##### Table of Contents





SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

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

(Mark One)

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

For the fiscal year ended March 27, 2009

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 whether the
registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ̈    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 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   ̈

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 27, 2008, was $116,717,086 based on the closing price on that date of the common stock as
quoted on the Nasdaq Stock Market. As of May 26, 2009, 22,875,245 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 22, 2009 are incorporated by reference in Part III.









---

##### Table of Contents

TABLE OF CONTENTS



|               |  |                                                                                                              |  |     
|-------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|               |  |                                                                                                              |  | Page
|PART I         |  |                                                                                                              |  |     
|               |  |                                                                                                             
|Item 1.        |  | Business                                                                                                     |  | 1   
|Item 1A.       |  | Risk Factors                                                                                                 |  | 11  
|Item 1B.       |  | Unresolved Staff Comments                                                                                    |  | 17  
|Item 2.        |  | Properties                                                                                                   |  | 18  
|Item 3.        |  | Legal Proceedings                                                                                            |  | 18  
|Item 4.        |  | Submission of Matters to a Vote of Security Holders                                                          |  | 19  
|               |  |                                                                                                             
|PART II        |  |                                                                                                              |  |     
|               |  |                                                                                                             
|Item 5.        |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 20  
|Item 6.        |  | Selected Financial Data                                                                                      |  | 22  
|Item 7.        |  | Managements Discussion and Analysis of Financial Condition and Results Of Operations                        |  | 23  
|Item 7A.       |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 36  
|Item 8.        |  | Financial Statements and Supplementary Data                                                                  |  | 37  
|Item 9.        |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 66  
|Item 9A.       |  | Controls and Procedures                                                                                      |  | 66  
|Item 9B.       |  | Other Information                                                                                            |  | 66  
|               |  |                                                                                                             
|PART III       |  |                                                                                                              |  |     
|               |  |                                                                                                             
|Item 10.       |  | Directors and Executive Officers of the Registrant                                                           |  | 68  
|Item 11.       |  | Executive Compensation                                                                                       |  | 68  
|Item 12.       |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 68  
|Item 13.       |  | Certain Relationships and Related Transactions                                                               |  | 68  
|Item 14.       |  | Principal Accountant Fees and Services                                                                       |  | 68  
|               |  |                                                                                                             
|PART IV        |  |                                                                                                              |  |     
|               |  |                                                                                                             
|Item 15.       |  | Exhibits and Financial Statement Schedules                                                                   |  | 69  
|               | 
|Signatures     |  | 70                                                                                                          
|Certifications |  |                                                                                                             



---

##### Table of Contents

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 27, 2009, we operated nine manufacturing facilities in seven states that
sell homes through 86 of our company-owned retail sales centers and builder locations and approximately 150 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 or sold to investors. 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 76% over the last nine years to a 45 year industry low of
82,000 in calendar year 2008. During this nine-year period, our manufactured housing shipments declined 81%.

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% and in calendar year 2008, industry shipments to these three states were down another 41%.

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 six 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 25% in fiscal 2009. 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 2008 were approximately 22,000, a decrease of 33% over calendar year 2007. Our unit sales of modular homes decreased 40% in fiscal
2009 as compared to fiscal 2008.

With the decline in retail demand, we have focused on new areas of business, including commercial and
military projects, which present new revenue opportunities for us. These institutions are looking for a quality provider and we are well positioned as a preferred supplier to meet this demand. During fiscal 2009, we produced barracks and other
housing for three military bases.



1



---

##### Table of Contents

In light of the current economic crisis and with no near-term signs of recovery for the factory-built
housing industry, our top priorities are cash generation and cash preservation in every area of our business. During fiscal 2009, we focused on these priorities through the following:



| |  |  | We sold $51.3 million of CountryPlaces warehoused portfolio of chattel and mortgage loans for a gain of $1.3 million. We used the proceeds to repay in full
and terminate the warehouse borrowing facility scheduled to expire on April 30, 2008.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Through CountryPlace, we obtained a $10.0 million construction lending line to use for financing mortgage loans.
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | We completed two sale leaseback transactions totaling $6.5 million in cash for 13 of our retail properties.
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | We retired $21.2 million of our convertible senior notes for $10.6 million of cash, resulting in a gain of $10.6 million and lower interest costs.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We closed three less-than-efficient manufacturing facilities and one retail sales center.
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | We reduced inventories by $26.2 million and receivables by $8.2 million.
| | - |  | ------------------------------------------------------------------------



| |  |  | We have continued to reduce our overhead costs and employed other cash management steps.
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | We accomplished all the above and still funded $20 million in committed pipeline loans from working capital when our warehouse lender exited the business.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have been working with a financial advisor to leverage $100 million of our unlevered assets.
| | - |  | -----------------------------------------------------------------------------------------------

For the near term, the outlook for housing, both site-built and factory-built, remains extremely challenging. A number of issues must be resolved for any
recovery to gain traction, and until inventories decline, housing prices stabilize, credit is restored and general economic fundamentals improve, we do not expect any short-term improvement. In the meantime, our strategy is to manage our operations
more efficiently and become a stronger and leaner company. Accordingly, we remain focused on three critical areas in our business for fiscal 2010. Our top priority is to manage our cash and leverage our balance sheet to maintain adequate liquidity
through this uncertain business climate. We are also streamlining our operations to reduce both marginal costs and selling, general and administrative expenses, consistent with expected revenues. And finally, we continue to look for new sources of
revenue by pursuing our creative efforts like flexible products, commercial and military modular products, and targeted Internet marketing strategies. Regardless of market conditions, we will continue to leverage our core strengthsthe most
trusted brand name in the industry, a diverse and high-quality product line, manufacturing excellence and exceptional customer service.

During the third quarter of fiscal 2009, our floor plan lender, Textron Financial Corporation (Textron), announced that they are in the process of an orderly liquidation of certain commercial loan business including their housing finance
business. As further discussed in Note 5 of our consolidated financial statements, in April 2009, we agreed to an amendment to our floor plan facility which includes a lower total commitment amount (from $70 million to $50 million), a new expiration
date of March 31, 2010, new interest rates and new financial covenants. In addition, as discussed in Note 5 of our consolidated financial statements, we agreed to a further amendment dated June 4, 2009, which extends the expiration date to
June 30, 2010, among other things.

We were in compliance with our new financial covenants as of March 27, 2009. In addition,
management believes that new quarterly financial covenants covering maximum net loss before taxes levels, annualized inventory turn and maximum borrowing base, all as defined in the recent amendments, for fiscal 2010 are achievable based upon our
fiscal 2010 operating plan. Management has also identified other actions within their control that could be implemented, as necessary, to help us meet these quarterly requirements. However, there can be no assurance that these actions will be
successful.

Additionally, in light of market conditions, it is possible that we may be unable to comply with the new financial covenants
during fiscal 2010. Textron could also declare a loan violation due to a material adverse



2



---

##### Table of Contents

change, as defined in the agreement. As a result, if a loan violation were to occur and not be remedied in accordance with the terms of the floor plan
facility, Textron could declare an event of default and demand that the full amount of the facility be paid in full prior to maturity. Such a demand would result in, among other things, a cross default of our convertible senior notes described in
Note 6 of our consolidated financial statements.

While we are currently exploring asset sales and other types of capital raising
alternatives in order to generate liquidity, there can be no assurance that such activities will be successful or generate cash resources adequate to fully retire the Textron floor plan facility at maturity. In this event, there can be no assurance
that Textron will consent to a further amendment of the floor plan facility agreement.

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 2009, 2008 and 2007.

Factory-Built Housing Segment

Our factory-built housing operations consist of the production and sale of manufactured homes (HUD-code), modular homes, and
commercial buildings. 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, commercial buildings sold and the number of manufacturing facilities we
operated for the fiscal years indicated:



|                                                           |  |                   |  |               |  |               |  |               |  |              
|---------------------------------------------------------- |  | ----------------- |  | ------------- |  | ------------- |  | ------------- |  | -------------
|                                                           |  | Fiscal Year Ended
|                                                           |  | March 27,2009     |  | March 28,2008 |  | March 30,2007 |  | March 31,2006 |  | March 25,2005
|Factory-built homes sold:                                  |  |                   |  |               |  |               |  |               |  |              
|Single-section(1)                                          |  | 661               |  | 658           |  | 434           |  | 1,015         |  | 355          
|Multi-section                                              |  | 2,254             |  | 3,163         |  | 4,453         |  | 6,282         |  | 6,211        
|Modular                                                    |  | 971               |  | 1,628         |  | 1,850         |  | 1,614         |  | 1,382        
|                                                           |  |                   |  |               |  |               |  |               |  |              
|Total factory-built homes sold                             |  | 3,886             |  | 5,449         |  | 6,737         |  | 8,911         |  | 7,948        
|                                                           |  |                   |  |               |  |               |  |               |  |              
|Commercial buildings sold                                  |  | 61                |  |              |  |              |  |              |  |             
|Operating manufacturing facilities (at end of fiscal year) |  | 9                 |  | 12            |  | 14            |  | 18            |  | 18           



|(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 has been reduced by 50% since March 31, 2006. During the last three fiscal years we idled 8 less-than-efficient facilities and had one facility destroyed by fire.
Currently, we have two facilities listed for sale and have entered into an agreement to sell another facility no later than the end of the first quarter of fiscal 2010. During fiscal 2009, we recorded impairment charges of $1.5 million related to
two of the three facilities listed for sale. See Note 1 in the notes to the consolidated financial statements for further details on our annual impairment testing.



3



---

##### Table of Contents

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 (83% in fiscal 2009), 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 80% of the manufactured homes we produce are structurally or decoratively customized to the homebuyers
specifications. During fiscal 2009, the average retail sales price (excluding land) of our manufactured and modular homes was approximately $73,000 and $175,000, respectively.

During fiscal 2009, we also produced commercial modular structures including apartment buildings, condominiums, hotels, schools and military barracks and
other housing for U.S. military troops. Commercial buildings are constructed in the same factories and using the same assembly lines as the factories where we produce our factory-built homes. These commercial projects are generally engineered to the
purchasers specifications. The buildings are transported to the customers site in the same manner as our homes and are crane set at the site. Commercial projects are finished on site.

We introduced flexible products during fiscal 2009. Flexible products are models that can be built from 1,200-2,400 square feet, built to either HUD-code
or modular specifications, all designed with a variety of exterior elevations and available by simply displaying one base model home. This long-term effort has helped us reduce our inventories by over $26 million this year and reduce our floor plan
payable by approximately $10 million.

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 two suppliers which accounted for more than 5% of our total purchases during the fiscal year ended March 27, 2009 represented 9.3% and 5.2%, respectively, 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.



4



---

##### Table of Contents

Our homes are constructed in indoor facilities, which have approximately 100,000 square feet of floor
space and employ an average of 150 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.

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 26, 2009, our backlog of manufactured housing orders was approximately $8.9 million, as compared to approximately $14.8 million as of May 27, 2008 and our backlog of modular housing orders as of
May 26, 2009 was approximately $35.2 million, as compared to approximately $34.0 million as of May 27, 2008.

Product
Distribution

Our homes are sold through a distribution network consisting of retail sales centers we own and independent dealers,
builders and developers. Our commercial buildings are sold to the U.S. government, general contractors and developers. The following table sets forth the number of homes and buildings 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 27,2009 |  | March 28,2008 |  | March 30,2007
|Factory-built homes sold by:                                                         |  |               |  |               |  |              
|Company-owned retail sales centers and builder locations                             |  | 2,932         |  | 3,763         |  | 4,003        
|Independent dealers, builders and developers                                         |  | 954           |  | 1,686         |  | 2,734        
|                                                                                     |  |               |  |               |  |              
|Total                                                                                |  | 3,886         |  | 5,449         |  | 6,737        
|                                                                                     |  |               |  |               |  |              
|Commercial buildings sold to the U.S. government, general contractors and developers |  | 61            |  |              |  |             
|Number of:                                                                           |  |               |  |               |  |              
|Company-owned retail sales centers and builder locations                             |  | 86            |  | 87            |  | 107          
|Independent dealers, builders and developers                                         |  | 150           |  | 275           |  | 350          
|                                                                                     |  |               |  |               |  |              
|Total                                                                                |  | 236           |  | 362           |  | 457          
|                                                                                     |  |               |  |               |  |              



5



---

##### Table of Contents

We currently have 82 company-owned retail sales centers in 14 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. The number of homes sold through our independent dealers, builders
and developers has decreased by 65.1% over the last two fiscal years. This decline is largely the result of slowdowns in sales to Lifestyle Communities in the 3 key states of Florida, Arizona and California, which historically were some of our most
profitable states. Our independent dealer network consists of approximately 80 local dealers that principally market lifestyle communities. Our builder/developer network consists of approximately 70 builders and developers who typically acquire and
develop the land and set a 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 27, 2009, 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 |  | 31.3                           | %
|Central   |  | Texas, Oklahoma, Arkansas, Louisiana                                                                                           |  | 46.8                           |  
|West      |  | New Mexico, Arizona, California, Colorado, Oregon, Washington, Montana, Nevada, Idaho                                          |  | 20.9                           |  
|Midwest   |  | Ohio, Indiana, Kentucky, Missouri                                                                                              |  | 1.0                            |  
|          |  |                                                                                                                                |  |                                |  
|          |  |                                                                                                                                |  | 100.0                          | %
|          |  |                                                                                                                                |  |                                |  

The two states which accounted for greater than 10% of our fiscal 2009 revenues were Texas and
Florida with approximately 36% and 12%, 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 50 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 FHA, Fannie Mae or Freddie Mac. The majority of modular homes



6



---

##### Table of Contents

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 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 2009; (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 $6.3 million as of March 27, 2009. During fiscal years 2009, 2008 and 2007, 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 2009. Since the beginning of the industry downturn, several
major floor plan lenders have exited the wholesale financing business for our independent dealers and GE, Textron and 21stMortgage are all
currently in the process of either exiting the business or reducing their lending to the industry. This reduced availability of wholesale financing has resulted in reduced sales to independent dealers, builders and developers during fiscal 2009.

Financial Services Segment

Our
financial services subsidiaries fiscal year ends on different dates than ours. CountryPlaces fiscal year ends on March 31 and Standards fiscal year ends on the last day of February.



7



---

##### Table of Contents

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 or sold to investors. 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 as of March 31, 2009 (in thousands):



|                                       |  |                  |       |                    |   |                  |  |       |         |  |   |        
|-------------------------------------- |  | ---------------- | ----- | ------------------ | - | ---------------- |  | ----- | ------- |  | - | -------
|                                       |  | Due within1 year |       | Due in1 to 5 years |   | Due after5 years |  | Total
|Scheduled repayments of consumer loans |  | $                | 3,738 |                    | $ | 24,820           |  | $     | 170,759 |  | $ | 199,317

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, 2009, 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, 2009 and March 31, 2008 (dollars in thousands):



|                                            |  |               |       |   |               |   |       |  
|------------------------------------------- |  | ------------- | ----- | - | ------------- | - | ----- | -
|                                            |  | March 31,2009 |       |   | March 31,2008 |  
|Non-performing loans:                       |  |               |       |   |               |   |       |  
|Loans accounted for on a nonaccrual basis   |  | $             | 2,574 |   |               | $ | 2,026 |  
|Accruing loans past due 90 days or more     |  |               | 390   |   |               |   | 244   |  
|                                            |  |               |       |   |               |   |       |  
|Total nonaccrual and 90 days past due loans |  |               | 2,964 |   |               |   | 2,270 |  
|Percentage of total loans                   |  |               | 1.49  | % |               |   | 0.83  | %
|Other non-performing assets(1)              |  |               | 2,048 |   |               |   | 1,635 |  
|Troubled debt restructurings                |  |               | 5,013 |   |               |   |      |  



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

During fiscal 2009, CountryPlace modified loans to retain borrowers with good payment history. These modifications were considered to represent
credit concessions due to hurricane and other repayment matters (such as employment/financial stress) impacting these borrowers. At March 31, 2009, CountryPlace has modified approximately $5.0 million of loans where principal and interest
payments have been deferred or waived for periods ranging from one to three months. These loans are not reflected as non-performing loans but as troubled debt restructurings. As of March 31, 2009, the allowance for loan losses totaled
$5.8 million of which $0.1 million is an impairment allowance for these loans.



8



---

##### Table of Contents

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,
2009 and March 31, 2008:



|           |  |               |   |  |               |  
|---------- |  | ------------- | - |  | ------------- | -
|           |  | March 31,2009 |   |  | March 31,2008 |  
|Texas      |  | 42.6          | % |  | 41.0          | %
|Arizona    |  | 6.3           |   |  | 4.1           |  
|Florida    |  | 7.1           |   |  | 6.9           |  
|California |  | 2.2           |   |  | 2.9           |  

The states of California, Florida, 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, 2009 or March 31, 2008. Management believes the allowance for loan losses is adequate to cover estimated losses at
March 31, 2009.

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, through 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 75 active producing agents.

