UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

For the quarterly period ended December 26, 2008

Commission file number 0-26188

PALM HARBOR HOMES, INC.

(Exact name of registrant as specified in its charter)

972-991-2422

(Registrant’s telephone number, including area code)

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

Indicate by check mark 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):

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

Indicate the number of shares outstanding of each of the issuer’ s classes of common stock, as of the latest practicable date.

Shares of common stock $.01 par value, outstanding on February 3, 2009 – 22,875,245.

PALM HARBOR HOMES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

See accompanying notes.

1

PALM HARBOR HOMES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

See accompanying notes.

2

PALM HARBOR HOMES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

See accompanying notes.

3

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Basis of Presentation

The condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation in conformity with accounting principles generally accepted in the United States. Certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted. The condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended March 28, 2008 included in the Company’s Form 10-K. Results of operations for any interim period are not necessarily indicative of results to be expected for a full year.

Information related to CountryPlace is based on a calendar month-end.

The balance sheet at March 28, 2008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

General Business Environment

The Company’s results for the third quarter were heavily influenced by the severe state of the industry, the weakness in the overall housing market and the prevailing economic uncertainties and credit crisis. The drastic slowdown in demand for factory-built housing products and decline in retail traffic has accelerated during the third quarter. Industry shipments for calendar year 2008 (through November) were down approximately 13% from the prior year and the three significant (to both the Company and the industry) manufactured housing states of Texas, Florida, California and Arizona were down a combined 38% from last year’s already historically low levels. 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.

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 and another production line in Austin, Texas during the third quarter. During the fourth fiscal quarter, the Company will idle another production line in Siler City, North Carolina and close several underperforming retail sales centers. 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.

In light of the economic crisis and challenging business environment, the Company’s top priorities are cash generation and cash preservation in every area of its operations. During the first quarter of fiscal 2009, the Company sold $51.3 million of CountryPlace’s warehoused portfolio of chattel and mortgage loans. The Company sold these loans for a gain of $1.3 million. The Company has taken advantage of market conditions and retired $15.6 million of its convertible senior notes (Notes) for $9.1 million of cash, resulting in a gain of $6.4 million. During the third quarter of fiscal 2009, the Company was awarded a winning bid on a $14 million military installation with construction expected to commence in early February. Also, in January 2009, CountryPlace obtained a $10 million construction lending line, which is especially noteworthy in this economic environment. CountryPlace’s obligation under the construction lending line is guaranteed by the Company. Additionally, the Company is pursuing some sale leaseback transactions for several of its retail properties and has been working with a financial advisor to leverage $100 million of its unlevered assets in an attempt to generate cash through this

4

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

uncertain economic environment. In spite of current economic conditions, both CountryPlace and Standard Casualty, the Company’s insurance subsidiary, remain profitable and continue to generate positive cash flow for the Company. These actions demonstrate the Company’s ability to move forward in spite of the challenges it is facing.

The Company’s floor plan lender, Textron Financial Corporation (Textron) is in the process of an orderly liquidation of certain commercial finance businesses including their housing inventory finance business. See note 5 for further details on modifications to the facility as a result of Textron exiting the business.

Inventories consist of the following (in thousands):

Restricted cash consists of the following (in thousands):

5

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Consumer loans receivable, net, consist of the following (in thousands):

On April 25, 2008, CountryPlace sold approximately $51.3 million of its $69.4 million warehoused portfolio of chattel and mortgage loans. Approximately $41.5 million of the proceeds were used to repay in full and terminate its warehouse borrowing facility scheduled to expire on April 30, 2008. The remaining cash proceeds were used for general corporate purposes. The transaction resulted in a gain of $1.3 million. In January 2009, CountryPlace obtained a $10.0 million construction line for short-term financing of mortgage loans. CountryPlace is currently considering additional alternatives for short-term and long-term financing of its loan portfolio. During the fourth quarter of fiscal 2008, CountryPlace ceased originating chattel and non-conforming mortgage loans.

