PALM HARBOR HOMES INC /FL/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K

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

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended March 29, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ____ to ____

Commission File Number 0-24268

PALM HARBOR HOMES, INC.
(Exact name of registrant as specified in our charter)

FLORIDA 59-1036634
(State or other jurisdiction of (I.R.S. Employer identification no.)
incorporation or organization)

15303 DALLAS PARKWAY, SUITE 800, ADDISON, TEXAS 75001
(Address of principal executive offices) (Zip Code)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)

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

Indicate by check mark 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. [ X ]

The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of May 13, 2002, was $233,069,447 based on
the closing price on that date of the Common Stock as quoted on the Nasdaq
National Stock Market.

As of May 13, 2002, 22,949,372 shares of the registrant's Common Stock
were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement relating to our Annual
Meeting of Shareholders to be held June 26, 2002 are incorporated by reference
in Part III.

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PART I.

ITEM 1. BUSINESS

GENERAL

Palm Harbor Homes, Inc. is one of the largest producers of
multi-section manufactured homes in the United States. Palm Harbor's operations
are vertically integrated and encompass manufacturing, marketing, financing and
insurance. At March 29, 2002, Palm Harbor operated 15 manufacturing facilities
that sell homes in 28 states through 151 Company-owned retail superstores and
approximately 100 independent retail sales centers.

At March 29, 2002, the Company-owned retail superstores operated in
Alabama, Arizona, Arkansas, Colorado, Florida, Georgia, Indiana, Kentucky,
Louisiana, Nevada, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, South
Carolina, Tennessee, Texas, Virginia and Washington. With a net increase of six
superstores in fiscal 2002, Palm Harbor continued its long-term plan of
increasing sales through Company-owned superstores. With this increase in
Company-owned superstores, Palm Harbor maintained a high internalization rate -
which is the percent of homes manufactured by Palm Harbor and sold through
Company-owned retail superstores. Palm Harbor's internalization rate was 83% in
both fiscal 2001 and fiscal 2002. Through our subsidiary, CountryPlace Mortgage,
Ltd. ("CountryPlace"), Palm Harbor offers installment financing to purchasers of
manufactured homes sold by Company-owned retail superstores. Palm Harbor
provides property and casualty insurance for owners of manufactured homes
through our subsidiary, Standard Casualty Company. Management of Palm Harbor
believes that having the internal capability to provide financing and insurance
complements our manufacturing and marketing operations and has been additive to
earnings.

PRODUCTS

Palm Harbor manufactures single and multi-section homes under various
brand names including Palm Harbor, Masterpiece, Keystone, CountryPlace, River
Bend and Windsor Homes(TM). Palm Harbor offers over 150 floor plans and
approximately 90% of the homes produced by Palm Harbor are structurally or
decoratively customized to the home buyer's specifications. Although Palm Harbor
produces a wide retail price range of homes, the average retail sales price
(excluding land) of Palm Harbor's homes is approximately $60,000 and
approximately 92% of Palm Harbor's homes are multi-section.

A typical home built by Palm Harbor contains two to five bedrooms, a
living room, family room, dining room, kitchen, two or three bathrooms and
features central heating, a range, refrigerator, carpeting and drapes. In
addition, Palm Harbor offers 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, computer rooms, skylights, vaulted
ceilings and whirlpool baths are also offered. Palm Harbor has 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.

Palm Harbor's homes are designed and copyrighted after extensive field
research and consumer feedback. Palm Harbor has developed engineering systems
which, through the use of computer-aided technology, permit customization of
homes and assist with product development and enhancement.

MANUFACTURING OPERATIONS

Palm Harbor currently owns or leases 15 facilities located in Alabama,
Arizona, Florida, Georgia, North Carolina, Ohio, Oregon and Texas. A typical
Palm Harbor manufacturing facility has approximately 100,000 square feet of
floor space and employs approximately 190 associates.

Palm Harbor's facilities generally operate on a one shift per day, five
days per week basis, and Palm Harbor currently manufactures a typical home in
approximately five days. Palm Harbor's facilities have the capacity to produce
an aggregate of approximately 142 sections per day. The current rate of
production is 53 sections per day.

1

The following table sets forth the total sections produced and homes
sold, as well as the number of manufacturing facilities operated by Palm Harbor,
for the fiscal years indicated:

The finished homes are transported by independent trucking companies to
either the retail sales center or the customer's site. The transportation cost
is borne by the independent retailer. Retailers or other independent installers
are responsible for placing the home on site, 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. Palm Harbor's associates, rather than independent third
parties, perform the finish out services on homes sold through Company-owned
retail superstores. Palm Harbor believes our finish-out services ensure that
Palm Harbor quality is applied during the entire process and increase customer
satisfaction, thereby providing Palm Harbor an advantage over many of our
competitors.

Palm Harbor's backlog of orders as of May 13, 2002 was approximately
$3.0 million, as compared to approximately $9.0 million as of May 14, 2001.
Since retailers may cancel orders prior to production without penalty, Palm
Harbor does not consider our order backlog to be firm orders; however, such
cancellations rarely occur. Because of the seasonality of the housing market,
the level of backlog generally declines during the winter months.

The principal materials used in the production of Palm Harbor's homes
include wood, wood products, gypsum wallboard, steel, fiberglass insulation,
carpet, vinyl, fasteners, appliances, electrical items, windows and doors. Palm
Harbor believes that the materials used in the production of our homes are
readily available at competitive prices from a wide variety of suppliers. The
three suppliers which accounted for more than 5% of Palm Harbor's total
purchases during the fiscal year ended March 29, 2002, represented only 9.7%,
6.8% and 5.6%, respectively, of our total purchases during fiscal year 2002.
Accordingly, Palm Harbor does not believe that the loss of any single supplier
would have a material adverse effect on our business.

2

RETAIL OPERATIONS

Palm Harbor's homes are sold through a distribution network consisting
of superstores owned by Palm Harbor and independent retailers. The following
table sets forth the number of homes sold by Palm Harbor through each of these
distribution channels, as well as the number of Company-owned retail superstores
and independent retail sales centers, during the past three fiscal years:

Palm Harbor first established wholly-owned superstores in 1992, and
currently has 151 superstores in Alabama, Arizona, Arkansas, Colorado, Florida,
Georgia, Indiana, Kentucky, Louisiana, Nevada, New Mexico, North Carolina, Ohio,
Oklahoma, Oregon, South Carolina, Tennessee, Texas, Virginia and Washington.
Palm Harbor plans to add additional retail superstores in fiscal 2003.

Palm Harbor's independent retailer network principally consists of
local retailers, developers that market land/home packages and developers of
retirement lifestyle communities. The decrease in Palm Harbor's independent
retailer network over the last two fiscal years is the result of the highly
competitive environment in the manufactured housing industry coupled with the
increase in Company-owned superstores. No single independent retailer accounted
for 5% or more of Palm Harbor's net sales during fiscal 2002. Palm Harbor
provides comprehensive sales training to our retail sales associates and brings
them to the manufacturing facilities for product training and to view new
product designs as they are developed. These training seminars, known as "Palm
Harbor University", facilitate the sale of Palm Harbor's homes by increasing the
skill and knowledge of the retail sales consultants. In addition, Palm Harbor
displays our products in trade shows and supports our retailers through the
distribution of floor plan literature, brochures, decor boards, banners and
videos.

