SECURITIES AND EXCHANGE COMMISSION

FORM 10-K/A

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

Commission File Number 0-24268

PALM HARBOR HOMES, INC.

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 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 o

     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. o

     The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of September 26, 2003, was $167,669,754 based on the closing price on that date of the common stock as quoted on the Nasdaq Stock Market. As of April 30, 2004, 22,837,462 shares of the registrant’s common stock were issued and outstanding.

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant’s Proxy Statement relating to our Annual Meeting of Shareholders to be held July 28, 2004 are incorporated by reference in Part III.

EXPLANATION OF AMENDMENT

Palm Harbor Homes, Inc. is filing this form 10-K/A as Amendment No. 1 to its Annual Report on Form 10-K for the year ended March 26, 2004 that was filed with the Securities and Exchange Commission on May 3, 2004 for the purpose of re-filing Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8 “Financial Statements and Supplementary Data.” See “Resolution of Securities and Exchange Commission ‘SEC Staff’ views on SFAS No. 95” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1 to the consolidated financial statements included in Item 8 “Financial Statements and Supplementary Data.”

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PART II

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

     We are one of the nation’s leading manufacturers and marketers of factory-built homes. We market nationwide through vertically integrated operations, encompassing manufactured and modular housing, chattel and mortgage bank financing, as well as insurance. As of March 26, 2004, we operated 19 manufacturing facilities that sell homes through 149 company-owned retail superstores and builder locations and approximately 275 independent retail dealers, builders and developers. Through our subsidiary, CountryPlace, we offer chattel and non-conforming land/home mortgages to purchasers of manufactured homes sold by company-owned retail superstores. Through our investment as the sole limited partner in BSM, we offer conforming and non-conforming mortgages for both modular and manufactured homes. We also provide property and casualty insurance for owners of manufactured and modular homes through our subsidiary, Standard Casualty.

     The manufactured housing industry has continued to face a very difficult operating environment as evidenced by the 22% decline in industry shipments for calendar 2003. Limited availability of retail and wholesale financing, increased levels of repossessions, excessive retail inventory levels and manufacturing capacity continued to impact our sales and operating results in fiscal 2004. Additionally, our operating margins have been adversely affected by significant increases in materials costs which we have not been able to fully pass on to the customer through price increases due to competitive industry conditions.

     Despite this challenging backdrop, we have not closed any manufacturing facilities and we only closed nine company-owned retail superstores bringing us to 149 retail superstores and builder locations. We continue to tightly manage receivables and new home inventory per retail superstore, which declined 5% compared to a year ago. Floor plan payable per retail superstore has declined 22% compared to a year ago. Although industry-wide manufactured housing shipments for calendar 2003 were down approximately 22%, our shipments declined only 10%. Additionally, CountryPlace, Standard Casualty and BSM continued to be additive to our results of operations for fiscal 2004.

     With the limited availability of financing in the manufactured housing industry, in fiscal 2003 we executed our planned strategy to expand CountryPlace into a full service chattel lender with originating, servicing and securitization capabilities. During fiscal 2004, CountryPlace originated over $77 million of loans to be held for investment on its balance sheet and is now servicing over $103 million of loans. These loans were funded through borrowings from its warehouse facility, as well as capital contributions and borrowings from us. During the fourth quarter of fiscal 2004, CountryPlace entered into a new warehouse facility agreement with a financial institution providing for increased borrowing capacity. See “Liquidity and Capital Resources” below for additional information.

     The largest impediment of our growth is financing for our retail customers which, if limited, could affect our sales volume. Additionally, obtaining funding for CountryPlace and obtaining wholesale financing are key risk factors that could impair the growth of our company.

     Although we cannot predict with any certainty when sustainable industry improvements will occur, we are continuing to position ourselves strategically for the future. First, we are focusing on the introduction of our Discovery Homes series of modular homes, as we believe that modular housing will be a key driver of our future growth and profitability. We continue to control our fixed expenses to enhance our competitive position as the industry begins to recover from this downturn.

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Results of Operations

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

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

2004 Compared to 2003

Net Sales. Net sales increased 0.9% to $578.5 million in 2004 from $573.1 million in 2003. Net sales for the factory-built housing segment increased $2.5 million primarily due to modular sales which totaled $83.5 million in fiscal 2004 versus $66.3 million in fiscal 2003, which was somewhat offset by a decrease in overall manufactured housing volume. The volume of manufactured homes sold through our retail superstores declined 12.4% while overall manufactured housing unit volume, which includes sales to independent retailers, declined 8.2% in fiscal 2004. This decline in volume is partially offset by an increase in the average selling price of a new manufactured home to $68,000 in 2004 from $63,000 in 2003. This increase in average selling price resulted primarily from our passing higher materials costs on to the customer through price increases as well as a shift in product mix towards multi-section manufactured homes, which constituted 93% of our manufactured homes sold in 2004, as compared to 91% in fiscal 2003, as customers are purchasing larger homes with more amenities. The number of our retail superstores and builder locations decreased from 158 at the end of fiscal 2003 to 149 at the end of fiscal 2004. Financial services revenue increased $2.8 million, which consists of a $1.5 million increase in interest income resulting from an increase in the loans held for investment from $32.1 million at the end of fiscal 2003 to $96.8 million at the end of fiscal 2004, and a $1.3 million increase in insurance revenues.