The allowance for loan losses and related additions and deductions to the allowance during the nine months ended December 31, 2008 and December 31, 2007 are as follows (in thousands):

6

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, it places 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 December 31, 2008, CountryPlace’s management was not aware of any potential problem loans that would have a material effect on loan delinquency or charge-offs. Loans are subject to continual review and are given management’s attention whenever a problem situation appears to be developing. The following table sets forth the amounts and categories of CountryPlace’s non-performing loans and assets as of December 31, 2008 and March 31, 2008 (dollars in thousands):

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 December 31, 2008, CountryPlace has modified approximately $4.6 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 December 31, 2008, the allowance for loan losses totaled $6.4 million of which $84,000 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 December 31, 2008 and March 31, 2008:

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 December 26, 2008 or March 31, 2008. Management believes the allowance for loan losses is adequate to cover estimated losses at December 26, 2008.

7

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company has an agreement with Textron Financial Corporation (Textron) for a $70.0 million floor plan facility. The advance rate for the facility is 90% of manufacturer’s invoice and the interest rate is LIBOR plus 3.75%. This facility is used to finance a portion of the new home inventory at its retail sales centers and is secured by new home inventory and a portion of receivables from financial institutions. For the third quarter of fiscal 2009, the Company had to comply with a loan to collateral value, as defined, of 50% and minimum liquidity amount, as defined, of $30.0 million. As of December 26, 2008, the loan to collateral value, as reported, was 63% and, therefore, the Company had to meet additional covenant requirements related to minimum inventory turns of 2.75 and tangible net worth of $110.0 million. Tangible net worth, as reported, was $97.1 million at December 26, 2008, and therefore the Company was not in compliance with the covenants. The Company has obtained a waiver of default from Textron as of December 26, 2008. During the 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. The Company has agreed to certain modifications to the facility including a new committed amount of $50 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%, a maximum borrowing base requirement of 60% of eligible finished goods inventory, and new financial covenants which will be determined during the fourth fiscal quarter after Textron’s reviews the Company’s financial projections. The Company had $58.3 million and $59.4 million outstanding under these floor plan credit facilities at December 26, 2008 and March 28, 2008, respectively.

During the first nine months of fiscal 2009, the Company repurchased $15.6 million of the Notes for $9.1 million in cash resulting in a gain of $6.4 million. In addition, for the nine month periods ended December 26, 2008 and December 28, 2007, the effect of converting the Notes to approximately 2.3 million and 2.9 million shares of common stock, respectively, was anti-dilutive, and therefore, was not considered in determining diluted earnings per share. Such shares were anti-dilutive for each third quarter period as well.

The difference between net loss and total comprehensive loss for the three and nine months ended December 26, 2008 and December 28, 2007 is as follows (in thousands):

8

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 or cash flows of the Company.

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.

The accrued product warranty obligation is classified as accrued liabilities in the condensed consolidated balance sheets. The following table summarizes the accrued product warranty obligations at December 26, 2008 and December 28, 2007 (in thousands):

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (SFAS 157). SFAS 157 introduces a framework for measuring fair value and expands required disclosure about fair value measurements of assets and liabilities. The Company has adopted the standard for those assets and liabilities as of March 29, 2008.

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 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.

9

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

During the third quarter of fiscal 2009, two of the Company’s available-for sale securities with a total carrying value of $203,000 were determined to be impaired and a realized loss of $199,000 was recorded in other income on the Company’s statement of operations.

The Company does not believe that the 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 December 26, 2008.

In May 2008, the FASB issued FSP Accounting Principles Board Opinion No.14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion” (Including Partial Cash Settlement)” (“FSP 14-1”). FSP 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 issuance cost and equity issuance cost, respectively. The provisions of FSP 14-1 shall be applied retrospectively to all periods presented when adopted. The provisions of FSP 14-1 are effective for fiscal years beginning after December 15, 2008, or our fiscal 2010 and interim periods within those fiscal years. We are currently evaluating the impact of adopting FSP 14-1 on our consolidated financial statements.

10

PALM HARBOR HOMES, INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 and income (loss) from operations by segment for the three and nine months ended December 26, 2008 and December 28, 2007 (in thousands):

During the nine month period ended December 26, 2008, the Company recorded no federal income tax expense due to the availability of net operating loss carryforwards. Tax expense recorded in this period related to taxes payable in various states the Company does business. The Company expects to record no federal income tax expense for the remainder of fiscal 2009. During the nine month period ended December 26, 2007, the Company recorded income tax expense of approximately $13.5 million resulting from the establishment of a valuation allowance against all of its net deferred tax assets.