MARKETS SERVED

Management believes that Palm Harbor's broad geographic presence
lessens the impact of adverse economic trends specific to any one region, while
at the same time enabling Palm Harbor to capitalize on favorable regional
economic trends. During the fiscal year ended March 29, 2002, the percentage of
Palm Harbor's revenues by region was as follows:

3

Manufactured housing is a regional business and the primary geographic
market for a typical manufacturing facility is within a 250-mile radius. Each of
Palm Harbor's manufacturing facilities typically serves 20 to 65 retailers, and
the facility sales staff maintains personal contact with each retailer, whether
Company-owned or independent. Palm Harbor's decentralized operations allow us to
be more responsive in addressing regional customer preferences of product
innovation and home design.

CONSUMER FINANCING

Historically, Palm Harbor has facilitated retail sales of our homes by
maintaining relationships with conventional lenders. Conventional lenders
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. Generally, the type of required foundations installed
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.
Effective January 1, 2002, Texas House Bill 1869 was implemented. This bill
requires all manufactured houses in Texas, which are not placed in manufactured
home rental communities, to be financed with mortgage loans versus chattel
loans. With the introduction of Texas House Bill 1869, Palm Harbor expects to
experience a growing shift in financing toward conforming loans.

While Palm Harbor intends to maintain these relationships with
conventional lenders, we believe that our ability to provide financing to our
customers on competitive terms only improves our responsiveness to the financing
needs of prospective purchasers and provides an additional source of earnings
for Palm Harbor. Through CountryPlace, Palm Harbor offers customary chattel
loans and land/home or mortgage loans to best suit the needs of our retail
customers. Financing services by CountryPlace are currently being offered only
through Company-owned retail superstores.

Loan applications originate at the Company-owned retail superstore and
are forwarded to CountryPlace for final credit approval. CountryPlace then sells
the approved loan contracts to one of three national consumer finance companies.
CountryPlace and the national consumer finance companies share on a
predetermined basis the interest income on all loan contracts. In some cases,
CountryPlace shares in losses resulting from defaults or prepayments on loan
contracts previously sold. One of the three finance companies is Associates
Housing Finance which announced in January 2000 that they would be discontinuing
retail and floor plan financing for the manufactured housing industry. Palm
Harbor's contract with the Associates expired on March 31, 2002. Consumer loan
contracts have been redirected to the remaining financing companies and/or to
new finance companies as agreements are negotiated. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Retail installment loans sold by CountryPlace are serviced and
administered by the national consumer finance companies. CountryPlace's share of
the interest income is in consideration for the following services provided by
CountryPlace: (i) contract origination services, including the training of
retailers with respect to the loan evaluation process; (ii) receipt and
processing of the retail installment sale contracts; (iii) collection assistance
with delinquent accounts, upon the request of the finance company and (iv)
repossession assistance.

4

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 Palm Harbor to enter into a separate
repurchase agreement with the financial institution under which Palm Harbor is
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 Palm Harbor may be obligated to repurchase a home under these agreements
is based upon Palm Harbor's original invoice price plus certain administrative
and shipping expenses. Palm Harbor's 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 17% of Palm Harbor's homes are sold to independent retailers;
(ii) a majority of the homes sold by Palm Harbor to independent retailers are
pre-sold to specific retail customers; (iii) Palm Harbor monitors each
retailer's inventory position on a regular basis; (iv) sales of Palm Harbor's
manufactured homes are spread over a large number of retailers; (v) none of Palm
Harbor's independent retailers accounted for more than 5% of Palm Harbor's net
sales in fiscal 2002; (vi) the price Palm Harbor is obligated to pay declines
over time and (vii) Palm Harbor is, in most cases, able to resell homes
repurchased from credit sources in the ordinary course of business without
incurring significant losses. Palm Harbor estimates that our potential
obligations under such repurchase agreements were approximately $13.8 million as
of March 29, 2002. During the fiscal years ended March 31, 2000, March 30, 2001
and March 29, 2002, net expenses incurred by Palm Harbor under these repurchase
agreements totaled $155,000, $132,000 and $212,000, respectively.

Beginning in fiscal 2000, lenient credit standards, which had
facilitated increased industry-wide wholesale shipments in previous years,
tightened, resulting in declining wholesale shipments, declining margins and
lower retail sales levels for most industry participants. At the end of fiscal
2002, additional issues arose in the manufactured housing industry. In March
2002, the largest floor plan lender in the industry, Conseco Finance Servicing
Corp. ("Conseco"), announced that they were exiting the wholesale financing, or
floor plan lending, business. Our agreement with Conseco, which totals $15.0
million, will be cancelled on June 30, 2002. In anticipation of such
cancellation, we obtained an additional $30.0 million of floor plan financing
during the fourth quarter of fiscal 2002. As of May 9, 2002, Palm Harbor had
floor plan borrowings of $11.4 million with Conseco and we had receivables due
from Conseco of approximately $10.2 million. We believe amounts due from Conseco
will be collected in the normal course of business and Palm Harbor will not
incur significant losses as the result of doing business with Conseco.

On May 16, 2002, Conseco indicated its commitment to continue to
provide retail financing; however, they also began notifying manufacturers and
independent retailers that amounts due under floor plan financing agreements
were to be paid in full on or prior to July 17, 2002. However, Conseco also
indicated in the notification that certain options would be made available to
the retailers. Palm Harbor has contacted our independent retailers where we have
repurchase obligations regarding the impact of this cancellation on their floor
plan financing needs. The majority of these retailers have made other
arrangements for their financing needs.

Additionally, the introduction of Texas House Bill 1869 in January 2002
presented another issue to the industry. This bill requires all manufactured
houses in Texas, which are not placed in manufactured home rental communities,
to be financed with conforming mortgages. Conforming mortgages are subject to
higher credit standards than chattel loans and therefore this new regulation may
cause certain consumers who would have otherwise qualified for financing under a
chattel loan to not qualify under a conforming loan.

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 homes compete with new and existing
site-built homes, as well as apartments, townhouses and condominiums. Palm
Harbor does not view any of our competitors as being dominant in the industry,
although some of Palm Harbor's competitors possess substantially greater
manufacturing, distribution and marketing resources than Palm Harbor.

5

GOVERNMENT REGULATION

Palm Harbor's 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. Palm Harbor's
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 Palm Harbor's
manufactured homes for compliance with the HUD regulations during construction.
Failure to comply with applicable HUD regulations could expose Palm Harbor to a
wide variety of sanctions, including mandated closings of Palm Harbor
manufacturing facilities. Palm Harbor believes our manufactured homes meet or
surpass all present HUD requirements.

Manufactured and site-built homes are all typically built with paneling
and other 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 (the "EPA")
and other governmental agencies have in the past evaluated the effects of
formaldehyde. Palm Harbor uses materials in our manufactured homes that meet HUD
standards for formaldehyde emissions and believes we comply with HUD and other
applicable government regulations in this regard.

The transportation of manufactured 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.

Palm Harbor's manufactured homes are subject to local zoning and
housing regulations. In certain cities and counties in areas where Palm Harbor's
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 Palm Harbor's
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.

Certain Palm Harbor 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 Palm
Harbor's 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 manufactured by
Palm Harbor. 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. Manufactured homes in Texas
that are not to be placed in a manufactured home rental community are subject to
Texas House Bill 1869, which requires them to be financed with a conforming
mortgage. A variety of

6

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. The sale of
insurance products by Palm Harbor is subject to various state insurance laws and
regulations which govern allowable charges and other insurance practices.