Gross Profit. In fiscal 2004, gross profit as a percentage of net sales declined to 26.0%, or $150.6 million, from 28.7%, or $164.4 million, in fiscal 2003. Gross profit for the factory-built housing segment decreased $16.1 million from 27.5% of net sales in fiscal 2003 to 24.5% of net sales in fiscal 2004. This decrease is principally the result of

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price increases of approximately $10.8 million in lumber, gypsum and other materials which outpaced materials price increases to customers. The percentage of factory-built homes sold through our retail superstores and builder locations decreased from 76% in fiscal 2003 to 71% in fiscal 2004. Gross profit for the financial services segment increased $2.4 million 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 decreased to 27.2% in 2004 from 27.5% in 2003. Selling, general and administrative expenses decreased slightly to $157.4 million in fiscal 2004 from $157.5 million in fiscal 2003. Selling, general and administrative expenses for factory-built housing decreased $0.9 million in fiscal 2004, which reflects a $3.5 million decrease in selling, general and administrative expenses associated with nine fewer retail superstores and a focus on reducing fixed costs in fiscal 2004 offset by an increase of $3.3 million due to selling, general and administrative expenses including 12 months of Nationwide’s expenses in fiscal 2004 versus 10 months in fiscal 2003. Selling, general and administrative expenses for financial services increased $0.8 million primarily due to additional expenses related to the expansion of CountryPlace.

Interest Expense. Interest expense decreased 16.6% to $5.6 million in 2004 as compared to $6.7 million in 2003. This decrease was primarily due to a $25.5 million decrease in the average floor plan liability in fiscal 2004 coupled with a slight decrease in the prime interest rate from 4.25% at the end of fiscal 2003 to 4.00% at the end of fiscal 2004.

Equity in Earnings of Limited Partnership. Equity earnings in limited partnership decreased 45.9% to $1.8 million in fiscal 2004 as compared to $3.4 million in fiscal 2003. This $1.6 million decrease was primarily due to our share of operating losses at BSM in the last half of fiscal 2004 resulting from a decline in the number of mortgage refinance originations and a decline in margins due to the timing differential between loans funded and loans sold to investors.

Other Income. Other income decreased 1.2% to $1.4 million in fiscal 2004 as compared to $1.5 million in fiscal 2003. This slight decrease was due to a $0.9 million decrease in interest income, $0.5 million decrease in income earned on a real estate investment offset by an increase of $1.1 million in gains on short-term investments.

2003 Compared to 2002

Net Sales. Net sales decreased 8.6% to $573.1 million in 2003 as compared to $627.4 million in 2002. Net sales for the factory-built housing segment decreased $49.7 million primarily due to the reduction of retail financing available in the manufactured housing industry, partially offset by the addition of modular sales which totaled $51.2 million in fiscal 2003. The volume of manufactured homes sold through our retail superstores declined 21.1% while overall manufactured housing unit volume, which includes sales to independent retailers, declined 19.4% in fiscal 2003. This decline in volume is partially offset by an increase in the average selling price of a new manufactured home to $63,000 in 2003 as compared to $60,000 in 2002. This increase in average selling price resulted from a slight shift in product mix towards multi-section manufactured homes. Multi-section manufactured homes represented 91% of our manufactured homes sold in 2003. The number of our retail superstores and builder locations increased from 151 at the end of fiscal 2002 to 158 at the end of fiscal 2003. Financial services net sales decreased $4.6 million due to a 35.3% decrease in the number of loans originated by CountryPlace, a $1.0 million decrease in insurance revenues resulting from the decrease in volume of new homes sold, and a $0.6 million decrease in investment income related to Standard’s investments.

Gross Profit. In fiscal 2003, gross profit as a percentage of net sales declined to 28.7% as compared to 32.0% in fiscal 2002. Gross profit decreased 18.2% to $164.4 million in 2003 compared to $201.0 million in 2002. Gross profit for the factory-built housing segment decreased $31.6 million from 30.5% of net sales in fiscal 2002 to 27.5% of net sales in fiscal 2003. This decrease, both as a percentage of sales and in absolute dollars, is principally the result of the contraction of retail financing and the intensely competitive industry environment. The percentage of factory-built homes sold through our retail superstores and builder locations decreased from 83% in fiscal 2002 to 76% in fiscal 2003 due to the addition of Nationwide which has a much lower internalization rate of 14%. Gross profit for the financial services segment decreased $5.0 million due to the decrease in net sales as explained above.

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Selling, General and Administrative Expenses. As a percentage of net sales, selling, general and administrative expenses increased to 27.5% in 2003 as compared to 26.8% in 2002. Selling, general and administrative expenses decreased $10.7 million, or 6.4%, to $157.5 million in 2003 as compared to $168.2 million in 2002. Selling, general and administrative expenses for factory-built housing decreased $10.9 million in fiscal 2003. This reduction reflects our focus on reducing fixed costs somewhat offset by its continued commitment to building brand awareness via advertising. Additionally, selling, general and administrative expenses for fiscal 2003 include 10 months of Nationwide’s fixed expenses. Selling, general and administrative expenses for financial services increased $0.3 million.

Interest Expense. Interest expense decreased 20.3% to $6.7 million in 2003 as compared to $8.4 million in 2002. This decrease was primarily due to a decrease in the prime interest rate from 4.75% at the end of fiscal 2002 to 4.25% at the end of fiscal 2003, coupled with a decrease in the floor plan liability.

Equity in Earnings of Limited Partnership. Equity earnings in limited partnership increased 100.0% to $3.4 million in fiscal 2003 as compared to none in fiscal 2002. This $3.4 million increase was due to our becoming a 50% sole limited partner in BSM during the first quarter of fiscal 2003.

Other Income. Other income decreased 77.4% to $1.5 million in fiscal 2003 as compared to $6.5 million in fiscal 2002. This decrease was primarily the result of a $2.1 million decrease in interest income in fiscal 2003, a $1.8 million decrease in income earned on a real estate investment in fiscal 2003 and a $1.0 million loss on short-term investments in fiscal 2003.

