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

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 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 24, 2004, was $161,125,304 based on the closing price on that date of the common stock as quoted on the Nasdaq Stock Market. As of June 2, 2005, 22,822,517 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 27, 2005 are incorporated by reference in Part III.

TABLE OF CONTENTS

PART I.

General

      We were formed in 1977 and are one of the leading manufacturers and marketers of factory-built homes in the United States. We market nationwide through vertically integrated operations, encompassing manufactured and modular housing, chattel and mortgage bank financing as well as insurance. At March 25, 2005, we operated 18 manufacturing facilities in nine states that sell homes in 32 states through 121 of our company-owned retail superstores and builder locations and approximately 375 independent retail dealers, builders and developers. Through our 80% owned subsidiary, CountryPlace Mortgage, Ltd., we offer chattel and non-conforming land/home mortgages to purchasers of manufactured homes sold by our retail superstores. Through our investment as the sole limited partner in BSM Financial L.P., we offer conforming and non-conforming mortgages. We provide property and casualty insurance for owners of manufactured and modular homes through our subsidiary, Standard Casualty Company.

      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. This is evidenced by a 62% decrease in industry-wide shipments of manufactured homes from calendar year 1999 to calendar year 2004. During this time, our manufactured housing shipments declined 57%. With the manufactured industry not showing any signs of recovery, we decided to diversify our operations by entering the modular home business. In June 2002, we acquired Nationwide Homes and have since added modular production to eight of our manufactured housing facilities. Industry-wide shipments of modular homes have increased 19% from calendar year 2002 to calendar year 2004. Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” further explains the impacts of these conditions on our operating results.

Factory-Built Operations

      Our factory-built operations consist of the production and sale of manufactured homes and modular homes. Our manufactured homes are constructed in accordance with the Federal Manufactured Home Construction and Safety Standards (HUD regulations). Approximately 82% of the homes we produced in fiscal 2005 were built to HUD regulations. The remaining 18% of homes we produced were modular homes, which 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 principal materials used in the production of our factory-built homes 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 production 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 three suppliers which accounted for more than 5% of our total purchases during the fiscal year ended March 25, 2005 represented 12.9%, 6.4% and 5.1%, respectively, of our total purchases during the fiscal year ended March 25, 2005. 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 materials costs. No assurances can be made that we will be able to pass these costs on in future years.

      We manufacture single and multi-section manufactured homes under various brand names including Palm Harbor^tm, Masterpiece^tm, Keystone^tm, CountryPlace, River Bend and Windsor Homes^tm. Approximately 94% of the manufactured homes we produced were multi-section in fiscal 2005 as compared to 95% in fiscal 2004. We offer over 600 floor plans, ranging in size from approximately 800 to 3,200 square feet. Approximately 90% of the manufactured homes we produce are structurally or decoratively customized to the homebuyer’s specifications. Although we produce a wide price range of manufactured homes, the average retail sales price (excluding land) of our manufactured homes was approximately $73,000 during fiscal 2005.

      Our homes are manufactured in indoor facilities, which have approximately 100,000 square feet of floor space and employ an average of 220 associates who generally work one shift per day, five days per week. Construction of our homes is performed in stages using an assembly-line process. Each section is permanently attached to a steel support chassis, various components such as floors, interior and exterior walls and a roof are added and function testing is performed. We currently manufacture a typical manufactured home in approximately five days. Our facilities have the capacity to produce an aggregate of approximately 119 sections per day. The current rate of production is 59.

      Our typical manufactured home contains two to five bedrooms, a living room, family room, dining room, kitchen, two or three bathrooms and features central air conditioning and heating, a range, refrigerator, carpeting and drapes. In addition, we offer optional amenities, including dishwashers, washers, dryers, furniture packages and specialty cabinets, as well as a wide range of colors, moldings and finishes. Optional features usually associated with site-built homes such as stone fireplaces, ceramic tile floors, showers and countertops, computer rooms, skylights, vaulted ceilings and whirlpool baths are also offered. We have a unique package of energy saving construction features referred to as “EnerGmiser^tm” which includes, among other things, additional insulation to reduce heating and cooling costs, and which exceeds statutorily-mandated energy efficiency levels.

