PALM HARBOR HOMES INC /FL/, 10-K405, 1997-06-17

PALM HARBOR HOMES INC /FL/
10-K405, 1997-06-17
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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
[NO FEE REQUIRED]
For the fiscal year ended March 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period from to
---- ----

Commission File Number 0-24268

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

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

15303 DALLAS PARKWAY, SUITE 800, DALLAS, TEXAS 75248
(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 June 6, 1997, was $166,551,843 based on the
closing price on that date of the Common Stock as quoted on the Nasdaq National
Market.

As of June 6, 1997, 15,096,313 shares of the registrant's Common Stock
were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Annual Report to Shareholders for the year
ended March 28, 1997, are incorporated by reference in Parts II and IV.

Portions of the registrant's Proxy Statement relating to its Annual
Meeting of Shareholders to be held June 24, 1997 are incorporated by reference
in Part III.
================================================================================
<PAGE> 2
This report contains forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including, without limitation,
those regarding the growth and financing strategies of Palm Harbor Homes, Inc.
(the "Company"), projections of revenues, income or other financial items, the
effective implementation of the Company's business or growth strategy, the
adequacy of the Company's capital resources and other statements regarding
trends relating to the manufactured home industry, and various other items
involving known and unknown risks, uncertainties and other factors which may
cause the actual results, performance and achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include
political, economic or other factors such as inflation rates, recessionary or
expansive trends, taxes and regulations and laws affecting the business in each
of the Company's markets; demographic changes; competitive product,
advertising, promotional and pricing activity; raw material and labor costs and
availability; dependence on the rate of development and degree of acceptance of
new product introductions in the marketplace; relationships with customers
or dealers; the availability, terms and development of capital; changes in or
failure to identify or consummate successful acquisitions or to assimilate the
operations of any acquired businesses with those of the Company; the difficulty
of forecasting sales at certain times in certain markets; and government
regulation.

PART I.

ITEM 1. BUSINESS

GENERAL

Palm Harbor Homes, Inc. (the "Company") is one of the largest producers
of multi-section manufactured homes in the United States. The Company's
operations are vertically integrated and encompass manufacturing, marketing,
financing and insurance. At March 28, 1997, the Company operated 15
manufacturing facilities that sell homes through retailers in 34 states
including approximately 600 independent retail sales centers and 54 Company-
owned superstores.

At March 28, 1997, the Company owned and operated 54 superstores in
Florida, Indiana, Louisiana, New Mexico, North Carolina, Ohio, Oregon, South
Carolina, Texas and Washington, and had options to acquire five additional
superstores. The Company took significant steps in fiscal year 1997 toward its
plan to increase sales through Company-owned superstores. Effective April 1,
1996, the Company exercised an option to acquire the retail operations of
Energy Efficient Housing, Inc. ("EEH"), which added eight superstores in North
Carolina to the Company's portfolio. Additionally, on August 1, 1996, Newco
Homes, Inc. ("Newco"), a Texas-based retailer, of which the Company was a co-
founder and a 41.6% stockholder, was acquired by the Company. Newco's
operations consisted of 21 retail superstores principally located in Texas and
New Mexico, many of which had operated under the name "Palm Harbor Village." In
connection with the acquisition, Newco's shareholders received $17.3 million in
cash and 1,444,445 shares of the Company's common stock. The Company's retail
operations are modeled after those of Newco, and management believes it now
owns the leading retail sales centers for multi-section manufactured homes in
Texas, based upon 1996 sales and unit volume.

Through its subsidiary, CountryPlace Mortgage, Ltd. ("CountryPlace"),
the Company offers installment financing to purchasers of manufactured homes
sold by Company-owned superstores. The Company believes that the ability to
finance its home sales will potentially provide it with an advantage over
certain of its competitors and create a source of additional earnings.

Through its subsidiary, Standard Casualty Company, which was acquired
by the Company in May 1996, the Company writes property and casualty
insurance for owners of manufactured homes. Management of the Company believes
that having the internal capability to provide this type of insurance
complements the services of CountryPlace and will be additive to earnings.

PRODUCTS

The Company manufactures a variety of single and multi-section homes
under various brand names including Palm Harbor(R), Masterpiece, Keystone,
River Bend and Windsor Homes(TM). Palm Harbor offers over 150 floor plans and
approximately 67% of the homes produced by the Company are structurally or
decoratively customized to the home buyer's specifications. Although the
Company produces a wide retail price range of homes, the average retail price
(excluding land) of the Company's homes is approximately $56,000 and
approximately 81% of the Company's homes are multi-section.

A typical home built by the Company 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, the Company offers optional amenities, including dishwashers,
washers, dryers, furniture packages and cabinets, as well as a wide range of
colors,

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moldings and finishes. The Company has also attempted to broaden its base of
potential customers by offering optional features associated with site-built
homes such as stone fireplaces, sky lights, vaulted ceilings and whirlpool
baths. The Company also offers a unique package of energy saving construction
features referred to as "EnerGmiser" which includes, among other things,
additional insulation to reduce heating and cooling costs, and which exceeds
statutorily-mandated energy efficiency levels.

