decision to dispose of the investments were made prior to the balance sheet dates. The unrealized losses noted are interest rate related due to rising rates subsequent to the acquisition of the securities. The Company has not identified
any issues related to the ultimate repayment of principal as a result of credit concerns on these securities.

Based upon managements
assessments, one available-for-sale equity security with amortized cost of $3.5 million had a fair value of $3.1 million with the $0.4 million decline in value being other than temporary. Accordingly, the Company recognized an other-than-temporary
impairment loss of $0.4 million during fiscal 2008. This impairment loss is included in interest income and other on the consolidated statement of operations for fiscal 2008. No impairment charges were recorded in fiscal 2007 or 2006.

The amortized cost and fair value of the Companys investment securities at March 28, 2008, by contractual maturity, are shown in the table
below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



|                                               |  |               |        |           |   |       
|---------------------------------------------- |  | ------------- | ------ | --------- | - | ------
|                                               |  | AmortizedCost |        | FairValue
|Due in one year or less                        |  | $             | 2,658  |           | $ | 2,658 
|Due after one year through five years          |  |               | 5,164  |           |   | 5,190 
|Due after five years through ten years         |  |               | 2,199  |           |   | 2,150 
|Due after ten years                            |  |               | 1,474  |           |   | 1,421 
|Mortgage-backed securities                     |  |               | 3,648  |           |   | 3,747 
|Marketable equity securities                   |  |               | 7,402  |           |   | 7,276 
|                                               |  |               |        |           |   |       
|Total investment securities available-for-sale |  | $             | 22,545 |           | $ | 22,442
|                                               |  |               |        |           |   |       

Gross gains realized on the sales of investment securities for fiscal years 2008, 2007 and 2006
were approximately $912,000, $763,000 and $380,000, respectively. Gross losses were approximately $302,000, $246,000 and $96,000 for fiscal years 2008, 2007 and 2006, respectively.



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Notes to Consolidated Financial Statements (continued)



|4. | Consumer loans receivable and allowance for loans losses
|-- | --------------------------------------------------------

Consumer loans receivable, net of allowance for loan losses, consist of the following (in thousands):



|                                                  |  |               |         |   |               |   |         |  
|------------------------------------------------- |  | ------------- | ------- | - | ------------- | - | ------- | -
|                                                  |  | March 31,2008 |         |   | March 31,2007 |  
|Consumer loans receivable held for investment     |  | $             | 221,213 |   |               | $ | 230,911 |  
|Consumer loans receivable held for sale           |  |               | 51,300  |   |               |   |        |  
|Construction advances on non-conforming mortgages |  |               | 11,665  |   |               |   | 11,745  |  
|Deferred financing costs, net                     |  |               | (7,567  | ) |               |   | (6,628  | )
|Allowance for loan losses                         |  |               | (8,975  | ) |               |   | (7,739  | )
|                                                  |  |               |         |   |               |   |         |  
|Consumer loans receivable, net                    |  | $             | 267,636 |   |               | $ | 228,289 |  
|                                                  |  |               |         |   |               |   |         |  

During the first quarter of fiscal 2009, the Company sold its loans held for sale, servicing
released (see Note 20 for further details of this transaction).

The allowance for loan losses and related additions and deductions to the
allowance are as follows (in thousands):



|                                               |  |               |        |   |               |   |        |               |  |   |        |  
|---------------------------------------------- |  | ------------- | ------ | - | ------------- | - | ------ | ------------- |  | - | ------ | -
|                                               |  | March 31,2008 |        |   | March 31,2007 |   |        | March 31,2006 | 
|Allowance for loan losses, beginning of period |  | $             | 7,739  |   |               | $ | 6,361  |               |  | $ | 5,365  |  
|Provision for credit losses                    |  |               | 3,572  |   |               |   | 3,790  |               |  |   | 3,407  |  
|Loans charged off, net of recoveries           |  |               | (2,336 | ) |               |   | (2,412 | )             |  |   | (2,411 | )
|                                               |  |               |        |   |               |   |        |               |  |   |        |  
|Allowance for loan losses, end of period       |  | $             | 8,975  |   |               | $ | 7,739  |               |  | $ | 6,361  |  
|                                               |  |               |        |   |               |   |        |               |  |   |        |  

CountryPlaces policy is to place loans on nonaccrual status when either principal or
interest is past due and remains unpaid for 120 days or more. In addition, they place loans on nonaccrual status when there is a clear indication that the borrower has the inability or unwillingness to meet payments as they become due. At
March 31, 2008, CountryPlaces management was not aware of any potential problem loans that would have a material effect on loan delinquency or charge-offs. Loans are subject to continual review and are given managements attention
whenever a problem situation appears to be developing. The following table sets forth the amounts and categories of CountryPlaces non-performing loans and assets as of March 31, 2008 and March 31, 2007 (dollars in thousands):



|                                            |  |               |       |   |               |   |       |  
|------------------------------------------- |  | ------------- | ----- | - | ------------- | - | ----- | -
|                                            |  | March 31,2008 |       |   | March 31,2007 |  
|Non-performing loans:                       |  |               |       |   |               |   |       |  
|Loans accounted for on a nonaccrual basis   |  | $             | 75    |   |               | $ |      |  
|Accruing loans past due 90 days or more     |  |               | 2,195 |   |               |   | 809   |  
|Total nonaccrual and 90 days past due loans |  |               | 2,270 |   |               |   | 809   |  
|Percentage of total loans                   |  |               | 0.83  | % |               |   | 0.35  | %
|Other non-performing assets(1)              |  |               | 1,635 |   |               |   | 1,169 |  



|(1) | Consists of land acquired through foreclosure, which is carried at fair value less estimated selling expenses, and is included in prepaid and other assets on the consolidated
balance sheets.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Notes to Consolidated Financial Statements (continued)