      We are constantly introducing new floor plans, decors, exteriors, features and accessories to appeal to different regions of the country and changing trends. Our manufactured 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 completed manufactured homes are transported by independent trucking companies to either the retail sales center or to the customer’s site. The transportation cost is borne by the independent retailer. Retailers or other independent installers are responsible for placing the manufactured home on site, joining the interior and exterior seams, making utility hook-ups and, in certain instances, providing installation and finish-out services. 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 manufactured homes sold. 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.

      Our backlog of manufactured housing orders as of June 2, 2005 was approximately $44.5 million, as compared to approximately $21.7 million as of April 29, 2004. Since retailers may cancel orders prior to production without penalty, we do not consider our order backlog to be firm orders; however, such cancellations rarely occur. Because of the seasonality of the manufactured housing market, the level of backlog generally declines during the winter months.

      We manufacture modular homes through our wholly owned subsidiary, Nationwide Custom Homes, Inc. Nationwide operates three facilities in Martinsville, Virginia, one in Arabi, Georgia, and one in Siler City, North Carolina. In addition, eight of our other manufacturing facilities produce modular homes principally under the brand name Discovery Custom Homes. We produce a wide price range of modular homes with an average retail sales price (excluding land) of $135,000 for fiscal 2005.

      Our modular homes include single story ranch homes, split-levels, cape cods and two and three story homes. Like a manufactured home, a typical modular home contains the standard rooms and features and offers optional amenities, decors, exteriors and floor plans.

      Each modular home is assembled in sections. The process begins on a production line where a team of assemblers creates the floor and walls of the house. The section is then wheeled down a tracked path where various stages of finish are performed and components are added — from wiring and insulation early in the process to fixtures and floor coverings just prior to shipping. Modular homes are typically completed in one to two weeks.

      The homes are shipped directly off the manufacturing line to the customer’s site. Once on site, the homes are typically crane set on the foundation, the roof is raised and the final seam of roof shingles along the ridges of the roofline is applied.

      Our backlog of orders at Nationwide as of June 2, 2005, was approximately $39.9 million, as compared to approximately $29.6 million as of April 29, 2004.

      Our homes are sold through a distribution network consisting of retail superstores we own and independent dealers, builders and developers. We had a shift in our distribution network from 75% to 71% to 60% of our homes being sold by our company-owned superstores and builder locations from fiscal 2003 to fiscal 2004 to fiscal 2005, respectively. This decrease in the percentage of homes we manufactured and sold through our company-owned superstores and builder locations has resulted in a decline of gross margins from 28.7% to 26.0% to 25.3% from fiscal 2003 to fiscal 2004 to fiscal 2005, respectively. 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 superstores and independent dealers, builders and developers during the past three fiscal years:

      We first established company-owned retail superstores in 1992 and currently have 117 superstores in 19 states. One of our typical retail superstores consists of a sales office, which is a manufactured home, and a variety of factory-built model homes of various sizes, floor plans, features and prices. Currently, 70 of our retail superstores have modular model homes on site and many of our retail superstores 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.

      Through Nationwide, we have four builder locations in Virginia and North Carolina. Our typical builder location consists of a modular model home which serves as a sales office.

      Our independent retailer network principally consists of local dealers and builders that market land/home packages and developers of communities. No single independent retailer accounted for 5% or more of our net sales during fiscal 2003, 2004 or 2005.

Independent Builders/ Developers

      Approximately 8% of the modular homes we sold in fiscal 2005 were sold from our five Nationwide manufacturing facilities directly to a consumer. Nationwide’s independent distribution network consists of approximately 200 local builders and developers with whom we have developed relationships through direct marketing, trade shows, the Internet and referrals. Nationwide transports the home to the builder’s/developer’s site and the builder/developer contracts crews to lift the home with a crane onto its foundation and subsequently perform the finish-out services. Modular homes typically require a larger amount of work to be done on-site to complete the production of the homes. Currently eight of our manufactured housing facilities also build modular homes and sell homes directly to builders/developers.

Markets Served

      During the fiscal year ended March 25, 2005, the percentage of our revenues by region was as follows:

      The two states which accounted for greater than 10% of our revenues were Florida and Texas with 22.8% and 21.3%, respectively, of total revenues.