11

PART I. Financial Information

See pages 1 through 11.

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 December 26, 2008, we operated 10 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, sold to investors, or included as part of securitized financing transactions. We provide property and casualty insurance for owners of manufactured homes through our subsidiary, Standard Casualty.

Our results for the third quarter were heavily influenced by the severe state of our industry, the weakness in the overall housing market and the prevailing economic uncertainties and credit crisis. The drastic slowdown in demand for factory-built housing products and decline in retail traffic has accelerated during the third quarter. Industry shipments for calendar year 2008 (through November) were down approximately 13% from the prior year and the three significant (to both us and the industry) manufactured housing states of Texas, Florida, California and Arizona were down a combined 38% from last year’s already historically low levels. 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.

We continue to take actions to further reduce our operating costs in response to current conditions and expected demand. We idled one production line in Martinsville, Virginia during the second quarter and another production line in Austin, Texas during the third quarter. During the fourth fiscal quarter, we will idle another production line in Siler City, North Carolina and close several underperforming retail sales centers. We are taking additional steps to further reduce our selling, general and administrative expenses, increase margins and further reduce our receivables and inventory levels. We believe that this will better position us to sustain a prolonged downturn and benefit from any upside in demand when it occurs.

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. During the first quarter of fiscal 2009, we sold $51.3 million of CountryPlace’s warehoused portfolio of chattel and mortgage loans. We sold these loans for a gain of $1.3 million. We have taken advantage of market conditions and retired $15.6 million of our convertible senior notes for $9.1 million of cash, resulting in a gain of $6.4 million. During the third quarter of fiscal 2009, we were awarded a winning bid on a $14 million military installation with construction expected to commence in early February. Also, in January 2009, CountryPlace obtained a $10 million construction lending line, which is especially noteworthy in this economic environment. CountryPlace’s obligation under the construction lending line is guaranteed by us. Additionally, we are pursuing some sale leaseback contracts for several of our retail properties and have been working with a financial advisor to leverage $100 million of our unlevered assets in an attempt to generate cash through this uncertain economic environment.

12

Our floor plan lender, Textron Financial Corporation (Textron) is in the process of an orderly liquidation of certain commercial finance businesses including their housing inventory finance business. See liquidity and capital resources section below for further details on modifications to the facility as a result of Textron exiting the business. In spite of current economic conditions, both CountryPlace and Standard Casualty, our insurance subsidiary, remain profitable and continue to generate positive cash flow for us. These actions demonstrate our ability to move forward in spite of the challenges we are facing.

The following table sets forth certain items of the Company’s condensed consolidated statements of operations as a percentage of net sales for the periods indicated.

The following table summarizes certain key sales statistics as of and for the three and nine months ended December 26, 2008 and December 28, 2007.

13

Three Months Ended December 26, 2008 Compared to Three Months Ended December 28, 2007

Net Sales. Net sales decreased 36.3% to $89.6 million in the third quarter of fiscal 2009 as compared to $140.6 million in the third quarter of fiscal 2008. This decrease is comprised of a $49.2 million decrease in factory-built housing net sales and a $1.8 million decrease in financial services net revenues. The decline in factory-built housing net sales is primarily due to a 36.3% decrease in the total number of factory-built homes sold coupled with decreases in the average wholesale selling prices of new manufactured and modular homes as well as decreases in the average retail selling price of a new modular home. 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, 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, decreased 45.2%. These states have been especially impacted by decreased manufactured home sales to retirement age buyers. The decrease in the average selling prices is the result of our new lower-priced products. The decrease in financial services net revenues primarily reflects a decline in the average consumer loans balance from $257.2 million for the third quarter of fiscal 2008 to $197.7 million for the third quarter of fiscal 2009, resulting from the sale of approximately $51.3 million of loans in April 2008.