Loan contracts secured by collateral that is geographically concentrated could experience higher
rates of delinquencies, default and foreclosure losses than loan contracts secured by collateral that is more geographically dispersed. CountryPlace has loan contracts secured by factory-built homes located in the following key states as of
March 31, 2008 and March 31, 2007:



|           |  |               |   |  |               |  
|---------- |  | ------------- | - |  | ------------- | -
|           |  | March 31,2008 |   |  | March 31,2007 |  
|Texas      |  | 41.0          | % |  | 42.1          | %
|Arizona    |  | 7.1           |   |  | 6.5           |  
|Florida    |  | 6.9           |   |  | 6.7           |  
|California |  | 2.9           |   |  | 2.7           |  

The states of California, Florida and Arizona, and to a lesser degree Texas, have experienced
economic weakness resulting from the decline in real estate values. The risks created by these concentrations have been considered by CountryPlaces management in the determination of the adequacy of the allowance for loan losses. No other
states had concentrations in excess of 10% of the principal balance of the consumer loans receivable as of March 31, 2008 or March 31, 2007. Management believes the allowance for loan losses is adequate to cover estimated losses at each
balance sheet date.



|5. | Floor plan payable
|-- | ------------------

The Company has an agreement
with a financial institution for a $70.0 million floor plan facility expiring March 30, 2009. The advance rate for the facility is 90% of manufacturers invoice. This facility is used to finance a portion of the new home inventory at its
retail sales centers and is secured by new home inventory and a portion of receivables from financial institutions. The interest rate on the facility is prime (5.25% at March 28, 2008) plus 0.6% or prime plus 1.0% to 3.0% for aged units, of
which the Company has none financed as of March 28, 2008. In May 2007, the agreement was amended to revise the covenants which must be maintained in order for the Company to borrow against the facility. The amended covenants require the Company
to comply with a loan to collateral value, as defined, of 50% and minimum liquidity amount, as defined, of $30.0 million. As of March 28, 2008, the loan to collateral value, as reported, was 57% and, therefore, the Company was not in compliance
with the covenant. If either of the covenants are not met, the Company must then comply with minimum inventory turns of 2.75, tangible net worth of $125.0 million and operating cash flow of negative $75.0 million. As of March 28, 2008, the
tangible net worth, as reported, was $114.2 million and, therefore, the Company was not in compliance with the covenant. The Company received a waiver for non-compliance through March 28, 2008 and executed an amendment to the agreement
effective June 1, 2008. The amendment extends the agreement to March 31, 2011, changes interest rate to LIBOR plus 3.75% and alters certain covenant levels (loan to collateral value is increased to 60% for quarter one of fiscal 2009 and is
gradually reduced to 50% by fiscal year end, tangible net worth is reduced to $110.0 million for quarter one of fiscal 2009 and is gradually increased to $115.0 by fiscal year-end, and fiscal 2009 operating cash flow is increased to $15.0 million).
The Company had $59.4 million and $43.6 million outstanding under these floor plan credit facilities at March 28, 2008 and March 30, 2007, respectively.



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Notes to Consolidated Financial Statements (continued)



|6. | Debt obligations
|-- | ----------------

Debt obligations consist of the
following (in thousands):



|                             |  |               |         |               |   |        
|---------------------------- |  | ------------- | ------- | ------------- | - | -------
|                             |  | March 28,2008 |         | March 30,2007
|Convertible senior notes     |  | $             | 75,000  |               | $ | 75,000 
|Securitized financing 2005-1 |  |               | 80,008  |               |   | 92,468 
|Securitized financing 2007-1 |  |               | 85,422  |               |   | 101,937
|Warehouse revolving debt     |  |               | 42,175  |               |   | 12,045 
|                             |  |               |         |               |   |        
|                             |  | $             | 282,605 |               | $ | 281,450
|                             |  |               |         |               |   |        

On May 5, 2004, the Company issued $65.0 million aggregate principal amount of 3.25%
Convertible Senior Notes due 2024 (the Notes) in a private, unregistered offering. Interest on the Notes is payable semi-annually in May and November. On June 8, 2004, the initial purchaser of the Notes exercised its option to
purchase an additional $10.0 million aggregate principal amount of the Notes. On September 15, 2004, for the benefit of the Note holders, the Company filed a shelf registration statement covering resales of the Notes and the shares of the
Companys common stock issuable upon the conversion of the Notes. The Notes are senior, unsecured obligations and rank equal in right of payment to all of the Companys existing and future unsecured and senior indebtedness. The note
holders may require the Company to repurchase all or a portion of their notes for cash on May 15, 2011, May 15, 2014 and May 15, 2019 at a repurchase price equal to 100% of the principal amount of the notes to be repurchased plus
accrued and unpaid interest, if any. Each $1,000 in principal amount of the Notes is convertible, at the option of the holder, at a conversion price of $25.92, or 38.5803 shares of the Companys common stock upon the satisfaction of certain
conditions and contingencies. For fiscal years 2008, 2007 and 2006, the effect of converting the senior notes to 2,894,000 shares of common stock was anti-dilutive, and was, therefore, not considered in determining diluted earnings per share. At
March 28, 2008 and March 30, 2007, the fair market value of the convertible senior notes is estimated at $42.4 and $63.6 million, respectively, based on quoted market prices.

On July 12, 2005, the Company, through its subsidiary CountryPlace, completed its initial securitization (2005-1) for approximately
$141.0 million of loans, which was funded by issuing bonds totaling approximately $118.4 million. The bonds were issued in four different classes: Class A-1 totaling $36.3 million with a coupon rate of 4.23%; Class A-2 totaling $27.4
million with a coupon rate of 4.42%; Class A-3 totaling $27.3 million with a coupon rate of 4.80%; and Class A-4 totaling $27.4 million with a coupon rate of 5.20%. Maturity of the bonds is at varying dates beginning in 2006 through 2015
and were issued with an expected weighted average maturity of 4.66 years. The proceeds from the securitization were used to repay approximately $115.7 million of borrowings on the Companys warehouse revolving debt with the remaining proceeds
being used for general corporate purposes, including future origination of new loans. For accounting purposes, this transaction was structured as a securitized borrowing.