Liquidity and Capital Resources

     Cash and cash equivalents totaled $50.9 million at March 26, 2004, up from $45.6 million at March 28, 2003. During fiscal 2004, net cash of $26.2 million was used in operating activities primarily for originating loans at CountryPlace, increased accounts payable and decreased trade receivables. The amount of loans originated at CountryPlace increased due to a full year of originations in fiscal 2004 versus less than half a year of originations in fiscal 2003. Payables increased due to temporarily renegotiated payment terms with certain vendors and receivables decreased due to increased collection efforts. At the beginning of fiscal 2005, payment terms returned to original terms following CountryPlace’s successful renegotiation of the warehouse facility. Net cash provided by investing activities primarily consisted of sales of investments of $12.2 million offset by purchases of investments of $8.3 million. Net proceeds from the warehouse facility of $58.9 million were offset by payments of $30.4 million on floor plan liabilities, and contributed to the $28.4 million in net cash provided by financing activities.

     We have an agreement with a financial institution for an $80.0 million syndicated floor plan facility expiring March 19, 2006. The advance rate for this facility is 90% of manufacturer’s invoice. We have a second facility with another financial institution for $10.0 million, which automatically renews annually on October 11 unless a 30-day notification of cancellation is received by the financial institution. These facilities are used to finance a major portion of the new home inventory at our retail superstores and are secured by new home inventory and a portion of receivables from financial institutions. The interest rates on the facilities are prime (4.00% at March 26, 2004) or prime plus 1.0% to 3.0% for aged units, of which we had none as of March 26, 2004 under our floor plan arrangements. These two floor plan facilities contain certain provisions regarding minimum financial requirements which we must maintain in order to borrow against the facilities. As of March 26, 2004, we were in compliance with the amended financial requirements under the $80.0 million facility. However, we do not expect to be in compliance with amended current covenants regarding funded debt to EBITDA, minimum EBITDA or minimum profitability during the next fiscal year. Accordingly, in April 2004, we obtained a firm commitment from the lending institution for a new, 3 year, $70.0 million floor plan facility conditional only upon customary preparation and execution of the final written agreement being entered into between the lender and us. The new floor plan facility will contain covenant requirements for minimum liquidity, tangible net worth, cash flow and profitability. We expect to be in compliance with the covenants of this new facility during the next fiscal year. We were not in compliance with the covenants under the $10.0 million facility, specifically funded debt to EBITDA, minimum EBITDA or minimum profitability. We have obtained a three-month limited forbearance with respect to this $10.0 million facility. The limited forbearance limits, under certain conditions, the financial institution from exercising its rights and remedies with respect to default under the terms of the floor plan agreement. It is not a waiver of the financial institution’s rights or remedies, does not obligate the financial institution to forbear on any type of default in the future and does not amend or waive any term or provision of the floor plan agreement, which continues unchanged and in full force and effect. We do not expect to be in compliance with these covenants in the

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next fiscal year and are in the process of renegotiating the facility. In the event we are not in compliance with any of our floor plan facility requirements in future periods, we would seek a waiver of any default from the lending institutions and, if no such waiver was obtained, maturities of outstanding debt could be accelerated. We had $114.4 million and $84.1 million outstanding under these floor plan credit facilities at March 28, 2003 and March 29, 2004, respectively.

     During the fourth quarter, CountryPlace entered into an agreement with a financial institution for a $200.0 million warehouse facility to fund chattel loans originated by Company-owned retail superstores, replacing its previous warehouse facility. The new facility is collateralized by specific receivables pledged to the facility and bears interest at the rate of LIBOR (1.125% at March 26, 2004) plus 2.00%. The facility terminates on March 18, 2006, however amounts outstanding under the facility are effectively settled and re-borrowed on a monthly basis. The facility provides for an advance of 80% against the outstanding principal balance of eligible receivables as defined in the warehouse agreement. The previous facility provided maximum funding of $125.0 million, an advance rate of 65%, an interest rate of LIBOR plus 1.25% and a one-year term. The new facility provides for an advance rate adjustment on March 18, 2005 as determined by the financial institution. If the advance rate is lowered, CountryPlace may terminate the borrowing facility with no penalty. If CountryPlace does not terminate the facility, it is obligated to pay the financial institution a fee of $1.0 million on March 18, 2005. CountryPlace had outstanding borrowings under warehouse facilities of $74.1 million and $15.1 million as of March 26, 2004 and March 28, 2003, respectively. The facility contains certain requirements relating to the performance and composition of the receivables pledged to the facility and certain financial covenants, which are customary in the industry. As of March 26, 2004, both we and CountryPlace were in compliance with these requirements. In connection with the warehouse borrowing facility, we agreed to fund in cash to CountryPlace, up to 25% of each loan loss incurred. During fiscal 2004, we funded $26,000 to CountryPlace under this loss funding arrangement. As CountryPlace continues to expand and draw down on its warehouse facility, we will fund 20% of any additional loan originations. Should CountryPlace increase its borrowings under the facility to the maximum $200.0 million, we will have to fund from other sources an additional $20.0 million of these loan originations.

     During the fiscal years ended March 28, 2003 and March 26, 2004, CountryPlace originated, net of financed loan points, $32,859,000 and $77,090,000 of chattel loans, respectively. Of these amounts, in fiscal 2003, $17,724,000 of loan originations was funded by our operations and $15,135,000 was funded through warehouse borrowings, and in fiscal 2004 $13,347,000 of loan originations was funded by our operations and $63,744,000 was funded through warehouse borrowings.

     CountryPlace currently intends to originate and hold loans for investment on a long-term basis. CountryPlace makes loans to borrowers that it believes are credit worthy based onits credit guidelines. However, originating and holding loans for investment subjects CountryPlace to more credit and interest rate risk than the previous business practice of 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. CountryPlace intends to securitize its loan portfolio on a routine basis. While we believe it will be able to obtain additional liquidity through the securitization of such loans, no assurances can be made that CountryPlace will successfully complete securitization transactions on acceptable terms and conditions, if at all.