Palm Harbor's 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, Palm Harbor is unable to predict the
ultimate cost of compliance with environmental laws and enforcement policies.
See "Item 3. Legal Proceedings."

ASSOCIATES

As of March 29, 2002, Palm Harbor had approximately 4,300 associates.
All of Palm Harbor's associates are non-union. Palm Harbor has not experienced
any labor-related work stoppages and believes that our relationship with our
associates is good.

ITEM 2. PROPERTIES

Palm Harbor currently owns or leases 15 manufacturing facilities in
eight states. Palm Harbor owns substantially all of our machinery and equipment.
Palm Harbor believes our facilities are adequately maintained and suitable for
the purposes for which they are used. The following table sets forth certain
information with respect to Palm Harbor's manufacturing facilities:

7

In addition to our production facilities, Palm Harbor owns certain
properties upon which 42 of our Company-owned retail superstores are located.
Palm Harbor also leases approximately 30,000 square feet of office space in
Addison, Texas for our corporate headquarters and CountryPlace's office. Palm
Harbor's corporate headquarters lease expires in 2003 and the CountryPlace
office lease expires in 2002. Effective January 1, 2003, Palm Harbor will obtain
an additional 18,000 square feet of office space and CountryPlace will move to
the corporate headquarters office space. This lease will expire in 2013.

ITEM 3. LEGAL PROCEEDINGS

Palm Harbor is 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 the
business, financial condition or results of operations of Palm Harbor.

In late 1992, Palm Harbor removed an underground storage tank formerly
used to store gasoline from the site of our Tempe, Arizona manufacturing
facility. Palm Harbor is 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. Palm Harbor is 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, Palm Harbor does not
expect that the costs of any corrective action or assessments related to the
tank will have a material adverse effect on our results of operations or
financial condition.

Palm Harbor's Tempe facility is partially located within a large area
that has been identified by the Environmental Protection Agency 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 Palm Harbor has 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, Palm Harbor does not believe that our ownership of property partially
located within the Indian Bend Superfund Site will have a material adverse
effect on our results of operations or financial condition.

In 1994, Palm Harbor removed two underground storage tanks used to
store petroleum substances from property we own in Georgia. In November 2001,
Palm Harbor 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, Palm Harbor does
not expect that the costs of future assessment and corrective action related to
the tanks will have a material adverse effect on our results of operations or
financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

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

8

PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Palm Harbor's Common Stock has been traded on the Nasdaq National Stock
Market under the symbol "PHHM" since July 31, 1995, the date on which Palm
Harbor completed our initial public offering. The following table sets forth,
for the period indicated, the high and low sales information per share of the
Common Stock as reported on the Nasdaq National Stock Market.

On May 13, 2002, the last reported sale price of Palm Harbor's Common
Stock on the Nasdaq National Stock Market was $24.34. As of May 13, 2002, there
were approximately 840 record holders of the Common Stock, and approximately
3,000 holders of the Common Stock overall based on an estimate of the number of
individual participants represented by security position listings.

Palm Harbor has never paid cash dividends on our Common Stock. The Board
of Directors intends to retain any future earnings generated by Palm Harbor 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 Palm Harbor's 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.

9

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial information regarding
Palm Harbor's financial position and operating results which has been extracted
from Palm Harbor's financial statements for the five fiscal years ended March
29, 2002. 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
included elsewhere in this report.

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

10

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Fiscal 2002 continued to be a difficult period for the manufactured
housing industry due to three major issues - retail financing availability,
repossessions and retail inventory levels. Elevated credit standards, which
began in mid-1999, resulted in reduced retail sales levels, declining wholesale
shipments and declining margins for most industry participants. Industry-wide
multi-section shipments for calendar 2001 were down 18% from a year ago;
however, Palm Harbor's shipments declined less than 5% during this same period.

At the end of fiscal 2002, additional issues arose in the manufactured
housing industry. In March 2002, the largest floor plan lender in the industry,
Conseco Finance Servicing Corp. ("Conseco"), announced that they were exiting
the wholesale financing, or floor plan lending, business. Our agreement with
Conseco, which totals $15.0 million, will be cancelled on June 30, 2002. In
anticipation of such cancellation, we obtained an additional $30.0 million of
floor plan financing during the fourth quarter of fiscal 2002. As of May 9,
2002, Palm Harbor had floor plan borrowings of $11.4 million with Conseco and we
had receivables due from Conseco of approximately $10.2 million. We believe
amounts due from Conseco will be collected in the normal course of business and
Palm Harbor will not incur significant losses as the result of doing business
with Conseco.

On May 16, 2002, Conseco indicated its commitment to continue to
provide retail financing; however, they also began notifying manufacturers and
independent retailers that amounts due under floor plan financing agreements
were to be paid in full on or prior to July 17, 2002. However, Conseco also
indicated in the notification that certain options would be made available to
the retailers. Palm Harbor has contacted our independent retailers where we have
repurchase obligations regarding the impact of this cancellation on their floor
plan financing needs. The majority of these retailers have made other
arrangements for their financing needs.

Additionally, the introduction of Texas House Bill 1869 in January 2002
presented another issue to the industry. This bill requires all manufactured
houses in Texas, which are not placed in manufactured home rental communities,
to be financed with conforming mortgages. Conforming mortgages are subject to
higher credit standards than chattel loans and therefore this new regulation may
cause certain consumers who would have otherwise qualified for financing under a
chattel loan to not qualify under a conforming loan.

Through CountryPlace Mortgage, Palm Harbor sells approved loan
contracts to one of three national finance companies, including Associates
Housing Finance. In January 2000, the Associates announced that they would be
discontinuing retail and floor plan financing for the manufactured housing
industry. Palm Harbor's contract with the Associates expired on March 31, 2002.
Consumer loan contracts have been redirected to the remaining finance companies
and/or to new finance companies as agreements are negotiated. The Company
believes that they will be able to continue to redirect consumer loan contracts,
however, no assurances can be made in this regard.

Despite these difficult conditions, both Palm Harbor's business
segments were profitable this fiscal year. Additionally, Palm Harbor maintained
gross margins, profitably increased market share and reduced inventories, while
continuing our controlled growth strategy of opening new retail superstores.
During fiscal 2002, the number of Company-owned retail superstores increased by
six to 151. The financial services segment, which consists of CountryPlace
Mortgage, Palm Harbor's finance subsidiary, and Standard Casualty Company, Palm
Harbor's insurance subsidiary, continued to be additive to consolidated sales
and net income.

Palm Harbor had cash and cash equivalents of $69.2 million at March 29,
2002 and virtually no long-term debt. In addition, Palm Harbor's practice of
manufacturing only to order coupled with closely monitored retail receivables
and stocking levels has enabled us to tightly manage retail receivables and
inventory levels. Receivables and inventory per retail superstore have declined
9% since the beginning of the fiscal year. Gross margin remained stable at 32%.

The manufactured housing industry is affected by cyclical downturns and
seasonal fluctuations that often make difficult period-to-period comparisons of
our revenues and operating results.

11

The following table sets forth certain items of Palm Harbor's Statement of
Income 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.