During fiscal 2009, 92% of homeowners who purchased a home through our own retail superstores purchased extended warranties and 70% purchased property and casualty insurance. At the end of fiscal 2009, Standard Casualty had approximately
11,700 policies in force.

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.



9



---

##### Table of Contents

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 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



10



---

##### Table of Contents

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 (including dividend payments to stockholders) 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 1,900 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.

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 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



11



---

##### Table of Contents

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:

If the current crisis continues for an extended period of time, or if
the crisis worsens, we could face significant problems caused by a lack of liquidity.

We are currently experiencing an extreme
crisis in the national and global economy generally as well as in the housing market specifically. This crisis has materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in certain cases has
resulted in the unavailability of certain types of financing. Continued uncertainty in the credit and equity markets may negatively impact our ability to access additional financing at reasonable terms or at all, which may negatively affect our
ability to conduct our operations or refinance our existing debt. Disruptions in the equity markets may also make it more difficult for us to raise capital through the issuance of additional shares of our common stock. In light of this economic
crisis and the challenging business conditions that we are currently facing, we are focusing a significant amount of effort on cash generation and preservation. We currently have in excess of $100 million of unlevered assets and we are working with
a financial advisor to leverage these assets to generate cash. However, there can be no guarantee that these efforts or any other efforts we take to increase our liquidity will be successful. If the current economic crisis continues for an extended
period of time, or if the crisis worsens, we may have insufficient liquidity to meet our financial obligations in the future.

Reduced availability
of wholesale financing could have a material adverse effect on us.

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 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. We have a floor plan facility with Textron. During our third quarter, Textron announced that they are in the process of an orderly liquidation of certain of their commercial
finance businesses, including their housing inventory finance business. On April 28, 2009 (with an effective date of January 26, 2009), we agreed to an amendment which includes the following modifications: a new committed amount of $50 million
(reduced from $70 million) which will gradually be reduced to $40 million by December 31, 2009, a new facility expiration date of March 31, 2010, a new interest rate of LIBOR plus 7.00%, and new financial covenants. We agreed to a further
amendment dated June 4, 2009, which includes the following: extends the expiration date to June 30, 2010; lowers the committed amount from $50 million to $45 million and further lowers it to $40 million upon the earlier of the sale of certain
assets or December 31, 2009; alters the maximum quarterly net loss before taxes covenant to exclude any interest expense reflected on the financial statements due to 2009 accounting changes; and requires a prepayment of principal equal to any
amounts of cash and cash equivalents greater than $20 million as of March 31, 2010 no later than the earlier of 10 business days after the closing of our fiscal quarter ending March 31, 2010 or April 30, 2010. We were in compliance with our new
financial covenants as of March 27, 2009. Although management believes the new covenant levels for fiscal 2010 are achievable based upon our fiscal 2010 operating plan, there can be no assurances that we will be in compliance. Additionally, in light
of market conditions, Textron could also declare a loan violation due to a material adverse change, as defined in the agreement. As a result, if a loan violation were to occur and not be remedied in accordance with the terms of the floor plan
facility, Textron could declare an event of default and demand that the full amount of the facility be paid in full prior to maturity, Such a demand, would result in, among other things, a cross default of our convertible senior notes as described
in Note 6 of our consolidated financial statements. While we are currently exploring asset sales and other types of capital raising alternatives in order to generate liquidity, there can be no assurance that such activities will be successful
or generate cash resources adequate to fully retire the Textron floor plan at maturity. In this event, there can be assurance that Textron will consent to a further amendment of the floor plan facility. Additionally, following the expiration of the
Textron facility, there can be no assurance that we will have access to a facility with similar terms. Any inability to borrow money under the Textron facility or one with similar terms, would have a material adverse effect on our operations.
Reduced availability of wholesale financing for our independent



12



---

##### Table of Contents

dealers (GE, Textron and 21stMortgage are all in the
process of either exiting the business or reducing their lending to the industry) could also have a material adverse effect on our operations.

Recent turmoil in the credit markets and the financial services industry may reduce the demand for our homes and the availability of home mortgage financing, among other things.

Recently, the credit markets and the financial services industry have been experiencing a period of unprecedented turmoil and upheaval characterized by
the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the United States federal government. While the ultimate outcome of these events cannot be predicted, it may have a material
adverse effect on us, our liquidity, our ability to borrow money to finance our operations from our existing lenders or otherwise, and could also adversely impact the availability of financing to our customers.

Deterioration in economic conditions in general could further reduce the demand for homes and, as a result, could reduce our earnings and adversely affect our
financial condition.

Changes in national and local economic conditions could have a negative impact on our business. Adverse
changes in employment levels, job growth, consumer confidence and income, interest rates and population growth may further reduce demand, depress prices for our homes and cause homebuyers to cancel their agreements to purchase our homes, thereby
possibly reducing earnings and adversely affecting our business and results of operations. Recent changes in these economic variables have had an adverse affect on consumer demand for, and the pricing of, our homes, causing our revenues to decline
and future deterioration in economic conditions could have further adverse effects.

Changes in laws or other events that adversely affect liquidity
in the secondary mortgage market could hurt our business.

The government-sponsored enterprises, principally Fannie Mae and Freddie
Mac, play a significant role in buying home mortgages and creating investment securities that they either sell to investors or hold in their portfolios. These organizations provide liquidity to the secondary mortgage market. Fannie Mae and Freddie
Mac have recently experienced financial difficulties. Any new federal laws or regulations that restrict or curtail their activities, or any other events or conditions that prevent or restrict these enterprises from continuing their historic
businesses, could affect the ability of our customers to obtain the mortgage loans or could increase mortgage interest rates or credit standards, which could reduce demand for our homes and/or the loans that we originate and adversely affect 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 origination 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.



13



---

##### Table of Contents

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 near-term recovery. We are subject to volatility in operating results due to external factors beyond our control such as:



| |  |  | 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.

We continue to reduce our manufacturing capacity and distribution channels to effectively align with current and expected regional demand
to maintain operating profitability. If the economy continues to worsen, our continued return to operating profitability will be delayed.

During the last three fiscal years, we idled 8 manufacturing plants and one retail sales center to effectively align current and expected regional demand. If the U.S. economy continues to slow, financial markets continue to decline, and
more layoffs occur nationally, our realignment will not allow us to return to operating profitability and further cost savings and other 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 and new home inventory is increasing, 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.

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;
| | - |  | -------------------------------------------------



14



---

##### Table of Contents

| |  |  | 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 and continued trends in general house price depreciation and increasing levels of unemployment may result in
additional defaults and exacerbate actual loss severities upon collateral liquidation beyond those normally experienced by CountryPlace. CountryPlace has a significant concentration (approximately 42%) of its borrowers in Texas. To date, Texas
has experienced less severe house price depreciation and more stable economic conditions than other parts of the country. However, these conditions may change in the future, and a downturn in economic conditions in Texas could severely affect
the performance of CountryPlaces loans. In addition, CountryPlace has loans in several states that are experiencing rapid house price depreciation, such as Florida, Arizona, and California. This may adversely affect the willingness
of CountryPlaces borrowers in these states to repay their loans and result in lower realized proceeds from liquidating repossessed or foreclosed property in these states.

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.



15



---

##### Table of Contents

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.

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 2009, average prices of our raw materials increased 5% compared to fiscal 2008 and in fiscal 2008, average raw materials prices decreased 2% compared to fiscal 2007. 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.

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 2009, 2008 and 2007, we did not incur any significant 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 three 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 Lee Posey (our Chairman Emeritus), 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.



16



---

##### Table of Contents

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, than 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. In addition, one of our competitors provides the largest single source of retail financing in our industry and if they were to discontinue providing this financing, our operating results
could be adversely affected.

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 2009, approximately 13% 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 2009, approximately 36% of our net sales were generated in Texas and approximately 13% of our net sales were generated in Florida. A decline in
the demand for manufactured housing in Florida has already impacted our operations. While Texas has lagged the national recession to a certain extent, a further 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.



17



---

##### Table of Contents

|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                         |  | Owned        |  | 103,800               
|Buda, Texas                           |  | Owned        |  | 88,275                
|Fort Worth, Texas                     |  | Owned        |  | 121,300               
|Martinsville, Virginia                |  | Owned        |  | 75,262                
|Millersburg, Oregon                   |  | Owned        |  | 168,650               
|Plant City, Florida                   |  | Owned        |  | 87,200                
|Tempe, Arizona                        |  | Owned        |  | 103,500               
|                                      |  |             
|Idled Manufacturing Facilities        |  |              |  |                       
|Austin, Texas                         |  | Owned        |  | 77,000                
|Casa Grande, Arizona(1)               |  | Owned        |  | 90,000                
|LaGrange, Georgia(1)                  |  | Owned        |  | 200,000               
|Martinsville, Virginia (2 facilities) |  | Owned        |  | 100,098               
|Plant City, Florida                   |  | Owned        |  | 93,600                
|Sabina, Ohio(2)                       |  | Owned        |  | 85,000                
|Siler City, North Carolina            |  | Owned        |  | 91,200                
|Siler City, North Carolina            |  | Leased       |  | 40,000                
|                                      |  |             
|Component and Supply Facilities       |  |              |  |                       
|Martinsville, Virginia                |  | Owned        |  | 148,346               
|                                      |  |             
|Corporate Headquarters                |  |              |  |                       
|Addison, Texas                        |  | Leased       |  | 48,000                



|(1) | Facility is permanently closed and listed for sale.
|--- | ---------------------------------------------------

|(2) | The Company has entered into an agreement to sell the facility no later than the end of the first quarter of fiscal 2010.
|--- | -------------------------------------------------------------------------------------------------------------------------

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 26% as of March 27, 2009.

In addition to our production facilities, we own 12 properties upon which 7 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 10 years.

See Note 1 to the consolidated financial
statements on our annual impairment analysis for long-term assets, including property, plant and equipment.



|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.



18



---

##### Table of Contents

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 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.

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. Subsequent to March 27, 2009, we received a notice of intent from the
Arizona Department of Water Resources to abandon the well. In general, although no assurance can be given, 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.



19



---

##### Table of Contents

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 2009    |  | High |       | Low
|First Quarter  |  | $    | 8.95  |     | $ | 5.05 
|Second Quarter |  |      | 11.51 |     |   | 4.26 
|Third Quarter  |  |      | 9.91  |     |   | 4.61 
|Fourth Quarter |  |      | 5.77  |     |   | 1.45 
|               |  |     
|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 

On May 26, 2009, the last reported sale price of our common stock on the Nasdaq Stock Market
was $2.45. As of May 26, 2009, there were approximately 550 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 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.



20



---

##### Table of Contents

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



21



---

##### 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 27, 2009. 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 27,                             |         |   | March 28,  |   |          | March 30,  |  |   | March 31,  |   |  | March 25,  |        
|                                                                                       |  | 2009                                  |         |   | 2008       |   |          | 2007       |  |   | 2006       |   |  | 2005       |        
|                                                                                       |  | (52 weeks)                            |         |   | (52 weeks) |   |          | (52 weeks) |  |   | (53 weeks) |   |  | (52 weeks) |        
|                                                                                       |  | (In thousands, except per share data) |        
|Statements of Operations:                                                              |  |                                       |         |   |            |   |          |            |  |   |            |   |  |            |         |   |  |   |         |  
|Net sales                                                                              |  | $                                     | 409,274 |   |            | $ | 555,096  |            |  | $ | 661,247    |   |  | $          | 710,635 |   |  | $ | 610,538 |  
|Cost of sales                                                                          |  |                                       | 312,428 |   |            |   | 421,371  |            |  |   | 503,419    |   |  |            | 525,023 |   |  |   | 455,960 |  
|                                                                                       |  |                                       |         |   |            |   |          |            |  |   |            |   |  |            |         |   |  |   |         |  
|Gross profit                                                                           |  |                                       | 96,846  |   |            |   | 133,725  |            |  |   | 157,828    |   |  |            | 185,612 |   |  |   | 154,578 |  
|Selling, general and administrative expenses                                           |  |                                       | 120,402 |   |            |   | 150,562  |            |  |   | 160,016    |   |  |            | 161,154 |   |  |   | 154,931 |  
|Goodwill impairment                                                                    |  |                                       |        |   |            |   | 78,506   |            |  |   |           |   |  |            |        |   |  |   |        |  
|                                                                                       |  |                                       |         |   |            |   |          |            |  |   |            |   |  |            |         |   |  |   |         |  
|Income (loss) from operations                                                          |  |                                       | (23,556 | ) |            |   | (95.343  | )          |  |   | (2,188     | ) |  |            | 24,458  |   |  |   | (353    | )
|Interest expense                                                                       |  |                                       | (15,417 | ) |            |   | (18,654  | )          |  |   | (15,695    | ) |  |            | (11,739 | ) |  |   | (8,990  | )
|Gain on repurchase of convertible senior notes                                         |  |                                       | 10,566  |   |            |   |         |            |  |   |           |   |  |            |        |   |  |   |        |  
|Equity in earnings (loss) of limited partnership and Impairment charges                |  |                                       |        |   |            |   |         |            |  |   | (4,709     | ) |  |            | 574     |   |  |   | (763    | )
|Other income                                                                           |  |                                       | 2,095   |   |            |   | 3,625    |            |  |   | 4,901      |   |  |            | 5,007   |   |  |   | 4,165   |  
|                                                                                       |  |                                       |         |   |            |   |          |            |  |   |            |   |  |            |         |   |  |   |         |  
|Income (loss) before income taxes                                                      |  |                                       | (26,312 | ) |            |   | (110,372 | )          |  |   | (17,691    | ) |  |            | 18,300  |   |  |   | (5,941  | )
|Income tax benefit (expense)                                                           |  |                                       | 8       |   |            |   | (13,890  | )          |  |   | 6,126      |   |  |            | (7,186  | ) |  |   | 2,118   |  
|                                                                                       |  |                                       |         |   |            |   |          |            |  |   |            |   |  |            |         |   |  |   |         |  
|Net income (loss)                                                                      |  | $                                     | (26,304 | ) |            | $ | (124,262 | )          |  | $ | (11,565    | ) |  | $          | 11,114  |   |  | $ | (3,823  | )
|                                                                                       |  |                                       |         |   |            |   |          |            |  |   |            |   |  |            |         |   |  |   |         |  
|Net income (loss) per common sharebasic and diluted                                   |  | $                                     | (1.15   | ) |            | $ | (5.44    | )          |  | $ | (0.51      | ) |  | $          | 0.49    |   |  | $ | (0.17   | )
|                                                                                       |  |                                       |         |   |            |   |          |            |  |   |            |   |  |            |         |   |  |   |         |  
|Weighted average common shares outstandingbasic and diluted                           |  |                                       | 22,856  |   |            |   | 22,852   |            |  |   | 22,852     |   |  |            | 22,831  |   |  |   | 22,832  |  
|                                                                                       |  |                                       |         |   |           
|Balance Sheet Data(1):                                                                 |  |                                       |         |   |            |   |          |            |  |   |            |   |  |            |         |   |  |   |         |  
|Total assets                                                                           |  | $                                     | 411,682 |   |            | $ | 564,900  |            |  | $ | 683,264    |   |  | $          | 654,051 |   |  | $ | 571,980 |  
|Convertible senior notes                                                               |  |                                       | 53,845  |   |            |   | 75,000   |            |  |   | 75,000     |   |  |            | 75,000  |   |  |   | 75,000  |  
|Floor plan payable                                                                     |  |                                       | 49,401  |   |            |   | 59,367   |            |  |   | 43,603     |   |  |            | 37,908  |   |  |   | 30,888  |  
|Warehouse revolving debt                                                               |  |                                       |        |   |            |   | 42,175   |            |  |   | 12,045     |   |  |            | 37,413  |   |  |   | 106,298 |  
|Securitized financings                                                                 |  |                                       | 140,283 |   |            |   | 165,430  |            |  |   | 194,405    |   |  |            | 105,379 |   |  |   |        |  
|Shareholders equity                                                                   |  |                                       | 99,728  |   |            |   | 126,575  |            |  |   | 250,130    |   |  |            | 263,024 |   |  |   | 252,907 |  
|                                                                                       |  |                                       |         |   |           
|Operating Data (unaudited):                                                            |  |                                       |         |   |            |   |          |            |  |   |            |   |  |            |         |   |  |   |         |  
|Number of new factory-built homes sold(2)                                              |  |                                       | 3,886   |   |            |   | 5,449    |            |  |   | 6,737      |   |  |            | 8,911   |   |  |   | 7,948   |  
|Multi-section manufactured homes sold as a percentage of total manufactured homes sold |  |                                       | 77      | % |            |   | 83       | %          |  |   | 91         | % |  |            | 86      | % |  |   | 95      | %
|Modular homes sold as a percentage of total factory-built homes sold                   |  |                                       | 25      | % |            |   | 30       | %          |  |   | 27         | % |  |            | 18      | % |  |   | 17      | %
|Number of manufacturing facilities(1)                                                  |  |                                       | 9       |   |            |   | 12       |            |  |   | 14         |   |  |            | 18      |   |  |   | 18      |  
|Number of company-owned retail sales centers and builder locations(1)                  |  |                                       | 86      |   |            |   | 87       |            |  |   | 107        |   |  |            | 116     |   |  |   | 121     |  



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

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



22



---

##### Table of Contents

|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 27, 2009, we operated nine manufacturing facilities that sell homes through
86 company-owned retail sales centers and builder locations and approximately 150 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 or sold to investors. We also provide property and
casualty insurance for owners of manufactured homes through our subsidiary, Standard Casualty.