     We believe that cash flows from operations, together with floor plan financing and other available borrowing alternatives in addition to the warehouse facility, will be adequate to support our working capital needs, currently planned capital expenditure needs and expansion of CountryPlace for the foreseeable future. However, because future cash flows and the availability of financing will depend on a number of factors, including prevailing economic and financial conditions, business, the market for asset backed securitizations, and other factors beyond our control, no assurances can be given in this regard.

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Contractual Obligations and Commitments (dollars in thousands)

     The following tables summarize our contractual cash obligations and commercial commitments, excluding interest, at March 26, 2004. For additional information related to these obligations, see the Notes to Consolidated Financial Statements.

(1)		We have contingent repurchase obligations outstanding at March 26, 2004 which have a finite life but are replaced as we continue to sell our manufactured homes to dealers under repurchase agreements with financial institutions. Our losses related to these contingent repurchase obligations were $212,000, $69,000 and $6,000 during fiscal 2002, 2003, and 2004, respectively. For additional information on our repurchase obligations, see critical accounting policies – reserve for repurchase obligations.
(2)		We have provided letters of credit to providers of certain of our insurance policies. While the current letters of credit have a finite life, they are subject to renewal at different amounts based on the requirements of the insurance carriers. We have recorded insurance expense based on anticipated losses related to these policies as is customary in the industry.

Critical Accounting Policies

     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, revenues 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.

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     Impairment of Intangible Assets. In assessing the recoverability of our intangibles, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets.

     Revenue recognition. Retail sales, 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. Homes sold to independent retailers are recognized when the home is shipped which is when the title passes to the independent retailer. The transportation cost is borne by the independent retailer.

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

     Reserve for Repurchase Obligations. Manufactured housing companies enter into repurchase agreements with financial institutions which have provided wholesale floor plan financing to independent retailers. These agreements generally provide that in the event of a retailer’s default we will repurchase the financed home from the lending institution at declining prices over the term of the repurchase agreement (generally 12 –18 months). The risk of loss under such repurchase agreements is mitigated by the fact that (i) only 22% of our homes are sold to independent retailers; (ii) a majority of the homes we sell to independent retailers are pre-sold to specific retail customers; (iii) we monitor each retailer’s inventory position on a regular basis; (iv) sales of our manufactured homes are spread over a large number of retailers; (v) none of our independent retailers accounted for more than 5% of our net sales in fiscal 2004; (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.

     Allowance for Loan Losses. CountryPlace originates and holds for investment purposes loans related to the retail sale of our manufactured homes, with such loans being collateralized primarily by the manufactured home. We provide allowances for estimated future loan losses at the time of sale and during the term of the loan. The allowance for loan losses gives consideration to the composition of the loan portfolio, including number of delinquencies and historical loss experience, and expectations as to future loan losses based upon industry knowledge. Although CountryPlace maintains an allowance for loan losses based upon these expectations and other criteria, future differences between CountryPlace’s expectations with respect to loan losses and actual losses incurred in the portfolio could differ, and require CountryPlace to provide additional allowances.

New Accounting Pronouncements

     In May 2003, the Financial Accounting Standards board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” Effective March 29, 2003, we adopted SFAS No. 150 which specifies the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. This statement requires that qualifying instruments be classified as liabilities in statements of financial position. The adoption of SFAS No. 150 did not have a material effect on our financial position, results of operations and cash flows.

     In 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46) which requires the consolidation of variable interest entities, as defined, by the primary beneficiary of such entities. In general, variable interest entities are entities that do not have, or are not subject to control through, voting interests. The provisions of FIN 46, as revised, were applicable to us for any interests in certain special purpose variable interest entities in the fourth quarter of fiscal 2004. For all other types of variable interest entities, the provisions of FIN 46 were applicable in our first quarter of fiscal 2005. We do not hold any investments in, or are the primary beneficiary of, any type of variable interest entity, and thus the adoption of FIN 46 did not have a material effect on our financial position, results of operations or cash flows.

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Resolution of Securities and Exchange Commission “SEC Staff” views on SFAS No. 95

     We were recently notified by members of the SEC Staff that the SEC Staff’s view on the Consolidated Statement of Cash Flows had now been confirmed by Staff Members of the Office of the Chief Accountant of the SEC and we should now restate the Consolidated Statement of Cash Flows to conform with the SEC views. Accordingly, the Consolidated Statement of Cash Flows has been restated to classify the origination and collection of long-term loans, which are held for investment purposes, in connection with customer purchases of products or services from us as operating activities rather than investing activities. As previously disclosed in our Consolidated Financial Statements in the Form 10-K, the restatement of the Consolidated Statement of Cash Flows had the following effect:

Forward-Looking Information/Risk Factors

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

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

     Our retail customers generally secure financing from third party lenders, which have been negatively affected by adverse loan experience. Conseco Finance Servicing Corp. and The Associates, which had provided financing for our customers, have withdrawn from the manufactured housing finance business. Reduced availability of such financing is currently having an adverse effect on 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 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. Financing for the purchase of manufactured homes is often more difficult to obtain than conventional home mortgages. 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 is unable to securitize its loans, it will be required to seek other sources of long term funding, which funding may not be available.

     Our 80%-owned subsidiary, CountryPlace, originates chattel and non-conforming land home mortgage loans that are funded with proceeds from its warehouse borrowing facility and borrowings from us. We anticipate that a primary future source of funding for CountryPlace will be from securitizations of its mortgage loans. The proceeds from the securitizations will be used to repay borrowings from the warehouse facility and from us, as well as to originate new loans. The securitization market is dependent upon a number of factors, including general

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economic conditions, conditions in the securities market generally and conditions in the asset-backed securities market specifically. Although the asset-backed securitization market for manufactured housing lenders has improved slightly in the past year in terms of access to the markets, as well as pricing and credit enhancement levels, poor performance of any loans we may securitize in the future could harm our future access to the securitization market. If CountryPlace is unable to securitize its loans on terms that are economical, or if there is a decline in the securitization market for manufactured housing lenders, and if CountryPlace is unable to obtain additional sources of long term funding, it could have a material adverse effect on our results of operations, financial condition and business prospects.