Gross Profit. In the third quarter of fiscal 2009, gross profit decreased to 21.2% of net sales, or $19.0 million, from 22.8% of net sales, or $32.1 million, in the third quarter of fiscal 2008. Gross profit for the factory-built housing segment decreased to 15.5% of net sales in the third quarter of fiscal 2009 from 18.2% in the third quarter of fiscal 2008. The decline in factory-built housing margin is primarily the result of weaker manufacturing margins due to low capacity utilization offset by an increase in the internalization rate from 65% in the third quarter of fiscal 2008 to 69% in the third quarter of fiscal 2009. Gross profit for the financial services segment decreased $1.9 million in the third quarter of fiscal 2009 due to decreased net revenues as explained above in the net sales section.

Selling, General and Administrative Expenses. As a percentage of net sales, selling, general and administrative expenses increased to 32.7% of net sales in the third quarter of fiscal 2009 from 26.7% of net sales in the third quarter of fiscal 2008. This increase resulted from the larger percentage decline in net sales. In dollars, selling, general and administrative expenses decreased $8.2 million to $29.3 million in the third quarter of fiscal 2009 from $37.5 million in the third quarter of 2008. Of this $8.2 million decrease, $6.0 million related to the factory-built housing segment, $1.7 million related to the financial services segment, and $0.5 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 made in fiscal 2008. The payment was based on CountryPlace profitability from inception (2002) through 2007.

Interest Expense. Interest expense decreased 19.1% to $3.9 million in the third quarter of fiscal 2009 as compared to $4.8 million in the third quarter of fiscal 2008. Of this decrease, $0.7 million related to decreased interest expense on the average balance of the warehouse facility which was terminated April 30, 2008 and $0.3 million related to decreased interest expense on the average balance of securitized loans resulting from reduced securitization financing balances in the third quarter of fiscal 2009 as compared to the third quarter of fiscal 2008.

Gain on Repurchase of Convertible Senior Notes. During the third quarter of fiscal 2009, we repurchased $1.1 million of our convertible senior notes for $0.6 million resulting in a gain of $0.6 million.

14

Other Income. Other income decreased 35.3% to $0.7 million in the third quarter of fiscal 2009 from $1.0 million in the third quarter of fiscal 2008 primarily due to a $0.5 million decrease in interest and dividend income resulting from reduced rates of return coupled with lower cash and cash equivalent balances.

Nine Months Ended December 26, 2008 Compared to Nine Months Ended December 28, 2007

Net Sales. Net sales decreased 22.9% to $330.4 million in the first nine months of fiscal 2009 as compared to $428.6 million in the first nine months of fiscal 2008. This decrease is primarily the result of a $95.7 million decrease in factory-built housing net sales and a $2.5 million decrease in financial services net revenues. The decline in factory-built housing net sales is primarily due to a 24.6% decrease in the total number of factory-built homes sold coupled with decreases in the average wholesale selling prices of new modular and manufactured homes as well as decreases in the average retail selling price of new modular 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, 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, decreased 39.5%. These states have been especially impacted by decreased manufactured home sales to retirement age buyers. The reduction in independent sales was bolstered by $10.7 million in commercial and military modular sales. The decrease in the average selling prices is the result of our new lower-priced products. The decrease in financial services net revenues reflects a decline in the average consumer loans balance from $246.0 million for the nine months ended December 28, 2007 to $231.6 million for the nine months ended December 26, 2008, resulting from the sale of approximately $51.3 million of loans in April 2008.

Gross Profit. In the first nine months of fiscal 2009, gross profit decreased to 23.5% of net sales, or $77.6 million, from 24.0% of net sales, or $103.0 million in the first nine months of fiscal 2008. Gross profit for the factory-built housing segment decreased to 18.9% of net sales in the first nine months of fiscal 2009 from 20.0% in the first nine months of fiscal 2008. The decline in factory-built housing margin is primarily the result of increased manufacturing costs driven by rapidly rising material costs offset by an increase in the internalization rate from 63% in the first nine months of fiscal 2008 to 69% in the first nine months of fiscal 2009 as well as 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. Gross profit for the financial services segment decreased $2.8 million in the first nine months of fiscal 2009 due to decreased net revenues as explained above in the net sales section.