(1) The internalization rate is the percentage of new homes that are
manufactured by Palm Harbor and sold through Company-owned retail
superstores.

Palm Harbor's fiscal year consists of 52 or 53 weeks, ending on the Friday
nearest the last day of March each year. The 2001 and 2002 fiscal years
consisted of 52 weeks and the 2000 fiscal year consisted of 53 weeks.

2002 COMPARED TO 2001

NET SALES. Net sales decreased 3.5% to $627.4 million in 2002 from $650.5
million in 2001. The decrease in net sales was primarily due to competitive
conditions in the manufactured housing industry as indicated by a decrease of
7.9% in the volume of homes sold through Company-owned retail superstores while
overall unit volume, which includes sales to independent retailers, declined
8.2% in fiscal 2002. This decline in volume is partially offset by an increase
in the average selling price of a new home, which resulted from a continued
shift in product mix towards multi-section homes. Of the homes sold by the
Company, 85% were multi-section in fiscal 2002 versus 80% in fiscal 2001. The
number of Company-owned superstores increased from 145 at the end of fiscal 2001
to 151 at the end of fiscal 2002.

12

GROSS PROFIT. In fiscal 2002, gross profit as a percentage of net sales
increased slightly to 32.0% from 31.9% in fiscal 2001. Gross profit decreased
3.0% to $201.0 million in 2002 compared to $207.3 million in 2001. Palm Harbor
sold 83% of its homes through Company-owned retail superstores in both fiscal
2002 and fiscal 2001.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. As a percentage of net sales,
selling, general and administrative expenses increased, as planned, to 26.8% in
2002 from 25.5% in 2001. Selling, general and administrative expenses increased
$2.3 million, or 1.4%, to $168.2 million in 2002 from $165.9 million in 2001,
primarily due to Palm Harbor's continued commitment to building brand awareness
via advertising, startup expenses associated with the net increase of six retail
superstores opened during fiscal 2002 as well as those expected to be opened in
fiscal 2003 and training costs associated with people development.

INTEREST EXPENSE. Interest expense decreased 34.5% to $8.4 million in 2002 from
$12.8 million in 2001. This decrease was primarily due to a decrease in the
prime interest rate from 8.0% at the end of fiscal 2001 to 4.75% at the end of
fiscal 2002 coupled with a decrease in the floor plan liability.

2001 COMPARED TO 2000

NET SALES. Net sales decreased 16.3% to $650.5 million in 2001 from $777.5
million in 2000. The decrease in net sales was primarily due to competitive
conditions in the manufactured housing industry as indicated by a decrease of
18.7% in the volume of homes sold through Company-owned superstores while
overall unit volume, which includes sales to independent retailers, declined
24.3% in fiscal 2001. This decline in volume is partially offset by an increase
in the average selling price of a new home, which resulted from a continued
shift in product mix towards multi-section homes. During fiscal year 2001, 80%
of the homes sold by the Company were multi-section. The number of superstores
increased from 133 at the end of fiscal 2000 to 145 at the end of fiscal 2001.

GROSS PROFIT. Gross profit margin as a percentage of net sales increased
slightly to 31.9% compared to 31.8% in fiscal 2001. Gross profit decreased 16.1%
to $207.3 million in 2001 compared to $247.1 million in 2000. Palm Harbor sold
83% of its homes through Company-owned retail superstores in fiscal 2001 versus
76% in fiscal 2000.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $14.3 million, or 8.0%, to $165.9 million in
2001 from $180.2 million in 2000, primarily due to Palm Harbor's continued focus
on reducing fixed expenses company-wide. This decrease was partially offset by
the continued commitment to building brand awareness via advertising and
expenses associated with the net increase of 12 Company-owned retail
superstores. As a percentage of net sales, selling, general and administrative
expenses increased, as planned, to 25.5% in 2001 from 23.2% in 2000. This
increase is due to the growth in Palm Harbor's retail operations which,
generally, have higher selling, general and administrative expenses as a
percentage of net sales as compared to wholesale operations.

INTEREST EXPENSE. Interest expense increased 24.9% to $12.8 million in 2001 from
$10.2 million in 2000. This increase was primarily due to increases in both the
average floor plan balance and interest rates from fiscal 2000 to fiscal 2001.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating activities totaled $35.9 million in 2000,
compared to $23.9 million in 2001 and $34.5 million in 2002. Cash provided by
operating activities increased in fiscal 2002 primarily due to decreases in
accounts receivable and inventories. Cash provided by operations was adequate to
support Palm Harbor's working capital needs, capital expenditures, floor plan
payments and investment purchases during fiscal 2002.

Capital expenditures were $15.9 million, $14.1 million and $14.8
million in fiscal 2000, 2001 and 2002, respectively. In 2000, capital
expenditures included $10.1 million for additional retail superstores and
approximately $5.8 million primarily for improvements in mature manufacturing
facilities. In 2001, capital expenditures included $8.2 million for additional
retail superstores and approximately $5.9 million primarily for improvements in
mature manufacturing facilities. In 2002, capital expenditures included $7.2
million for additional retail superstores and approximately $7.6 million
primarily for improvements in mature manufacturing facilities. Palm Harbor
expects capital expenditures to approximate $14 million during 2003 primarily
for the purpose of adding retail superstores.

13

Palm Harbor currently has four floor plan facilities with financial
institutions totaling $155.0 million to finance a major portion of the home
inventory at our retail superstores. These facilities are secured by a portion
of our home inventory and receivables from financial institutions. The interest
rates on the facilities range from prime (4.75% at March 29, 2002) to prime plus
2.0%. One of our facilities totaling $15.0 million with Conseco (of which $14.2
million was outstanding at March 29, 2002) will be cancelled on June 30, 2002.
In anticipation of such floor plan cancellation, we increased one of our other
facilities by $30.0 million during the fourth quarter of fiscal 2002. Palm
Harbor has three facilities totaling $140.0 million, which require notification
six months prior to cancellation. Such notification has not been received by
Palm Harbor from any of these three financial institutions. These floor plan
facilities contain provisions regarding minimum financial requirements which the
Company must maintain in order to borrow against the facilities. Palm Harbor had
$144,747,000 and $134,977,000 outstanding on these floor plan credit facilities
at March 30, 2001 and March 29, 2002, respectively.

Two of Palm Harbor's floor plan financing agreements permit us to earn
interest on investments made with the financial institutions, which can be
withdrawn without any imposed restrictions. These investments have certain
limitations depending upon the amount of floor plan balance outstanding. The
interest rate earned on the amounts invested is prime (4.75% at March 29, 2002)
minus 0.5%. Palm Harbor had $16,175,000 and $14,275,000 invested at March 30,
2001 and March 29, 2002, respectively, and has classified these amounts as Cash
and Cash Equivalents in the accompanying Consolidated Balance Sheets.

Palm Harbor has two revolving lines of credit - one $20.0 million
committed and one $15.0 million uncommitted - from a financial institution for
general corporate purposes. The lines of credit bear interest, at the option
(under certain conditions) of Palm Harbor, at either the LIBOR rate (1.88% at
March 29, 2002) plus 2.0% or the prime rate (4.75% at March 29, 2002) minus
0.25%. The lines of credit contain provisions regarding minimum financial
requirements and certain indebtedness limitations which would limit the amount
available for future borrowings. Palm Harbor's borrowing capacity on the lines
of credit is reduced by letters of credit totaling $3.6 million. The lines of
credit are available through June 26, 2002, and require an annual commitment fee
of up to $50,000. Palm Harbor has received a commitment letter from the
financial institution which extends the availability of the lines of credit
through June 2003. Palm Harbor had no amounts outstanding on the lines of credit
at March 30, 2001 and March 29, 2002.