On March 22, 2007, the Company, through its subsidiary CountryPlace, completed its second securitization (2007-1) for approximately $116.5 million of loans (including approximately $10.4 million of
pre-funded loans to be originated in the future), which was funded by issuing bonds totaling approximately $101.9 million. The bonds were issued in four classes: Class A-1 totaling $28.9 million with a coupon rate of 5.484%; Class A-2
totaling $23.4 million with a coupon rate of 5.232%; Class A-3 totaling $24.5 million with a coupon rate of 5.593%; and Class A-4 totaling $25.1 million with a coupon rate of 5.846%. Maturity of the bonds is at varying dates beginning in
2008 through 2017 and were issued with an expected weighted average maturity of 4.86 years. The proceeds from the securitization were used to repay approximately $97.1 million of borrowings on the



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Notes to Consolidated Financial Statements (continued)



Companys warehouse revolving debt with the remaining proceeds being used for general corporate purposes, including future origination of new loans. For
accounting purposes, this transaction was also structured as a securitized borrowing.

The Company, through its subsidiary CountryPlace,
had an agreement with a financial institution for a $150.0 million warehouse borrowing facility to fund loans originated by CountryPlace. The facility was collateralized by specific consumer loans receivable pledged to the facility and the interest
rate was LIBOR (2.8125% at March 31, 2008) plus 1.25%. The advance against the outstanding principle balance of eligible consumer loan receivables was 88% and draws could be made at an 80% advance rate against land-home loans in various stages
of completion. The advance rates were subject to market value adjustments. CountryPlace had outstanding borrowings under the warehouse facility of $42.2 million as of March 31, 2008 and $12.0 million as of March 31, 2007. The facility was
originally scheduled to expire March 14, 2008; however, CountryPlace negotiated an extension with the lender until April 30, 2008. During the extension period, the interest rate was increased to LIBOR plus 3.00%, and the advance rate,
affected for market value adjustments, was reduced to 60%. CountryPlace stopped taking applications for chattel, land/home, and non-conforming mortgage loans but continued to originate conforming mortgage loans during the extension period. On
April 25, 2008, CountryPlace sold approximately $51.3 million of its warehoused portfolio of chattel and mortgage loans. Approximately $41.5 million of the proceeds were used to repay in full and terminate the warehouse borrowing facility
scheduled to expire on April 30, 2008. CountryPlace is currently considering alternatives for short-term and long-term financing of its loan portfolio, including construction financing for mortgage loans. Until such financing is arranged, the
Company will continue to advance funds to CountryPlace.

Upon completion of the 2007-1 securitization, CountryPlace extinguished its
interest rate swap agreement on its variable rate debt which was used to hedge against an increase in variable interest rates. CountryPlace recorded the hedge instrument at fair value as of the end of each fiscal quarter with the effective
offsetting portion of the hedge being recorded as a component of accumulated other comprehensive loss and the ineffective portion, if any, of the hedge being recorded in the Companys consolidated statement of operations. Upon extinguishment of
the hedge, CountryPlace recorded a loss of $1.0 million, net of tax, for the change in fair value to other comprehensive income (loss), which is amortized to interest expense over the life of the loans. There was no significant ineffectiveness.



|7. | Accrued liabilities
|-- | -------------------

Accrued liabilities consist of
the following (in thousands):



|                               |  |               |        |               |   |       
|------------------------------ |  | ------------- | ------ | ------------- | - | ------
|                               |  | March 28,2008 |        | March 30,2007
|Salaries, wages and benefits   |  | $             | 15,727 |               | $ | 14,392
|Accrued expenses on homes sold |  |               | 6,064  |               |   | 5,236 
|Customer deposits              |  |               | 9,727  |               |   | 18,062
|Deferred revenue               |  |               | 11,044 |               |   | 20,969
|Warranty                       |  |               | 5,425  |               |   | 5,922 
|Sales incentives               |  |               | 4,018  |               |   | 5,607 
|Insurance reserves             |  |               | 3,580  |               |   | 3,068 
|Taxes                          |  |               | 3,357  |               |   | 2,662 
|Other                          |  |               | 11,270 |               |   | 9,448 
|                               |  |               |        |               |   |       
|                               |  | $             | 70,212 |               | $ | 85,366
|                               |  |               |        |               |   |       



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Notes to Consolidated Financial Statements (continued)



|8. | Income taxes
|-- | ------------

Deferred tax assets and liabilities
are determined based on temporary differences between the financial statement amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. To the extent the
Company believes it is more likely than not that some portion or all of its deferred tax assets will not be realized prior to expiration, it is required to establish a valuation allowance against that portion of the deferred tax assets. The
determination of valuation allowances involves significant management judgments and is based upon the evaluation of both positive and negative evidence, including the Companys best estimates of anticipated taxable profits in the various
jurisdictions with which the deferred tax assets are associated. Changes in events or expectations could result in significant adjustments to the valuation allowances and material changes to the Companys provision for income taxes.

As a result of the continued difficult market environment, particularly the recent fallout in the sub-prime market, and the Companys losses for
the cumulative three-year historical period, the Company reviewed its deferred tax assets to determine whether a valuation allowance was necessary. After considering both positive and negative evidence, based primarily upon its recent losses, the
Company recognized a valuation allowance of $31.9 million against all of its net deferred tax assets which resulted in the Company recording an income tax provision of approximately $13.9 million for fiscal 2008. If, after future considerations of
positive and negative evidence related to the recoverability of its deferred tax assets, the Company determines a lesser allowance is required, it would record a reduction to income tax expense and the valuation allowance in the period of such
determination.