The Company's homes are designed and copyrighted after extensive field
research and consumer feedback. The Company 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

The Company's homes are currently manufactured at 15 facilities located
in Alabama, Arizona, Florida, Georgia, North Carolina, Ohio, Oregon and Texas.
A typical Company manufacturing facility has approximately 100,000 square feet
of floor space, and employs approximately 225 associates.

The Company's facilities generally operate on a one shift per day, five
days per week basis, and the Company currently manufactures a typical home in
approximately three to five days. The Company's facilities have the capacity
to produce an aggregate of approximately 143 sections per day. The current
rate of production is 105 sections per day. The Company believes that its
overall production will continue to increase as the new manufacturing
facilities opened in Georgia and Oregon during the past 24 months mature and
the associates employed at these facilities gain experience in the Company's
operating procedures.

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

<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Homes sold:
Single-section . . . . 1,382 1,327 1,474 2,192 2,781
Multi-section . . . . . 4,831 6,661 8,723 9,983 11,092
----- ----- ----- ----- ------
Total homes sold . . . . . . . 6,213 7,988 10,197 12,175 13,873
===== ===== ====== ====== ======

Sections produced . . . . . . . 11,162 14,815 19,163 22,049 24,545
Manufacturing facilities
(at end of fiscal year) 9 12 13 14 15
</TABLE>

The Company's homes are constructed at the Company's manufacturing
facilities. Typically, independent trucking companies transport finished homes
to retailers at the retailer's expense. 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. The Company believes that its
factory finish-out program ensures that Palm Harbor quality is applied to the
entire process, lessens customer concerns, strengthens the Company's
relationship with its retailers and provides the Company an advantage over many
of its competitors.

The Company's backlog of orders as of May 30, 1997 was approximately $13
million, as compared to approximately $47 million as of May 31, 1996. Since
retailers may cancel orders prior to production without penalty, the Company
does not consider its 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 the Company's homes
include wood, wood products, gypsum wallboard, steel, fiberglass insulation,
carpet, vinyl, fasteners, appliances, electrical items, windows and doors. The
Company believes that the materials used in the production of its homes are
readily available at competitive prices from a wide variety of suppliers. Two
suppliers, which accounted for more than 5% of the Company's total purchases
during the Company's fiscal year ended March 28, 1997, represented
approximately 10.4% and 6.7%, respectively, of total purchases during such
fiscal year. Accordingly, the Company does not believe that the loss of any
single supplier would have a material adverse effect on its business.

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RETAIL OPERATIONS

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

<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------------
March 31, March 29, March 28,
1995 1996 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Homes sold by retailers:

Company- owned . . . . . 580 1,055 5,211
Independent . . . . . . . 9,617 11,120 8,662
----- ------ -----

Total . . 10,197 12,175 13,873
====== ====== ======
Number of sales centers:

Company- owned . . . . . 9 16 54
Independent . . . . . . . 540 628 600
--- --- ---
Total . . 549 644 654
=== === ===
</TABLE>

Based in part on the experience gained in the development of Newco, the
Company originally established wholly-owned superstores in 1992, and, following
the acquisitions of EEH and Newco, currently has 54 superstores in Florida,
Indiana, Louisiana, New Mexico, North Carolina, Ohio, Oregon, South Carolina ,
Texas and Washington. The Company plans to add 10 to 15 retail superstores in
fiscal 1998.

The Company's independent retailer network principally consists of local
retailers, developers that market land/home packages and developers of
retirement lifestyle communities. No single independent retailer accounted for
5% or more of the Company's net sales during fiscal 1997. The Company provides
comprehensive sales training to its 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 the Company's homes by increasing the skill
and knowledge of the retail sales consultants. In addition, the Company
displays its products in trade shows and supports its retailers through the
distribution of floor plan literature, brochures, decor boards, banners and
videos.

The Company's five largest retailers (including Company-owned or
affiliated superstores) accounted for approximately 33% of net sales in fiscal
1997. The Company's retailer arrangements are terminable at will by either
party without penalty.

MARKETS SERVED

Management believes that the Company's broad geographic presence
lessens the impact of adverse economic trends specific to any one region, while
at the same time enabling the Company to capitalize on favorable regional
economic trends. During the fiscal year ended March 28, 1997, the percentage
of the Company's revenues by region was as follows:

<TABLE>
<CAPTION> PERCENTAGE OF
REGION PRIMARY STATES REVENUE BY REGION
- --------- ------------------------------------------------------------ -----------------
<S> <C> <C>
Southeast Florida, North Carolina, Alabama, Georgia, South Carolina,
Mississippi, Tennessee, Virginia 44.0%
Central Texas, Oklahoma, Louisiana 27.0
West New Mexico, Arizona, Colorado, Oregon, Washington, Idaho,
Montana, Nevada, Utah 23.0
Midwest Ohio, Michigan, Indiana, Kentucky, West Virginia, Illinois 6.0
------
100.0%
======
</TABLE>

Manufactured housing is a regional business and the primary geographic
market for a typical manufacturing facility is within a 250-mile radius. Each
of the Company'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. The Company's decentralized

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operations allow it to be more responsive to retailers' concerns with respect
to leadership in product innovation, local home design and customer
satisfaction.