Our results for fiscal 2009 were heavily
influenced by the severe state of the factory-built housing industry, the weakness in the overall housing market and the prevailing economic uncertainties and credit crisis. There was a drastic slowdown in demand for factory-built housing products
and decline in retail traffic during fiscal 2009. Industry shipments for calendar year 2008 (through November) were down approximately 14% from the prior years already historically low levels. The three significant (to both us and the
industry) manufactured housing states of Florida, California and Arizona were down a combined 41%. Consumer concerns about the economy and the lack of available credit are keeping potential homebuyers on the sidelines; therefore affecting the demand
for factory-built housing. While we expect these conditions to worsen and expect our performance to improve in fiscal 2010, we are likely to still incur a net loss.

With the decline in retail demand, we have focused on new areas of business, including commercial and military projects, which present new revenue opportunities for us. These institutions are looking for a quality
provider and we are well positioned as a preferred supplier to meet this demand. During fiscal 2009, we produced barracks and other housing for three military bases.

In light of the current economic crisis and with no near-term signs of recovery for the factory-built housing industry, our top priorities are cash generation and cash preservation in every area of our business.
During fiscal 2009, we focused on these priorities through the following:



| |  |  | We sold $51.3 million of CountryPlaces warehoused portfolio of chattel and mortgage loans for a gain of $1.3 million. We used the proceeds to repay in full
and terminate the warehouse borrowing facility scheduled to expire on April 30, 2008.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Through CountryPlace, we obtained a $10.0 million construction lending line to use for financing mortgage loans.
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | We completed two sale leaseback transactions totaling $6.5 million in cash for 13 of our retail properties.
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | We retired $21.2 million of our convertible senior notes for $10.6 million of cash, resulting in a gain of $10.6 million and lower interest costs.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We closed three less-than-efficient manufacturing facilities and one retail sales center.
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | We reduced inventories by $26.2 million and receivables by $8.2 million.
| | - |  | ------------------------------------------------------------------------



| |  |  | We have continued to reduce our overhead costs and employed other cash management steps.
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | We accomplished all the above and still funded $20 million in committed pipeline loans from working capital when our warehouse lender exited the business.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have been working with a financial advisor to leverage $100 million of our unlevered assets.
| | - |  | -----------------------------------------------------------------------------------------------



23



---

##### Table of Contents

For the near term, the outlook for housing, both site-built and factory-built, remains extremely
challenging. A number of issues must be resolved for any recovery to gain traction, and until inventories decline, housing prices stabilize, credit is restored and general economic fundamentals improve, we do not expect any short-term improvement.
In the meantime, our strategy is to manage our operations more efficiently and become a stronger and leaner company. Accordingly, we remain focused on three critical areas in our business for fiscal 2010. Our top priority is to manage our cash and
leverage our balance sheet to maintain adequate liquidity through this uncertain business climate. We are also streamlining our operations to reduce both marginal costs and selling, general and administrative expenses, consistent with expected
revenues. And finally, we continue to look for new sources of revenue by pursuing our creative efforts like flexible products, commercial and military modular products, and targeted Internet marketing strategies. Regardless of market conditions, we
will continue to leverage our core strengthsthe most trusted brand name in the industry, a diverse and high-quality product line, manufacturing excellence and exceptional customer service.

During the third quarter of fiscal 2009, our floor plan lender, Textron Financial Corporation (Textron), announced that they are in the process of an
orderly liquidation of certain commercial loan business including their housing finance business. As further discussed in Note 5 of our consolidated financial statements, in April 2009, we agreed to an amendment to our floor plan facility which
includes a lower total commitment amount (from $70 million to $50 million), a new expiration date of March 31, 2010, new interest rates and new financial covenants. In addition, as discussed in Note 5 of our consolidated financial statements,
we agreed to a further amendment dated June 4, 2009, which extends the expiration date to June 30, 2010, among other things.

We
were in compliance with our new financial covenants as of March 27, 2009. In addition, management believes that new quarterly financial covenants covering maximum net loss before taxes levels, annualized inventory turn and maximum borrowing
base, all as defined in the recent amendments, for fiscal 2010 are achievable based upon our fiscal 2010 operating plan. Management has also identified other actions within their control that could be implemented, as necessary, to help us meet these
quarterly requirements. However, there can be no assurance that these actions will be successful.

Additionally, in light of market
conditions, it is possible that we may be unable to comply with the new financial covenants during fiscal 2010. Textron could also declare a loan violation due to a material adverse change, as defined in the agreement. As a result, if a loan
violation were to occur and not be remedied in accordance with the terms of the floor plan facility, Textron could declare an event of default and demand that the full amount of the facility be paid in full prior to maturity. Such a demand would
result in, among other things, a cross default of our convertible senior notes described in Note 6 of our consolidated financial statements.

While we are currently exploring asset sales and other types of capital raising alternatives in order to generate liquidity, there can be no assurance that such activities will be successful or generate cash resources adequate to fully
retire the Textron floor plan facility at maturity. In this event, there can be no assurance that Textron will consent to a further amendment of the floor plan facility agreement.



24



---

##### Table of Contents

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 27,2009     |    |  | March 28,2008 |    |  | March 30,2007 |   
|Net sales                                                    |  | 100.0             | %  |  | 100.0         | %  |  | 100.0         | % 
|Cost of sales                                                |  | 76.3              |    |  | 75.9          |    |  | 76.1          |   
|                                                             |  |                   |    |  |               |    |  |               |   
|Gross profit                                                 |  | 23.7              |    |  | 24.1          |    |  | 23.9          |   
|Selling, general and administrative expenses                 |  | 29.4              |    |  | 27.1          |    |  | 24.2          |   
|Goodwill impairment                                          |  |                  |    |  | 14.2          |    |  |              |   
|                                                             |  |                   |    |  |               |    |  |               |   
|Loss from operations                                         |  | (5.7              | )  |  | (17.2         | )  |  | (0.3          | ) 
|Interest expense                                             |  | (3.8              | )  |  | (3.3          | )  |  | (2.4          | ) 
|Gain on repurchase of convertible senior notes               |  | 2.5               |    |  |              |    |  |              |   
|Equity in loss of limited partnership and impairment charges |  |                  |    |  |              |    |  | (0.7          | ) 
|Other income                                                 |  | 0.5               |    |  | 0.7           |    |  | 0.7           |   
|                                                             |  |                   |    |  |               |    |  |               |   
|Loss before income taxes                                     |  | (6.5              | )  |  | (19.8         | )  |  | (2.7          | ) 
|Income tax benefit (expense)                                 |  |                  |    |  | (2.5          | )  |  | 0.9           |   
|                                                             |  |                   |    |  |               |    |  |               |   
|Net loss                                                     |  | (6.5              | )% |  | (22.3         | )% |  | (1.8          | )%
|                                                             |  |                   |    |  |               |    |  |               |   

The following table summarizes certain key sales statistics as of and for the period indicated.



|                                                                                    |  |                   |         |               |   |               |  |   |        
|----------------------------------------------------------------------------------- |  | ----------------- | ------- | ------------- | - | ------------- |  | - | -------
|                                                                                    |  | Fiscal Year Ended
|                                                                                    |  | March 27,2009     |         | March 28,2008 |   | March 30,2007
|Homes sold through company-owned retail sales centers and builder locations         |  |                   | 2,932   |               |   | 3,763         |  |   | 4,003  
|Homes sold to independent dealers, builders and developers                          |  |                   | 954     |               |   | 1,686         |  |   | 2,734  
|Total new factory-built homes sold                                                  |  |                   | 3,886   |               |   | 5,449         |  |   | 6,737  
|Average new manufactured home priceretail                                          |  | $                 | 73,000  |               | $ | 76,000        |  | $ | 79,000 
|Average new manufactured home pricewholesale                                       |  | $                 | 54,000  |               | $ | 61,000        |  | $ | 66,000 
|Average new modular home priceretail                                               |  | $                 | 175,000 |               | $ | 176,000       |  | $ | 165,000
|Average new modular home pricewholesale                                            |  | $                 | 72,000  |               | $ | 80,000        |  | $ | 80,000 
|Number of company-owned retail sales centers and builder locations at end of period |  |                   | 86      |               |   | 87            |  |   | 107    

2009 Compared to 2008

Net Sales. Net sales decreased 26.3% to $409.3 million in fiscal 2009 as compared to $555.1 million in fiscal 2008. This decrease is primarily the result of a $140.3 million decrease in factory-built
housing net sales and a $5.5 million decrease in financial services net revenues. The decline in factory-built housing net sales is primarily due to a 28.7% decrease in the total number of factory-built homes sold coupled with decreases in the
average selling prices of new modular and manufactured homes. The decrease in the total number of factory-built homes sold reflects the severe state of the factory-built housing industry, the prevailing economic uncertainties, credit crisis and
general consumer paralysis that has kept potential homebuyers on the sidelines. Also, we were operating 20 fewer retail stores and four less factories than last year. Homes sold to independent dealers, builders and developers decreased 43.4% in
fiscal 2009 largely due to slowdowns in sales to Lifestyle Communities in the three key states of Florida, California and Arizona, which historically were some of our most profitable states. The reduction in independent sales was bolstered by $16.7
million in commercial and military modular sales. The



25



---

##### Table of Contents

decrease in the average selling prices is the result of our lower-priced products. The decrease in financial services net revenues reflects a decline in the
average consumer loans balance from $248.0 million for fiscal 2008 to $229.6 million for fiscal 2009, resulting from the sale of approximately $51.3 million of loans in April 2008.

Gross Profit. In fiscal 2009, gross profit decreased to 23.7% of net sales, or $96.8 million, from 24.1% of net sales, or $133.7 million in
fiscal 2008. Gross profit for the factory-built housing segment decreased to 18.8% of net sales in fiscal 2009 from 19.7% in fiscal 2008. The decline in factory-built housing margin is primarily the result of increased manufacturing costs driven by
rapidly rising material costs. This decline is partially offset by an increase in margin resulting from the impact of the restructuring actions taken in the fourth quarter of fiscal 2008 to close 18 under-performing sales centers and three less than
efficient plants coupled with an increase in the internalization rate (the percentage of factory-built homes we manufactured and sold through our company-owned retail stores and builder locations) from 64% in fiscal 2008 to 69% in fiscal 2009. Gross
profit for the financial services segment decreased $5.8 million in fiscal 2009 due to decreased net revenues as explained above in the net sales section. However, the financial services segment produced gross profit of $27.1 million in fiscal 2009
and positively contributed to our cash flow.

Selling, General and Administrative Expenses.As a percentage of net sales,
selling, general and administrative expenses increased to 29.4% of net sales in fiscal 2009 from 27.1% of net sales in fiscal 2008. This increase resulted from the larger percentage decline in net sales. In dollars, selling, general and
administrative expenses decreased $30.2 million to $120.4 million in fiscal 2009 from $150.6 million in fiscal 2008. Of this $30.2 million decrease, $21.5 million related to the factory-built housing segment, $1.9 million related to the financial
services segment and $6.8 million related to general corporate expenses. The majority of the reductions in selling, general and administrative expenses related to the factory-built housing segment and general corporate expenses resulted from the
restructuring actions taken in the fourth quarter of fiscal 2008 to close 18 under-performing sales centers and three less than efficient plants, plus a reduction in performance based compensation expense. The decrease in selling, general and
administrative expenses for the financial services segment relates to a $1.5 million one-time performance-based compensation payment in fiscal 2008. 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 and our
operating 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 to fully impair the goodwill related to our factory-built housing
segment.

Interest Expense.Interest expense decreased 17.4% to $15.4 million in fiscal 2009 as compared to $18.7 million in
fiscal 2008. Of this decrease, $1.7 million related to decreased interest expense on the average balance of the warehouse facility which was terminated April 30, 2008 and $1.4 million related to decreased interest expense on the average balance
of the securitized loans resulting from reduced securitization financing balances in fiscal 2009 as compared to fiscal 2008.

Gain on
Repurchase of Convertible Senior Notes.During fiscal 2009, we repurchased $21.2 million of our convertible senior notes for $10.6 million in cash, resulting in a gain of $10.6 million.

Other Income. Other income decreased 42.2% to $2.1 million in fiscal 2009 from $3.6 million in fiscal 2008 primarily due to a $2.2 million
decrease in interest and dividend income resulting from reduced rates of return coupled with lower average cash and cash equivalent balances. This is offset by a $0.4 million increase on income earned on a real estate investment.

Income Tax Benefit (Expense). Income tax benefit was $8,000 in fiscal 2009 as compared to expense of $13.9 million in fiscal 2008. The
$13.9 million of income tax expense for fiscal 2008 related to our recording a valuation allowance against all of our net deferred tax assets due to the uncertainty of realizing the tax benefits associated with these assets.



26



---

##### Table of Contents

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
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 in fiscal 2008 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.



27



---

##### Table of Contents

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.

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 and determined that realization of the deferred tax benefits were uncertain. 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.

Liquidity and
Capital Resources

Cash and cash equivalents totaled $12.4 million at March 27, 2009, down from $28.2 million at March 28,
2008. Net cash provided by operating activities was $56.1 million in fiscal 2009 as compared to net cash used of $32.8 million in fiscal 2008. The cash provided by operating activities in fiscal 2009 is primarily attributable to the proceeds from
the sale of consumer loans and principal payments on consumer loans originated. Also, the amount of net cash used for consumer loans has decreased as a result of CountryPlace not accepting applications for chattel loans and non-conforming mortgages.

Net cash provided by investing activities was $5.9 million in fiscal 2009 as compared to net cash net cash used of $0.2 million in fiscal
2008. This increase in cash provided by investing activities is primarily due to an increase in net cash received from divesting available-for-sale securities as well as a decrease in cash used for capital expenditures.

Net cash used in financing activities was $77.8 million in fiscal 2009 as compared to net cash provided by financing activities of $16.9 million in
fiscal 2008. Net cash used in financing activities is primarily the result of $42.2 million used to repay in full and terminate the warehouse borrowing facility with Citigroup, $10.6 million used to repurchase $21.2 million of our convertible senior
notes and $10.0 million used to pay down our floor plan payable.

We have an agreement with Textron for a floor plan facility. During the
third quarter of fiscal 2009, Textron announced that they are in the process of an orderly liquidation of certain of their commercial finance businesses, including their housing inventory finance business. On April 28, 2009 (with an effective
date of January 26, 2009), we agreed to an amendment which includes the following modifications: a new committed amount of $50 million (reduced from $70 million) which will gradually be reduced to $40 million by December 31, 2009, a new
facility expiration date of March 31, 2010, a new interest rate of LIBOR plus 7.00%, and new financial



28



---

##### Table of Contents

covenants. The new financial covenants we had to comply with as of March 27, 2009 were a maximum quarterly net loss before taxes of $15 million, a
minimum inventory turn of 2.75, and a maximum borrowing base requirement of 60% of eligible finished goods inventory. For the remaining quarters of fiscal 2010, the aggregate maximum net loss before taxes covenant requirement is reduced to $10
million. The facility has an advance rate of 90% of manufacturers invoice and is principally secured by new home inventory and a portion of receivables from financial institutions. As of March 27, 2009 and March 28, 2008, we had
$49.4 million and $59.4 million, respectively, outstanding under the floor plan credit facility.

We agreed to a further amendment dated
June 4, 2009, which includes the following:



| |  |  | extends the expiration date to June 30, 2010,
| | - |  | ---------------------------------------------



| |  |  | lowers the committed amount from $50 million to $45 million and further lowers it to $40 million upon the earlier of the sale of certain assets or December 31,
2009,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | alters the maximum quarterly net loss before taxes covenant to exclude any interest expense reflected on the financial statements due to 2009 accounting changes,
and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | requires a prepayment of principal equal to any amounts of cash and cash equivalents greater than $20 million as of March 31, 2010 no later than the earlier of
10 business days after the closing of our fiscal quarter ending March 31, 2010 or April 30, 2010.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We were in
compliance with our new financial covenants as of March 27, 2009. In addition, management believes that new quarterly financial covenants covering maximum net loss before taxes levels, annualized inventory turn and maximum borrowing base, all
as defined in the recent amendments, for fiscal 2010 are achievable based upon our fiscal 2010 operating plan. Management has also identified other actions within their control that could be implemented, as necessary, to help us meet these quarterly
requirements. However, there can be no assurance that these actions will be successful.