      Factory-built housing, which consists of manufactured housing and modular housing, is a regional business and 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 90 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

      We maintain relationships with conventional lenders who provide two basic types of consumer financing in the manufactured housing industry: chattel or personal property loans for purchasers of a home with no real estate involved and land/home or mortgage loans which finance the land, home and all improvements on the property. There are two types of mortgage loans — conforming and non-conforming. Conforming loans conform to FHA, VA, Freddie Mac and Fannie Mae standards. Generally, the type of required foundations installed must conform to Federal requirements and the borrower must meet certain criteria. Non-conforming loans are financed by a major bank or lending institution which does not require a specific foundation type and have more flexible criteria. Beginning in fiscal 2000 and continuing through fiscal 2005, many consumer

lenders have tightened credit-underwriting standards which has resulted in reduced lending volumes and lower 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 or 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 corporate purposes.

      In addition, we provide financing to our customers on competitive terms through our 80% owned subsidiary, CountryPlace, and our investment as the sole limited partner in BSM. Through CountryPlace, we offer customary chattel loans and non-conforming land/home mortgage loans for manufactured homes sold through our own retail superstores. Through BSM, we offer conforming and non-conforming mortgage financing for both modular and manufactured homes. We believe that providing these financing alternatives to our customers improves our responsiveness to the financing needs of prospective purchasers and provides us with an additional source of earnings.

      Prior to the third quarter of 2003, CountryPlace originated loans and immediately sold them to other lenders. During the third quarter of 2003, we executed our planned strategy and expanded CountryPlace into a full service chattel lender with originating, servicing and securitization capabilities. CountryPlace originated $32.9 million, $77.1 million and $59.2 million of loans for its own investment portfolio in fiscal 2003, 2004 and 2005, respectively. CountryPlace services and collects its portfolio of loans using its own employees and systems.

Insurance

      We offer property and casualty insurance as well as extended warranties for owners of manufactured homes through our subsidiary, Standard Casualty. During fiscal 2005, 57% and 89% of homeowners who purchased a home through our own retail superstores purchased property and casualty insurance and extended warranties, respectively. At the end of fiscal 2005, Standard Casualty had approximately 11,000 policies in force.

Wholesale Financing

      In accordance with manufactured housing industry practice, substantially all retailers finance a portion of their purchases of manufactured homes through wholesale “floor plan” financing arrangements. Under a typical floor plan financing arrangement, a financial institution provides the retailer with a loan for the purchase price of the home and maintains a security interest in the home as collateral. The financial institution which provides financing to the retailer customarily requires us to enter into a separate repurchase agreement with the financial institution under which we are obligated, upon default by the retailer and under certain other circumstances, to repurchase the financed home at declining prices over the term of the repurchase agreement (which generally ranges from 12 to 18 months). The price at which we may be obligated to repurchase a home under these agreements is based upon our original invoice price plus certain administrative and shipping expenses. Our obligation under these repurchase agreements ceases upon the purchase of the home by the retail customer.

      The risk of loss under such repurchase agreements is mitigated by the fact that (i) only 35% 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 2005; (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 $19.3 million as of March 25, 2005. During the fiscal years ended

March 28, 2003, March 26, 2004 and March 25, 2005, we incurred net expenses under these repurchase agreements totaling $69,000, $6,000 and $65,000, respectively.

      Beginning in fiscal 2000 and continuing through fiscal 2005, 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. During this time, several major floor plan lenders have exited the wholesale financing business and a number of regional banks have entered the retail financing or increased their lending volumes.

Competition

      The manufactured 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 in the industry, although some of our competitors possess substantially greater manufacturing, distribution and marketing resources than us.

      Although many lenders to the manufactured housing industry have reduced their volume or gone out of business, there are still competitors to CountryPlace and BSM in the markets where we do business. These competitors include national, regional and local banks, independent finance companies, mortgage brokers and mortgage banks. None of these competitors is considered to be dominant or to have a material impact on the financing opportunities at CountryPlace or BSM.

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 2003, 2004 and 2005.