CONSUMER FINANCING

Historically, the Company has facilitated retail sales of its homes by
maintaining relationships with conventional lenders. While the Company intends
to maintain its relationships with conventional lenders, it believes that the
ability to provide financing to its customers on competitive terms will not
only improve its responsiveness to the financing needs of prospective
purchasers, but will also provide an additional source of earnings for the
Company. The Company offers through CountryPlace a variety of financing
options, including customary retail installment sales contracts, land in lieu
of down payment and land/home financing to best suit the needs of its retail
customers. Financing services by CountryPlace are currently being offered
through Company-owned or affiliated superstores.

Loan applications originate at the superstore and are forwarded to
CountryPlace for final credit approval. CountryPlace then assigns the approved
loan contracts to one of two national consumer finance companies. CountryPlace
and the national consumer finance companies share on a predetermined basis the
interest income and losses resulting from the majority of the loans unless the
loan is also secured by the related land, whereby the national consumer finance
companies assume all losses.

Retail installment loans assigned by CountryPlace are serviced and
administered by the national consumer finance companies. CountryPlace's share
of the interest income is, in part, 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.

RETAILER INVENTORY FINANCING

In accordance with manufactured housing industry practice, substantially
all retailers finance all or 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 the Company to enter into a separate
repurchase agreement with the financial institution under which the Company 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 the Company may be obligated to repurchase a home under these
agreements is based upon the Company's original invoice price plus certain
administrative and shipping expenses. The Company'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) a majority of the homes sold by the Company to independent
retailers are pre-sold to specific retail customers; (ii) the Company monitors
each retailer's inventory position on a regular basis; (iii) sales of the
Company's manufactured homes are spread over a large number of retailers, (iv)
none of the Company's independent retailers accounted for more than 5% of the
Company's net sales in fiscal 1997; (v) the price the Company is obligated to
pay declines over time; and (vi) the Company is, in most cases, able to resell
homes repurchased from credit sources in the ordinary course of business
without incurring significant losses. The Company estimates that its potential
obligations under such repurchase agreements was approximately $121 million as
of March 28, 1997. During the fiscal years ended March 31, 1995, March 29,
1996, and March 28, 1997, net expenses (income) incurred by the Company under
these repurchase agreements totaled $22,000, ($3,000), and $55,000,
respectively.

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, town houses and condominiums. The Company
does not view any of its competitors as being dominant in the industry,
although some of the Company's competitors possess substantially greater
financial (including captive retail financing), manufacturing, distribution and
marketing resources than the Company. While the Company believes mortgage and
personal property financing have generally become more available to the
manufactured housing industry

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in recent years, a contraction in consumer credit could provide an advantage to
those competitors with substantial capital resources.

GOVERNMENT REGULATION

The Company'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, 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. The Company's
manufacturing facilities and the plans and specifications of its manufactured
homes have been approved by a HUD-certified inspection agency. Further, an
independent HUD-certified third-party inspector regularly reviews the Company's
manufactured homes for compliance with the HUD regulations during construction.
Failure to comply with applicable HUD regulations could expose the Company to a
wide variety of sanctions, including mandated closings of Company manufacturing
facilities. The Company believes its 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. The Company uses materials in its manufactured homes that meet
HUD standards for formaldehyde emissions and believes it otherwise complies
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.

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

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

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

ASSOCIATES

As of March 28, 1997, the Company had approximately 4,010 associates.
All of the Company's associates are non-union. The Company has not experienced
any labor-related work stoppages, and believes that its relationship with its
associates is good.

ITEM 2. PROPERTIES

The Company's homes are currently manufactured at 15 facilities in eight
states. The Company owns substantially all of its machinery and equipment.
The Company believes its facilities are adequately maintained and suitable for
the purposes for which they are used. The following table sets forth certain
information with respect to the Company's manufacturing facilities:

<TABLE>
<CAPTION>
COMMENCEMENT APPROXIMATE
STATE CITY OF PRODUCTION OWNED/LEASED SQUARE FEET
----- ---- -------------- ------------ -----------
<S> <C> <C> <C> <C>
Alabama Boaz December 1986 Leased 97,683
January 1993 Leased 75,164

Arizona Tempe January 1978 Owned 103,500
Casa Grande (1) Owned 90,000

Florida Plant City September 1981 Owned 93,600
June 1985 Owned 87,200

Georgia LaGrange August 1996 Owned 200,000

North Carolina Albemarle January 1994 Owned 112,700
Siler City January 1988 Owned 91,200
July 1996 Leased 40,000

Ohio Sabina January 1988 Owned 85,000

Oregon Millersburg April 1995 Owned 168,650

Texas Austin January 1981 Owned 103,800
April 1992 Owned 77,000
Burleson June 1993 Owned 94,300
Fort Worth April 1993 Owned 121,300
Buda November 1994 Owned 88,275

</TABLE>

- ------------------
(1) Production is expected to commence in July 1997.