Income tax expense (benefit) for fiscal years 2008, 2007 and 2006 is as follows (in thousands):



|                                   |  |               |        |   |               |   |        |               |  |   |      
|---------------------------------- |  | ------------- | ------ | - | ------------- | - | ------ | ------------- |  | - | -----
|                                   |  | March 28,2008 |        |   | March 30,2007 |   |        | March 31,2006
|Current                            |  |               |        |   |               |   |        |               |  |   |      
|Federal                            |  | $             | (1,681 | ) |               | $ | (4,742 | )             |  | $ | 5,730
|State                              |  |               | 1,095  |   |               |   | (203   | )             |  |   | 856  
|Deferred                           |  |               | 14,476 |   |               |   | (1,181 | )             |  |   | 600  
|                                   |  |               |        |   |               |   |        |               |  |   |      
|Total income tax expense (benefit) |  | $             | 13,890 |   |               | $ | (6,126 | )             |  | $ | 7,186
|                                   |  |               |        |   |               |   |        |               |  |   |      

Significant components of deferred tax assets and liabilities are as follows (in thousands):



|                                        |  |               |         |   |               |   |       
|--------------------------------------- |  | ------------- | ------- | - | ------------- | - | ------
|                                        |  | March 28,2008 |         |   | March 30,2007
|Deferred tax assets                     |  |               |         |   |               |   |       
|Warranty reserves                       |  | $             | 718     |   |               | $ | 783   
|Accrued liabilities                     |  |               | 4,064   |   |               |   | 3,109 
|Inventory                               |  |               | 2,986   |   |               |   | 1,132 
|Property and equipment                  |  |               | 6,322   |   |               |   | 6,202 
|State net operating loss carryforward   |  |               | 3,104   |   |               |   | 888   
|Federal net operating loss carryforward |  |               | 8,351   |   |               |   |      
|Other                                   |  |               | 5,255   |   |               |   | 5,827 
|                                        |  |               |         |   |               |   |       
|Gross deferred tax assets               |  |               | 30,800  |   |               |   | 17,941
|Valuation allowance                     |  |               | (31,946 | ) |               |   |      
|                                        |  |               |         |   |               |   |       
|Total deferred tax assets               |  |               | 1,146   |   |               |   | 17,941
|Deferred tax liabilities                |  |               |         |   |               |   |       
|Other                                   |  |               | 1,146   |   |               |   | 3,362 
|                                        |  |               |         |   |               |   |       
|Total deferred tax liabilities          |  |               | 1,146   |   |               |   | 3,362 
|                                        |  |               |         |   |               |   |       
|Net deferred income tax assets          |  |               |        |   |               | $ | 14,579
|                                        |  |               |         |   |               |   |       



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Notes to Consolidated Financial Statements (continued)



As of March 28, 2008, the Company has federal net operating loss carryforwards of approximately
$23.9 million available to offset future federal income tax and which expire in 2027 and 2028. In addition, the Company has state net operating loss carryforwards of approximately $86.2 million available to offset future state income tax and which
expire between 2009 and 2028.

The effective income tax rate on pretax earnings differed from the U.S. federal statutory rate for the
following reasons (in thousands):



|                                       |  |               |         |    |               |   |        |               |  |   |       |  
|-------------------------------------- |  | ------------- | ------- | -- | ------------- | - | ------ | ------------- |  | - | ----- | -
|                                       |  | March 28,2008 |         |    | March 30,2007 |   |        | March 31,2006 | 
|Tax at statutory rate                  |  | $             | (38,630 | )  |               | $ | (6,192 | )             |  | $ | 6,405 |  
|Increases (decreases)                  |  |               |         |    |               |   |        |               |  |   |       |  
|Goodwill impairment                    |  |               | 21,909  |    |               |   |       |               |  |   |      |  
|Valuation allowance                    |  |               | 31,101  |    |               |   |       |               |  |   |      |  
|State taxesnet of federal tax benefit |  |               | (729    | )  |               |   | 517    |               |  |   | 808   |  
|Tax exempt interest                    |  |               | (103    | )  |               |   | (89    | )             |  |   | (81   | )
|Other                                  |  |               | 342     |    |               |   | (362   | )             |  |   | 54    |  
|                                       |  |               |         |    |               |   |        |               |  |   |       |  
|Income tax expense (benefit)           |  | $             | 13,890  |    |               | $ | (6,126 | )             |  | $ | 7,186 |  
|                                       |  |               |         |    |               |   |        |               |  |   |       |  
|Effective tax rate                     |  |               | (12.6   | )% |               |   | (34.6  | )%            |  |   | 39.3  | %
|                                       |  |               |         |    |               |   |        |               |  |   |       |  



|9. | Shareholders equity
|-- | --------------------

The Board of Directors
may, without further action by the Companys shareholders, from time to time, authorize the issuance of shares of preferred stock in series and may, at the time of issuance, determine the powers, rights, preferences and limitations, including
the dividend rate, conversion rights, voting rights, redemption price and liquidation preference, and the number of shares to be included in any such series. Any preferred stock so issued may rank senior to the common stock with respect to the
payment of dividends or amounts upon liquidation, dissolution or winding up, or both. In addition, any such shares of preferred stock may have class or series voting rights.



|10. | Employee plan
|--- | -------------

The Company sponsors an employee
savings plan (the 401k Plan) that is intended to provide participating employees with additional income upon retirement. Employees may contribute between 1% and 18% of eligible compensation to the 401k Plan. The Company matches 25% of
the first 6% deferred by employees. Employees are immediately eligible to participate and employer contributions, which begin one year after employment, are vested at the rate of 20% per year and are fully vested after five years of employment.
Contribution expense was $1.0, $0.8 and $1.0 million in fiscal years 2008, 2007 and 2006, respectively.



|11. | Commitments and contingencies
|--- | -----------------------------

Future minimum lease
payments for all noncancelable operating leases having a remaining term in excess of one year at March 28, 2008, are as follows (in thousands):



|                    |  |        |      
|------------------- |  | ------ | -----
|Fiscal Year         |  | Amount
|2009                |  | $      | 5,426
|2010                |  |        | 2,813
|2011                |  |        | 1,900
|2012                |  |        | 1,601
|2013 and thereafter |  |        | 2,365



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Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



Rent expense (net of sublease income) was $9.8 million, $10.1 million and $9.0 million for fiscal
years 2008, 2007 and 2006, respectively.