Through CountryPlace Mortgage, Palm Harbor sells approved loan
contracts to one of three national finance companies, including Associates
Housing Finance. In January 2000, the Associates announced that they would be
discontinuing retail and floor plan financing for the manufactured housing
industry. Palm Harbor's contract with the Associates expired on March 31, 2002.
Consumer loan contracts have been redirected to the remaining finance companies
and/or to new finance companies as agreements are negotiated. The Company
believes that they will be able to continue to redirect consumer loan contracts,
however, no assurances can be made in this regard.

In July 1999, Palm Harbor's Board of Directors authorized, subject to
certain business and market conditions, the use of up to $20.0 million to
repurchase Palm Harbor's common stock. In July 2000, the Board of Directors
authorized another $20.0 million for common stock repurchases. As of May 13,
2002, Palm Harbor had invested $20.5 million in the common stock buyback
program.

Palm Harbor believes that cash flows from operations, together with floor
plan financing and our revolving lines of credit, will be adequate to support
our working capital, currently planned capital expenditure needs and future
share repurchases in the foreseeable future. Palm Harbor may, from time to time,
obtain additional floor plan financing for our retail inventories. Such practice
is customary in the industry. However, because future cash flows and the
availability of financing will depend on a number of factors, including
prevailing economic and financial conditions, business and other factors beyond
Palm Harbor's control, no assurances can be given in this regard.

14

CONTRACTUAL OBLIGATIONS AND COMMITMENTS (dollars in thousands)

The following tables summarize Palm Harbor's contractual obligations
and contingent commitments at March 29, 2002. For additional information related
to these obligations, see the Notes to Consolidated Financial statements.

(1) Palm Harbor has contingent repurchase obligations outstanding at March
29, 2002 which have a finite life but are replaced as Palm Harbor
continues to sell our manufactured homes to dealers under repurchase
agreements with financial institutions. The cost of these contingent
repurchase obligations to Palm Harbor was $155,000, $132,000 and
$212,000 during fiscal 2000, 2001, and 2002, respectively. For
additional information on Palm Harbor's repurchase obligations, see
critical accounting policies - reserve for repurchase obligations.

(2) Palm Harbor has 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. Palm Harbor has recorded
insurance expense based on anticipated losses related to these policies
as is customary in the manufactured housing industry.

(3) Palm Harbor has contingent obligations related to installment loan
contracts sold with recourse. See Note 13 to the financial statements
for a discussion of such recourse contingent obligations.

CRITICAL ACCOUNTING POLICIES

Palm Harbor's discussion and analysis of its 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 Palm Harbor 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. In assessing the recoverability of
Palm Harbor's 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,
Palm Harbor may be required to record impairment charges for these assets.
Effective March 31, 2001, Palm Harbor adopted Statement of Financial Standards
No. 142, "Goodwill and Other Intangible Assets" and is now required to analyze
goodwill for impairment issues on an annual basis. The carrying value of the
goodwill was assessed for impairment as of March 31, 2001 and there was no
indication of impairment of goodwill and other intangible assets.

15

WARRANTIES. Palm Harbor provides 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 Palm Harbor's 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 Palm Harbor 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 17%
of Palm Harbor Harbor's homes are sold to independent retailers; (ii) a majority
of the homes sold by Palm Harbor to independent retailers are pre-sold to
specific retail customers; (iii) Palm Harbor monitors each retailer's inventory
position on a regular basis; (iv) sales of Palm Harbor's manufactured homes are
spread over a large number of retailers; (v) none of Palm Harbor's independent
retailers accounted for more than 5% of Palm Harbor's net sales in fiscal 2002;
(vi) the price Palm Harbor is obligated to pay declines over time and (vii) Palm
Harbor is, in most cases, able to resell homes repurchased from credit sources
in the ordinary course of business without incurring significant losses. Since
mid-1999, the manufactured housing industry has been affected by three major
challenges - retail financing availability, repossessions and retail inventory
levels. The rapid growth in the number of retailers prior to the deterioration
of retail financing has resulted in an imbalance between retail inventory levels
and consumer demand. If retail financing was to significantly weaken further,
the inventory imbalance could result in even greater price competition, gross
margin deterioration and have an overall material adverse effect on Palm
Harbor's operating results. While Palm Harbor's practice of manufacturing only
to order coupled with closely monitored retail stocking levels has enabled us to
continue to tightly manage inventories, we are unable to predict the impact on
Palm Harbor's results if industry conditions were to further deteriorate.

RESIDUAL INTERESTS. CountryPlace Mortgage originates and sells loan
contracts to national consumer finance companies and receives cash and/or
retains a residual interest in the interest generated by the sold contracts.
Since April 1999, substantially all interest income on the sold contracts has
been received in cash upon sale of the contracts. Prior to April 1999, a
residual interest in the interest generated by the sold contracts was retained
and recorded. Residual interests in installment sales contracts sold are
recorded at fair value when the Company relinquishes control of the transferred
financial assets in accordance with SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" - a
replacement of SFAS No. 125 and other related pronouncements. The gain on sale
of these contracts is included in revenues net of any estimated recourse
obligations, while unrealized gains are included as a component of retained
earnings. During the life of the loan, accretion income or expense, as
appropriate, is included in revenues and the related receivables on residual
interests are marked to fair value at the end of each reporting period through
comprehensive income.

The gain or loss on the sale of the installment sales contracts depends
in part on the previous carrying amount of the contracts, allocated between the
contracts sold and the retained interests based upon their respective fair
values at the date of sale. The fair value of the residual interest is
determined by discounting the projected cash flows over the expected life of the
contracts sold using a number of estimates and assumptions including prepayment,
default, and interest rates. Company estimates of prepayment and default rates
are determined based upon a model developed by the Company and refined to
reflect Company-specific experience and trends. At March 29, 2002, the Company
had net receivables of approximately $8.9 million related to the retained
residual interests of loan contracts previously sold by CountryPlace.

16

RECOURSE OBLIGATIONS. In some cases, CountryPlace shares in losses
resulting from defaults or prepayments of loan contracts previously sold and
therefore establishes a reserve for estimated losses at the time the loan
contract is sold. At March 29, 2002, the Company had net reserve balances of
approximately $2.9 million for future losses. The reserve for recourse
obligation is established based upon historical loss experience, current
economic conditions, and industry trends. Management periodically evaluates its
reserve for recourse obligations based upon the performance of outstanding
receivables remaining in the portfolio in comparison to projected performance
when the reserves were established, actual loss history, geographic
concentrations, and the estimated value of the underlying collateral.

NEW ACCOUNTING PRONOUNCEMENTS

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Effective March 31, 2001, Palm
Harbor adopted SFAS No. 144, which supercedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The standard retains the previously existing accounting requirements related to
the recognition and measurement of the impairment of long-lived assets to be
held and used while expanding the measurement requirements of long-lived assets
to be disposed of by sale to include discontinued operations. It also expands on
the previously existing reporting requirements for discontinued operations to
include a component of an entity that either has been disposed of or is
classified as held for sale. The adoption of SFAS No. 144 did not have a
material effect on Palm Harbor's financial statements.