In addition to its production facilities, the Company owns certain
properties upon which 18 of its retail superstores are located. The Company
also leases approximately 24,000 square feet of office space in Dallas, Texas
as its corporate headquarters. The Company's corporate headquarters lease
expires in 2003.

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ITEM 3. LEGAL PROCEEDINGS

The Company is currently not 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 the Company.

In late 1992, the Company removed an underground storage tank formerly
used to store gasoline from the site of its Tempe, Arizona manufacturing
facility. The Company 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. The Company is
evaluating the extent of the corrective action that may be necessary. Site
characterization is complicated by virtue of the presence of contaminants
associated with the Indian Bend Wash Area Superfund Site described below. At
this time, the Company does not expect that the costs of any corrective action
or assessments related to the tank will have a material adverse effect on its
results of operations or financial condition.

The Company's Tempe facility is partially located within a large area
that has been identified by the Environmental Protection Agency ("EPA") as the
Indian Bend Wash Area Superfund Site (the "Indian Bend 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 the
Company has been or will be named as a PRP or that it is 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, the Company does not
believe that its ownership of property partially located within the Indian Bend
Superfund Site will have a material adverse effect on its results of operations
or financial condition.

In 1994, the Company removed two underground storage tanks used to store
petroleum substances from property it owns in Georgia. The Company is
currently working in cooperation with the Georgia Department of Natural
Resources to assess and respond to petroleum related hydrocarbons detected in
soil and groundwater at this site, and to evaluate the extent of corrective
action that may be necessary. At this time, the Company does not expect that
the costs of future assessment and corrective action related to the tanks will
have a material adverse effect on its 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.

PART II.

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

The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "PHHM" since July 31, 1995, the date on which the Company
completed its 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 Market.

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<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW
----------- ---- ---
<S> <C> <C>
First Quarter . . . . . . . . . . . . . . . . . . . . . . $26.60 $19.20

Second Quarter* . . . . . . . . . . . . . . . . . . . . . $31.50 $24.40

Third Quarter . . . . . . . . . . . . . . . . . . . . . . $30.75 $25.25

Fourth Quarter . . . . . . . . . . . . . . . . . . . . . $28.00 $22.00

FISCAL 1996 HIGH LOW
----------- ---- ---

Second Quarter (from July 31) . . . . . . . . . . . . . . $14.20 $8.80

Third Quarter . . . . . . . . . . . . . . . . . . . . . . $18.00 $13.00

Fourth Quarter . . . . . . . . . . . . . . . . . . . . . $20.60 $15.20

</TABLE>

- ----------

*On July 12, 1996, the Board of Directors of the Company declared a 5-for-4
stock split effected in the form of a 25% stock dividend to shareholders of
record on July 26, 1996. The stock dividend was paid on August 2, 1996.

On June 6, 1997, the last reported sale price of the Company's Common
Stock on the Nasdaq National Market was $29.00. As of June 6, 1997, there were
approximately 1,164 record holders of the Common Stock, and approximately 3,500
holders of the Common Stock overall based on an estimate of the number of
individual participants represented by security position listings.

The Company has never paid cash dividends on its Common Stock. The
Board of Directors intends to retain any future earnings generated by the
Company to support operations and to finance expansion and does not intend to
pay cash dividends on the 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 factors such as the Company's earnings levels,
capital requirements, financial condition and other factors deemed relevant by
the Board of Directors. Future loan agreements may restrict or prohibit the
payment of dividends.

ITEM 6. SELECTED FINANCIAL DATA

Information with respect to this Item 6 is incorporated herein by
reference from page 13 of the Company's Annual Report to Shareholders for the
year ended March 28, 1997, such pages being filed as Exhibit 13.1 hereto.

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

Information with respect to this Item 7 is incorporated herein by
reference from pages 14 through 17 of the Company's Annual Report to
Shareholders for the year ended March 28, 1997, such pages being filed as
Exhibit 13.1 hereto.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's financial statements for the year ended March 28, 1997 are
listed in the accompanying Index to Consolidated Financial Statements at page
F-1 and are incorporated by reference from pages 18 through 29 of the Company's
Annual Report to Shareholders for the year ended March 28, 1997, such pages
being filed as Exhibit 13.1 hereto.

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

None.

8
<PAGE> 10
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 2 through 5 of the
Company's definitive Proxy Statement filed with the Securities and Exchange
Commission on May 23, 1997 in connection with the Annual Meeting of
Shareholders to be held June 24, 1997.

(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 its 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 4 and 5 of the Company's definitive Proxy Statement filed
May 23, 1997 in connection with the Annual Meeting of Shareholders to be held
June 24, 1997.