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. A substantial increase in the delinquency rate that results from improper servicing or mortgage loan performance in general could adversely affect the profitability and cash flow from the loan portfolio in CountryPlace.

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

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

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

If customers do not repay their loans, the profitability and cash flow from the loan portfolio could adversely affect CountryPlace and our consolidated financial position, results of operations and cash flows.

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 superstores through wholesale “floor plan” financing arrangements. Through these arrangements, financial institutions provide us with a loan for the purchase price of the home. After the departure of Conseco Finance Servicing Corp. from wholesale financing, in 2002, Deutsche Financial Services Corporation announced that they were exiting the floor plan financing business. Although we currently have floor plan facilities with financial institutions totaling $90 million, there can be no assurance that we will continue to have access to such facilities or that we will not be forced to reduce our new home inventory at our retail superstores.

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 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 2004 and 2003, net expenses incurred under these repurchase agreements totaled $6,000 and $69,000, respectively.

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

     Our results of operations can be affected by the pricing and availability of raw materials. In 2004, we experienced an increase in prices of our raw materials of 14%. 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. Three of the most important raw materials used in our operations, lumber, gypsum wallboard and insulation, have experienced significant price fluctuations in the past fiscal year. 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.

We are dependent on our executive officers and the loss of their service could adversely affect us.

     We are dependent to a significant extent upon the efforts of our executive officers, particularly Lee Posey, Chairman of the Board and Larry H. Keener, President and Chief Executive Officer. The loss of the services of one or more of our executive officers could have 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 54% of our outstanding common stock is beneficially owned or controlled by our Chairman of the Board, Lee 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.

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

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

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

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

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

     The manufactured and modular housing industry is highly cyclical and seasonal and has experienced wide fluctuations in aggregate sales in the past. We are subject to volatility in operating results due to external factors beyond our control such as:

	•		the level and stability of interest rates;
	•		unemployment trends;
	•		the availability of retail financing;
	•		the availability of wholesale financing;
	•		housing supply and demand;
	•		international tensions and hostilities;
	•		levels of consumer confidence;

11

	•		inventory levels; and
	•		changes in general economic conditions.

     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 revenues and operating results to fluctuate and makes it difficult for management to forecast sales and profits in uncertain times. As a result of seasonal and cyclical downturns, results from any quarter should not be relied upon as being indicative of performance in future quarters.

We are concentrated geographically, which could harm our business.

     In fiscal 2004, 26% of our revenues were generated in Texas. Additionally, in fiscal 2004, 18% of our revenues were generated in Florida and 10% of our revenues were generated in North Carolina. A decline in the demand for manufactured housing in these three states and/or a decline in the economies of these three states could have a material adverse effect on our results of operations.

12

Item 8. Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

Board of Directors
Palm Harbor Homes, Inc.

We have audited the accompanying consolidated balance sheets of Palm Harbor Homes, Inc. and Subsidiaries (the “Company”) as of March 26, 2004 and March 28, 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three fiscal years in the period ended March 26, 2004. 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 26, 2004 and March 28, 2003, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended March 26, 2004, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, the Company restated its consolidated statement of cash flows for the fiscal years ended March 26, 2004 and March 28, 2003.

13

Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Balance Sheets
(In thousands)

14

Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Balance Sheets
(In thousands, except share and per share data)

See accompanying notes.

15

Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Statements of Operation
(In thousands, except per share data)

See accompanying notes.

16

Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity
(In thousands, except share data)

See accompanying notes.

17

Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Statements of Cash Flows
(In thousands)

See accompanying notes.

18

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

1. Summary of Significant Accounting Policies

Principles of consolidation

The consolidated financial statements include the accounts of Palm Harbor Homes, Inc. (the “Company”) and its majority-owned and wholly-owned subsidiaries. Investments in 50% or less-owned entities are accounted for under the equity method. CountryPlace Mortgage, Ltd. is 80% owned by the Company. All significant intercompany transactions and balances have been eliminated in consolidation. The Company’s fiscal year ends on the last Friday in March. Headquartered in Addison, Texas, the Company markets factory-built homes nationwide through vertically integrated operations, encompassing factory-built housing, chattel and mortgage bank financing, as well as insurance.

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

Revenue recognition

Retail sales, 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. Homes sold to independent retailers are recognized when the home is shipped which is when the title passes to the independent retailer. Transportation costs, unless borne by the retail customer or independent retailer, are included in cost of sales.

Interest income on loans held for investment is recognized as net sales on an accrual basis. Loans receivable are placed on nonaccrual by the Company whenever payments become more than 120 days past due or once a related home is repossessed, whichever is earlier. Loan origination fees and certain direct loan origination costs are deferred and amortized into net sales over the contractual life of the loan using the interest method.

Most of the homes sold to independent retailers are financed through standard industry arrangements which include repurchase agreements (see Note 13). The Company extends credit in the normal course of business under normal trade terms and our receivables are subject to normal industry risk.

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

Residual interests and recourse obligations

Through November 2002, CountryPlace Mortgage, Ltd. (“CountryPlace”), the Company’s finance subsidiary, originated and sold loan contracts to national consumer finance companies and received cash and/or retained a residual interest in the interest generated by the sold contracts. Since April 1, 1999, substantially all interest income on sold contracts was received in cash upon the sale of the contracts. Prior to April 1, 1999, a residual interest in the interest generated by the sold contracts was retained and recorded. The fair value of the residual interests was previously recorded on the balance sheet at fair value. Additionally, in some cases, in connection with the sale of loan contracts, CountryPlace was required to share in the losses resulting from defaults or prepayments of loan contracts previously sold and therefore established estimated losses at the time the loan contracts were sold.