The Company is contingently liable under the terms of repurchase agreements covering independent
dealers, builders and developers floor plan financing. Under such agreements, the Company agrees to repurchase homes at declining prices over the term of the agreement, generally 12 to 18 months. At March 28, 2008, the Company
estimates that its potential obligations under all repurchase agreements were approximately $16.4 million. However, it is managements opinion that no material loss will occur from the repurchase agreements. During fiscal years 2008, 2007 and
2006, the Company did not incur any losses under these repurchase agreements.

The Company is subject to various legal proceedings and
claims that arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position or results of operations of the Company.



|12. | Losses from natural disaster
|--- | ----------------------------

During the third
quarter of fiscal 2007, the Companys Burleson, Texas manufacturing facility was destroyed by fire. The Company has business interruption and general liability insurance that covered the losses. During fiscal 2007, the Company received $2.0
million in recoveries and recorded $2.5 million in losses. During fiscal 2008, the Company received recoveries totaling $4.3 million and recorded $0.5 million in losses. Final settlement of the claim occurred in fiscal 2008 resulting in a gain of
$3.3 million which is included in cost of sales in the consolidated statement of operations.



|13. | Restructuring charges
|--- | ---------------------

During the fourth quarter of
fiscal 2008, the Company closed its Sabina, Ohio, Casa Grande, Arizona and one of its Plant City, Florida manufacturing facilities as well as 18 under-performing retail sales centers to more effectively align its manufacturing capacity and
distribution channels with current and expected regional demand. In connection with these actions, the Company recorded restructuring charges totaling $8.3 million primarily related to facility closure costs. Of this $8.3 million, $2.9 million is
included in cost of sales and $5.4 million is included in selling, general and administrative expenses on the Companys consolidated statement of operations. Also, as part of this restructuring, the Company listed three of its manufacturing
facilities for sale. The Company expects to sell these facilities during fiscal 2009. The carrying value of these facilities is included in assets held for sale on the consolidated balance sheets. No significant additional charges are expected to be
incurred in connection with this restructuring.

During fiscal 2007, the Company closed two less-than-efficient manufacturing facilities
and 13 under-performing retail sales centers. In connection with these actions, the Company recorded restructuring charges totaling $6.1 million primarily related to facility closure costs. Of this $6.1 million, $2.4 million is included in cost of
sales and $3.7 million is included in selling, general and administrative expenses on the Companys consolidated statement of operations.



|14. | Fair value of financial investments
|--- | -----------------------------------

The estimated
fair values of all financial instruments approximate book values due to the instruments short term maturities, except for the Companys consumer loans receivable, convertible senior notes and securitized financings, which were valued
based upon trading activity and managements estimates.



54



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Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



The book value and estimated fair value of the Companys financial instruments are as follows
(dollars in thousands):



|                              |  |                |         |                     |   |            |  |                     |         |  |   |        
|----------------------------- |  | -------------- | ------- | ------------------- | - | ---------- |  | ------------------- | ------- |  | - | -------
|                              |  | March 28, 2008 |         | March 30, 2007     
|                              |  | Book Value     |         | Estimated FairValue |   | Book Value |  | Estimated FairValue
|Cash and cash equivalents     |  | $              | 28,206  |                     | $ | 28,206     |  | $                   | 44,292  |  | $ | 44,292 
|Restricted cash               |  |                | 25,487  |                     |   | 25,487     |  |                     | 43,469  |  |   | 43,469 
|Investments                   |  |                | 22,442  |                     |   | 22,442     |  |                     | 21,832  |  |   | 21,832 
|Consumer loans receivables(1) |  |                | 272,513 |                     |   | 264,338    |  |                     | 230,911 |  |   | 230,670
|Floor plan payable            |  |                | 59,367  |                     |   | 59,367     |  |                     | 43,603  |  |   | 43,603 
|Warehouse revolving debt      |  |                | 42,175  |                     |   | 42,175     |  |                     | 12,045  |  |   | 12,045 
|Convertible senior notes      |  |                | 75,000  |                     |   | 42,400     |  |                     | 75,000  |  |   | 63,600 
|Securitized financings        |  |                | 165,430 |                     |   | 157,074    |  |                     | 194,405 |  |   | 191,500



|(1) | Includes consumer loans receivable held for investment and held for sale.
|--- | -------------------------------------------------------------------------



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Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



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

The Company operates
principally in two segments: 1) factory-built housing, which includes manufactured housing, modular housing and retail operations and 2) financial services, which includes finance and insurance. The following table details net sales, income (loss)
from operations, identifiable assets, depreciation and amortization expense and capital expenditures by segment for fiscal 2008, 2007 and 2006 (in thousands):