Additionally, in light of market conditions, it is
possible that we may be unable to comply with the new financial covenants during fiscal 2010. Textron could also declare a loan violation due to a material adverse change, as defined in the agreement. As a result, if a loan violation were to occur
and not be remedied in accordance with the terms of the floor plan facility, Textron could declare an event of default and demand that the full amount of the facility be paid in full prior to maturity. Such a demand would result in, among other
things, a cross default of our convertible senior notes described in Note 6 of our consolidated financial statements.

While we are
currently exploring asset sales and other types of capital raising alternatives in order to generate liquidity, there can be no assurance that such activities will be successful or generate cash resources adequate to fully retire the Textron floor
plan facility at maturity. In this event, there can be no assurance that Textron will consent to a further amendment of the floor plan facility agreement.

In fiscal 2005, we issued $75.0 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. 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 2009, 2008 and 2007, the effect of converting
the senior notes to 2.1 million, 2.9 million and 2.9 million shares of common stock, respectively, was anti-dilutive, and, therefore, was not considered in determining diluted earnings per share. During fiscal 2009, we repurchased
$21.2 million of the Notes for $10.6 million in cash, resulting in a gain of $10.6 million.



29



---

##### Table of Contents

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,
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. CountryPlaces obligation under this securitized financing is guaranteed by us.

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. 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.

CountryPlace had an agreement with a financial institution for a $150.0 million warehouse borrowing
facility to fund loans originated by CountryPlace. 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. In January 2009, CountryPlace obtained a $10.0 million construction lending line to use for financing mortgage loans during the construction period.
There is no expiration period for the agreement, but CountryPlace is obligated to repurchase individual loans within 180 days from the date of original purchase of each respective loan by the financial institution. Historically, the construction
period has been approximately ninety days. The construction lender has full discretion to accept or decline each individual loan purchase requested by CountryPlace. The maximum advance for loans purchased is 92% of the loan amount. The interest rate
on unpaid amounts advanced is 10%. CountryPlace had outstanding unpaid advances under the facility of $3.6 million as of March 31, 2009. The facility contains certain requirements relating to the documentation of the loans purchased and amounts
drawn during the construction period of each individual loan, which are customary in the industry. CountryPlace funds the difference between the amounts advanced under the facility and the balance of any additional loan.

CountryPlace currently originates 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.



30



---

##### Table of Contents

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 factory-built homes, or that CountryPlace will successfully complete transactions on acceptable terms and conditions, if at all.

During the fourth quarter of fiscal 2009, we completed two sale leaseback transactions (one transaction was with two members of senior
management of the Company who are related parties) where we sold in total 13 retail sales center properties for $6.5 million in cash. One transaction (the related party transaction) resulted in a $0.7 million gain which will be amortized over the
term of the lease and the other transaction resulted in a $0.5 million loss which was recorded in selling, general and administrative expenses in our consolidated statement of operations. Concurrent with the sale, we leased the properties back for a
period of ten years at an aggregate annual rental of $0.6 million plus escalation under certain circumstances. The lease is renewable at our option for an additional five years. We do not have continuing involvement in the properties other than
through a normal sale-leaseback.

In light of the economic crisis and challenging business environment, our top priorities are cash
generation and cash preservation in every area of our operations. We have been working with a financial advisor to leverage $100 million of unlevered assets in an attempt to generate cash through this uncertain economic environment. As previously
mentioned, we sold $51.3 million of CountryPlaces warehoused portfolio of chattel and mortgage loans for a gain of $1.3 million, obtained a $10.0 million construction lending line for CountryPlace to use for financing mortgage loans and
completed two sale leaseback transactions for $6.5 million in cash. Additionally, we took advantage of market conditions and retired $21.2 million of our convertible senior notes for $10.6 million of cash, resulting in a gain of $10.6 million. We
accomplished all these things and still funded $20 million in committed pipeline loans from working capital when our warehouse lender exited the business.

Typically our wholesale customers pay within 15 days. During fiscal 2009, we began building barracks and other housing for the U.S. Government. These government contracts have longer payment periods, which have put
pressure on our cash balance. In response to these cash pressures, on April 27, 2009, the Company issued warrants to each of Capital Southwest Venture Corporation, Sally Posey and the Estate of Lee Posey (collectively, the lenders) to purchase
up to an aggregate of 429,939 shares of common stock of the Company at a price of $3.14 per share, which was the closing price of the Companys common stock on April 24, 2009. The warrants were granted in connection with a loan made by the
lenders to the Company of an aggregate of $4.5 million pursuant to senior subordinated secured promissory notes between the Company and each of the lenders (collectively, the Promissory Notes). The proceeds were used for working capital purposes. If
the Promissory Notes are not repaid in full by June 29, 2009, the aggregate number of shares of common stock that may be purchased may be increased by an amount equal to $450,000 divided by the closing price of the common stock on June 29,
2009. The warrants, which expire on April 24, 2019, contain anti-dilution provisions and other customary provisions. The Promissory Notes bear interest at the rate of LIBOR plus 2.0% and are secured by 150,000 shares of Standards common
stock. The Promissory Notes also restrict the Company from selling, leasing or otherwise transferring all or any material portion of its assets or businesses without the lenders consent.

We believe that our cash on hand and 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, our top priorities are cash generation and conservation throughout 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.



31



---

##### Table of Contents

Contractual Obligations(dollars in thousands)

The following tables summarize our contractual obligations, including interest, at March 27, 2009. 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)           |  | $                      | 53,106  |                 | $ | 53,106   |  | $        |       |              | $ |       |  | $ |       
|Debt obligations                |  |                        |         |                 |   |          |  |          |        |              |   |        |  |   |        
|Construction lending line(1)    |  |                        | 3,948   |                 |   | 3,948    |  |          |       |              |   |       |  |   |       
|Convertible senior notes(4)     |  |                        | 81,061  |                 |   | 1,841    |  |          | 5,250  |              |   | 3,500  |  |   | 70,470 
|Securitized financing 2005-1(1) |  |                        | 89,456  |                 |   | 12,281   |  |          | 16,857 |              |   | 13,223 |  |   | 47,095 
|Securitized financing 2007-1(1) |  |                        | 96,121  |                 |   | 12,789   |  |          | 20,376 |              |   | 14,695 |  |   | 48,261 
|Repurchase obligations(2)       |  |                        | 6,299   |                 |   | 3,485    |  |          | 2,814  |              |   |       |  |   |       
|Letters of credit(3)            |  |                        | 9,584   |                 |   | 9,584    |  |          |       |              |   |       |  |   |       
|Operating lease obligations     |  |                        | 17,840  |                 |   | 5,176    |  |          | 7,295  |              |   | 2,506  |  |   | 2,863  
|                                |  |                        |         |                 |   |          |  |          |        |              |   |        |  |   |        
|Total contractual obligations   |  | $                      | 357,415 |                 | $ | 102,210  |  | $        | 52,592 |              | $ | 33,924 |  | $ | 168,689
|                                |  |                        |         |                 |   |          |  |          |        |              |   |        |  |   |        



|(1) | Interest is calculated by applying contractual interest rates to 2009 fiscal year-end balances.
|--- | -----------------------------------------------------------------------------------------------

|(2) | We have contingent repurchase obligations outstanding at March 27, 2009 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 significant losses related to these contingent repurchase obligations during fiscal 2009, 2008 and 2007.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

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



32



---

##### Table of Contents

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.

Due to the difficult market environment and the losses we recorded during fiscal 2007 and early 2008, we reviewed our deferred tax assets during fiscal
2008 to determine whether a valuation allowance was necessary. In fiscal 2008, 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. In fiscal 2009, we recorded an additional $14.9 million valuation allowance and an income tax benefit of $8,000. 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. Sales of our commercial buildings, including shipping charges, are recognized when the
customer enters into a legally binding sales contract, title has transferred and the home is substantially completed and accepted by the customer. 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 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 completed two securitizations of factory-built housing loan receivables, both of which 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. The securitizations include provisions for removal of accounts by CountryPlace and other factors 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



33



---

##### Table of Contents

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, 2009, CountryPlace management was not aware of any potential problem loans that would have a material effect on loan delinquency or charge-offs.

The portion of the loan portfolio with payments delinquent sixty-one or more days has increased to 2.09% at March 31, 2009 from 1.00% at March 31, 2008. CountryPlace management believes this increase is
attributable primarily to two factors: 1) anticipated increases expected with the aging of the portfolio; and 2) deterioration in general economic conditions, including increasing levels of unemployment and continued house-price depreciation in
certain states.

Based on prior experience with factory-built home loan performance, CountryPlace management expects the incidence of
defaults to increase as loans age for the first three to six years of a portfolio life, and then decrease in later years. The weighted average remaining contractual life of the portfolio increased from 29 months at March 31, 2008 to 46 months
at March 31, 2009. This age difference includes the effect of the April, 2008 sale of $51.3 million of loans receivable which had a weighted average age of 6 months.

House price depreciation and economic weakness has continued to adversely affect the rates of delinquency and default in mortgage loan portfolios. California, Florida, and Arizona have been especially affected. With
the exception of a 42.6% concentration of loans receivable in Texas, CountryPlaces loan portfolio is well diversified across 27 states. Accordingly, CountryPlaces exposure to isolated local or regional economic downturns is, in normal
conditions, offset by more favorable economic conditions in other states. To date, Texas has performed better than in other states in the current economic downturn and CountryPlaces loans receivable concentration in Texas has offset the
effects of economic weakness in other states. The portion of CountryPlaces loans receivable in Texas that were 61 days or more past due at March 31, 2009 was 1.27%, or 0.82% lower than the delinquency rate for the total loans receivable
portfolio.

The portion of CountryPlaces loans receivable in Florida that were past due sixty-one days or more at March 31, 2009
increased to 3.51% from 1.51% at March 31, 2008. While loans receivable in Florida represented 7.1% of CountryPlaces total loans receivable at March 31, 2009, Florida loans receivable past due 61 days or more represented 0.25% of
total loans receivable at March 31, 2009, up from 0.10% at March 31, 2008. With the exception of Florida, delinquency performance for the Companys loans receivable in the three states most severely affected by house price
depreciation indicates that the effects of declining house prices in these states in general has had little or no discernable effect to date on the overall performance of CountryPlaces loans receivable portfolio. Delinquent accounts in Arizona
and California represent 0.14% and 0.06%, respectively, of the total loans receivable balance.



34



---

##### Table of Contents

Deteriorating performance of mortgage loans in general 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 portfolio is comprised entirely of fixed-rate, full-amortizing loans. 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, since house price depreciation has always been considered in determining
CountryPlaces allowance for loan losses.

Allowance for loan losses as of March 31, 2009 was $5.8 million, or approximately 2.9%
of the $203.0 million total consumer loans receivable and construction advances balance. We believe this allowance is adequate for expected loan losses, considering the geographic and loan-type concentrations of the portfolio, the age and remaining
life 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 and homes available for purchase at our retail sales centers. 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
factory-built 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 Pronouncement

In May 2008, the FASB issued FSP APB 14-1, Accounting
for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 specifies that issuers of convertible debt instruments should separately account for the liability and
equity components in a manner that will reflect the entitys nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. In addition, transaction costs incurred with third parties that directly relate to the
issuance of convertible debt instruments shall be allocated to the liability and equity components in proportion to the allocation of proceeds and accounted for as debt and equity issuance costs, respectively. The provisions of FSP APB 14-1 shall be
applied retrospectively to all periods presented when adopted. The provisions of FSP APB 14-1 are effective for our 3.25% convertible notes on March 28, 2009, the beginning of our fiscal year 2010. We are currently evaluating the effects of FSP
APB 14-1 on our consolidated financial statements. However, while our cash payments for interest on the 3.25% convertible notes will not be affected, based upon current amounts outstanding, we expect that upon adoption we will have higher annual
interest expense through May 2011. Additionally, as the adoption of FSP APB 14-1 is retrospective, non-cash adjustments to increase interest expense in prior periods will be reflected in future filings, along with corresponding non-cash adjustments
to record the unamortized portion of a debt discount on our 3.25% convertible notes, reduce retained earnings, increase additional paid-in capital, and reflect related income tax effects, as appropriate.



35



---

##### Table of Contents

|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 27, 2009 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 $0.5 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. 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, 2009 is held constant, a 10% increase in average interest rates would increase the fair value of CountryPlaces portfolio by approximately $39,000. 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 27, 2009 is held constant, a 10% decrease in interest rates would increase
the fair value of the notes by approximately $0.5 million.



36



---

##### Table of Contents

|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 27, 2009 and March 28, 2008, and the related consolidated statements of income, shareholders equity, and cash flows for each of the three years in the period ended March 27, 2009. Our audits
also included the financial statement schedule listed in the Index at Item 15(a)(2). These consolidated financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion
on these financial statements and schedule 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 27, 2009 and March 28, 2008, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended March 27, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects the information set forth therein.

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 27, 2009, 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 9, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Dallas,
Texas

June 9, 2009



37



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands)



|                                                                                                                        |  |               |         |   |               |   |         |  
|----------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ------------- | - | ------- | -
|                                                                                                                        |  | March 27,2009 |         |   | March 28,2008 |  
|Assets                                                                                                                  |  |               |         |   |               |   |         |  
|Cash and cash equivalents                                                                                               |  | $             | 12,374  |   |               | $ | 28,206  |  
|Restricted cash                                                                                                         |  |               | 17,771  |   |               |   | 25,487  |  
|Investments                                                                                                             |  |               | 17,175  |   |               |   | 22,442  |  
|Trade receivables                                                                                                       |  |               | 23,458  |   |               |   | 31,616  |  
|Consumer loans receivable, net (includes loans held for sale of $1,148 at March 27, 2009 and $51,300 at March 28,
2008) |  |               | 191,597 |   |               |   | 267,636 |  
|Inventories                                                                                                             |  |               | 97,144  |   |               |   | 123,294 |  
|Assets held for sale                                                                                                    |  |               | 5,775   |   |               |   | 7,532   |  
|Prepaid expenses and other assets                                                                                       |  |               | 10,451  |   |               |   | 11,685  |  
|Property, plant and equipment, at cost:                                                                                 |  |               |         |   |               |   |         |  
|Land and improvements                                                                                                   |  |               | 16,381  |   |               |   | 29,562  |  
|Buildings and improvements                                                                                              |  |               | 45,985  |   |               |   | 44,268  |  
|Machinery and equipment                                                                                                 |  |               | 55,822  |   |               |   | 53,564  |  
|Construction in progress                                                                                                |  |               | 265     |   |               |   | 3,658   |  
|                                                                                                                        |  |               |         |   |               |   |         |  
|                                                                                                                        |  |               | 118,453 |   |               |   | 131,052 |  
|Accumulated depreciation                                                                                                |  |               | (82,516 | ) |               |   | (84,050 | )
|                                                                                                                        |  |               |         |   |               |   |         |  
|                                                                                                                        |  |               | 35,937  |   |               |   | 47,002  |  
|                                                                                                                        |  |               |         |   |               |   |         |  
|Total assets                                                                                                            |  | $             | 411,682 |   |               | $ | 564,900 |  
|                                                                                                                        |  |               |         |   |               |   |         |  



See accompanying Notes to
Consolidated Financial Statements.



38



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share data)



|                                                                        |  |               |         |   |               |   |         |  
|----------------------------------------------------------------------- |  | ------------- | ------- | - | ------------- | - | ------- | -
|                                                                        |  | March 27,2009 |         |   | March 28,2008 |  
|Liabilities and Shareholders Equity                                    |  |               |         |   |               |   |         |  
|Accounts payable                                                        |  | $             | 18,954  |   |               | $ | 26,641  |  
|Accrued liabilities                                                     |  |               | 45,882  |   |               |   | 69,712  |  
|Floor plan payable                                                      |  |               | 49,401  |   |               |   | 59,367  |  
|Warehouse revolving debt                                                |  |               |        |   |               |   | 42,175  |  
|Construction lending line                                               |  |               | 3,589   |   |               |   |        |  
|Securitized financings                                                  |  |               | 140,283 |   |               |   | 165,430 |  
|Convertible senior notes                                                |  |               | 53,845  |   |               |   | 75,000  |  
|                                                                        |  |               |         |   |               |   |         |  
|Total liabilities                                                       |  |               | 311,954 |   |               |   | 438,325 |  
|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 27, 2009 and March 28, 2008           |  |               | 239     |   |               |   | 239     |  
|Additional paid-in capital                                              |  |               | 54,093  |   |               |   | 54,108  |  
|Retained earnings                                                       |  |               | 62,723  |   |               |   | 89,027  |  
|Treasury stock932,634 at March 27, 2009, and 956,014 at March 28, 2008 |  |               | (15,717 | ) |               |   | (15,896 | )
|Accumulated other comprehensive loss                                    |  |               | (1,610  | ) |               |   | (903    | )
|                                                                        |  |               |         |   |               |   |         |  
|Total shareholders equity                                              |  |               | 99,728  |   |               |   | 126,575 |  
|                                                                        |  |               |         |   |               |   |         |  
|Total liabilities and shareholders equity                              |  | $             | 411,682 |   |               | $ | 564,900 |  
|                                                                        |  |               |         |   |               |   |         |  



See accompanying Notes
to Consolidated Financial Statements.