Selling, General and Administrative Expenses. As a percentage of net sales, selling, general and administrative expenses increased to 27.7% of net sales in the first nine months of fiscal 2009 from 26.2% of net sales in the first nine months of fiscal 2008. This increase resulted from the larger percentage decline in net sales. In dollars, selling, general and administrative expenses decreased $20.5 million to $91.6 million in the first nine months of fiscal 2009 from $112.1 million in the first nine months of fiscal 2008. Of this $20.5 million decrease, $15.5 million related to the factory-built housing segment, $1.4 million related to the financial services segment and $3.7 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. The payment was based on CountryPlace profitability from inception (2002) through 2007.

15

Goodwill Impairment. Goodwill impairment was $78.5 million in the first nine months of fiscal 2008. Due to the difficult market environment and the losses we recorded during fiscal 2007 and early 2008, 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 the write-off of our entire goodwill balance.

Interest Expense. Interest expense decreased 15.7% to $11.8 million in the first nine months of fiscal 2009 as compared to $14.0 million in the first nine months of fiscal 2008. Of this decrease, $1.1 million related to decreased interest expense on the average balance of the warehouse facility which was terminated April 30, 2008 and $1.1 million related to decreased interest expense on the average balance of the securitized loans resulting from reduced securitization financing balances in the first nine months of fiscal 2009 as compared to the first nine months of fiscal 2008.

Gain on Repurchase of Convertible Senior Notes. During the first nine months of fiscal 2009, we repurchased $15.6 million of our convertible senior notes for $9.1 million resulting in a gain of $6.4 million.

Other Income. Other income decreased 48.2% to $1.8 million in the first nine months of fiscal 2009 from $3.5 million in the first nine months of fiscal 2008 primarily due to a $1.7 million decrease in interest and dividend income resulting from reduced rates of return coupled with lower average cash and cash equivalent balances.

Income Tax Expense. Income tax expense was $0.2 million in the first nine months of fiscal 2009 as compared to $13.5 million in the first nine months of fiscal 2008. The $0.2 million of income tax expense for the first nine months of fiscal 2009 related to taxes payable in various states in which we do business. The $13.5 million of income tax expense for the first nine months of fiscal 2008 related to our recording a valuation allowance against all of our net deferred tax assets.

Liquidity and Capital Resources

Cash and cash equivalents totaled $25.0 million at December 26, 2008, down $3.2 million from $28.2 million at March 28, 2008. Net cash provided by operating activities was $64.1 million in the first nine months of fiscal 2009 as compared to $33.3 million net cash used in the first nine months of fiscal 2008. The cash provided by operating activities in the first nine months of 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 $5.5 million in the first nine months of fiscal 2009 as compared to $1.5 million of net cash used in the first nine months of fiscal 2008. This increase in cash provided by investing activities is due to an increase in net cash received from divesting in available-for-sale securities.

Net cash used in financing activities was $72.8 million in the first nine months of 2009 as compared to $20.3 million provided by financing activities in the first nine months of 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 coupled with $9.1 million used to repurchase $15.6 million of our convertible senior notes.

We have an agreement with Textron Financial Corporation (Textron) for a $70.0 million floor plan facility. The advance rate for the facility is 90% of manufacturer’s invoice and the interest rate is LIBOR plus 3.75%. This facility is used to finance a portion of the new home inventory at our retail sales centers

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and is secured by new home inventory and a portion of receivables from financial institutions. For the third quarter of fiscal 2009, we had to comply with a loan to collateral value, as defined, of 50% and minimum liquidity amount, as defined, of $30.0 million. As of December 26, 2008, the loan to collateral value, as reported, was 63% and, therefore, we had to meet additional covenant requirements related to minimum inventory turns of 2.75 and tangible net worth of $110.0 million. Tangible net worth, as reported, was $97.1 million at December 26, 2008, and therefore we were not in compliance with the covenants. We have obtained a waiver of default from Textron as of December 26, 2008. During the 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. We have agreed to certain modifications to the facility including a new committed amount of $50 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%, a maximum borrowing base requirement of 60% of eligible finished goods inventory, and new financial covenants which will be determined during the fourth fiscal quarter after Textron’s reviews our financial projections. We had $58.3 million and $59.4 million outstanding under these floor plan credit facilities at December 26, 2008 and March 28, 2008, respectively.