|                                                                        |  |                         |          |      |                         |   |         |                         |  |   |         |  
|----------------------------------------------------------------------- |  | ----------------------- | -------- | ---- | ----------------------- | - | ------- | ----------------------- |  | - | ------- | -
|                                                                        |  | Year Ended              |         
|                                                                        |  | March 28,2008(52 weeks) |          |      | March 30,2007(52 weeks) |   |         | March 31,2006(53 weeks) | 
|Net sales                                                               |  |                         |          |      |                         |   |         |                         |  |   |         |  
|Factory-built housing                                                   |  | $                       | 511,577  |      |                         | $ | 623,139 |                         |  | $ | 679,119 |  
|Financial services                                                      |  |                         | 43,519   |      |                         |   | 38,108  |                         |  |   | 31,516  |  
|                                                                        |  |                         |          |      |                         |   |         |                         |  |   |         |  
|                                                                        |  | $                       | 555,096  |      |                         | $ | 661,247 |                         |  | $ | 710,635 |  
|                                                                        |  |                         |          |      |                         |   |         |                         |  |   |         |  
|Income (loss) from operations                                           |  |                         |          |      |                         |   |         |                         |  |   |         |  
|Factory-built housing                                                   |  | $                       | (95,089  | )(1) |                         | $ | 2,317   |                         |  | $ | 31,014  |  
|Financial services                                                      |  |                         | 21,638   |      |                         |   | 19,695  |                         |  |   | 15,210  |  
|General corporate expenses                                              |  |                         | (21,892  | )    |                         |   | (24,200 | )                       |  |   | (21,766 | )
|                                                                        |  |                         |          |      |                         |   |         |                         |  |   |         |  
|                                                                        |  | $                       | (95,343  | )    |                         | $ | (2,188  | )                       |  | $ | 24,458  |  
|                                                                        |  |                         |          |      |                         |   |         |                         |  |   |         |  
|Interest expense                                                        |  | $                       | (18,654  | )    |                         | $ | (15,695 | )                       |  | $ | (11,739 | )
|Equity in earnings (loss) of limited partnership and impairment charges |  |                         |         |      |                         |   | (4,709  | )                       |  |   | 574     |  
|Interest income and other                                               |  |                         | 3,625    |      |                         |   | 4,901   |                         |  |   | 5,007   |  
|                                                                        |  |                         |          |      |                         |   |         |                         |  |   |         |  
|Income (loss) before income taxes                                       |  | $                       | (110,372 | )    |                         | $ | (17,691 | )                       |  | $ | 18,300  |  
|                                                                        |  |                         |          |      |                         |   |         |                         |  |   |         |  
|Identifiable assets                                                     |  |                         |          |      |                         |   |         |                         |  |   |         |  
|Factory-built housing                                                   |  | $                       | 212,233  |      |                         | $ | 231,167 |                         |  | $ | 243,460 |  
|Financial services                                                      |  |                         | 317,239  |      |                         |   | 305,732 |                         |  |   | 234,555 |  
|Other                                                                   |  |                         | 35,928   |      |                         |   | 146,365 |                         |  |   | 176,036 |  
|                                                                        |  |                         |          |      |                         |   |         |                         |  |   |         |  
|                                                                        |  | $                       | 565,400  |      |                         | $ | 683,264 |                         |  | $ | 654,051 |  
|                                                                        |  |                         |          |      |                         |   |         |                         |  |   |         |  
|Depreciation and amortization                                           |  |                         |          |      |                         |   |         |                         |  |   |         |  
|Factory-built housing                                                   |  | $                       | 6,433    |      |                         | $ | 7,872   |                         |  | $ | 9,127   |  
|Financial services                                                      |  |                         | 804      |      |                         |   | 652     |                         |  |   | 1,233   |  
|Other                                                                   |  |                         | 893      |      |                         |   | 739     |                         |  |   | 712     |  
|                                                                        |  |                         |          |      |                         |   |         |                         |  |   |         |  
|                                                                        |  | $                       | 8,130    |      |                         | $ | 9,263   |                         |  | $ | 11,072  |  
|                                                                        |  |                         |          |      |                         |   |         |                         |  |   |         |  
|Capital expenditures                                                    |  |                         |          |      |                         |   |         |                         |  |   |         |  
|Factory-built housing                                                   |  | $                       | 1,203    |      |                         | $ | 4,495   |                         |  | $ | 1,076   |  
|Financial services                                                      |  |                         | 123      |      |                         |   | 46      |                         |  |   | 361     |  
|Other                                                                   |  |                         |         |      |                         |   |        |                         |  |   |        |  
|                                                                        |  |                         |          |      |                         |   |         |                         |  |   |         |  
|                                                                        |  | $                       | 1,326    |      |                         | $ | 4,541   |                         |  | $ | 1,437   |  
|                                                                        |  |                         |          |      |                         |   |         |                         |  |   |         |  
|Net sales for financial services consists of:                           |  |                         |          |      |                         |   |         |                         |  |   |         |  
|Insurance                                                               |  | $                       | 17,180   |      |                         | $ | 15,633  |                         |  | $ | 14,204  |  
|Finance                                                                 |  |                         | 26,339   |      |                         |   | 22,475  |                         |  |   | 17,312  |  
|                                                                        |  |                         |          |      |                         |   |         |                         |  |   |         |  
|                                                                        |  | $                       | 43,519   |      |                         | $ | 38,108  |                         |  | $ | 31,516  |  
|                                                                        |  |                         |          |      |                         |   |         |                         |  |   |         |  



|(1) | Includes $78.5 million of goodwill impairment charges.
|--- | ------------------------------------------------------



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Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



|16. | Investment in limited partnership
|--- | ---------------------------------

In June 2002,
the Company invested $3.0 million to become the sole limited partner and 50% owner of an existing mortgage banking firm, BSM Financial L. P. (BSM), which was accounted for using the equity method of accounting. During the second quarter
of fiscal 2007, the Company filed a petition for the dissolution of its partnership with BSM. The investment of $4.4 million was written off effective September 29, 2006. Effective May 18, 2007, the Company reached an agreement with BSM to
terminate the partnership. As part of the agreement, both parties agreed to mutual releases of all prior claims, counterclaims and causes of action. The revenues and net income (loss) of the limited partnership for the six months ended
September 29, 2006 and the fiscal year ended March 31, 2006 are as follows (in thousands):



|                  |  |                                   |        |   |                                |   |       
|----------------- |  | --------------------------------- | ------ | - | ------------------------------ | - | ------
|                  |  | Six Months EndedSeptember 29,2006 |        |   | Fiscal Year EndedMarch 31,2006
|Revenues          |  | $                                 | 25,220 |   |                                | $ | 54,991
|Net income (loss) |  |                                   | (648   | ) |                                |   | 1,148 



|17. | Acquisition
|--- | -----------

On February 15, 2008, the Company
entered into an agreement with CountryPlaces minority interest holders (related parties to the Company) in which the Company purchased the remaining 20% of CountryPlace. In accordance with the agreement, the Company paid the minority interest
holders $1.8 million on February 15 and issued a promissory note to pay $1.8 million plus interest (LIBOR plus 1.25%) on June 30, 2008 in exchange for 500,000 shares of CountryPlace Common Stock, $1 par value. Additionally, as an
inducement to each minority interest holder to remain in his management capacity with CountryPlace, the Company agreed that if each minority interest holder is in the employ of CountryPlace on February 10, 2010, it will issue 52,424 shares of
the Companys Common Stock to each minority interest holder. The minority interest acquisition was accounted for using purchase accounting and resulted in goodwill of $2.7 million. The common stock transaction will be recorded as compensation
expense over the service period and will be included in selling, general and administrative expenses on the Companys consolidated statement of operations. Unrecognized compensation expense totaled $1.0 million at March 28, 2008. The note
is recorded in accounts payable in the accompanying consolidated balance sheets.



|18. | Accrued product warranty obligations
|--- | ------------------------------------

The Company
provides the retail homebuyer a one-year limited warranty covering defects in material or workmanship in home structure, plumbing and electrical systems. The amount of warranty reserves recorded are estimated future warranty costs relating to homes
sold, based upon the Companys assessment of historical experience factors, such as actual number of warranty calls and the average cost per warranty call.