39



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)



|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|------------------------------------------------------------ |  | ------------- | ------- | - | ------------- | - | -------- | ------------- |  | - | ------- | -
|                                                             |  | Year Ended    |        
|                                                             |  | March 27,2009 |         |   | March 28,2008 |   |          | March 30,2007 | 
|Net sales                                                    |  | $             | 409,274 |   |               | $ | 555,096  |               |  | $ | 661,247 |  
|Cost of sales                                                |  |               | 312,428 |   |               |   | 421,371  |               |  |   | 503,419 |  
|Selling, general and administrative expenses                 |  |               | 120,402 |   |               |   | 150,562  |               |  |   | 160,016 |  
|Goodwill impairment                                          |  |               |        |   |               |   | 78,506   |               |  |   |        |  
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|Loss from operations                                         |  |               | (23,556 | ) |               |   | (95,343  | )             |  |   | (2,188  | )
|Interest expense                                             |  |               | (15,417 | ) |               |   | (18,654  | )             |  |   | (15,695 | )
|Gain on repurchase of convertible senior notes               |  |               | 10,566  |   |               |   |         |               |  |   |        |  
|Equity in loss of limited partnership and impairment charges |  |               |        |   |               |   |         |               |  |   | (4,709  | )
|Other income                                                 |  |               | 2,095   |   |               |   | 3,625    |               |  |   | 4,901   |  
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|Loss before income taxes                                     |  |               | (26,312 | ) |               |   | (110,372 | )             |  |   | (17,691 | )
|Income tax benefit (expense)                                 |  |               | 8       |   |               |   | (13,890  | )             |  |   | 6,126   |  
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|Net loss                                                     |  | $             | (26,304 | ) |               | $ | (124,262 | )             |  | $ | (11,565 | )
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|Net loss per common sharebasic and diluted                  |  | $             | (1.15   | ) |               | $ | (5.44    | )             |  | $ | (0.51   | )
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|Weighted average common shares outstandingbasic and diluted |  |               | 22,856  |   |               |   | 22,852   |               |  |   | 22,852  |  
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  



See accompanying Notes
to Consolidated Financial Statements.



40



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Statements of Shareholders Equity

(In thousands, except share
data)



|                                                              |  |              |  |                          |     |  |                  |        |        |                                            |   |          |                |  |   |        |   |  |          |   |  |   |         |   |  |   |          |  
|------------------------------------------------------------- |  | ------------ |  | ------------------------ | --- |  | ---------------- | ------ | ------ | ------------------------------------------ | - | -------- | -------------- |  | - | ------ | - |  | -------- | - |  | - | ------- | - |  | - | -------- | -
|                                                              |  | Common Stock |  | AdditionalPaid-InCapital |     |  | RetainedEarnings |        |        | AccumulatedOtherComprehensiveIncome
(Loss) |   |          | Treasury Stock |  |   | Total  |  
|                                                              |  | Shares       |  | Amount                   |     |  |                  |        | Shares |                                            |   | Amount   |                | 
|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 (income) 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  |  
|Comprehensive loss                                            |  |              |  |                          |     |  |                  |        |        |                                            |   |          |                |  |   |        |   |  |          |   |  |   |         |   |  |   |          |  
|Net loss                                                      |  |             |  |                          |    |  |                  |       |        |                                            |   | (26,304  | )              |  |   |       |   |  |         |   |  |   |        |   |  |   | (26,304  | )
|Unrealized loss on available-for-sale investments             |  |             |  |                          |    |  |                  |       |        |                                            |   |         |                |  |   | (803   | ) |  |         |   |  |   |        |   |  |   | (803     | )
|Amortization of interest rate hedge                           |  |             |  |                          |    |  |                  |       |        |                                            |   |         |                |  |   | 96     |   |  |         |   |  |   |        |   |  |   | 96       |  
|                                                              |  |              |  |                          |     |  |                  |        |        |                                            |   |          |                |  |   |        |   |  |          |   |  |   |         |   |  |   |          |  
|Total comprehensive loss                                      |  |             |  |                          |    |  |                  |       |        |                                            |   | (26,304  | )              |  |   | (707   | ) |  |         |   |  |   |        |   |  |   | (27,011  | )
|Stock awards                                                  |  |              |  |                          |     |  |                  |        |        |                                            |   |          |                |  |   |        |   |  |          |   |  |   |         |   |  |   |          |  
|Shares granted                                                |  |             |  |                          |    |  |                  | (179   | )      |                                            |   |         |                |  |   |       |   |  | 23,380   |   |  |   | 179     |   |  |   |         |  
|Terminations                                                  |  |             |  |                          |    |  |                  |       |        |                                            |   |         |                |  |   |       |   |  |         |   |  |   |        |   |  |   |         |  
|Provision                                                     |  |             |  |                          |    |  |                  | 164    |        |                                            |   |         |                |  |   |       |   |  |         |   |  |   |        |   |  |   | 164      |  
|                                                              |  |              |  |                          |     |  |                  |        |        |                                            |   |          |                |  |   |        |   |  |          |   |  |   |         |   |  |   |          |  
|Balance at March 27, 2009                                     |  | 23,807,879   |  | $                        | 239 |  | $                | 54,093 |        |                                            | $ | 62,723   |                |  | $ | (1,610 | ) |  | (932,634 | ) |  | $ | (15,717 | ) |  | $ | 99,728   |  
|                                                              |  |              |  |                          |     |  |                  |        |        |                                            |   |          |                |  |   |        |   |  |          |   |  |   |         |   |  |   |          |  

See accompanying Notes to Consolidated Financial Statements.



41



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Statements of Cash Flows



|                                                                                         |  |               |         |   |               |   |          |               |  |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ------------- | - | -------- | ------------- |  | - | ------- | -
|                                                                                         |  | Year Ended    |        
|                                                                                         |  | March 27,2009 |         |   | March 28,2008 |   |          | March 30,2007 | 
|Operating Activities                                                                     |  |               |         |   |               |   |          |               |  |   |         |  
|Net loss                                                                                 |  | $             | (26,304 | ) |               | $ | (124,262 | )             |  | $ | (11,565 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities |  |               |         |   |               |   |          |               |  |   |         |  
|Depreciation and amortization                                                            |  |               | 5,928   |   |               |   | 8,130    |               |  |   | 9,263   |  
|Provision for credit losses                                                              |  |               | 2,862   |   |               |   | 3,572    |               |  |   | 3,790   |  
|Deferred income taxes                                                                    |  |               |        |   |               |   | 14,476   |               |  |   | (1,181  | )
|Goodwill impairment                                                                      |  |               |        |   |               |   | 78,506   |               |  |   |        |  
|Impairment of investment securities                                                      |  |               | 508     |   |               |   | 432      |               |  |   |        |  
|Impairment of property, plant and equipment                                              |  |               |        |   |               |   | 582      |               |  |   |        |  
|Impairment of assets held for sale                                                       |  |               | 1,543   |   |               |   |         |               |  |   |        |  
|(Gain) loss on disposition of assets                                                     |  |               | (1,045  | ) |               |   | (623     | )             |  |   | 1,677   |  
|Gain on sale of investments                                                              |  |               | (146    | ) |               |   | (359     | )             |  |   | (345    | )
|Gain on sale of loans                                                                    |  |               | (1,336  | ) |               |   |         |               |  |   |        |  
|Loss on sale leaseback transaction                                                       |  |               | 504     |   |               |   |         |               |  |   |        |  
|Gain on repurchase of convertible senior notes                                           |  |               | (10,566 | ) |               |   |         |               |  |   |        |  
|Provision for long-term incentive plan                                                   |  |               | 164     |   |               |   | 201      |               |  |   | 194     |  
|Proceeds from business interruption insurance                                            |  |               |        |   |               |   | 3,300    |               |  |   |        |  
|Equity in loss of limited partnership and impairment charges                             |  |               |        |   |               |   |         |               |  |   | 4,709   |  
|Changes in operating assets and liabilities:                                             |  |               |         |   |               |   |          |               |  |   |         |  
|Restricted cash                                                                          |  |               | 7,716   |   |               |   | 17,982   |               |  |   | (16,869 | )
|Trade receivables                                                                        |  |               | 7,931   |   |               |   | 2,362    |               |  |   | 16,575  |  
|Consumer loans originated for investment or sale                                         |  |               | (32,756 | ) |               |   | (78,925  | )             |  |   | (92,676 | )
|Principal payments on consumer loans originated                                          |  |               | 37,663  |   |               |   | 36,006   |               |  |   | 28,063  |  
|Proceeds from sales of loans                                                             |  |               | 69,833  |   |               |   |         |               |  |   |        |  
|Inventories                                                                              |  |               | 26,150  |   |               |   | 15,396   |               |  |   | 10,878  |  
|Prepaid expenses and other assets                                                        |  |               | 705     |   |               |   | 9,065    |               |  |   | (12,464 | )
|Accounts payable and accrued expenses                                                    |  |               | (32,089 | ) |               |   | (18,677  | )             |  |   | (27,721 | )
|                                                                                         |  |               |         |   |               |   |          |               |  |   |         |  
|Net cash provided by (used in) operating activities                                      |  |               | 57,265  |   |               |   | (32,836  | )             |  |   | (87,672 | )
|                                                                                         |  |               |        
|Investing Activities                                                                     |  |               |         |   |               |   |          |               |  |   |         |  
|Purchase of minority interest                                                            |  |               |        |   |               |   | (1,800   | )             |  |   |        |  
|Purchase of property, plant and equipment, net of proceeds from disposition              |  |               | 567     |   |               |   | (1,326   | )             |  |   | (4,541  | )
|Insurance proceeds received for property, plant and equipment                            |  |               |        |   |               |   | 3,000    |               |  |   |        |  
|Purchases of investments                                                                 |  |               | (15,165 | ) |               |   | (7,258   | )             |  |   | (10,824 | )
|Sales of investments                                                                     |  |               | 19,301  |   |               |   | 7,215    |               |  |   | 12,962  |  
|                                                                                         |  |               |         |   |               |   |          |               |  |   |         |  
|Net cash provided by (used in) investing activities                                      |  |               | 4,703   |   |               |   | (169     | )             |  |   | (2,403  | )
|                                                                                         |  |               |        
|Financing Activities                                                                     |  |               |         |   |               |   |          |               |  |   |         |  
|Net (payments on) proceeds from floor plan payable                                       |  |               | (9,966  | ) |               |   | 15,764   |               |  |   | 5,695   |  
|Net (payments on) proceeds from warehouse revolving debt                                 |  |               | (42,175 | ) |               |   | 30,130   |               |  |   | (25,368 | )
|Net proceeds from construction lending line                                              |  |               | 3,589   |   |               |   |         |               |  |   |        |  
|Payments to repurchase convertible senior notes                                          |  |               | (10,577 | ) |               |   |         |               |  |   |        |  
|Net proceeds from sale leaseback transactions                                            |  |               | 6,476   |   |               |   |         |               |  |   |        |  
|Proceeds from securitized financings, net of transaction costs                           |  |               |        |   |               |   |         |               |  |   | 101,476 |  
|Payments on securitized financings                                                       |  |               | (25,147 | ) |               |   | (28,975  | )             |  |   | (12,450 | )
|                                                                                         |  |               |         |   |               |   |          |               |  |   |         |  
|Net cash (used in) provided by financing activities                                      |  |               | (77,800 | ) |               |   | 16,919   |               |  |   | 69,353  |  
|Net decrease in cash and cash equivalents                                                |  |               | (15,832 | ) |               |   | (16,086  | )             |  |   | (20,722 | )
|Cash and cash equivalents at beginning of year                                           |  |               | 28,206  |   |               |   | 44,292   |               |  |   | 65,014  |  
|                                                                                         |  |               |         |   |               |   |          |               |  |   |         |  
|Cash and cash equivalents at end of year                                                 |  | $             | 12,374  |   |               | $ | 28,206   |               |  | $ | 44,292  |  
|                                                                                         |  |               |         |   |               |   |          |               |  |   |         |  
|Supplemental disclosures of cash flow information:                                       |  |               |         |   |               |   |          |               |  |   |         |  
|Cash paid (received) during the year for:                                                |  |               |         |   |               |   |          |               |  |   |         |  
|Interest                                                                                 |  | $             | 16,738  |   |               | $ | 18,434   |               |  | $ | 14,972  |  
|Income taxes                                                                             |  | $             | 49      |   |               | $ | (8,752   | )             |  | $ | 2,954   |  
|Non-cash transactions:                                                                   |  |               |         |   |               |   |          |               |  |   |         |  
|Loans subject to foreclosure                                                             |  | $             | 2,048   |   |               | $ | 1,206    |               |  | $ | 909     |  

See accompanying Notes to Consolidated Financial Statements.



42



---

##### Table of Contents

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). 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 Companys results for fiscal 2009 were heavily influenced by the severe state of the factory-built housing industry, the weakness in the overall
housing market and the prevailing economic uncertainties and credit crisis. There was a drastic slowdown in demand for factory-built housing products and decline in retail traffic during fiscal 2009. Industry shipments for calendar year 2008
(through November) were down approximately 14% from the prior years already historically low levels. The three significant (to both the Company and the industry) manufactured housing states of Florida, California and Arizona were down a
combined 41%. Consumer concerns about the economy and the lack of available credit are keeping potential homebuyers on the sidelines; therefore affecting the demand for factory-built housing. While the Company expects these conditions to worsen and
the Companys performance to improve in fiscal 2010, the Company is likely to still incur a net loss.

The Company continues to take
actions to further reduce its operating costs in response to current conditions and expected demand. The Company idled one production line in Martinsville, Virginia during the second quarter, another production line in Austin, Texas during the third
quarter and another production line in Siler City, North Carolina during the fourth quarter. The Company is taking additional steps to further reduce its selling, general and administrative expenses, increase margins and further reduce its
receivables and inventory levels. The Company believes that this will better position it to sustain a prolonged downturn and benefit from any upside in demand when it occurs.

With the decline in retail demand, the Company has focused on new areas of business, including commercial and military projects, which present new
revenue opportunities for it. These institutions are looking for a quality provider and the Company is well positioned as a preferred supplier to meet this demand. During fiscal 2009, the Company produced barracks and other housing for three
military bases.

In light of the current economic crisis and with no near-term signs of recovery for the factory-built housing industry,
the Companys top priorities are cash generation and cash preservation in every area of its business. During fiscal 2009, the Company focused on these priorities through the following:



| |  |  | The Company sold $51.3 million of CountryPlaces warehoused portfolio of chattel and mortgage loans for a gain of $1.3 million. The Company used the proceeds
to repay in full and terminate the warehouse borrowing facility scheduled to expire on April 30, 2008.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Through CountryPlace, the Company obtained a $10.0 million construction lending line to use for financing mortgage loans.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



43



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



| |  |  | The Company completed two sale leaseback transactions totaling $6.5 million in cash for 13 of its retail properties.
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | The Company retired $21.2 million of its convertible senior notes for $10.6 million of cash, resulting in a gain of $10.6 million and lower interest costs.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company closed three less-than-efficient manufacturing facilities and one retail sales center.
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | The Company reduced inventories by $26.2 million and receivables by $8.2 million.
| | - |  | ---------------------------------------------------------------------------------



| |  |  | The Company has continued to reduce its overhead costs and employed other cash management steps.
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | The Company accomplished all the above and still funded $20 million in committed pipeline loans from working capital when its warehouse lender exited the business.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company has been working with a financial advisor to leverage $100 million of its unlevered assets.
| | - |  | -------------------------------------------------------------------------------------------------------

For the near term, the outlook for housing, both site-built and factory-built, remains extremely challenging. A number of issues must be resolved for any
recovery to gain traction, and until inventories decline, housing prices stabilize, credit is restored and general economic fundamentals improve, the Company does not expect any short-term improvement. In the meantime, the Companys strategy is
to manage its operations more efficiently and become a stronger and leaner company. Accordingly, the Company remains focused on three critical areas in its business for fiscal 2010. The Companys top priority is to manage its cash and leverage
its balance sheet to maintain adequate liquidity through this uncertain business climate. The Company is also streamlining its operations to reduce both marginal costs and selling, general and administrative expenses, consistent with expected
revenues. And finally, the Company continues to look for new sources of revenue by pursuing its creative efforts like flexible products, commercial and military modular products, and targeted Internet marketing strategies. Regardless of market
conditions, the Company will continue to leverage its core strengthsthe most trusted brand name in the industry, a diverse and high-quality product line, manufacturing excellence and exceptional customer service.