During the fourth quarter of fiscal 2003, the Company sold all of its interest-only strip receivables related to loan contracts previously sold for approximately $7.0 million and was released from all of its related recourse obligations. No significant gain or loss was recorded in connection with this transaction. During the fiscal year ended March 28, 2002 and March 28, 2003, the Company recognized approximately $3.9 million and $1.0 million

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Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

in gains, respectively, related to loan contracts sold. The Company had $0.8 million in unrealized gains for the fiscal year ended March 29, 2002.

Cash and cash equivalents

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

Restricted cash

At March 26, 2004 and March 28, 2003, $4,771,000 and $4,484,000, respectively, of cash was pledged as collateral for outstanding letters of credit which collaterized insurance programs and surety bonds.

Loans held for investment

Loans held for investment are stated at the aggregate remaining unpaid principal balances less allowances for loan losses and unamortized deferred finance fees.

Allowance for loan losses

CountryPlace originates and holds for investment purposes loans related to the retail sale of factory-built Palm Harbor homes, with such loans being collateralized primarily by the factory-built home. The Company provides allowances for estimated future loan losses at the time of sale and during the term of the loan. The allowance for loan losses gives consideration to the composition of the loan portfolio, including number of delinquencies and historical loss experience, known losses due to existing repossessed homes, expected losses due to specific customer delinquencies, and expected future losses based on industry knowledge of losses for a given credit score. Although the Company maintains an allowance for loan losses based upon these expectations and other criteria, future differences between the Company’s expectations with respect to loan losses and actual losses incurred in the portfolio could differ, and require the Company to provide additional allowances. The Company recorded a provision for credit losses totaling $1,409,000 and $2,076,000 for fiscal 2003 and 2004, respectively, and four loans were charged off totaling $87,000 in fiscal 2004.

Investments

The Company holds investments as trading and available-for-sale. The trading account assets consist of marketable debt and equity securities and are stated at fair value. Marketable debt and equity securities not classified as trading are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported in shareholders’ equity.

Inventories

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

Property, plant and equipment

Property, plant and equipment are carried at cost. Depreciation is calculated using the straight-line method over the assets’ estimated useful lives. Leasehold improvements are amortized using the straight-line method over the shorter of the lease period or the improvements’ useful lives. Estimated useful lives for significant classes of assets are as follows: Land and Improvements 10-15 years, Buildings and Improvements 3-15 years, and Machinery and Equipment 2-10 years. The Company had depreciation expense of $11,993,000, $13,704,000 and $13,331,000 in fiscal 2002, 2003 and 2004, respectively. Repairs and maintenance are expensed as incurred. The recoverability of property, plant and equipment is evaluated whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable, primarily based on estimated selling price, appraised value or projected

20

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

undiscounted cash flows. The Company has not recorded any impairment charges in fiscal 2002, 2003 or 2004.

Goodwill

Goodwill is the excess of cost over fair value of net assets of businesses acquired. Goodwill is no longer amortized. The Company tests goodwill annually for impairment by reporting unit and records an impairment charge when the implied fair value of goodwill is less than its carrying value. The Company’s two reporting units are factory-built housing and financial services. All of the Company’s goodwill relates to its factory-built housing reporting unit. The Company performed its annual goodwill impairment test for fiscal year 2004 as of December 27, 2003, the first day of its fourth fiscal quarter, and noted no implied impairment of goodwill.

Warranties

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

Start-up costs

Costs incurred in connection with the start-up of manufacturing facilities and retail superstores are expensed as incurred.

Income taxes

Deferred income taxes are determined by the liability method and reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Earnings per share

In computing both basic and diluted earnings per share, the number of weighted average shares outstanding during the periods presented were used.

Financial statement classifications

During the fiscal year ended March 28, 2003, the Company announced plans to significantly increase its finance operations through CountryPlace. As of March 26, 2004, CountryPlace had obtained a warehouse revolving debt facility of $200.0 million whereby CountryPlace could borrow against the facility on a short-term basis to fund the origination of manufactured housing loans until sufficient sums of loans are accumulated and then securitized with debt with longer-term maturities. As of March 26, 2004, the Company had approximately $96.8 million of net loans held for investment.

As a result of the Company’s plans to continue to significantly expand its finance and insurance operations, an accounting policy to no longer present a classified balance sheet was adopted in fiscal 2003.

Accumulated other comprehensive income

Accumulated other comprehensive income is presented net of income taxes and is comprised of unrealized gains and losses on securities available-for-sale.

New Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” Effective March 29, 2003, the Company adopted SFAS No. 150 which specifies the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. This Statement requires that qualifying instruments be classified as liabilities in statements of financial position. The adoption of SFAS No. 150 did not have a material effect on the Company’s financial position, results of operations and cash flows.

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Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

In 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), which requires the consolidation of variable interest entities, as defined, by the primary beneficiary of such entities. In general, variable interest entities are entities that do not have, or are not subject to control through, voting interests. The provisions of FIN 46, as revised, were applicable to the Company for any interests in certain special purpose variable interest entities in the fourth quarter of fiscal 2004. For all other types of variable interest entities, the provisions of FIN 46 were applicable in the Company’s first quarter of fiscal 2005. The Company does not hold any investments in, or is the primary beneficiary of, any type of variable interest entity, and thus the adoption of FIN 46 did not have a material effect on the Company’s financial position, results of operations or cash flows.

Resolution of Securities and Exchange Commission “SEC Staff” views on SFAS No. 95

The Company was recently notified by members of the SEC Staff that the SEC Staff’s view on the Consolidated Statement of Cash Flows had now been confirmed by Staff Members of the Office of the Chief Accountant of the SEC and the Company should now restate the Consolidated Statement of Cash Flows to conform with the SEC views. Accordingly, the Consolidated Statement of Cash Flows has been restated to classify the origination and collection of long-term loans, which are held for investment purposes, in connection with customer purchases of products or services from the Company as operating activities rather than investing activities. As previously disclosed in the Company’s Consolidated Financial Statements in the Form 10-K, the restatement of the Consolidated Statement of Cash Flows had the following effect:

2.