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:

o AVAILABILITY OF RETAIL FINANCING. Since mid-1999, loans to
purchase manufactured houses have been subjected to elevated
credit standards, resulting in reduced lending volumes and
consequently reduced sales in the manufactured housing
industry. A further tightening of credit standards may cause
Palm Harbor to experience significant sales declines.

o AVAILABILITY OF WHOLESALE FINANCING. The largest floor plan
lender has chosen to exit the manufactured housing business,
thereby reducing the amount of credit available to industry
retailers. Further reductions in the availability of floor
plan lending may affect Palm Harbor's inventory levels of new
homes.

o MANAGEMENT'S ABILITY TO ATTRACT AND RETAIN EXECUTIVE OFFICERS
AND OTHER KEY PERSONNEL. Palm Harbor is dependent on the
services and performance of our executive officers, including
our Chairman of the Board, Lee Posey and our President and
Chief Executive Officer, Larry Keener. The loss of the
services of one or more of our executive officers could have a
material adverse effect upon the Company's business, financial
condition and results of operations.

o CONTROL BY EXISTING SHAREHOLDERS. Approximately 55% of the
outstanding Common Stock of Palm Harbor is beneficially owned
or controlled by Mr. Posey, Capital Southwest Corporation and
its wholly-owned subsidiary, Capital Southwest Venture
Corporation and William R. Thomas, President of Capital
Southwest Corporation. As a result, these shareholders, acting
together, will be able to determine the outcome of elections
of Palm Harbor's directors and thereby control the management
of Palm Harbor's business.

o IMPACT OF INFLATION. The past several years have shown a
relatively moderate rate of inflation which Palm Harbor has
been able to offset through increased selling prices. A
material increase in inflation in the future could adversely
affect Palm Harbor's operating results.

17

o COMPETITIVE PRODUCT ADVERTISING, PROMOTIONAL AND PRICING
ACTIVITY. There are numerous manufactured housing companies in
the industry and many have their own retail distribution
systems and consumer finance operations. In addition to
competition within the manufactured housing industry, our
products also compete with other forms of lower to
moderate-cost housing, including site-built homes, apartments,
townhouses and condominiums. If we are unable to address this
competition, growth in each segment of our business could be
limited.

o CYCLICALITY OF THE MANUFACTURED HOUSING INDUSTRY. The cyclical
and seasonal nature of the industry causes our revenues and
operating results to fluctuate and makes it hard for
management to forecast sales and profits in uncertain times.
As a result of seasonal and cyclical downturns, we may
experience fluctuations in our operating results that make
difficult period-to-period comparisons.

o VOLATILITY IN OUR STOCK PRICE. Our stock is traded on the
Nasdaq National Stock Market and is therefore subject to
market fluctuations. During fiscal 2002, our stock price
ranged from a low of $15.00 per share to a high of $26.99 per
share.

o TERRORIST ATTACKS. Market disruptions and other effects
resulting from the terrorist attacks on September 11, 2001 and
actions, including armed conflict by the United States and
other governments in reaction thereto.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Palm Harbor is 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. Palm Harbor is not
involved in any other market risk sensitive contracts or investments such as
interest rate swaps, futures contracts, or other types of derivative financial
instruments.

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 Palm Harbor's level of variable rate debt as of March 29,
2002 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 $1.3 million.

18

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Auditors

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 30, 2001 and March 29,
2002, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three fiscal years in the period ended March 29,
2002. 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 auditing standards generally accepted
in the 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 30, 2001 and March 29, 2002, and the consolidated
results of their operations and their cash flows for each of the three fiscal
years in the period ended March 29, 2002, in conformity with accounting
principles generally accepted in the United States.

As discussed in Note 1 to the financial statements, in fiscal 2001 the Company
changed its method of accounting for revenue recognition and in fiscal 2002 the
Company changed its method of accounting for goodwill.

Dallas, Texas Ernst & Young LLP
May 3, 2002

19

PALM HARBOR HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)

20

PALM HARBOR HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)

See accompanying notes.

21

PALM HARBOR HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except per share data)

See accompanying notes.

22

PALM HARBOR HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands of dollars)

See accompanying notes.

23

PALM HARBOR HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)

See accompanying notes.

24

PALM HARBOR HOMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Palm Harbor Homes,
Inc. (the "Company") and our wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
The Company's fiscal year ends on the last Friday in March. Fiscal years 2000,
2001 and 2002 contained 53, 52 and 52 weeks, respectively. Headquartered in
Addison, Texas, the Company markets manufactured homes nationwide through
vertically integrated operations, encompassing manufacturing, marketing,
financing and insurance.

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

REVENUE RECOGNITION

Effective April 1, 2000, in accordance with Staff Accounting Bulletin No. 101,
the Company changed its method of accounting for revenue recognition for retail
sales. Historically, the Company recognized revenues for its retail home sales
when the home was delivered. Under its new accounting method, adopted in the
fourth quarter of 2001 retroactive to April 1, 2000, the Company now recognizes
revenue for retail sales when the home is delivered and permanently located at
the customer's site. The second and third quarters of 2001 have not been
restated for the change because the effect on such quarters is immaterial.
Furthermore, the effect of the change on the fourth quarter was immaterial. The
cumulative effect of the change on prior years resulted in a charge to net
income of $2,048,000 (after income taxes of $1,366,000 which is included in
results for fiscal 2001). The effect of the change on fiscal 2001 was to
increase income before the cumulative effect of the accounting change by
$101,000 and decrease net income by approximately $2.0 million ($0.09 per
share). For the first quarter of 2001, the Company recognized $11,535,000 in
revenues that are included in the cumulative effect adjustment as of April 1,
2000. Pro-forma amounts (assuming the change is applied retroactively) for
periods prior to 2001 are not materially different from reported results and are
not presented.

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.

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.

RESIDUAL INTERESTS

CountryPlace Mortgage, Ltd. ("CountryPlace"), the Company's finance subsidiary,
originates and sells loan contracts to national consumer finance companies and
receives cash and/or retains a residual interest in the interest generated by
the sold contracts. Since April 1, 1999, substantially all interest income on
sold contracts has been received in cash upon 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 interest is
determined using a number of market based assumptions. The gain on the sale of
these contracts is included in revenues net of any estimated recourse
obligations while unrealized gains are included as a component of retained
earnings. The interest income is shared between CountryPlace and the national
consumer finance companies on a predetermined basis for all loan contracts and
losses resulting from defaults or prepayments are shared in some cases on loan
contracts previously sold.

25

PALM HARBOR HOMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

RECOURSE OBLIGATIONS

In some cases, CountryPlace shares in losses resulting from defaults or
prepayments of loan contracts previously sold and therefore establishes a
reserve for estimated losses at the time the loan contract is sold. At March 29,
2002, the Company had net reserve balances of approximately $2.9 million for
future losses. The reserve for recourse obligation is established based upon
historical loss experience, current economic conditions, and industry trends.
Management periodically evaluates its reserve for recourse obligations based
upon the performance of outstanding receivables remaining in the portfolio in
comparison to projected performance when the reserves were established, actual
loss history, geographic concentrations, and the estimated value of the
underlying collateral.