During the first nine months of fiscal 2009, we repurchased $15.6 million of the Notes for $9.1 million in cash resulting in a gain of $6.4 million.

On April 25, 2008, CountryPlace sold approximately $51.3 million of its $69.4 million warehoused portfolio of chattel and mortgage loans. Approximately $41.5 million of the proceeds were used to repay in full and terminate its warehouse borrowing facility scheduled to expire on April 30, 2008. The remaining cash proceeds were used for general corporate purposes. The transaction resulted in a gain of $1.3 million. In January 2009, CountryPlace obtained a $10.0 million construction lending line for short-term financing of mortgage loans. CountryPlace is currently considering additional alternatives for short-term and long-term financing of its loan portfolio. During the fourth quarter of fiscal 2008, CountryPlace ceased originating chattel and non-conforming mortgage loans until it determines that a term financing market exists or can be developed for such products.

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. During the first quarter of fiscal 2009, we sold $51.3 million of CountryPlace’s warehoused portfolio of chattel and mortgage loans. We sold these loans for a gain of $1.3 million. We have taken advantage of market conditions and retired $15.6 million of our convertible senior notes for $9.1 million of cash, resulting in a gain of $6.4 million. During the third quarter of fiscal 2009, we were awarded a new government contract on a $14 million military installation with construction expected to commence in late January. Also, CountryPlace obtained a $10 million construction lending line, which is especially noteworthy in this economic environment. Additionally, we are pursuing some sale leaseback contracts for several of our retail properties and have been working with a financial advisor to leverage $100 million of our unlevered assets in an attempt to generate cash through this uncertain economic environment. In spite of current economic conditions, both CountryPlace and Standard Casualty, our insurance subsidiary, remain profitable and continue to generate positive cash flow for us. These actions demonstrate our ability to move forward in spite of the challenges we are facing.

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, as previously mentioned, 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.

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Forward-Looking Information/Risk Factors

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

If the current economic 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. 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 had a floor plan facility with Textron totaling $70.0 million. However, during the 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. We have agreed to certain modifications to the facility including a new committed amount of $50 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%, a maximum borrowing base requirement of 60% of eligible finished goods inventory, and new financial covenants which will be determined during the fourth fiscal quarter after Textron’s reviews our financial projections. There can be no assurance that we will continue to have access to this facility or one with similar terms which could have a material adverse affect on our operations. Additionally, reduced availability of wholesale financing for our independent dealers (GE, Textron and 21^st Mortgage are all in the process of either exiting the business or reducing their lending to the industry) could have a material adverse affect 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.

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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.

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

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

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 fiscal 2009, we have closed two manufacturing plants and are in the process of closing a third plant and several retail sales centers during the fourth quarter 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 measures will be required.

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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:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We are controlled by 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.

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

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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 the third quarter of 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 the third quarter of fiscal 2009, approximately 39% 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 (see the Executive Overview section of Management’s Discussion and Analysis for more details) and a decline in the economy of Texas could have a material adverse effect on our results of operations as well.

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 December 26, 2008 is held constant, each one percentage point increase in interest rates occurring on the first day of the year would result in an increase in interest expense for the coming year of approximately $0.6 million.

CountryPlace is exposed to market risk related to the accessibility and terms of financing in the asset-backed securities market. On July 12, 2005, CountryPlace successfully completed its initial securitized financing of approximately $141.0 million of loans. On March 22, 2007, CountryPlace completed a second securitized financing of approximately $116.5 million of loans (including approximately $10.4 million of pre-funded loans which were subsequently funded on May 7, 2007). 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-tern 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 December 26, 2008 is held constant, a 10% increase in average interest rates would increase the fair value of CountryPlace’s portfolio by approximately $73,000. 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 December 26, 2008 is held constant, a 10% decrease in interest rates would increase the fair value of the notes by approximately $0.5 million.

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Under the supervision and with the participation of our principal executive officer and principal financial officer, management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange act of 1934) as of December 26, 2008. Based on that evaluation, our principal executive officer and out principal financial officer have concluded that our disclosure controls and procedures were effective as of December 26, 2008.

There has been no change to our internal control over financial reporting during the quarter ended December 26, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. Other Information

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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