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 page 8 of the Company's
definitive Proxy Statement filed May 23, 1997 in connection with the Annual
Meeting of Shareholders to be held June 24, 1997.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information with respect to certain relationships and related
transactions is incorporated by reference from page 7 of the Company's
definitive Proxy Statement filed May 23, 1997 in connection with the Annual
Meeting of Shareholders to be held June 24, 1997.

PART IV.

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

(a) (1) Financial Statements

The Company's financial statements for the year ended March 28,
1997 are listed in the accompanying Index to Consolidated Financial Statements
at page F-1 and are incorporated herein by reference from pages 18 through 29
of the Company's Annual Report to Shareholders for the year ended March 28,
1997.

(2) Financial Statement Schedules

None

(3) Index to Exhibits

<TABLE>
<CAPTION>
Exhibit
No. - Description
- ------
<S> <C>
3.1 Amended and Restated Articles of Incorporation (Incorporated by
reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1, Registration No. 33-79164)

</TABLE>

9
<PAGE> 11
<TABLE>
<CAPTION>
<S> <C>
3.2 Articles of Amendment (Incorporated by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1, Registration No. 33-79164)
3.3 Restated Bylaws (Incorporated by reference to Exhibit 3.3 to the Registrant's
Registration Statement on Form S-1, Registration No. 33-79164)
4.1 Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1, Registration No. 33-79164)
10.1 Associate Stock Purchase Plan (Incorporated by reference to Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1, No. 33-97676)
10.2 Form of Indemnification Agreement between the Company and each of its directors and
certain officers (Incorporated by reference to Exhibit 10.4 to the Registrant's
Registration Statement on Form S-1, Registration No. 33-79164)
10.3 Compensation Agreement between the Company and Lee Posey (Incorporated by reference
to Exhibit 10.7 to the Registrant's Registration Statement on Form S-1, Registration
No. 33-79164)
10.4 Amendment to Compensation Agreement between the Company and Lee Posey (Incorporated
by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1,
No. 33-97676)
10.5 Agreement and Plan of Merger, dated as of June 30, 1996, by and among Palm Harbor
Homes, Inc., Newco Homes, Inc., Scott W. Chaney, Christopher M. Finke, Thomas B.
Kesterson and Joseph H. Kesterson (Incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated August 1, 1996 (File No. 0-24268))
10.6 Amendment No. 1 to Agreement and Plan of Merger, dated August 1, 1996 (Incorporated
by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated
August 1, 1996 (File No. 0-24268))
*13.1 Selected pages of the Company's Annual Report to Shareholders for the year ended
March 28, 1997
*21.1 List of Subsidiaries
*23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney (included on the signature page of the Report)
*27.1 Financial Data Schedule [Filed in electronic format only]

</TABLE>

* Filed herewith

- ---------------------------
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this Annual Report on Form 10-K.
(c) See Item 14(a)(3) above.
(d) None.

10
<PAGE> 12

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

The following financial statements of the Company and its subsidiaries
required to be included in Item 14(a)(1) are listed below:

PALM HARBOR HOMES, INC. AND SUBSIDIARIES

Consolidated Financial Statements (incorporated by reference under Item 8 of
Part II from pages 18 through 29 of the Company's Annual Report to
Shareholders for the year ended March 28, 1997):

Consolidated Balance Sheets as of March 29, 1996 and March 28, 1997
Consolidated Statements of Income for the years ended March 31, 1995,
March 29, 1996 and March 28, 1997
Consolidated Statements of Shareholders' Equity for the years ended
March 31, 1995, March 29, 1996 and March 28, 1997
Consolidated Statements of Cash Flows for the years ended
March 31, 1995, March 29, 1996 and March 28, 1997
Notes to Consolidated Financial Statements
Report of Independent Auditors

F-1

<PAGE> 13
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 its behalf by the undersigned, thereunto duly authorized.

June 13, 1997 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 28, 1997
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.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Lee Posey Chairman of the Board and Director June 13, 1997
------------------------------------ (Principal Executive Officer)
Lee Posey

/s/ Larry Keener Chief Executive Officer, President, June 13, 1997
------------------------------------ Chief Operating Officer and Director
Larry Keener

/s/ Scott W. Chaney Executive Vice President and Director June 13, 1997
------------------------------------
Scott W. Chaney

/s/ Kelly Tacke Vice President-Finance, Chief Financial June 13, 1997
------------------------------------ Officer and Secretary (Principal
Kelly Tacke Financial and Accounting Officer)

/s/ William R. Thomas Director June 13, 1997
------------------------------------
William R. Thomas

/s/ Walter D. Rosenberg, Jr. Director June 13, 1997
------------------------------------
Walter D. Rosenberg, Jr.