CASH AND CASH EQUIVALENTS

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

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 Improvements 10-15
years, Buildings and Improvements 3-15 years, and Machinery and Equipment 2-10
years. Repairs and maintenance are expensed as incurred.

GOODWILL

Goodwill is the excess of cost over fair value of net assets of businesses
acquired. Through fiscal 2001, goodwill was amortized on the straight-line
method over the expected periods to be benefited - between 10 and 20 years.
Commencing in fiscal 2002, goodwill is no longer amortized. The Company tests
annually for impairment by reporting unit and expenses an impairment charge when
the implied fair value of a reporting unit is less than its carrying value.
Substantially all of the Company's goodwill is attributable to its "housing"
reporting unit.

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.

26

PALM HARBOR HOMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 CONCENTRATION

In March 2002, the largest floor plan lender in the industry, Conseco Finance
Servicing Corp. ("Conseco") announced that they were exiting the wholesale
financing, or floor plan lending, business. The Company's agreement with
Conseco, which totals $15.0 million, will be cancelled on June 30, 2002. In
anticipation of such floor plan cancellation, the Company increased one of its
other facilities by $30.0 million during the fourth quarter of fiscal 2002. As
of May 9, 2002, the Company had floor plan borrowings of $11.4 million with
Conseco and had receivables due from Conseco of approximately $10.2 million. The
Company believes amounts due from Conseco will be collected in the normal course
of business and the Company will not incur significant losses as the result of
doing business with Conseco.

On May 16, 2002, Conseco indicated its commitment to continue to provide retail
financing; however, they also began notifying manufacturers and independent
retailers that amounts due under floor plan financing agreements were to be paid
in full on or prior to July 17, 2002. However, Conseco also indicated in the
notification that certain options would be made available to the retailers. The
Company has contacted its independent retailers where it has repurchase
obligations regarding the impact of this cancellation on their floor plan
financing needs. The majority of these retailers have made other arrangements
for their financing needs.

RECLASSIFICATIONS

Certain prior period amounts have been reclassified to conform to the current
period presentation.

ADOPTION OF FINANCIAL ACCOUNTING STANDARD NO. 142

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets." Effective March 31, 2001, the Company adopted SFAS No. 142, which
requires that goodwill not be amortized but instead be tested at least annually
for impairment by reporting unit and expensed against earnings when the implied
fair value of a reporting unit, including goodwill, is less than its carrying
amount. Comparative pro forma results for the fiscal years ended March 31, 2000
and March 30, 2001 would have increased income before cumulative effect of
change in accounting principle and net income by $2.8 million and $2.5 million,
or $0.12 and $0.11 per share, to $1.78 and $0.98 per share, respectively. The
carrying value of the goodwill was assessed for impairment as of March 31, 2001
and there was no indication of impairment of goodwill and other intangible
assets.

NEW ACCOUNTING PRONOUNCEMENTS

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". Effective March 31, 2001, the Company adopted
SFAS No. 144, which supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The standard
retains the previously existing accounting requirements related to the
recognition and measurement of the impairment of long-lived assets to be held
and used while expanding the measurement requirements of long-lived assets to be
disposed of by sale to include discontinued operations. It also expands on the
previously existing reporting requirements for discontinued operations to
include a component of an entity that either has been disposed of or is
classified as held for sale. The adoption of SFAS No. 144 did not have a
material effect on the Company's financial statements.

27

PALM HARBOR HOMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. INVENTORIES

Inventories consist of the following:

3. INVESTMENTS

The Company's investments totaled $25,132,000 and $30,051,000 at March 30, 2001
and March 29, 2002, respectively. The fair value of the available-for-sale
securities was $20,469,000 and $20,393,000, resulting in net unrealized gains
recorded of $961,000 and $0 at March 30, 2001 and March 29, 2002, 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.

4. RESIDUAL INTERESTS IN LOAN CONTRACTS SOLD

Palm Harbor Homes' carrying value (fair value) of retained interest related to
the residual interests of loan contracts previously sold by CountryPlace are
included in other assets and amounted to approximately $8.2 million and $8.9
million, as of March 30, 2001 and March 29, 2002, respectively. The significant
economic assumptions used in measuring the retained interest at the date of sale
were as follows: prepayment speed (250% MHP model); weighted average life
(approximately five years); and residual cash flow discount rate (18.5%). A
sensitivity analysis as of March 29, 2002, reflecting a 10% and 20% adverse
change in the prepayment speed results in a hypothetical reduction in the
carrying value of the residual interests by approximately $0.4 million and $0.9
million while a 10% and 20% adverse change in the discount rate results in a
hypothetical reduction in the carrying value of the residual interests by
approximately $0.5 million and $1.0 million. The sensitivity analysis is
hypothetical and should be used with caution. For instance, changes in fair
value based on a 10% variation in assumptions generally cannot be extrapolated
because the relationship of the change in assumption to the change in fair value
may not be linear. In addition, the effect of a variation in a particular
assumption on the fair value of the retained interest is calculated without
changing any other assumption, when in reality, changes in any one factor may
result in changes in another factor.

During the fiscal year ended March 31, 2000, March 30, 2001 and March 29, 2002,
the Company recognized approximately $6.7 million, $5.0 million and $3.9 million
in gains, respectively. The Company had $1.1 million, $1.1 million and $0.8
million in unrealized gains for the fiscal years ended March 31, 2000, March 30,
2001 and March 29, 2002, respectively.

5. FLOOR PLAN PAYABLE

The Company currently has four floor plan facilities with financial institutions
totaling $155.0 million to finance a major portion of its home inventory at the
Company's retail superstores. These facilities are secured by a portion of the
Company's home inventory and receivables from financial institutions. The
interest rates on the facilities range from prime (4.75% at March 29, 2002) to
prime plus 2.0%. One of the Company's facilities totaling $15.0 million with
Conseco (of which $14.2 million was outstanding at March 29, 2002) will be
cancelled on June 30, 2002. In anticipation of such cancellation, the Company
increased one of its other facilities by $30.0 million during the fourth quarter
of fiscal 2002. The Company has three facilities totaling $140.0 million which
require notification from the financial institution six months prior to
cancellation. Such notification has not been received by the Company from

28

PALM HARBOR HOMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

any of these three financial institutions. These floor plan facilities contain
provisions regarding minimum financial requirements which the Company must
maintain in order to borrow against the facilities. The Company had $144,747,000
and $134,977,000 outstanding on these floor plan credit facilities at March 30,
2001 and March 29, 2002, respectively.

Two of the Company's floor plan financing agreements permit the Company to earn
interest on investments made with the financial institution, which can be
withdrawn without any imposed restrictions. These investments have certain
limitations depending upon the amount of floor plan balance outstanding. The
interest rate earned on the amounts invested is prime (4.75% at March 29, 2002)
minus 0.5%. The Company had $16,175,000 and $14,275,000 invested at March 30,
2001 and March 29, 2002, respectively, and has classified these amounts as Cash
and Cash Equivalents in the accompanying Consolidated Balance Sheets.