Accrued product warranty obligations are classified as accrued liabilities in the consolidated balance sheets. The following table summarizes the accrued product warranty obligations at March 28,
2008, March 30, 2007 and March 31, 2006 (in thousands).



|                                              |  |               |         |   |               |   |         |               |  |   |         |  
|--------------------------------------------- |  | ------------- | ------- | - | ------------- | - | ------- | ------------- |  | - | ------- | -
|                                              |  | March 28,2008 |         |   | March 30,2007 |   |         | March 31,2006 | 
|Accrued warranty balance, beginning of period |  | $             | 5,922   |   |               | $ | 7,354   |               |  | $ | 5,406   |  
|Net warranty expense provided                 |  |               | 20,178  |   |               |   | 21,590  |               |  |   | 20,953  |  
|Cash warranty payments                        |  |               | (20,675 | ) |               |   | (23,022 | )             |  |   | (19,005 | )
|                                              |  |               |         |   |               |   |         |               |  |   |         |  
|Accrued warranty balance, end of period       |  | $             | 5,425   |   |               | $ | 5,922   |               |  | $ | 7,354   |  
|                                              |  |               |         |   |               |   |         |               |  |   |         |  



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Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



|19. | Quarterly financial data (unaudited)
|--- | ------------------------------------

The following
table sets forth certain unaudited quarterly financial information for the fiscal years 2008 and 2007.



|                                            |  |                                       |         |   |               |   |         |              |  |   |               |      |  |       |         |   |  |   |          |  
|------------------------------------------- |  | ------------------------------------- | ------- | - | ------------- | - | ------- | ------------ |  | - | ------------- | ---- |  | ----- | ------- | - |  | - | -------- | -
|                                            |  | FirstQuarter                          |         |   | SecondQuarter |   |         | ThirdQuarter |  |   | FourthQuarter |      |  | Total |        
|                                            |  | (in thousands, except per share data) |        
|Fiscal Year Ended                           |  |                                       |         |   |               |   |         |              |  |   |               |      |  |       |         |   |  |   |          |  
|March 28, 2008                              |  |                                       |         |   |               |   |         |              |  |   |               |      |  |       |         |   |  |   |          |  
|Net sales                                   |  | $                                     | 143,294 |   |               | $ | 144,639 |              |  | $ | 140,626       |      |  | $     | 126,537 |   |  | $ | 555,096  |  
|Gross profit                                |  |                                       | 34,401  |   |               |   | 36,488  |              |  |   | 32,102        |      |  |       | 30,734  |   |  |   | 133,725  |  
|Loss from operations                        |  |                                       | (2,626  | ) |               |   | (79,545 | )            |  |   | (5,450        | )(1) |  |       | (7,722  | ) |  |   | (95,343  | )
|Net loss                                    |  |                                       | (4,251  | ) |               |   | (98,097 | )            |  |   | (9,251        | )    |  |       | (12,663 | ) |  |   | (124,262 | )
|Loss per sharebasic and diluted            |  | $                                     | (0.19   | ) |               | $ | (4.29   | )            |  | $ | (0.41         | )    |  | $     | (0.55   | ) |  | $ | (5.44    | )
|                                            |  |                                       |         |   |              
|Fiscal Year Ended                           |  |                                       |         |   |               |   |         |              |  |   |               |      |  |       |         |   |  |   |          |  
|March 30, 2007                              |  |                                       |         |   |               |   |         |              |  |   |               |      |  |       |         |   |  |   |          |  
|Net sales                                   |  | $                                     | 194,530 |   |               | $ | 179,409 |              |  | $ | 151,402       |      |  | $     | 135,906 |   |  | $ | 661,247  |  
|Gross profit                                |  |                                       | 51,488  |   |               |   | 40,625  |              |  |   | 35,834        |      |  |       | 29,881  |   |  |   | 157,828  |  
|Income (loss) from operations               |  |                                       | 7,484   |   |               |   | (1,652  | )            |  |   | (743          | )    |  |       | (7,277  | ) |  |   | (2,188   | )
|Net income (loss)                           |  |                                       | 3,557   |   |               |   | (5,279  | )            |  |   | (2,616        | )    |  |       | (7,227  | ) |  |   | (11,565  | )
|Earnings (loss) per sharebasic and diluted |  | $                                     | 0.16    |   |               | $ | (0.23   | )            |  | $ | (0.11         | )    |  | $     | (0.32   | ) |  | $ | (0.51    | )



|(1) | Includes $1.5 million related to one-time performance based compensation payments to CountryPlace management determined by total CountryPlace profits since inception in 2002. Of
this amount, $1.2 million related to the fiscal years 2002 through 2007 and $0.2 million related to the six months ended September 28, 2007. The adjustment was made in the third quarter of fiscal 2008 as the amount of the adjustment was not
material to prior periods, expected 2008 results or the trend of earnings in any period.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|20. | Subsequent Event
|--- | ----------------

On April 25, 2008,
CountryPlace sold approximately $51.3 million of its $69.4 million warehoused portfolio of chattel and mortgage loans. Approximately $41.5 million of the proceeds were used to repay in full and terminate the warehouse borrowing facility scheduled to
expire on April 30, 2008. The remaining cash proceeds will be used for general corporate purposes. The transaction resulted in a small gain on sale.