Acquisitions/Investments

On June 7, 2002, the Company acquired Nationwide Custom Homes (“Nationwide”), a manufacturer and marketer of modular homes, for $32.5 million in cash. The acquisition was accounted for using the purchase method of accounting. The Company acquired Nationwide primarily to enhance its competitive position, extend its geographic presence, expand its product line offerings, target more customers in the higher-end market, and further complement its existing operations. These factors contributed to the Company’s purchase price, which resulted in approximately $25 million of goodwill. Proforma results of operations would not be materially different for fiscal year 2003 and therefore are not presented. The following table details a condensed balance sheet of Nationwide Homes assigning an amount to each major asset and liability account as of the acquisition date (in thousands):

22

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

In June 2002, the Company invested $3.0 million to become the sole limited partner and 50% owner of an existing mortgage banking firm, BSM Financial L. P. (“BSM”) which is being accounted for using the equity method of accounting. During fiscal 2004, the Company’s equity in the net income of BSM was $1.8 million. Condensed balance sheets as of March 28, 2003 and March 26, 2004 and the condensed income statements for the fiscal years ending March 28, 2003 and March 26, 2004 are as follows (in thousands):

3.

Inventories

Inventories consist of the following:

4.

Investments

The Company’s investments totaled $23,987,000 and $21,126,000 at March 28, 2003 and March 26, 2004, respectively. The fair value of the available-for-sale securities was $14,619,000 and $14,486,000, and the Company had net unrealized gains recorded of $195,000 and $767,000 at March 28, 2003 and March 26, 2004, respectively. The majority of the available-for-sale securities consist of U.S. government related obligations and other debt obligations with contractual maturities of generally 2 to 11 years. The remaining of the Company’s investments are classified as trading securities.

23

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

5.

Floor plan payable

The Company has an agreement with a financial institution for an $80.0 million syndicated floor plan facility expiring March 19, 2006. The advance rate for this facility is 90% of manufacturer’s invoice. The Company has a second facility with another financial institution for $10.0 million, which automatically renews annually on October 11 unless a 30-day notification of cancellation is received by the financial institution. These facilities are used to finance a major portion of the new home inventory at the Company’s retail superstores and are secured by new home inventory and a portion of receivables from financial institutions. The interest rates on the facilities are prime (4.00% at March 26, 2004) or prime plus 1.0% to 3.0% for aged units, of which the Company has none as of March 26, 2004 under its floor plan arrangements. These two floor plan facilities contain certain provisions regarding minimum financial requirements which the Company must maintain in order to borrow against the facilities. As of March 26, 2004, the Company was in compliance with the amended minimum financial requirements under the $80.0 million facility. However, the Company does not expect to be in compliance with the current covenants regarding funded debt to EBITDA, minimum EBITDA or minimum profitability during the next fiscal year. Accordingly, in April 2004, the Company obtained a firm commitment from the lending institution for a new, 3 year, $70.0 million floor plan facility conditional only upon customary preparation and execution of the final written agreement being entered into between the lender and the Company. The new floor plan facility will contain covenant requirements for minimum liquidity, tangible net worth, cash flow and profitability. The Company expects to be in compliance with the covenants of this new facility during the next fiscal year. The Company, at March 26, 2004, was not in compliance with the covenants under the $10.0 million facility, specifically the covenants for funded debt to EBITDA, minimum EBITDA or minimum profitability. The Company had obtained a three-month limited forbearance with respect to this $10.0 million facility. The limited forbearance limits, under certain conditions, the financial institution from exercising its rights and remedies with respect to default under the terms of the floor plan agreement. It is not a waiver of the financial institution’s rights or remedies, does not obligate the financial institution to forbear on any type of default in the future and does not amend or waive any term or provision of the floor plan agreement, which continues unchanged and in full force and effect. The Company does not expect to be in compliance with these covenants in the next fiscal year and is in the process of renegotiating the facility. In the event the Company is not in compliance any of its floor plan facility covenant requirements in future periods, the Company would seek a waiver of any default from the lending institutions and, if no such waiver was obtained, maturities of outstanding debt could be accelerated. The Company had $114,437,000 and $84,069,000 outstanding under these floor plan credit facilities at March 28, 2003 and March 29, 2004, respectively.

6.

Warehouse revolving debt

In March 2004, the Company, through its subsidiary CountryPlace, entered into an agreement with a financial institution for a $200.0 million loan warehouse borrowing facility to fund chattel loans originated by company-owned retail superstores, replacing its previous warehouse facility. This new facility is collateralized by specific receivables pledged to the facility and bears interest at the rate of LIBOR (1.125% at March 26, 2004) plus 2.00%. The facility terminates on March 18, 2006, however amounts outstanding under the facility are effectively settled and re-borrowed on a monthly basis. The facility provides for an advance of 80% against the outstanding principal balance of eligible receivables, as defined in the warehouse agreement. The previous facility provided maximum funding of $125.0 million, an advance rate of 65%, an interest rate of LIBOR plus 1.25% and a one-year term. The new facility provides for an advance rate adjustment on March 18, 2005 as determined by the financial institution. If the advance rate is lowered, CountryPlace may terminate the borrowing facility with no penalty. If CountryPlace does not terminate the facility, it is obligated to pay the financial institution a fee of $1,000,000 on March 18, 2005. CountryPlace had outstanding borrowings under warehouse facilities of $15,135,000 and $74,071,000 as of March 28, 2003 and March 26, 2004, respectively. The facility contains certain requirements relating to the performance and composition of the receivables pledged to the facility and certain financial covenants, which are customary in the industry. As of March 26, 2004, both Palm Harbor and CountryPlace were in compliance with these requirements. In connection with the warehouse borrowing facility, Palm Harbor agreed to fund in cash to CountryPlace, up to 25% of each loan loss incurred. During the year ended March 26, 2004, the Company funded $26,000 to CountryPlace under this loss funding arrangement. As CountryPlace continues to expand and draw down on its warehouse facility, the Company will fund 20% of any additional loan originations. Should

24

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

CountryPlace increase its borrowings under the facility to the maximum $200.0 million, the Company will have to fund from other sources an additional $20.0 million to of these loan originations.