During the third quarter of fiscal 2009, the Companys floor plan lender, Textron Financial Corporation (Textron), announced that they are in the
process of an orderly liquidation of certain commercial loan business including their housing finance business. As further discussed in Note 5, in April 2009, the Company agreed to an amendment to its floor plan facility which includes a lower total
commitment amount (from $70 million to $50 million), a new expiration date of March 31, 2010, new interest rates and new financial covenants. In addition, as discussed in Note 5, the Company agreed to a further amendment dated June 4,
2009, which extends the expiration date to June 30, 2010, among other things.

The Company was in compliance with its new financial
covenants as of March 27, 2009. In addition, management believes that new quarterly financial covenants covering maximum net loss before taxes levels, annualized inventory turn and maximum borrowing base, all as defined in the recent
amendments, for fiscal 2010 are achievable based upon the Companys fiscal 2010 operating plan. Management has also identified other actions within their control that could be implemented, as necessary, to help the Company meet these quarterly
requirements. However, there can be no assurance that these actions will be successful.

Additionally, in light of market conditions, it is
possible that the Company may be unable to comply with the new financial covenants during fiscal 2010. Textron could also declare a loan violation due to a material adverse change, as defined in the agreement. As a result, if a loan violation were
to occur and not be remedied in accordance with the terms of the floor plan facility, Textron could declare an event of default and demand that the full amount of the facility be paid in full prior to maturity. Such a demand would result in, among
other things, a cross default of the Companys convertible senior notes described in Note 6.



44



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



While the Company is currently exploring asset sales and other types of capital raising alternatives
in order to generate liquidity, there can be no assurance that such activities will be successful or generate cash resources adequate to fully retire the Textron floor plan facility at maturity. In this event, there can be no assurance that Textron
will consent to a further amendment of the floor plan facility agreement.

Year End

The Companys fiscal year ends on the last Friday in March. 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. Sales of the Companys commercial buildings, including shipping charges, are recognized when the customer enters into a legally binding sales contract, title has transferred and the home is substantially complete and
accepted by the customer. 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.

Cash and cash equivalents

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



45



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



Restricted cash

Restricted cash consists of the following (in thousands):



|                                                                                                                              |  |               |        |               |   |       
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | ------------- | - | ------
|                                                                                                                              |  | March 27,2009 |        | March 28,2008
|Cash pledged as collateral for outstanding insurance programs and surety bonds                                                |  | $             | 10,358 |               | $ | 13,778
|Cash related to customer deposits held in trust accounts                                                                      |  |               | 3,225  |               |   | 5,107 
|Cash related to CountryPlace customers principal and interest payments on the loans that are in the warehouse or
securitized |  |               | 4,188  |               |   | 6,602 
|                                                                                                                              |  |               |        |               |   |       
|                                                                                                                              |  | $             | 17,771 |               | $ | 25,487
|                                                                                                                              |  |               |        |               |   |       

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 recorded at the lower of cost or market on an aggregate basis. Interest
income is recognized based upon the unpaid principal amount outstanding.

As of March 27, 2009 and March 28, 2008, the Company
had $1.1 million and $51.3 million of loans held for sale, respectively. These loans were transferred from loans held for investment to loans held for sale at the lower of cost or fair market value. 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, 2009, CountryPlace management
was not aware of any potential problem loans that would have a material effect on loan delinquency or charge-offs.

The portion of the loan
portfolio with payments delinquent sixty-one or more days has increased to 2.09% at March 31, 2009 from 1.00% at March 31, 2008. CountryPlace management believes this increase is attributable primarily to two factors: 1) anticipated
increases expected with the aging of the portfolio; and 2) deterioration in general economic conditions, including increasing levels of unemployment and continued house-price depreciation in certain states.



46



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



Based on prior experience with factory-built home loan performance, CountryPlace management expects
the incidence of defaults to increase as loans age for the first three to six years of a portfolio life, and then decrease in later years. The weighted average remaining contractual life of the portfolio increased from 29 months at March 31,
2008 to 46 months at March 31, 2009. This age difference includes the effect of the April, 2008 sale of $51.3 million of loans receivable which had a weighted average age of 6 months.

House price depreciation and economic weakness has continued to adversely affect the rates of delinquency and default in mortgage loan portfolios.
California, Florida, and Arizona have been especially affected. With the exception of a 42.6% concentration of loans receivable in Texas, CountryPlaces loan portfolio is well diversified across 27 states. Accordingly, CountryPlaces
exposure to isolated local or regional economic downturns is, in normal conditions, offset by more favorable economic conditions in other states. To date, Texas has performed better than in other states in the current economic downturn and
CountryPlaces loans receivable concentration in Texas has offset the effects of economic weakness in other states. The portion of CountryPlaces loans receivable in Texas that were 61 days or more past due at March 31, 2009 was
1.27%, or 0.82% lower than the delinquency rate for the total loans receivable portfolio.

The portion of CountryPlaces loans
receivable in Florida that were past due sixty-one days or more at March 31, 2009 increased to 3.51% from 1.51% at March 31, 2008. While loans receivable in Florida represented 7.1% of CountryPlaces total loans receivable at
March 31, 2009, Florida loans receivable past due 61 days or more represented 0.25% of total loans receivable at March 31, 2009, up from 0.10% at March 31, 2008. With the exception of Florida, delinquency performance for the
Companys loans receivable in the three states most severely affected by house price depreciation indicates that the effects of declining house prices in these states in general has had little or no discernable effect to date on the overall
performance of CountryPlaces loans receivable portfolio. Delinquent accounts in Arizona and California represent 0.14% and 0.06%, respectively, of the total loans receivable balance.

Deteriorating performance of mortgage loans in general 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 portfolio is comprised
entirely of fixed-rate, full-amortizing loans. 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, since house price depreciation has always been considered in determining CountryPlaces allowance for loan losses.

Allowance for loan losses as of March 31, 2009 was $5.8 million, or approximately 2.9% of the $203.0 million total consumer loans receivable and
construction advances balance. The Company believes this allowance is adequate for expected loan losses, considering the geographic and loan-type concentrations of the portfolio, the age and remaining life 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 completed two securitizations of factory-built housing loan receivables both of which 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



47



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



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. The securitizations include provisions for removal of
accounts by CountryPlace and other factors 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. 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 if applicable. 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) 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 and homes
available for purchase at the Companys retail sales centers. 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 factory-built 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.



48



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



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 $5.4 million, $7.1 million and $8.4 million in fiscal 2009, 2008 and 2007, respectively. Repairs and maintenance are expensed as incurred. The recoverability of property, plant and equipment is evaluated whenever events or changes in
circumstances 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 evaluated its property, plant and equipment for
impairment during the fourth quarter of fiscal 2009 and determined that no impairment charges were necessary. The Company recorded $0.6 million for impairment charges in fiscal 2008 and none in 2007.

Assets held for sale

During fiscal 2008, management
committed to sell three manufacturing facilities with a carrying amount of $7.5 million and determined that the plan of sale criteria in FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, had
been met. As a result of deteriorating market conditions in fiscal 2009, the properties were not sold and continue to be classified as held for sale. However, the Company continues to actively market these properties and have reduced the selling
prices to respond to the current market conditions. The Company has entered into an agreement to sell one of the facilities no later than the end of the first quarter of fiscal 2010 and plan for the remaining two facilities to be sold by the end of
fiscal 2010. The carrying value of the production equipment was adjusted to its fair value less costs to sell, amounting to $5.7 million, which was determined based on third-party appraisals. A $1.5 million impairment loss has been recorded as an
adjustment to the valuation allowance. The carrying value of the facilities that are held for sale is separately presented in the Assets Held for Sale caption in the consolidated balance sheets and is reported under the factory-built
housing segment.

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 tests 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. Due to the difficult market environment and the losses incurred during fiscal
2007 and early 2008, the Company, with the assistance of an independent valuation firm, performed an interim goodwill impairment analysis in fiscal 2008 and concluded that the goodwill relating to its factory-built housing reporting unit was
impaired. As a result, during the second quarter of fiscal 2008, the Company recorded a non-cash impairment charge of $78.5 million to fully impair the goodwill related to its factory-built housing segment.

Goodwill totaling $2.2 million at both March 27, 2009 and March 28, 2008 relates to the Companys minority interest purchase of the
remaining 20% of CountryPlace in fiscal 2008 and is included in prepaids and other assets on the Companys consolidated balance sheets.



49



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



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 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.

Due to the difficult market environment and the losses incurred during fiscal 2007 and early 2008, the Company reviewed its deferred tax assets during
fiscal 2008 to determine whether a valuation allowance was necessary. In fiscal 2008, 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. In fiscal 2009, the Company recorded an additional $14.9 million valuation allowance against its deferred tax assets generated in fiscal 2009 and an income tax benefit of $8,000. 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.

Other Income

Other income totals $2.1 million, $3.6 million and $4.9 million in fiscal 2009, 2008 and 2007, respectively. In fiscal 2009, other income consists of $0.7 million of interest income, $0.7 million of income earned on a real estate investment
and $0.7 million of income earned from mortgage lending. In fiscal 2008, other income consists of $3.0 million of interest income, $0.4 million of income earned from mortgage lending and $0.3 million of income earned on a real estate investment. In
fiscal 2007, other income consists of $4.4 million in interest income and $0.3 million of gain on the sale of available-for-sale investments.

Accumulated other comprehensive income (loss)

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

New Accounting Pronouncement

In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement). FSP APB 14-1 specifies that issuers of convertible debt instruments should separately account for the liability and equity components in a manner that will reflect the entitys nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. In addition, transaction costs incurred with third parties that directly relate to the issuance of convertible debt instruments shall be allocated to the liability and equity
components in proportion to the allocation of proceeds and accounted for as debt and equity issuance costs, respectively. The provisions of FSP APB 14-1 shall be applied retrospectively to all periods presented when adopted. The provisions of FSP
APB 14-1 are



50



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



effective for the Companys 3.25% convertible notes on March 28, 2009, the beginning of its fiscal year 2010. The Company is currently evaluating
the effects of FSP APB 14-1 on its consolidated financial statements. However, while the Companys cash payments for interest on the 3.25% convertible notes will not be affected, based upon current amounts outstanding, the Company expects that
upon adoption it will have higher annual interest expense through May 2011. Additionally, as the adoption of FSP APB 14-1 is retrospective, non-cash adjustments to increase interest expense in prior periods will be reflected in future filings, along
with corresponding non-cash adjustments to record the unamortized portion of a debt discount on its 3.25% convertible notes, reduce retained earnings, increase additional paid-in capital, and reflect related income tax effects, as appropriate.



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

Inventories consist of the following
(in thousands):



|                          |  |               |        |               |   |        
|------------------------- |  | ------------- | ------ | ------------- | - | -------
|                          |  | March 27,2009 |        | March 28,2008
|Raw materials             |  | $             | 8,198  |               | $ | 10,111 
|Work in process           |  |               | 6,110  |               |   | 6,730  
|Finished goods at factory |  |               | 2,934  |               |   | 2,146  
|Finished goods at retail  |  |               | 79,902 |               |   | 104,307
|                          |  |               |        |               |   |        
|                          |  | $             | 97,144 |               | $ | 123,294
|                          |  |               |        |               |   |        

Inventories are pledged as collateral with Textron. See Note 5.



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

The following tables summarize the
Companys available-for-sale investment securities as of March 27, 2009 and March 28, 2008 (in thousands):



|                                    |  |                |        |                      |   |                       |  |   |           |   |  |   |       
|----------------------------------- |  | -------------- | ------ | -------------------- | - | --------------------- |  | - | --------- | - |  | - | ------
|                                    |  | March 27, 2009
|                                    |  | AmortizedCost  |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | FairValue
|Government-sponsored enterprises(1) |  | $              | 7,119  |                      | $ | 274                   |  | $ | (2        | ) |  | $ | 7,391 
|States and political subdivisions   |  |                | 991    |                      |   | 16                    |  |   |          |   |  |   | 1,007 
|Corporate debt securities           |  |                | 5,612  |                      |   | 27                    |  |   | (128      | ) |  |   | 5,511 
|Marketable equity securities        |  |                | 4,355  |                      |   | 20                    |  |   | (1,109    | ) |  |   | 3,266 
|                                    |  |                |        |                      |   |                       |  |   |           |   |  |   |       
|Total                               |  | $              | 18,077 |                      | $ | 337                   |  | $ | (1,239    | ) |  | $ | 17,175
|                                    |  |                |        |                      |   |                       |  |   |           |   |  |   |       



|                                    |  |                |        |                      |   |                       |  |   |           |   |  |   |       
|----------------------------------- |  | -------------- | ------ | -------------------- | - | --------------------- |  | - | --------- | - |  | - | ------
|                                    |  | March 28, 2008
|                                    |  | AmortizedCost  |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | FairValue
|U.S. Government Agencies            |  | $              | 25     |                      | $ |                      |  | $ |          |   |  | $ | 25    
|Government-sponsored enterprises(1) |  |                | 3,648  |                      |   | 109                   |  |   | (10       | ) |  |   | 3,747 
|States and political subdivisions   |  |                | 10,205 |                      |   | 37                    |  |   | (114      | ) |  |   | 10,128
|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
|                                    |  |                |        |                      |   |                       |  |   |           |   |  |   |       



51



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

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 27, 2009 (in thousands):



|                                    |  |                     |       |                |                     |        |            |  |                |  |            |  |                |       |  |   |        |  
|----------------------------------- |  | ------------------- | ----- | -------------- | ------------------- | ------ | ---------- |  | -------------- |  | ---------- |  | -------------- | ----- |  | - | ------ | -
|                                    |  | Less than 12 months |       |                | 12 Months or Longer |        | Total      | 
|                                    |  | Fair Value          |       | UnrealizedLoss |                     |        | Fair Value |  | UnrealizedLoss |  | Fair Value |  | UnrealizedLoss |      
|Government-sponsored enterprises(1) |  | $                   | 509   |                | $                   | (2     | )          |  |               |  |           |  | $              | 509   |  | $ | (2     | )
|Corporate debt securities           |  |                     | 3,830 |                |                     | (128   | )          |  |               |  |           |  |                | 3,830 |  |   | (128   | )
|Marketable equity securities        |  |                     | 1,611 |                |                     | (1,109 | )          |  |               |  |           |  |                | 1,611 |  |   | (1,109 | )
|                                    |  |                     |       |                |                     |        |            |  |                |  |            |  |                |       |  |   |        |  
|Total                               |  | $                   | 5,950 |                | $                   | (1,239 | )          |  |               |  |           |  | $              | 5,950 |  | $ | (1,239 | )
|                                    |  |                     |       |                |                     |        |            |  |                |  |            |  |                |       |  |   |        |  

(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          |       | UnrealizedLoss |                     |      | Fair Value |       | UnrealizedLoss |       |  | Fair Value |     | UnrealizedLoss | 
|Government-sponsored enterprises(1) |  | $                   |      |                | $                   |     |            |       | $              | 90    |  | $          | (10 | )              |  | $ | 90    |  | $ | (10  | )
|States and political subdivisions   |  |                     | 4,450 |                |                     | (114 | )          |       |                |      |  |            |    |                |  |   | 4,450 |  |   | (114 | )
|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 | )
|                                    |  |                     |       |                |                     |      |            |       |                |       |  |            |     |                |  |   |       |  |   |      |  



|(1) | Includes obligations of Government-sponsored enterprises, such as Fannie Mae, the Federal Home Loan Banks and the Federal Home Loan Mortgages.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

During fiscal 2009, 15 of the Companys available-for-sale securities with a total carrying value of $0.9 million were determined to be impaired and
a realized loss of $0.5 million was recorded in the Companys consolidated statements of operations. During fiscal 2008, one of the Companys available-for-sale securities with a carrying value of $3.5 million was determined to be impaired
and a realized loss of $0.4 million was recorded in the Companys consolidated statements of operations.

The Company does not believe
that the remaining unrealized losses on its available-for-sale investments 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 and, (2) it is probable that the Company will be able to collect the amounts contractually due as it has not identified any credit concerns on these securities. The Company has no non-agency mortgage related securities
at March 27, 2009.