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

None.



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

Managements
Evaluation of Disclosure Controls and Procedures

The term disclosure controls and procedures is defined in Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. An evaluation was performed under the supervision and with the participation of the Companys
management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Companys disclosure controls and procedures as of March 28, 2008. Based on that evaluation, the Companys
management, including the CEO and CFO, concluded that the Companys disclosure controls and procedures were effective as of March 28, 2008. During the quarter ending on March 28, 2008, there was no change in the Companys
internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.

Managements Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Companys internal control over
financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even
those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of the Companys internal control over financial reporting as of March 28, 2008 using the criteria set forth in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of March 28, 2008, the Companys internal control over financial reporting was effective based on those criteria.



|                                                    
|----------------------------------------------------
|                                                    
|/s/    LARRY H. KEENER                              
|Larry H. Keener Chairman and Chief Executive Officer



|                                                                           
|---------------------------------------------------------------------------
|                                                                           
|/s/    KELLY TACKE                                                         
|Kelly Tacke Executive Vice President, Chief Financial Officer and Secretary



|Item 9B. | Other Information
|-------- | -----------------

None.



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##### Table of Contents

Report of Independent Registered Public Accounting Firm on

Internal Control over Financial Reporting

Board of
Directors and Shareholders

Palm Harbor Homes, Inc.

We have audited Palm Harbor Home Inc.s internal control over financial reporting as of March 28, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Palm Harbor Homes Inc.s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on
our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Palm Harbor Homes, Inc.
maintained, in all material respects, effective internal control over financial reporting as of March 28, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2008 consolidated balance sheets of Palm Harbor Homes, Inc. as of March 28, 2008 and
March 30, 2007, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the three years in the period ended March 28, 2008 of Palm Harbor Homes, Inc. and our report dated June 2, 2008
expressed an unqualified opinion thereon.

/s/Ernst & Young LLP

Dallas, Texas

June 2, 2008



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PART III.



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

(a) Information set forth in the sections entitled Proposal One: Election of Directors and Executive Officers in the Companys proxy statement for the annual meeting of shareholders to be held July 23, 2008
is incorporated herein by reference.

(b) The information set forth under the caption Section 16(a) Beneficial Ownership Reporting
Compliance in the Companys proxy statement for the annual meeting of shareholders to be held July 23, 2008 is incorporated herein by reference.



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

The information set forth
in the sections entitled Executive Officers and Report of the Compensation Committee in the Companys proxy statement for the annual meeting of shareholders to be held July 23, 2008 is incorporated herein by
reference.



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

The information set forth in the section entitled Share ownership of principal shareholders, directors and management in the Companys
proxy statement for the annual meeting of shareholders to be held July 23, 2008 is incorporated herein by reference.



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

None.



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

The
information set forth in the section entitled Proposal Two: Ratification of Independent Auditors in the Companys proxy statement for the annual meeting of shareholders to be held July 23, 2008 is incorporated herein by
reference.



61



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##### Table of Contents

PART IV.



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

(a) (1)
Financial Statements

Our Consolidated Financial Statements for the year ended March 28, 2008 are
included on pages 29 through 52 of this report.

(2) Financial Statement Schedules

None

(3) 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
|- | --------------



| | (b) | None.
| | --- | -----

| | (c) | See Item 14(a)(3) above.
| | --- | ------------------------

| | (d) | None.
| | --- | -----



62



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on our behalf by the undersigned, thereunto duly authorized on June 3, 2008.



PALM HARBOR HOMES, INC./s/    LARRY H. KEENERLarry H. Keener, Chairman of the Board


Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

KNOW ALL MEN BY THESE
PRESENTS, that the undersigned do hereby constitute and appoint Larry H. Keener and Kelly Tacke, and each of them, each with full power to act without the other, his true and lawful attorneys-in-fact and agents, each with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to the annual report on Form 10-K for the year ended March 28, 2008 of Palm Harbor Homes, Inc., and to file the same, with
any and all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all of each of said attorneys-in-fact and agents or any of them may lawfully do or cause to be
done by virtue thereof.



|                                                         |  |                                                                                                                      |  |             
|-------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ------------
|Signatures                                               |  | Title                                                                                                                |  | Date        
|                                                         |  |                                                                                                                     
|/s/    LARRY H.
KEENER Larry H. Keener                   |  | Chairman of the Board, Director and Chief Executive Officer (Principal Executive Officer)                            |  | June 3, 2008
|                                                         |  |                                                                                                                     
|/s/    KELLY
TACKE Kelly Tacke                           |  | Executive Vice President-Finance, Chief Financial
Officer and Secretary (Principal Financial and Accounting Officer) |  | June 3, 2008
|                                                         |  |                                                                                                                     
|/s/    WALTER D. ROSENBERG,
JR. Walter D. Rosenberg, Jr. |  | Director                                                                                                             |  | June 3, 2008
|                                                         |  |                                                                                                                     
|/s/    FREDERICK R.
MEYER Frederick R. Meyer             |  | Director                                                                                                             |  | June 3, 2008
|                                                         |  |                                                                                                                     
|/s/    JOHN H.
WILSON John H. Wilson                     |  | Director                                                                                                             |  | June 3, 2008
|                                                         |  |                                                                                                                     
|/s/    A. GARY
SHILLING A. Gary Shilling                 |  | Director                                                                                                             |  | June 3, 2008
|                                                         |  |                                                                                                                     
|/s/    JERRY D.
MALLONEE Jerry D. Mallonee               |  | Director                                                                                                             |  | June 3, 2008
|                                                         |  |                                                                                                                     
|/s/    W. CHRISTOPHER
WELLBORN W. Christopher Wellborn   |  | Director                                                                                                             |  | June 3, 2008
|                                                         |  |                                                                                                                     
|/s/    WILLIAM M.
ASHBAUGH William M. Ashbaugh           |  | Director                                                                                                             |  | June 3, 2008



63



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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
|- | --------------



64