/s/ Frederick R. Meyer Director June 13, 1997
------------------------------------
Frederick R. Meyer

/s/ John H. Wilson Director June 13, 1997
------------------------------------
John H. Wilson

/s/ A. Gary Shilling Director June 13, 1997
------------------------------------
A. Gary Shilling

</TABLE>

<PAGE> 14
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
Exhibit
No. Description
- ------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit
3.1 to the Registrant's Registration Statement on Form S-1, Registration No. 33-
79164)
3.2 Articles of Amendment (Incorporated by reference to Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1, Registration No. 33-79164)
3.3 Restated Bylaws (Incorporated by reference to Exhibit 3.3 to the Registrant's
Registration Statement on Form S-1, Registration No. 33-79164)
4.1 Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-1, Registration No. 33-79164)
10.1 Associate Stock Purchase Plan (Incorporated by reference to Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1, No. 33-97676)
10.2 Form of Indemnification Agreement between the Company and each of its directors and
certain officers (Incorporated by reference to Exhibit 10.4 to the Registrant's
Registration Statement on Form S-1, Registration No. 33-79164)
10.3 Compensation Agreement between the Company and Lee Posey (Incorporated by reference
to Exhibit 10.7 to the Registrant's Registration Statement on Form S-1, Registration
No. 33-79164)
10.4 Amendment to Compensation Agreement between the Company and Lee Posey (Incorporated
by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1,
No. 33-97676)
10.5 Agreement and Plan of Merger, dated as of June 30, 1996, by and among Palm Harbor
Homes, Inc., Newco Homes, Inc., Scott W. Chaney, Christopher M. Finke, Thomas B.
Kesterson and Joseph H. Kesterson (Incorporated by reference to Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated August 1, 1996 (File No. 0-24268))
10.6 Amendment No. 1 to Agreement and Plan of Merger, dated August 1, 1996 (Incorporated
by reference to Exhibit 2.2 to the Registrant's Current Report on Form 8-K dated
August 1, 1996 (File No. 0-24268))
*13.1 Selected pages of the Company's Annual Report to Shareholders for the year ended
March 28, 1997
*21.1 List of Subsidiaries
*23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney (included on the signature page of the Report)
*27.1 Financial Data Schedule [Filed in electronic format only]
</TABLE>

- --------------------------
* Filed herewith

<PAGE> 1
EXHIBIT 13.1

SELECTED FINANCIAL DATA

(In thousands, except per share and operating data)
<TABLE>
<CAPTION>

Fiscal Year Ended
- -------------------------------------------------------------------------------------------------------------------------------
March 26, March 25, March 31, March 29, March 28,
1993 1994 1995 1996 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income:
Net sales $ 162,945 $ 231,832 $ 330,547 $ 417,214 $ 563,192
Cost of sales 134,584 194,634 275,848 345,508 436,850
-------------------------------------------------------------------------
Gross profit 28,361 37,198 54,699 71,706 126,342
Selling, general and administrative expenses 22,452 29,996 40,776 52,676 87,983
-------------------------------------------------------------------------
Income from operations 5,909 7,202 13,923 19,030 38,359
Interest expense (434) (409) (395) (751) (2,029)
Other income 132 131 514 1,276 2,250
-------------------------------------------------------------------------
Income before income from affiliate, income taxes
and cumulative effect of accounting change 5,607 6,924 14,042 19,555 38,580
Income from affiliate 877 1,823 2,745 2,995 1,049
-------------------------------------------------------------------------
Income before income taxes and cumulative
effect of accounting change 6,484 8,747 16,787 22,550 39,629
Income tax expense 2,197 2,649 5,562 7,572 14,890
-------------------------------------------------------------------------
Income before cumulative effect of
accounting change 4,287 6,098 11,225 14,978 24,739
Cumulative effect of change in method of
accounting for income taxes (379) -- -- -- --
=========================================================================
Net income $ 3,908 $ 6,098 $ 11,225 $ 14,978 $ 24,739
=========================================================================
Net income per common share $ 0.32 $ 0.49 $ 0.93 $ 1.18 $ 1.68
=========================================================================
Weighted average common and common
equivalent shares outstanding 12,220 12,415 12,099 12,718 14,737

Operating Data:
Number of homes sold 6,213 7,988 10,197 12,175 13,873
Multi-section homes sold as a percentage of
total homes sold 78% 83% 86% 82% 81%
Number of manufacturing facilities (1) 9 12 13 14 15
Number of company-owned superstores (1) 3 5 9 16 54

Balance Sheet Data:
Working capital $ 3,473 $ 3,852 $ 1,966 $ 22,727 $ 39,232
Total assets 46,811 65,914 97,650 143,712 246,335
Long-term debt 3,700 3,616 7,700 3,784 3,583
Shareholders' equity 16,042 22,736 32,907 68,982 119,949
</TABLE>

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

Palm Harbor Homes 13
<PAGE> 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Fiscal 1997 was another record year for Palm Harbor with net sales of $563.2
million, net income of $24.7 million and earnings per share of $1.68. These
results reflect a compound growth rate over the last 5 years of 36%, 59% and
51% for net sales, net income and earnings per share, respectively.