52



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



The amortized cost and fair value of the Companys investment securities at March 27, 2009,
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                        |  | $             | 301    |           | $ | 307   
|Due after one year through five years          |  |               | 7,007  |           |   | 7,000 
|Due after five years                           |  |               | 6,414  |           |   | 6,602 
|Marketable equity securities                   |  |               | 4,355  |           |   | 3,266 
|                                               |  |               |        |           |   |       
|Total investment securities available-for-sale |  | $             | 18,077 |           | $ | 17,175
|                                               |  |               |        |           |   |       

Gross gains realized on the sales of investment securities for fiscal years 2009, 2008 and 2007
were approximately $0.4 million, $0.9 million and $0.8 million, respectively. Gross losses were approximately $0.7 million, $0.3 million and $0.2 million for fiscal years 2009, 2008 and 2007, respectively.



|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 31,2009 |         |   | March 31,2008 |  
|Consumer loans receivable held for investment     |  | $             | 198,169 |   |               | $ | 221,213 |  
|Consumer loans receivable held for sale           |  |               | 1,148   |   |               |   | 51,300  |  
|Construction advances on non-conforming mortgages |  |               | 3,638   |   |               |   | 11,665  |  
|Deferred financing costs, net                     |  |               | (5,558  | ) |               |   | (7,567  | )
|Allowance for loan losses                         |  |               | (5,800  | ) |               |   | (8,975  | )
|                                                  |  |               |         |   |               |   |         |  
|Consumer loans receivable, net                    |  | $             | 191,597 |   |               | $ | 267,636 |  
|                                                  |  |               |         |   |               |   |         |  

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



|                                               |  |               |        |   |               |   |        |               |  |   |        |  
|---------------------------------------------- |  | ------------- | ------ | - | ------------- | - | ------ | ------------- |  | - | ------ | -
|                                               |  | March 31,2009 |        |   | March 31,2008 |   |        | March 31,2007 | 
|Allowance for loan losses, beginning of period |  | $             | 8,975  |   |               | $ | 7,739  |               |  | $ | 6,361  |  
|Provision for credit losses                    |  |               | 2,862  |   |               |   | 3,572  |               |  |   | 3,790  |  
|Loans charged off, net of recoveries           |  |               | (4,396 | ) |               |   | (2,336 | )             |  |   | (2,412 | )
|Reduction of reserve due to loan sale          |  |               | (1,641 | ) |               |   |       |               |  |   |       |  
|                                               |  |               |        |   |               |   |        |               |  |   |        |  
|Allowance for loan losses, end of period       |  | $             | 5,800  |   |               | $ | 8,975  |               |  | $ | 7,739  |  
|                                               |  |               |        |   |               |   |        |               |  |   |        |  



53



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



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,
2009, 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, 2009 and March 31, 2008 (dollars in thousands):



|                                            |  |               |       |   |               |   |       |  
|------------------------------------------- |  | ------------- | ----- | - | ------------- | - | ----- | -
|                                            |  | March 31,2009 |       |   | March 31,2008 |  
|Non-performing loans:                       |  |               |       |   |               |   |       |  
|Loans accounted for on a nonaccrual basis   |  | $             | 2,574 |   |               | $ | 2,026 |  
|Accruing loans past due 90 days or more     |  |               | 390   |   |               |   | 244   |  
|                                            |  |               |       |   |               |   |       |  
|Total nonaccrual and 90 days past due loans |  |               | 2,964 |   |               |   | 2,270 |  
|Percentage of total loans                   |  |               | 1.49  | % |               |   | 0.83  | %
|Other non-performing assets(1)              |  |               | 2,048 |   |               |   | 1,635 |  
|Troubled debt restructurings                |  |               | 5,013 |   |               |   |      |  



|(1) | Consists of land and homes 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During fiscal 2009, CountryPlace modified loans to retain borrowers with good payment
history. These modifications were considered to represent credit concessions due to hurricane and other repayment matters (such as employment/financial stress) impacting these borrowers. At March 31, 2009, CountryPlace has modified
approximately $5.0 million of loans where principal and interest payments have been deferred or waived for periods ranging from one to three months. These loans are not reflected as non-performing loans but as troubled debt
restructurings. As of March 31, 2009, the allowance for loan losses totaled $5.8 million of which $0.1 million is an impairment allowance for these loans.

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, 2009 and March 31, 2008:



|           |  |               |   |  |               |  
|---------- |  | ------------- | - |  | ------------- | -
|           |  | March 31,2009 |   |  | March 31,2008 |  
|Texas      |  | 42.6          | % |  | 41.0          | %
|Arizona    |  | 6.3           |   |  | 7.1           |  
|Florida    |  | 7.1           |   |  | 6.9           |  
|California |  | 2.2           |   |  | 2.9           |  

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, 2009 or March 31, 2008. Management believes the allowance for loan losses is adequate to cover estimated losses at
March 31, 2009.



54



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



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

The Company has an agreement
with Textron for a floor plan facility. During the third quarter of fiscal 2009, Textron announced that they are in the process of an orderly liquidation of certain of their commercial finance businesses, including their housing inventory finance
business. On April 28, 2009 (with an effective date of January 26, 2009), the Company agreed to an amendment which includes the following modifications: a new committed amount of $50 million (reduced from $70 million) which will gradually
be reduced to $40 million by December 31, 2009, a new facility expiration date of March 31, 2010, a new interest rate of LIBOR plus 7.00%, and new financial covenants. The new financial covenants the Company had to comply with as of
March 27, 2009 were a maximum quarterly net loss before taxes of $15 million, a minimum annualized inventory turn of 2.75, and a maximum borrowing base requirement of 60% of eligible finished goods inventory. For the remaining quarters of
fiscal 2010, the maximum net loss before taxes covenant requirement is reduced to $10 million. The facility has an advance rate of 90% of manufacturers invoice and is principally secured by new home inventory and a portion of receivables from
financial institutions. As of March 27, 2009 and March 28, 2008, the Company had $49.4 million and $59.4 million, respectively, outstanding under the floor plan credit facility.

The Company agreed to a further amendment dated June 4, 2009, which includes the following:



| |  |  | extends the expiration date to June 30, 2010,
| | - |  | ---------------------------------------------



| |  |  | lowers the committed amount from $50 million to $45 million and further lowers it to $40 million upon the earlier of the sale of certain assets or December 31,
2009,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | alters the maximum quarterly net loss before taxes covenant to exclude any interest expense reflected on the financial statements due to 2009 accounting changes,
and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | requires a prepayment of principal equal to any amounts of cash and cash equivalents greater than $20 million as of March 31, 2010 no later than the earlier of
10 business days after the closing of the Companys fiscal quarter ending March 31, 2010 or April 30, 2010.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company was in compliance with its new financial covenants as of March 27, 2009. In addition, management believes that new quarterly financial covenants covering maximum net loss before taxes levels, annualized inventory turn and
maximum borrowing base, all as defined in the recent amendments, for fiscal 2010 are achievable based upon the Companys fiscal 2010 operating plan. Management has also identified other actions within their control that could be implemented, as
necessary, to help the Company meet these quarterly requirements. However, there can be no assurance that these actions will be successful.

Additionally, in light of market conditions, it is possible that the Company may be unable to comply with the new financial covenants during fiscal 2010. Textron could also declare a loan violation due to a material adverse change, as
defined in the agreement. As a result, if a loan violation were to occur and not be remedied in accordance with the terms of the floor plan facility, Textron could declare an event of default and demand that the full amount of the facility be paid
in full prior to maturity. Such a demand would result in, among other things, a cross default of the Companys convertible senior notes described in Note 6.

While the Company is currently exploring asset sales and other types of capital raising alternatives in order to generate liquidity, there can be no assurance that such activities will be successful or generate cash
resources adequate to fully retire the Textron floor plan facility at maturity. In this event, there can be no assurance that Textron will consent to a further amendment of the floor plan facility agreement.



55



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



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

Debt obligations consist of the
following (in thousands):



|                             |  |               |         |               |   |        
|---------------------------- |  | ------------- | ------- | ------------- | - | -------
|                             |  | March 27,2009 |         | March 28,2008
|Convertible senior notes     |  | $             | 53,845  |               | $ | 75,000 
|Securitized financing 2005-1 |  |               | 68,413  |               |   | 80,008 
|Securitized financing 2007-1 |  |               | 71,870  |               |   | 85,422 
|Warehouse revolving debt     |  |               |        |               |   | 42,175 
|Construction lending line    |  |               | 3,589   |               |   |       
|                             |  |               |         |               |   |        
|                             |  | $             | 197,717 |               | $ | 282,605
|                             |  |               |         |               |   |        

In fiscal 2005, the Company issued $75.0 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. 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 2009, 2008 and 2007, the effect of converting the senior notes to 2.1 million, 2.9 million and 2.9 million shares of common
stock, respectively, was anti-dilutive, and was, therefore, not considered in determining diluted earnings per share. At March 27, 2009 and March 28, 2008, the fair market value of the convertible senior notes is estimated at $21.5 and
$42.4 million, respectively, based on quoted market prices. During fiscal 2009, the Company repurchased $21.2 million of the Notes for $10.6 million in cash, resulting in a gain of $10.6 million.

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. CountryPlaces obligation under this securitized financing is guaranteed by the Company.

On March 22, 2007, the Company, through its subsidiary CountryPlace, completed its second securitization (2007-1) for approximately
$116.5 million of loans, 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 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.



56



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



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. 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.

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. 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. In January 2009, CountryPlace obtained a $10.0 million
construction lending line to use for financing mortgage loans during the construction period. There is no expiration period for the agreement, but CountryPlace is obligated to repurchase individual loans within 180 days from the date of original
purchase of each respective loan by the financial institution. Historically, the construction period has been approximately ninety days. The construction lender has full discretion to accept or decline each individual loan purchase requested by
CountryPlace. The maximum advance for loans purchased is 92% of the loan amount. The interest rate on unpaid amounts advanced is 10%. CountryPlace had outstanding unpaid advances under the facility of $3.6 million as of March 31, 2009. The
facility contains certain requirements relating to the documentation of the loans purchased and amounts drawn during the construction period of each individual loan, which are customary in the industry. CountryPlace funds the difference between the
amounts advanced under the facility and the balance of any additional loan.

On April 27, 2009, the Company issued warrants to each of
Capital Southwest Venture Corporation, Sally Posey and the Estate of Lee Posey (collectively, the lenders) to purchase up to an aggregate of 429,939 shares of common stock of the Company at a price of $3.14 per share, which was the closing price of
the Companys common stock on April 24, 2009. The warrants were granted in connection with a loan made by the lenders to the Company of an aggregate of $4.5 million pursuant to senior subordinated secured promissory notes between the
Company and each of the lenders (collectively, the Promissory Notes). The proceeds were used for working capital purposes. If the Promissory Notes are not repaid in full by June 29, 2009, the aggregate number of shares of common stock that may
be purchased may be increased by an amount equal to $450,000 divided by the closing price of the common stock on June 29, 2009. The warrants, which expire on April 24, 2019, contain anti-dilution provisions and other customary provisions.
The Promissory Notes bear interest at the rate of LIBOR plus 2.0% and are secured by 150,000 shares of Standards common stock. The Promissory Notes also restrict the Company from selling, leasing or otherwise transferring all or any material
portion of its assets or businesses without the lenders consent.

Scheduled maturities of the Companys debt obligations
consist of the following (in thousands):



|            |  |        |       
|----------- |  | ------ | ------
|Fiscal year |  | Amount
|2010        |  | $      | 18,203
|2011        |  |        | 14,779
|2012        |  |        | 11,013
|2013        |  |        | 9,858 
|2014        |  |        | 8,830 



57



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



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

Accrued liabilities consist of
the following (in thousands):



|                               |  |               |        |               |   |       
|------------------------------ |  | ------------- | ------ | ------------- | - | ------
|                               |  | March 27,2009 |        | March 28,2008
|Salaries, wages and benefits   |  | $             | 10,949 |               | $ | 15,727
|Accrued expenses on homes sold |  |               | 3,693  |               |   | 6,064 
|Customer deposits              |  |               | 6,060  |               |   | 9,727 
|Deferred revenue               |  |               | 5,108  |               |   | 11,044
|Warranty                       |  |               | 2,972  |               |   | 5,425 
|Sales incentives               |  |               | 2,322  |               |   | 4,018 
|Insurance reserves             |  |               | 3,008  |               |   | 4,333 
|Taxes                          |  |               | 3,061  |               |   | 3,357 
|Other                          |  |               | 8,709  |               |   | 10,517
|                               |  |               |        |               |   |       
|                               |  | $             | 45,882 |               | $ | 70,212
|                               |  |               |        |               |   |       



|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.

The Company reviewed its deferred tax assets to determine whether a valuation allowance was necessary. In fiscal 2008, 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. In fiscal 2009, the Company recorded an additional $14.9 million
valuation allowance against its deferred tax assets generated in fiscal 2009 and an income tax benefit of $8,000. 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 benefit (expense) for fiscal years 2009, 2008 and 2007 is as follows (in thousands):



|                                   |  |               |         |   |               |   |         |               |  |   |      
|---------------------------------- |  | ------------- | ------- | - | ------------- | - | ------- | ------------- |  | - | -----
|                                   |  | March 27,2009 |         |   | March 28,2008 |   |         | March 30,2007
|Current                            |  |               |         |   |               |   |         |               |  |   |      
|Federal                            |  | $             | 12,883  |   |               | $ | 1,681   |               |  | $ | 4,742
|State                              |  |               | (70     | ) |               |   | (1,095  | )             |  |   | 203  
|Deferred                           |  |               | (12,805 | ) |               |   | (14,476 | )             |  |   | 1,181
|                                   |  |               |         |   |               |   |         |               |  |   |      
|Total income tax benefit (expense) |  | $             | 8       |   |               | $ | (13,890 | )             |  | $ | 6,126
|                                   |  |               |         |   |               |   |         |               |  |   |      



58



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



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



|                                        |  |               |         |   |               |   |         |  
|--------------------------------------- |  | ------------- | ------- | - | ------------- | - | ------- | -
|                                        |  | March 27,2009 |         |   | March 28,2008 |  
|Deferred tax assets                     |  |               |         |   |               |   |         |  
|Warranty reserves                       |  | $             | 294     |   |               | $ | 718     |  
|Accrued liabilities                     |  |               | 3,593   |   |               |   | 4,064   |  
|Inventory                               |  |               | 1,567   |   |               |   | 2,986   |  
|Property and equipment                  |  |               | 7,182   |   |               |   | 6,322   |  
|State net operating loss carryforward   |  |               | 8,800   |   |               |   | 3,104   |  
|Federal net operating loss carryforward |  |               | 22,476  |   |               |   | 8,351   |  
|Other                                   |  |               | 2,774   |   |               |   | 5,255   |  
|                                        |  |               |         |   |               |   |         |  
|Gross deferred tax assets               |  |               | 46,686  |   |               |   | 30,800  |  
|Valuation allowance                     |  |               | (46,821 | ) |               |   | (31,946 | )
|                                        |  |               |         |   |               |   |         |  
|Total deferred tax assets               |  |               | (135    | ) |               |   | (1,146  | )
|Deferred tax liabilities                |  |               |         |   |               |   |         |  
|Other                                   |  |               | 135     |   |               |   | 1,146   |  
|                                        |  |               |         |   |               |   |         |  
|Total deferred tax liabilities          |  |               | 135     |   |               |   | 1,146   |  
|                                        |  |               |         |   |               |   |         |  
|Net deferred income tax assets          |  |               |        |   |               |   |        |  
|                                        |  |               |         |   |               |   |         |  

As of March 27, 2009, the Company has federal net operating loss carryforwards of
approximately $64.2 million available to offset future federal income tax and which expire between 2027 and 2029. In addition, the Company has state net operating loss carryforwards of approximately $76.0 million available to offset future state
income tax and which expire between 2009 and 2029.