6. LINES OF CREDIT

The Company has two revolving lines of credit - one $20.0 million committed and
one $15.0 million uncommitted - from a financial institution for general
corporate purposes. The lines of credit bear interest, at the option (under
certain conditions) of the Company, at either the LIBOR rate (1.88% at March 29,
2002) plus 2.0% or the prime rate (4.75% at March 29, 2002) minus 0.25%. The
lines of credit contain provisions regarding minimum financial requirements and
certain indebtedness limitations which would limit the amount available for
future borrowings. The Company's borrowing capacity on the lines of credit is
reduced by letters of credit totaling $3.6 million. The lines of credit are
available through June 26, 2002, and require an annual commitment fee of up to
$50,000. The Company has received a commitment letter from the financial
institution which extends the availability of the lines of credit through June
2003. The Company had no amounts outstanding on the lines of credit at March 30,
2001 and March 29, 2002.

7. ACCRUED LIABILITIES

Accrued liabilities consist of the following:

29

PALM HARBOR HOMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. LONG-TERM DEBT

Long-term debt consists 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 29, 2002 of $5,264,000.

Scheduled maturities of long-term debt are as follows (in thousands):

The carrying value of the Company's long-term debt approximates its fair value.

9. INCOME TAXES

Income tax expense for fiscal years 2000, 2001 and 2002 is as follows:

30

PALM HARBOR HOMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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. Current and non-current deferred tax assets
are classified in prepaid expenses and other assets and other assets, net,
respectively, in the Consolidated Balance Sheets.

Income tax expense for fiscal year 2001 does not include approximately
$1,366,000 in income tax benefit provided for the cumulative effect of a change
in accounting principle.

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

31

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 purchased by the
Company in the open market. 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 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 15% 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 $1,226,000,
$1,387,000 and $1,627,000 in fiscal years 2000, 2001 and 2002, 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 29, 2002, are as follows (in
thousands):

Rent expense (net of sublease income) was $9,047,000, $8,991,000 and $8,617,000
for fiscal years 2000, 2001 and 2002, respectively.

32

PALM HARBOR HOMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

On May 16, 2002, Conseco indicated its commitment to continue to provide retail
financing; however, they also began notifying manufacturers and independent
retailers that amounts due under floor plan financing agreements were to be paid
in full on or prior to July 17, 2002. However, Conseco also indicated in the
notification that certain options would be made available to the retailers. The
Company has contacted its independent retailers where it has repurchase
obligations regarding the impact of this cancellation on their floor plan
financing needs. The majority of these retailers have made other arrangements
for their financing needs.

At March 29, 2002, the Company estimates that its potential obligations under
all repurchase agreements were approximately $13.8 million. However, it is
management's opinion that no material loss will occur from the repurchase
agreements. During fiscal years 2000, 2001 and 2002, net expenses incurred by
the Company under these repurchase agreements totaled $155,000, $132,000 and
$212,000, respectively.

With respect to certain installment contracts sold prior to April 1, 1999, the
Company is contingently liable, as guarantor, for up to 50% of any losses. At
March 29, 2002, the outstanding principal balance of these contracts sold with
partial recourse was $35.0 million. With respect to the installment contracts
sold after April 1, 1999, the Company's contingent liability is limited to a
loss of up to $5,000 per contract. At March 29, 2002, the number of these
outstanding contracts sold with partial recourse was 2,944. Management has
consistently provided for its estimated recourse obligation exposure and has
recorded a reserve of $2.9 million at March 29, 2002.

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. INTEREST INCOME AND OTHER

During fiscal years 2000, 2001 and 2002, the Company recorded interest income of
$4,419,000, $5,247,000 and $3,823,000, respectively and other income, primarily
income earned on a real estate investment, of $2,615,000, $2,032,000 and
$2,627,000, respectively.

33

PALM HARBOR HOMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. BUSINESS SEGMENT INFORMATION

During the past three fiscal years, the Company has reported three business
segments in its annual reports - retail, manufacturing and financial services.
However, the Company has experienced a significant increase in the
internalization rate, thereby bringing the retail and manufacturing segments
together. The Company's internalization rate reflects the percentage of homes
manufactured by the Company and sold through its Company-owned retail stores.
The Company's internalization rate was 83% in fiscal year 2002 versus 63% in
fiscal year 1999. The high volume of transactions occurring between the two
divisions results in the majority of the manufacturing divisions' sales being
eliminated in consolidation. The manufacturing division is dependent upon the
retail division to place orders for sales. Based on these facts, the Company
will now report a total of two segments - a "housing" segment which combines the
retail and manufacturing operations and a financial services segment which
combines the insurance and finance operations. The following table summarizes
information with respect to the Company's business segments for the periods
indicated (in thousands):

34

PALM HARBOR HOMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following table sets forth certain unaudited quarterly financial information
for the fiscal years 2001 and 2002.

Quarterly data for the first quarter of fiscal year 2001 has been restated to
comply with Staff Accounting Bulletin No. 101. The effect of the change on the
first quarter of fiscal year 2001 was to increase income before the cumulative
effect of the accounting change by approximately $2.0 million ($0.09 per share).
The effect of the change on the second, third and fourth quarters was
immaterial.

35

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a) Information with respect to the Company's Board of Directors and
executive officers is incorporated by reference from pages 3 through 6 of the
Company's definitive Proxy Statement filed with the SEC on May 24, 2002 in
connection with the Annual Meeting of Shareholders to be held June 26, 2002.

(b) Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company pursuant to Rule 16a-3(e) promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), during the
Company's most recent fiscal year and Form 5 and amendments thereto furnished to
the Company with respect to our most recent fiscal year, no person who, at any
time during the most recent fiscal year was a director, officer, beneficial
owner of more than 10% of any class of equity securities of the Company
registered pursuant to Section 12 of the Exchange Act, or any other person
subject to Section 16 of the Exchange Act failed to file on a timely basis,
reports required by Section 16(a) of the Exchange Act during the most recent
fiscal year.

ITEM 11. EXECUTIVE COMPENSATION

Information with respect to executive compensation is incorporated by
reference from pages 10 through 12 of The Company's definitive Proxy Statement
filed with the SEC on May 24, 2002 in connection with the Annual Meeting of
Shareholders to be held June 26, 2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information with respect to security ownership of certain beneficial
owners and management is incorporated by reference from pages 7 and 8 of the
Company's definitive Proxy Statement filed with the SEC on May 24, 2002 in
connection with the Annual Meeting of Shareholders to be held June 26, 2002.

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.
PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT, SCHEDULES AND REPORTS ON FORM 8-K

(a) (1) Financial Statements

The Company's Consolidated Financial Statements for the year
ended March 29, 2002 are included on pages 20 through 35 of this report.

(2) Financial Statement Schedules

None

36

(3) Index to Exhibits

- ----------

* Filed herewith

(b) None.

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

(d) None.

37

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
our behalf by the undersigned, thereunto duly authorized on May 24, 2002.

PALM HARBOR HOMES, INC.

/s/ Lee Posey
----------------------------------
Lee Posey, Chairman of the Board

Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

KNOW ALL MEN BY THESE PRESENTS, that the undersigned do hereby
constitute and appoint Lee Posey and Kelly Tacke, and each of them, each with
full power to act without the other, his true and lawful attorneys-in-fact and
agents, each with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments to the annual report on Form 10-K for the year ended March 29, 2002
of Palm Harbor Homes, Inc., and to file the same, with any and all exhibits
thereto, and all other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done as fully to all intents and purposes as the undersigned
might or could do in person, hereby ratifying and confirming all of each of said
attorneys-in-fact and agents or any of them may lawfully do or cause to be done
by virtue thereof.

38

INDEX TO EXHIBITS

- ----------

* Filed herewith