During fiscal 1997, the Company acquired Newco Homes, Inc., ("Newco") and
Energy Efficient Housing, Inc., bringing the total of Company-owned retail
superstores to 54. Manufacturing capacity increased with the opening of the
Company's fifteenth manufacturing facility, located in Georgia.

The Company's vertical integration plan was further enhanced with the
acquisition of a property and casualty insurer of manufactured homes, Standard
Casualty Company, and the continued maturation of its finance subsidiary,
CountryPlace Mortgage.

The following table sets forth certain items of the Company's statement of
income as a percentage of net sales for the period indicated.

<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
March 31, March 29, March 28,
1995 1996 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 83.5 82.8 77.6
-----------------------------------
Gross profit 16.5 17.2 22.4
Selling, general and administrative expenses 12.3 12.6 15.6
-----------------------------------
Income from operations 4.2 4.6 6.8
Interest expense (0.1) (0.2) (0.4)
Other income 0.2 0.3 0.4
-----------------------------------
Income before income from affiliate and income taxes 4.3 4.7 6.8
Income from affiliate 0.8 0.7 0.2
Income tax expense 1.7 1.8 2.6
-----------------------------------
Net income 3.4% 3.6% 4.4%
-----------------------------------
</TABLE>

The following table reflects the percentage increases in retail sales by
Company-owned superstores and in wholesale sales on a pro forma basis as if the
results of Newco and Energy Efficient Housing, Inc. were consolidated for the
periods indicated. It also shows percentage increases in the average number of
Company-owned superstores and in average home price.

<TABLE>
<CAPTION>
Pro forma Pro forma
Fiscal Year Fiscal Year
1997 vs 1996 1996 vs 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Retail:
Dollar sales +20.6% +43.7%
Weighted average number of superstores +30.2% +41.9%
Average home price +7.8% +13.1%

Wholesale:
Dollar sales +14.7% +21.0%
Average home price +2.9% +1.9%

</TABLE>

Palm Harbor Homes 14

<PAGE> 3

1997 Compared to 1996

Net Sales. Net sales increased 35.0% to $563.2 million in 1997 from $417.2
million in 1996. Of this increase, 28.6% was a result of the acquisitions of
the remaining 58.4% of Newco and of Energy Efficient Housing, Inc. The 35.0%
increase in net sales reflected a 13.9% increase in the volume of homes sold
and a significant increase in the number of the Company's homes sold through
Company-owned retail superstores. In addition to the Company's acquisitions,
the increase in volume and retail sales of the Company's homes through
Company-owned superstores resulted from the opening of new retail superstores
and an increase in production at manufacturing facilities.

Gross Profit. Gross profit increased 76.2% to $126.3 million in 1997 from
$71.7 million in 1996. During the same period, gross profit margin as a
percentage of net sales increased to 22.4% from 17.2%. This increase was
primarily the result of selling 31% of the Company's homes through
Company-owned retail superstores in 1997 versus 7% in 1996.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 67.0% to $88.0 million in 1997 from $52.7
million in 1996, primarily due to operating expenses related to the acquired
superstores, increased sales and start-up expenses. As a percentage of net
sales, selling, general and administrative expenses increased to 15.6% in 1997
from 12.6% in 1996. Of the 3.0% increase, approximately 1.8% was related to
performance compensation based on operating results at acquired superstores.

Income from Operations. As a result of the foregoing factors, income from
operations increased 101.6% to $38.4 million in 1997 compared to $19.0 million
in 1996.

Other Income. Other income increased 76.3% to $2.3 million in 1997 from $1.3
million in 1996. This increase was primarily the result of interest earned on
additional cash available for the full year.

Income from Affiliate. Income from affiliate decreased 65.0% to $1.0 million
in 1997 from $3.0 million in 1996. The decrease was due to consolidating
Newco's operating results with the Company's operations beginning in the second
quarter of fiscal 1997. See "Note 3" in Notes to Consolidated Financial
Statements.

1996 Compared to 1995

Net Sales. Net sales increased 26.2% to $417.2 million in 1996 from $330.5
million in 1995. The 26.2% increase in net sales reflected a 19.4% increase in
the volume of homes sold and a 5.7% increase in selling prices. The increase in
volume and average selling prices is due to the growth in the Company's retail
operations and expansion of manufacturing facilities. The number of
Company-owned or affiliated retail superstores, excluding the 19 operated by
Newco, increased from 15 in 1995 to 25 in 1996; and the volume of homes sold
increased 71%. Net sales for 1996 include $41.1 million from two manufacturing
facilities that were not open for the full 1995 fiscal year.

Gross Profit. Increased sales volume contributed to an increase in gross
profit of 31.1% to $71.7 million in 1996 compared to $54.7 million in 1995.
During the same period, gross profit margin as a percentage of net sales
increased to 17.2% from 16.5%. Gross profit for 1996 increased due to the
expansion of the Company's retail operations, the continued maturation of
relatively new manufacturing facilities and slight decreases in material costs.