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



|                                       |  |               |        |   |               |   |         |               |  |   |       |  
|-------------------------------------- |  | ------------- | ------ | - | ------------- | - | ------- | ------------- |  | - | ----- | -
|                                       |  | March 27,2009 |        |   | March 28,2008 |   |         | March 30,2007 | 
|Tax at statutory rate                  |  | $             | 9,209  |   |               | $ | 38,630  |               |  | $ | 6,192 |  
|(Increases) decreases                  |  |               |        |   |               |   |         |               |  |   |       |  
|Goodwill impairment                    |  |               |       |   |               |   | (21,909 | )             |  |   |      |  
|Valuation allowance                    |  |               | (9,107 | ) |               |   | (31,101 | )             |  |   |      |  
|State taxesnet of federal tax benefit |  |               | (71    | ) |               |   | 729     |               |  |   | (517  | )
|Tax exempt interest                    |  |               | 84     |   |               |   | 103     |               |  |   | 89    |  
|Other                                  |  |               | (107   | ) |               |   | (342    | )             |  |   | 362   |  
|                                       |  |               |        |   |               |   |         |               |  |   |       |  
|Income tax benefit (expense)           |  | $             | 8      |   |               | $ | (13,890 | )             |  | $ | 6,126 |  
|                                       |  |               |        |   |               |   |         |               |  |   |       |  
|Effective tax rate                     |  |               | 0.03   | % |               |   | (12.6   | )%            |  |   | 34.6  | %
|                                       |  |               |        |   |               |   |         |               |  |   |       |  



|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



59



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



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 $0.8 million, $1.0 million and $0.8 million in fiscal years 2009, 2008 and 2007, 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 27, 2009, are as follows (in thousands):



|                    |  |        |      
|------------------- |  | ------ | -----
|Fiscal Year         |  | Amount
|2010                |  | $      | 5,176
|2011                |  |        | 2,795
|2012                |  |        | 2,447
|2013                |  |        | 2,053
|2014 and thereafter |  |        | 5,369

Rent expense (net of sublease income) was $8.1 million, $9.8 million and $10.1 million for fiscal
years 2009, 2008 and 2007, 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 27, 2009, the Company
estimates that its potential obligations under all repurchase agreements were approximately $6.3 million. However, it is managements opinion that no material loss will occur from the repurchase agreements. During fiscal years 2009, 2008 and
2007, the Company did not incur any significant 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. | Sale-leaseback transactions
|--- | ---------------------------

During the fourth
quarter of fiscal 2009, the Company completed two sale leaseback transactions (one transaction was with two members of senior management of the Company who are related parties) where it sold in total 13 retail sales center properties for $6.5
million in cash. One transaction (the related party transaction) resulted in a $0.7 million gain which will be amortized over the term of the lease and the other transaction resulted in a $0.5 million loss which was recorded in selling, general and
administrative expenses in the Companys consolidated statement of operations. Concurrent with the sale, the Company leased the properties back for a period of ten years at an aggregate annual rental of $0.6 million plus escalation under
certain



60



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



circumstances. The lease is renewable at the Companys option for an additional five years. The Company does not have continuing involvement in the
properties other than through a normal sale-leaseback. The future minimum lease payments under the terms of the related lease agreements are disclosed in Note 11.



|13. | 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 statements of operations.



|14. | 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 continues to try to sell these facilities. 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 statements of operations.



|15. | Fair value of financial instruments
|--- | -----------------------------------

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



|                              |  |                |         |                     |   |            |  |                     |         |  |   |        
|----------------------------- |  | -------------- | ------- | ------------------- | - | ---------- |  | ------------------- | ------- |  | - | -------
|                              |  | March 27, 2009 |         | March 28, 2008     
|                              |  | Book Value     |         | Estimated FairValue |   | Book Value |  | Estimated FairValue
|Cash and cash equivalents(1)  |  | $              | 12,374  |                     | $ | 12,374     |  | $                   | 28,206  |  | $ | 28,206 
|Restricted cash(1)            |  |                | 17,771  |                     |   | 17,771     |  |                     | 25,487  |  |   | 25,487 
|Investments(2)                |  |                | 17,175  |                     |   | 17,175     |  |                     | 22,442  |  |   | 22,442 
|Consumer loans receivables(3) |  |                | 199,317 |                     |   | 193,029    |  |                     | 272,513 |  |   | 264,338
|Floor plan payable(1)         |  |                | 49,401  |                     |   | 49,401     |  |                     | 59,367  |  |   | 59,367 
|Warehouse revolving debt(1)   |  |                |        |                     |   |           |  |                     | 42,175  |  |   | 42,175 
|Construction lending line(1)  |  |                | 3,589   |                     |   | 3,589      |  |                     |        |  |   |       
|Convertible senior notes(2)   |  |                | 53,845  |                     |   | 13,461     |  |                     | 75,000  |  |   | 42,400 
|Securitized financings(4)     |  |                | 140,283 |                     |   | 108,972    |  |                     | 165,430 |  |   | 157,074



|(1) | The fair value approximates book value due to the instruments short term maturity.
|--- | -----------------------------------------------------------------------------------



61



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



|(2) | The fair value is based on market prices.
|--- | -----------------------------------------

|(3) | Includes consumer loans receivable held for investment and held for sale. The fair value of the loans held for investment is based on the discounted value of the remaining principal
and interest cash flows. The fair value of the loans held for sale approximates book value since the sales price of these loans is known as of March 27, 2009.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The fair value is estimated using quoted market prices for similar securities.
|--- | ------------------------------------------------------------------------------

As of March 29, 2008, the Company has adopted Statement of Financial Accounting Standards No. 157 Fair Value Measurements (SFAS 157) for financial assets and liabilities. SFAS 157 defines fair
value, introduces a framework for measuring fair value and enhances disclosures about fair value measurements of assets and liabilities.

The Company elected to implement SFAS 157 with the one-year deferral permitted by FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2), issued February 2008, which defers the effective
date of SFAS 157 for one year for certain nonfinancial assets and nonfinancial liabilities measured at fair value, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. As it relates to the
Company, the deferral applies to assets held for sale, which totaled $5.8 million as of March 27, 2009.

SFAS 157 defines fair values
as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs
that may be used to measure fair value:

Level 1Quoted prices in active markets for identical assets or liabilities.

Level 2Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. (The Company had no level 3 securities at the end of 2009 or
during the year then ended).

The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The
market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):



|                               |  |                      |        |         |   |         |  |         |        |  |   |  
|------------------------------ |  | -------------------- | ------ | ------- | - | ------- |  | ------- | ------ |  | - | -
|                               |  | As of March 27, 2009
|                               |  | Total                |        | Level 1 |   | Level 2 |  | Level 3
|Investments(1)                 |  | $                    | 17,175 |         | $ | 3,270   |  | $       | 13,905 |  | $ | 
|Other non-performing assets(2) |  | $                    | 2,048  |         |   |        |  | $       | 2,048  |  |   | 



|(1) | Unrealized gains or losses on investments are recorded in accumulated other comprehensive loss at each measurement date.
|--- | ------------------------------------------------------------------------------------------------------------------------

|(2) | Consists of land and homes acquired through foreclosure.
|--- | --------------------------------------------------------



62



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



|16. | 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 2009, 2008 and 2007 (in thousands):



|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|------------------------------------------------------------ |  | ------------- | ------- | - | ------------- | - | -------- | ------------- |  | - | ------- | -
|                                                             |  | Year Ended    |        
|                                                             |  | March 27,2009 |         |   | March 28,2008 |   |          | March 30,2007 | 
|Net sales                                                    |  |               |         |   |               |   |          |               |  |   |         |  
|Factory-built housing                                        |  | $             | 371,265 |   |               | $ | 511,577  |               |  | $ | 623,139 |  
|Financial services                                           |  |               | 38,009  |   |               |   | 43,519   |               |  |   | 38,108  |  
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|                                                             |  | $             | 409,274 |   |               | $ | 555,096  |               |  | $ | 661,247 |  
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|Net sales for financial services consists of:                |  |               |         |   |               |   |          |               |  |   |         |  
|Insurance                                                    |  | $             | 15,606  |   |               | $ | 17,180   |               |  | $ | 15,633  |  
|Finance                                                      |  |               | 22,403  |   |               |   | 26,339   |               |  |   | 22,475  |  
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|                                                             |  | $             | 38,009  |   |               | $ | 43,519   |               |  | $ | 38,108  |  
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|Income (loss) from operations                                |  |               |         |   |               |   |          |               |  |   |         |  
|Factory-built housing                                        |  | $             | (24,171 | ) |               | $ | (95,089  | )(1)          |  | $ | 2,317   |  
|Financial services                                           |  |               | 17,753  |   |               |   | 21,638   |               |  |   | 19,695  |  
|General corporate expenses                                   |  |               | (17,138 | ) |               |   | (21,892  | )             |  |   | (24,200 | )
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|                                                             |  | $             | (23,556 | ) |               | $ | (95,343  | )             |  | $ | (2,188  | )
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|Interest expense                                             |  | $             | (15,417 | ) |               | $ | (18,654  | )             |  | $ | (15,695 | )
|Gain on repurchase of convertible senior notes               |  |               | 10,566  |   |               |   |         |               |  |   |        |  
|Equity in loss of limited partnership and impairment charges |  |               |        |   |               |   |         |               |  |   | (4,709  | )
|Other income                                                 |  |               | 2,095   |   |               |   | 3,625    |               |  |   | 4,901   |  
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|Loss before income taxes                                     |  | $             | (26,312 | ) |               | $ | (110,372 | )             |  | $ | (17,691 | )
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|Identifiable assets                                          |  |               |         |   |               |   |          |               |  |   |         |  
|Factory-built housing                                        |  | $             | 125,333 |   |               | $ | 159,383  |               |  | $ | 231,167 |  
|Financial services                                           |  |               | 255,623 |   |               |   | 317,239  |               |  |   | 305,732 |  
|Other                                                        |  |               | 30,726  |   |               |   | 88,278   |               |  |   | 146,365 |  
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|                                                             |  | $             | 411,682 |   |               | $ | 564,900  |               |  | $ | 683,264 |  
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|Depreciation and amortization                                |  |               |         |   |               |   |          |               |  |   |         |  
|Factory-built housing                                        |  | $             | 4,841   |   |               | $ | 6,433    |               |  | $ | 7,872   |  
|Financial services                                           |  |               | 280     |   |               |   | 804      |               |  |   | 652     |  
|Other                                                        |  |               | 807     |   |               |   | 893      |               |  |   | 739     |  
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|                                                             |  | $             | 5,928   |   |               | $ | 8,130    |               |  | $ | 9,263   |  
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|Capital expenditures, net of proceeds from disposition       |  |               |         |   |               |   |          |               |  |   |         |  
|Factory-built housing                                        |  | $             | (1,800  | ) |               | $ | 1,203    |               |  | $ | 4,495   |  
|Financial services                                           |  |               | 84      |   |               |   | 123      |               |  |   | 46      |  
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  
|                                                             |  | $             | (1,716  | ) |               | $ | 1,326    |               |  | $ | 4,541   |  
|                                                             |  |               |         |   |               |   |          |               |  |   |         |  



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



63



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



|17. | 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.



|18. | 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 $2.2 million. The common stock transaction will be recorded as compensation
expense over the service period and is included in selling, general and administrative expenses on the Companys consolidated statements of operations.



|19. | 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 27,
2009, March 28, 2008 and March 30, 2007 (in thousands).



|                                              |  |               |         |   |               |   |         |               |  |   |         |  
|--------------------------------------------- |  | ------------- | ------- | - | ------------- | - | ------- | ------------- |  | - | ------- | -
|                                              |  | March 27,2009 |         |   | March 28,2008 |   |         | March 30,2007 | 
|Accrued warranty balance, beginning of period |  | $             | 5,425   |   |               | $ | 5,922   |               |  | $ | 7,354   |  
|Net warranty expense provided                 |  |               | 7,736   |   |               |   | 20,178  |               |  |   | 21,590  |  
|Cash warranty payments                        |  |               | (10,189 | ) |               |   | (20,675 | )             |  |   | (23,022 | )
|                                              |  |               |         |   |               |   |         |               |  |   |         |  
|Accrued warranty balance, end of period       |  | $             | 2,972   |   |               | $ | 5,425   |               |  | $ | 5,922   |  
|                                              |  |               |         |   |               |   |         |               |  |   |         |  



|20. | Related party transactions
|--- | --------------------------

During the fourth
quarter of fiscal 2009, the Company completed a sale leaseback transaction with a partnership which included two members of senior management of the Company. See note 12 for further details of the transaction.

On April 27, 2009, the Company issued warrants to each of Capital Southwest Corporation, Sally Posey and the Estate of Lee Posey, all of which are
related parties to the Company. The warrants were granted in connection with a loan made by these related parties to the Company. See Note 6 for further details of the transaction.



64



---

##### Table of Contents

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)



|21. | Quarterly financial data (unaudited)
|--- | ------------------------------------

The following
table sets forth certain unaudited quarterly financial information for the fiscal years 2009 and 2008.



|                                          |  |                                       |         |   |               |   |         |              |  |   |               |      |  |       |         |   |  |   |          |  
|----------------------------------------- |  | ------------------------------------- | ------- | - | ------------- | - | ------- | ------------ |  | - | ------------- | ---- |  | ----- | ------- | - |  | - | -------- | -
|                                          |  | FirstQuarter                          |         |   | SecondQuarter |   |         | ThirdQuarter |  |   | FourthQuarter |      |  | Total |        
|                                          |  | (in thousands, except per share data) |        
|Fiscal Year Ended                         |  |                                       |         |   |               |   |         |              |  |   |               |      |  |       |         |   |  |   |          |  
|March 27, 2009                            |  |                                       |         |   |               |   |         |              |  |   |               |      |  |       |         |   |  |   |          |  
|Net sales                                 |  | $                                     | 130,021 |   |               | $ | 110,716 |              |  | $ | 89,642        |      |  | $     | 78,895  |   |  | $ | 409,274  |  
|Gross profit                              |  |                                       | 31,957  |   |               |   | 26,635  |              |  |   | 19,045        |      |  |       | 19,209  |   |  |   | 96,846   |  
|Income (loss) from operations             |  |                                       | 778     |   |               |   | (4,449  | )            |  |   | (10,278       | )    |  |       | (9,607  | ) |  |   | (23,556  | )
|Net income (loss)                         |  |                                       | 1,625   |   |               |   | (6,474  | )            |  |   | (12,891       | )    |  |       | (8,564  | ) |  |   | (26,304  | )
|Income (loss) per sharebasic and diluted |  | $                                     | 0.07    |   |               | $ | (0.28   | )            |  | $ | (0.56         | )    |  | $     | (0.37   | ) |  | $ | (1.15    | )
|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    | )



|(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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



65



---

##### Table of Contents

|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 27, 2009. 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 27, 2009. During the quarter ending on March 27, 2009, 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 27, 2009 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 27, 2009, the Companys internal control over financial reporting was effective based on those criteria.

The effectiveness of internal control over financial reporting as of March 27, 2009, has been audited by Ernst & Young LLP, the independent
registered accounting firm who also audited the Companys consolidated statements. Ernst & Young LLPs attestation report on the effectiveness of the Companys internal control over financial reporting appears on page 67.

|                                                               
|---------------------------------------------------------------
|                                                               
|/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.



66



---

##### 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 Homes Inc.s internal control over financial reporting as of March 27, 2009, 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 27, 2009, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Palm Harbor Homes, Inc. as of March 27, 2009 and
March 28, 2008, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the three years in the period ended March 27, 2009 of Palm Harbor Homes, Inc. and related financial statement
schedule and our report dated June 9, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Dallas, Texas

June 9, 2009



67



---

##### Table of Contents

PART III.



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

(a) Information set forth in the sections entitled Proposal One: Election of Directors, Governance of the Company, and Executive Officers in the Companys proxy statement for the annual meeting of
shareholders to be held July 22, 2009 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 22, 2009 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 22, 2009 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 22, 2009 is incorporated herein by reference.



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

The
information set forth in the Section entitled Related Party Transaction in the Companys proxy statement for the annual meeting of shareholders to be held July 22, 2009 is incorporated herein by reference.



|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 22, 2009 is incorporated herein by reference.



68



---

##### 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 27, 2009 are included on pages 37 through 65 of this report.

(2)    Financial Statement Schedules

Schedule II Valuation and Qualifying Accounts and
Reserves is included on page 71 of this report.

(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).          
|            | 
|*10.5       |  | Sixth Amendment to Amended and Restated Agreement for Wholesale Financing dated June 4, 2009 by and between Textron Financial Corporation, Palm Harbor Homes, Inc. and Palm Harbor Manufacturing,
L.P.                             
|            | 
|*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 and Kelly Tacke.                                                                                                                        



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



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

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

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



69



---

##### 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 9, 2009.



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 27, 2009 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 9, 2009
|                                                         |  |                                                                                                                     
|/s/    KELLY
TACKE Kelly Tacke                           |  | Executive Vice President-Finance, Chief Financial
Officer and Secretary (Principal Financial and Accounting Officer) |  | June 9, 2009
|                                                         |  |                                                                                                                     
|/s/    WALTER D. ROSENBERG,
JR. Walter D. Rosenberg, Jr. |  | Director                                                                                                             |  | June 9, 2009
|                                                         |  |                                                                                                                     
|/s/    FREDERICK R.
MEYER Frederick R. Meyer             |  | Director                                                                                                             |  | June 9, 2009
|                                                         |  |                                                                                                                     
|/s/    JOHN H.
WILSON John H. Wilson                     |  | Director                                                                                                             |  | June 9, 2009
|                                                         |  |                                                                                                                     
|/s/    A. GARY
SHILLING A. Gary Shilling                 |  | Director                                                                                                             |  | June 9, 2009
|                                                         |  |                                                                                                                     
|/s/    W. CHRISTOPHER
WELLBORN W. Christopher Wellborn   |  | Director                                                                                                             |  | June 9, 2009
|                                                         |  |                                                                                                                     
|/s/    WILLIAM M.
ASHBAUGH William M. Ashbaugh           |  | Director                                                                                                             |  | June 9, 2009
|                                                         |  |                                                                                                                     
|/s/    TIM
SMITH Tim Smith                               |  | Director                                                                                                             |  | June 9, 2009



70



---

##### Table of Contents

Palm Harbor Homes, Inc.

Schedule IIValuation and Qualifying Accounts



|                                             |  |   |       
|-------------------------------------------- |  | - | ------
|Deferred tax asset valuation allowance:      |  |   |       
|Balance at March 31, 2006 and March 30, 2007 |  | $ |      
|Establish valuation allowance                |  |   | 15,317
|Net change in deferred tax assets            |  |   | 16,629
|                                             |  |   |       
|Balance at March 28, 2008                    |  |   | 31,946
|Net change in deferred tax assets            |  |   | 14,875
|                                             |  |   |       
|Balance at March 27, 2009                    |  | $ | 46,821
|                                             |  |   |       



71