Government Regulation

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

      Manufactured and site-built homes are all typically built with some products that contain formaldehyde resins. Since February 1985, HUD has regulated the allowable concentrations of formaldehyde in certain products used in manufactured homes and requires manufacturers to warn purchasers as to formaldehyde-

associated risks. The Environmental Protection Agency and other governmental agencies have in the past evaluated the effects of formaldehyde. We use materials in our manufactured homes that meet HUD standards for formaldehyde emissions and believe we comply with HUD and other applicable government regulations in this regard.

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

      Our manufactured homes are subject to local zoning and housing regulations. In certain cities and counties in areas where our homes are sold, local governmental ordinances and regulations have been enacted which restrict the placement of manufactured homes on privately-owned land or which require the placement of manufactured homes in manufactured home communities. Such ordinances and regulations may adversely affect our ability to sell homes for installation in communities where they are in effect. A number of states have adopted procedures governing the installation of manufactured homes. Utility connections are subject to state and local regulation and must be complied with by the retailer or other person installing the home. Our modular homes are also subject to local zoning regulations which govern the placement of homes.

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

      A variety of laws affect the financing of the homes we manufacture. The Federal Consumer Credit Protection Act (Truth-in-Lending) and Regulation Z promulgated thereunder require written disclosure of information relating to such financing, including the amount of the annual percentage rate and the finance charge. The Federal Fair Credit Reporting Act also requires certain disclosures to potential customers concerning credit information used as a basis to deny credit. The Federal Equal Credit Opportunity Act and Regulation B promulgated thereunder prohibit discrimination against any credit applicant based on certain specified grounds. The Real Estate Settlement Procedures Act and Regulation X promulgated thereunder require certain disclosures regarding the nature and costs of real estate settlements. The Federal Trade Commission has adopted or proposed 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.

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

      As of March 25, 2005, we had approximately 4,600 associates. All of our associates are non-union. We have not experienced any labor-related work stoppages and believe that our relationship with our associates is good.

Website Access to Company Reports and Other Documents

      Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge on our website at www.palmharbor.com as soon as reasonably practicable after such material is electronically filed with or furnished to 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.

      We currently own or lease properties at 20 manufacturing facilities in nine states. We own substantially all of our machinery and equipment. We believe our facilities are adequately maintained and suitable for the purposes for which they are used. Our current utilization rate at our manufacturing facilities is approximately 49%. The following table sets forth certain information with respect to properties at our manufacturing facilities:

      In addition to our production facilities, we own certain properties upon which 38 of our retail superstores are located. We also lease approximately 48,000 square feet of office space in Addison, Texas for our corporate headquarters. Our corporate headquarters lease expires in 2013.

      We are not currently subject to any pending or threatened litigation, other than routine litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on our financial condition, results of operations or cash flows.

      In late 1992, we removed an underground storage tank formerly used to store gasoline from the site of our Tempe, Arizona manufacturing facility. We are currently working 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. Under certain circumstances, a state fund may be available to compensate responsible parties for petroleum releases from underground storage tanks. We are evaluating the extent of the corrective action that may be necessary. Site characterization is complicated by the presence of contaminants associated with the Indian Bend Wash Area Superfund Site described below. 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.

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 June 2, 2005, the last reported sale price of our common stock on the Nasdaq Stock Market was $18.84. As of June 2, 2005, there were approximately 710 record holders of our common stock, and approximately 3,300 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.

      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 25, 2005. 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.

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 25, 2005, we operated 18 manufacturing facilities that sell homes through 121 company-owned retail superstores and builder locations and approximately 375 independent retail dealers, builders and developers. Through our 80% owned 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 50% 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 wholly owned subsidiary, Standard Casualty.

      During the first quarter, we completed a successful private offering of $75.0 million aggregate principal amount of convertible senior notes that will be convertible into shares of Palm Harbor’s common stock, subject to certain conditions and contingencies. We have used the majority of the proceeds to reduce our floor plan payable to $30.9 million at March 25, 2005 from $84.1 million at March 26, 2004. The remainder of the proceeds has been used to help fund CountryPlace’s operations and for general corporate purposes. See “Liquidity and Capital Resources” below for additional information.