During the fiscal years ended March 28, 2003 and March 26, 2004, CountryPlace originated, net of financed loan points, approximately $32,859,000 and $ 77,090,000 of chattel loans, respectively. Of these amounts, in fiscal 2003, $17,724,000 of loan originations was funded by the Company’s operations and $15,135,000 was funded through warehouse borrowings, and in fiscal 2004 $13,347,000 of loan originations was funded by the Company’s operations and $63,744,000 was funded through warehouse borrowings.

7.

Accrued liabilities

Accrued liabilities consist of the following:

8.

Bonds payable

Bonds payable consist of the following:

The revenue bonds require the maintenance of certain financial statement ratios, prohibit the payment of dividends and are collateralized by certain fixed assets having a carrying value as of March 26, 2004 of $4,319,000. The Company was in compliance with the financial statement ratios as of March 26, 2004.

Scheduled maturities of bonds payable are as follows (in thousands):

The carrying value of the Company’s bonds payable approximates their fair value.

25

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

9. Income taxes

     Income tax expense for fiscal years 2002, 2003 and 2004 is as follows:

Significant components of deferred tax assets and liabilities are as follows:

Tax benefits purchased are investments in Safe Harbor lease agreements that are carried net of tax benefits realized. The balance will be amortized over the remaining term of the related lease.

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

26

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

10. Shareholders’ equity

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

11. Long-Term Incentive Plan

Effective March 29, 1999, the Board of Directors approved the Fiscal Year 2000 Long-Term Incentive Plan (the “Plan”) whereby certain key associates received awards of restricted common stock. The Company’s Chairman and President/CEO do not participate in the Plan. Shares awarded under the Plan are either purchased by the Company in the open market or transferred from the Company’s treasury stock account. These restricted stock awards give the associate the right to receive a specific number of shares of common stock contingent upon remaining an associate of the Company for a specified period. Effective April 3, 2000, April 2, 2001 and April 1, 2002, the Board of Directors approved the Fiscal Year 2001 Long-Term Incentive Plan (the “2001 Plan”), the Fiscal Year 2002 Long-Term Incentive Plan (the “2002 Plan”) and the Fiscal Year 2003 Long-Term Incentive Plan (the “2003 Plan”), respectively. The 2001 Plan, 2002 Plan and the 2003 Plan have substantially the same terms as the Plan. The adoption of the Fiscal Year 2004 Long-Term Incentive Plan was modified until certain earnings levels are achieved.

The unamortized cost of the common stock acquired by the Company for the participants in the plans is reflected as “Unearned Compensation” in the accompanying Consolidated Balance Sheets. The plans are administered by a committee authorized by the Board of Directors.

12. Employee plan

The Company sponsors an employee savings plan (the “401k Plan”) that is intended to provide participating employees with additional income upon retirement. Employees may contribute between 1% and 18% of eligible compensation to the 401k Plan. The Company matches 50% of the first 6% deferred by employees. Employees are immediately eligible to participate and employer contributions, which begin one year after employment, are vested at the rate of 20% per year and are fully vested after five years of employment. Contribution expense was $1,627,000, $1,631,000 and $1,123,000 in fiscal years 2002, 2003 and 2004, respectively.

13. Commitments and contingencies

Future minimum lease payments for all noncancelable operating leases having a remaining term in excess of one year at March 26, 2004, are as follows (in thousands):

Rent expense (net of sublease income) was $8,617,000, $8,124,000 and $8,451,000 for fiscal years 2002, 2003 and 2004, respectively.

The Company is contingently liable under the terms of repurchase agreements covering independent retailers’ floor plan financing. Under such agreements, the Company agrees to repurchase homes at declining prices over the term of the agreement, generally 12 to 18 months. At March 26, 2004, the Company estimates that its potential obligations under all repurchase agreements were approximately $11.0 million. However, it is management’s

27

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

opinion that no material loss will occur from the repurchase agreements. During fiscal years 2002, 2003 and 2004, net expenses incurred by the Company under these repurchase agreements totaled $212,000, $69,000 and $6,000, respectively.

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

14. Other income

During fiscal years 2002, 2003 and 2004, the Company recorded interest income of $3,823,000, $1,700,000 and $826,000, respectively and other income (expense) of $2,627,000, $(242,000) and $614,000, respectively. Other income consists primarily of income earned on a real estate investment of $2,700,000 in fiscal 2002, $928,000 in fiscal 2003 and $457,000 in fiscal 2004, partially offset by a $1,000,000 loss on short-term investments in fiscal 2003.

28

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

15. Business segment information

The Company operates principally in two segments: (1) factory-built housing, which includes manufactured housing, modular housing and retail operations and (2) financial services, which includes finance and insurance. The following table details net sales, income (loss) from operations, identifiable assets, depreciation and amortization expense and capital expenditures by segment for fiscal 2002, 2003 and 2004 (in thousands):

29

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

16. Accrued product warranty obligations

The following table summarizes the changes in accrued product warranty obligations during the last three fiscal years. A portion of warranty reserves is classified as other long-term liabilities in the consolidated balance sheet.

17. Quarterly financial data (unaudited)

The following table sets forth certain unaudited quarterly financial information for the fiscal years 2003 and 2004.