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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

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

(Mark One)

For the fiscal year ended March 28, 2008

OR

For the transition period from                      to                     

Commission File Number 0-24268

PALM HARBOR HOMES, INC.

(Exact name of registrant as specified in our charter)

Registrant’s telephone number, including area code: (972) 991-2422

Securities registered pursuant to Section 12(b) of the Act: None

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

Common Stock, par value $0.01 per share

(Title of Class)

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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PART I.

General

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

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

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

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

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

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

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

Business Segment Information

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

Factory-Built Housing Segment

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

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

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

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Products

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

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

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

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

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

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

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

Product Distribution

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

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

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

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

Markets Served

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

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

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

Consumer Financing

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

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

Wholesale Financing

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

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

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

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

Financial Services Segment

Finance

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

Loan Portfolio

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

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

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

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

Insurance

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

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

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Competition

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

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

Government Regulation

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

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

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

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

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

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

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

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

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

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

Seasonality

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

Associates

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

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Website Access to Company Reports and Other Documents

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We are concentrated geographically, which could harm our business.

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

None.

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

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

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

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

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

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

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

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

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

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PART II.

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.

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

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

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PERFORMANCE GRAPH

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

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

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

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Executive Overview

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

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

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

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

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

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

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

Results of Operations

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

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

2008 Compared to 2007

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

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

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

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

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

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

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

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

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

2007 Compared to 2006

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

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

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

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

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

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Contractual Obligations (dollars in thousands)

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

Critical Accounting Policies

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

New Accounting Pronouncements

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

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

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

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

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

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

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

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

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Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Palm Harbor Homes, Inc.

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

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

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

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

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

/s/Ernst & Young LLP

Dallas, Texas

June 2, 2008

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Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands)

See accompanying Notes to Consolidated Financial Statements.

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Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share data)

See accompanying Notes to Consolidated Financial Statements.

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Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)

See accompanying Notes to Consolidated Financial Statements.

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Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(In thousands, except share data)