      The second quarter of fiscal 2005 results were impacted by the hurricane activity on the east coast. This created a number of disruptions for Palm Harbor and others in our industry with the resultant delays in both wholesale and retail deliveries. Also, retail demand has been slow to recover, especially in our key markets of Texas and the Carolinas, where we have a significant retail presence.

      During the third quarter of fiscal 2005, we streamlined our retail operations in order to improve our operating efficiencies. Additionally, we temporarily idled a production line in Texas and shifted production to another plant. Furthermore, we closed 12 of our least productive retail sales centers in order to more effectively align our resources with current demand in the market. Our results for the third quarter include $2.8 million, or $0.12 per share, for charges related to these decisions. Of the $2.8 million in charges, $2.7 million was recorded as a component of cost of sales and $1.9 million as selling, general and administrative expenses offset by a $1.8 million income tax benefit. Resulting cost reductions should approximate $5.0 million after tax annually.

      Subsequent to our fiscal year-end, we temporarily shifted production from one of our production lines to two other lines in order to create some operational efficiencies. Management will analyze this revised

production schedule for a while and determine whether we should continue with the shift or open the production line back up.

      We are focusing on increasing sales of our modular homes. We sold 43.7% more modular homes during fiscal 2005 as compared to fiscal 2004 and the number of modular homes sold was 17.4% of total factory-built homes sold in fiscal 2005 versus 11.7% in fiscal 2004. Our Discovery series of modular homes account for about one quarter of total modular sales. We believe that modular housing is a key driver of our future growth and profitability.

      We continue to execute our strategy of expanding our consumer financing capabilities through our finance subsidiary, CountryPlace, and our partnership in BSM. CountryPlace is now servicing 2,330 consumer chattel loans, totaling $132.4 million. During fiscal 2005, BSM originated 10,695 loans, 980 of which were for Palm Harbor customers. For fiscal 2005, approximately 40% of our retail customers were financed by either CountryPlace or BSM.

      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.

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.

      Net Sales. Net sales increased 5.5% to $610.5 million in fiscal 2005 from $578.5 million in fiscal 2004. Net sales for the factory-built housing segment increased $25.6 million primarily due to a shift in product mix to modular homes which have a higher average selling price than manufactured homes ($135,000 for modular homes compared to $73,000 for manufactured homes). The number of modular homes sold during fiscal 2005 increased 43.7% compared to fiscal 2004 and comprised 17.4% of total factory-built home sales in fiscal 2005 versus 11.7% in fiscal 2004. Financial services revenue increased $6.5 million reflecting an increase in the number of renewals of insurance policies at Standard Casualty and an increase in interest income at CountryPlace resulting from an increase in loans held for investment from $96.7 million at the end of fiscal 2004 to $132.4 million at the end of fiscal 2005.

      Gross Profit. In fiscal 2005, gross profit as a percentage of net sales declined to 25.3%, or $154.6 million, from 26.0%, or $150.6 million, in fiscal 2004. Gross profit for the factory-built housing segment decreased $2.2 million from 24.5% of net sales in fiscal 2004 to 23.1% of net sales in fiscal 2005. This decrease is principally the result of $2.7 million of charges related to closing 12 of our least productive sales centers and streamlining our retail operations in the third quarter of fiscal 2005. In addition, the internalization rate, which is the percentage of factory-built homes we manufactured and sold through our company-owned retail superstores and builder locations, decreased from 71% in fiscal 2004 to 60% in fiscal 2005. Gross profit for the financial services segment increased $6.1 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 25.4% in fiscal 2005 from 27.2% in fiscal 2004. Selling, general and administrative expenses decreased to $154.9 million in fiscal 2005 from $157.4 million in fiscal 2004. Selling, general and administrative expenses for factory-built housing decreased $1.5 million in fiscal 2005 due to a focus on reducing costs, offset by $1.9 million in charges associated with closing 12 under-performing sales centers. Selling, general and administrative expenses for general corporate purposes decreased $1.8 million primarily resulting from a $0.7 million decrease in advertising costs, $0.8 million decrease in workers compensation reserves due to the reduction in our workforce several years ago, $0.5 million decrease in expenses related to the long-term incentive plan which was modified in fiscal 2004, and $0.6 million decrease in salaries and bonuses offset by $0.6 million increase in expenses related to becoming Sarbanes-Oxley compliant. Selling, general and administrative expenses for financial services increased $0.8 million primarily due to additional expenses related to commissions and amortization of debt issue costs associated with the expansion of CountryPlace.

      Interest Expense. Interest expense increased 61.5% to $9.0 million in fiscal 2005 as compared to $5.6 million in fiscal 2004. This increase was primarily due to a $3.3 million increase in interest expense

incurred on the warehouse revolving debt and hedge facility and $2.4 million in interest expense incurred on the $75.0 million convertible senior notes that were issued during the first quarter of fiscal 2005. This increase is offset by a $2.2 million reduction in flooring interest resulting from a decrease in the floor plan liability from $84.1 million at March 26, 2004 to $30.9 million at March 25, 2005.

      Equity in Earnings (Loss) of Limited Partnership. Equity in earnings (loss) of limited partnership decreased 141.3% to a $0.8 million loss in fiscal 2005 as compared to $1.8 million of earnings in fiscal 2004. This decrease is primarily due to our share of operating losses at BSM increasing due to a lesser number of mortgage refinance originations in fiscal 2005 compared to fiscal 2004.

      Other Income. Other income increased 189.2% to $4.2 million in fiscal 2005 as compared to $1.4 million in fiscal 2004 primarily due to a $2.8 million increase in income earned on a real estate investment.

      Net Sales. Net sales increased 0.9% to $578.5 million in fiscal 2004 from $573.1 million in fiscal 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 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 fiscal 2004 from 27.5% in fiscal 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 fiscal 2004 as compared to $6.7 million in fiscal 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.

      Cash and cash equivalents totaled $46.2 million at March 25, 2005, down from $50.8 million at March 26, 2004. During fiscal 2005, net cash used in operating activities totaled $51.1 million and consisted of $59.2 million used for originating loans at CountryPlace, offset by $20.8 million provided by principal payments on loans originated, $14.6 million used to increase inventory through a greater number of homes per sales center as well as a higher average invoice cost per home, and $10.4 million used to increase restricted cash for outstanding letters of credit which collateralized insurance programs and surety bonds and principal and interest payments on the loans that are in the warehouse. Net cash used in investing activities consisted of $1.1 million used for net purchases of property, plant and equipment and $1.5 million of net purchases of investments by Standard Casualty. Net proceeds from the warehouse facility of $32.2 million and convertible senior notes of $72.5 million were offset by payments of $53.2 million on floor plan liabilities and $2.4 million on bonds payable to contribute to the $49.2 million in net cash provided by financing activities.

      During the first quarter of fiscal 2005, we amended our agreement with a financial institution from an $80.0 million syndicated floor plan facility expiring March 19, 2006 to a $70.0 million facility expiring May 25, 2007. The advance rate for this facility is 90% of manufacturer’s invoice. This facility is used to finance a portion of the new home inventory at our retail superstores and is secured by new home inventory and a portion of receivables from financial institutions. The interest rate on the facility is prime (5.75% at March 25, 2005) or prime plus 1.0% to 3.0% for aged units, of which we have none as of March 25, 2005. The floor plan facility contains certain provisions requiring us to maintain minimum amounts of liquidity, profitability, inventory turns and tangible net worth in order to borrow against the facility. As of March 25, 2005, we were not in compliance with one of these provisions and have since obtained a waiver of default from the lending institution. 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 $84.1 million and $30.9 million outstanding under these floor plan credit facilities at March 26, 2004 and March 25, 2005, 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. 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.

      We used the majority of the proceeds from the offering to reduce our floor plan payable from $84.1 million at March 26, 2004 to $30.9 million at March 25, 2005. The remainder of the proceeds has been used to help fund CountryPlace’s operations and for general corporate purposes.

      In March 2004, through our subsidiary CountryPlace, we entered into an agreement with a financial institution for a $200.0 million warehouse borrowing facility to fund chattel loans originated by Company-owned retail superstores. The facility is collateralized by specific receivables pledged to the facility and bears

interest at the rate of LIBOR (2.875% at March 25, 2005) 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 facility provided for an advance rate adjustment on March 18, 2005 as determined by the financial institution. The advance rate was not lowered by the financial institution, and therefore the facility was not terminated and CountryPlace was obligated to pay a fee of $1.0 million to the financial institution. The $1.0 million fee is being amortized over the remaining term of the facility. CountryPlace had outstanding borrowings under the warehouse facility of $74.1 million and $106.3 million as of March 26, 2004 and March 25, 2005, respectively. The facility contains certain requirements relating to the performance and composition of the receivables pledged to the facility and financial covenants regarding the maintenance of a certain loan delinquency ratio, minimum ratio of liabilities to stockholder’s equity for CountryPlace and a minimum capitalization for CountryPlace, which are customary in the industry. As of March 25, 2005, CountryPlace was 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 the fiscal year ended March 25, 2005, we funded $343,000 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 originate an additional $112.9 million of new loans, of which $22.6 million will have to be funded through our operations.

      During fiscal year ended March 25, 2005, we entered into an interest rate swap agreement on our variable rate debt in order to hedge against an increase in variable interest rates. The terms of the agreement effectively fix the interest rate on $75.0 million of our variable rate, long-term warehouse revolving debt at 4.07% per annum. Based on the terms and conditions, under SFAS No.’s 133 and 138, Accounting for Derivative Financial Instruments and Hedging Activities, we recorded the hedge instrument at fair value as of March 25, 2005 with the effective offsetting portion of the hedge recorded as a component of accumulated other comprehensive income and the ineffective portion, if any, of the hedge recorded in our consolidated statement of operations. As of March 25, 2005, we had no significant ineffective portion and we recorded an unrealized gain of $1.1 million, net of tax, related to our interest rate swap agreement.

      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 on its 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 the proceeds from the issuance of the convertible senior notes, floor plan financing, available borrowing alternatives (including securitizations) 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.

      The following tables summarize our contractual cash obligations and commercial commitments, excluding interest, at March 25, 2005. For additional information related to these obligations, see the Notes to Consolidated Financial Statements.

      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.

      Impairment of Intangible Assets (Goodwill). In assessing the recoverability of our intangible 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. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets.

      Recovery of Deferred Tax Asset. We believe it is more likely than not we will recover all of our net deferred tax assets. Recovery of our deferred tax assets is dependent upon the generation of future taxable income, which we currently believe will come from future profitable operating results and available tax planning strategies. Should we continue to operate unprofitably, or otherwise change our estimate of future profitable operations, we may need to record a valuation allowance on all or a part of our deferred tax assets. Net deferred tax assets at March 26, 2004 and March 25, 2005 are $10.3 million and $11.7 million, respectively.

      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, revenue is not recognized until after final consumer closing. Transportation costs, unless borne by the retail customer or independent retailer, are included in the cost of sales.

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

      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 35% 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 2005; (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.

      In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, “Inventory Costs”, an amendment of ARB No. 43, Chapter 4. SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years

beginning after June 15, 2005, though earlier application is permitted. The provisions of SFAS No. 151 are to be applied prospectively. We do not believe that the adoption of SFAS No. 151 will have a material impact on our financial condition, results of operations or cash flows.

      In September and December 2004, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) reached a final consensus in EITF Issue 04-08 “The Effect of Contingently Convertible Debt on Earnings Per Share” affirming its tentative conclusion with respect to the accounting for contingently convertible debt instruments, which generally become convertible into common stock only if one or more specified events occurs such as the underlying common stock achieving a specified target. Under previous interpretations of FASB Statement No. 128, “Earnings Per Share”, issuers of contingently convertible debt instruments generally excluded the dilutive effects of potential common shares underlying such debt from earnings per share calculations until the market price or other contingency was met. In the final consensus, among other things, the EITF concluded that the effect of contingently convertible debt instruments should be included in earnings per share computations, if dilutive, regardless of whether the market price trigger has been met. For all periods presented herein, we have considered the consensus reached in EITF 04-08 in calculating dilutive earnings per share, however, the effect of applying such consensus was anti-dilutive for the fiscal year ended March 25, 2005 and for each of its quarterly periods therein and thus earnings per share is not impacted. Approximately 2,894,000 shares of common stock to which the Senior Notes could be converted were excluded from weighted average shares outstanding as a result of the antidilution.

      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:

      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.

      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 any 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 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.

      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.

      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, the profitability and cash flow from the loan portfolio could adversely affect CountryPlace and our consolidated financial position, results of operations and cash flows.

      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. 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 million, there can be no assurance that we will continue to have access to such a facility or that we will not be forced to reduce our new home inventory at our retail superstores.

      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 2003, 2004 and 2005, net expenses incurred under these repurchase agreements totaled $69,000, $6,000 and $65,000, respectively.

      Our results of operations can be affected by the pricing and availability of raw materials. In fiscal 2004 and 2005, we experienced an increase in prices of our raw materials of 14% and 6%, respectively. 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. Many of the most important raw materials used in our operations have experienced significant price fluctuations in the past two 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.

      We are dependent to a significant extent upon the efforts of our principal executive officer, Larry H. Keener, Chairman of the Board, President 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.

      Approximately 54% of our outstanding common stock is beneficially owned or controlled by our Chairman Emeritus 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 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.

      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:

      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.

      In fiscal 2005, 22.8% of our revenues were generated in Florida and 21.3% of our revenues were generated in Texas. A decline in the demand for manufactured housing in these two states and/or a decline in the economies of these two states could have a material adverse effect on our 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 and warehouse revolving debt, and our fixed rate convertible senior notes and loans receivable balances. During the third quarter of fiscal 2005, we entered into an interest rate swap agreement to hedge the interest rate risk related to approximately $75 million of our variable rate borrowings.

      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 and CountryPlace’s level of variable rate debt as of March 25, 2005 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 $1.4 million.

      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 25, 2005 is held constant, a 10% increase in average interest rates would decrease the fair value of CountryPlace’s portfolio by approximately $3.9 million. This decrease in fair value is not linear to changes in interest rates and may or may not have any impact on the realizable amount of the receivables. For our fixed rate 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 25, 2005 is held constant, a 10% decrease in interest rates would increase the fair value of the notes by approximately $1.5 million.

      CountryPlace is exposed to market risk related to the accessibility and terms of financing in the asset-backed securities market. CountryPlace intends to securitize its loan portfolio as a means to obtain long term fixed interest rate funding. The asset-backed securities market for manufactured housing has been volatile during the past year. The inability to securitize its loans would require CountryPlace to seek other sources of funding or to reduce or eliminate its loan originations if other sources of funding are not available.

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 (the “Company”) as of March 25, 2005 and March 26, 2004 and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three fiscal years in the period ended March 25, 2005. 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 25, 2005 and March 26, 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 25, 2005, in conformity with U.S. generally accepted accounting principles.

      We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Palm Harbor Homes, Inc.’s internal control over financial reporting as of March 25, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 20, 2005 expressed an unqualified opinion thereon.

Dallas, Texas

May 20, 2005

Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Balance Sheets

See accompanying notes.

Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Statements of Operations

See accompanying notes.

Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity

See accompanying notes.

Palm Harbor Homes, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

See accompanying notes.

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

      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. (“CountryPlace”) 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 consolidated financial statements.

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

      Interest income on 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.

      Through November 2002, CountryPlace 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, and, in some cases, 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.

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)

      Cash and cash equivalents, restricted cash, trade receivables, accounts payable, accrued liabilities, floor plan payable and warehouse revolving debt are stated at expected settlement amounts and approximate fair value. Additional information concerning the fair value of the Company’s investments, loans held for investment and convertible senior notes is disclosed in notes 4, 5 and 7, respectively.

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

      At March 26, 2004 and March 25, 2005, $4.8 million and $12.3 million, respectively, of cash was pledged as collateral for outstanding letters of credit which collaterized insurance programs and surety bonds. The remainder of the March 25, 2005 restricted cash balance relates primarily to CountryPlace customers’ principal and interest payments on the loans that are in the warehouse. In the event of default on the warehouse facility, this amount would be paid to the financial institution as payment of outstanding principal and interest on the facility.

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

      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 experience 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 holds investments as available-for-sale. The available-for-sale investments include marketable debt and equity securities and are stated at fair value with realized gains and losses, net of tax, reported in shareholders’ equity.

      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.

Palm Harbor Homes, Inc. and Subsidiaries

Notes to Consolidated Financial Statements — (Continued)