Selling, General and Administrative Expenses. Primarily due to start-up
expenses for ten retail superstores, increased sales and the addition of
manufacturing facilities, selling, general and administrative expenses
increased 29.2% to $52.7 million in 1996 from $40.8 million in 1995. Selling,
general and administrative expenses as a percentage of net sales increased to
12.6% in 1996 from 12.3% in 1995.

Palm Harbor Homes 15

<PAGE> 4

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Income from Operations. As a result of the foregoing factors, income from
operations increased 36.7% to $19.0 million in 1996 compared to $13.9 million
in 1995.

Other Income. Other income increased 148.3% to $1.3 million in 1996 from $.5
million in 1995. This increase was primarily the result of additional interest
earned on investments of the unused proceeds received from the public offerings
of shares of common stock.

Income from Affiliate. Income from affiliate, which consisted of the
Company's 41.6% equity interest in the net earnings of Newco, increased 9.1% to
$3.0 million in 1996 from $2.7 million in 1995. Newco's volume of homes sold
increased 13.2% and average selling prices increased 11.3%.

Liquidity and Capital Resources

Historically, the Company financed its operations and capital expansion
program primarily through cash flow from operations. On July 31, 1995, the
Company completed a public offering of 302,700 shares of common stock at $12
per share to its employees, officers, directors and certain of its retailers,
vendors and consultants. An additional 752,142 shares were distributed by
Capital Southwest Corporation, a significant shareholder of the Company, to its
shareholders. Further, principal shareholders exercised warrants to purchase
5,483,197 shares of common stock at $.39744 per share. On October 30, 1995, the
Company completed a secondary public offering of 1,000,000 shares of common
stock at $17 per share. The proceeds received from the offerings approximated
$21.3 million and were used primarily to fund expansion of the Company's retail
operations.

On August 1, 1996, the Company acquired the remaining 58.4% of Newco, a
Texas-based retailer of manufactured homes. The Company had previously owned
41.6% of Newco's outstanding shares. The purchase price for the remaining 58.4%
of Newco's outstanding shares consisted of $17.3 million cash and 1,444,445
shares of the Company's common stock.

Capital expenditures were $13.3 million, $6.8 million and $21.6 million in
1995, 1996 and 1997, respectively. Capital expenditures during these periods
were for expansion of manufacturing facilities and retail superstores and for
normal property, plant and equipment maintenance and replacement. In 1995,
capital expenditures included the August 1994 acquisition of a manufacturing
facility in Texas for $1.3 million and the construction of a manufacturing
facility in Oregon completed in April 1995 for $6.3 million. In fiscal 1997,
capital expenditures included the April 1996 acquisition and renovation of a
manufacturing facility in Georgia for $3.2 million, the November 1996
acquisition of a manufacturing facility in Arizona for $1.4 million and
expansion of retail superstores for $9.1 million. Approximately $7.0 million
was expended for normal maintenance and replacement on mature manufacturing
facilities. The Company expects capital expenditures to approximate $10.0
million during fiscal 1998. These expenditures include renovating the
manufacturing facility in Arizona, upgrading current manufacturing facilities
as well as adding 10-15 retail superstores.

In April 1997, the Company obtained a commitment from a financial
institution for a $25.0 million unsecured revolving line of credit for general
corporate purposes. The line of credit will bear interest at the LIBOR rate
plus .625% or the prime rate minus 1%. The Company has floor plan credit
facilities totaling $68.5 million from financial institutions to finance a
major portion of its home inventory at the Company's retail superstores. The
facilities are secured by a portion of the Company's home inventory and cash in
transit from financial institutions. Interest rates range from prime (8.5% at
March 28, 1997) to prime plus .75%. The Company had $45.3 million outstanding
on these lines of credit at March 28, 1997.

The Company believes that cash flow from operations, together with floor
plan financing and the revolving line of credit, will be adequate to support
its working capital and currently planned capital expenditure needs in the
foreseeable future. The Company may, from time to time, obtain additional floor
plan financing for its 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

Palm Harbor Homes 16

<PAGE> 5

prevailing economic and financial conditions, business and other factors beyond
the Company's control, no assurances can be given in this regard.

In accordance with customary business practice in the manufactured housing
industry, the Company has entered into repurchase agreements with various
financial institutions and other credit sources pursuant to which the Company
has agreed, under certain circumstances, to repurchase homes sold to
independent retailers in the event of a default by a retailer in its obligation
to such credit sources. Under such agreements, the Company agrees to repurchase
homes at declining prices over the term of the agreement (which generally
ranges from 12 to 18 months). The Company estimates that its potential
obligations under such repurchase agreements approximated $121 million at March
28, 1997. During 1995, 1996 and 1997, net expenses (income) incurred by the
Company under these repurchase agreements totaled $22,000, ($3,000) and
$55,000, respectively.

Forward-Looking Information

Management is unaware of any trends or conditions that could have a material
adverse effect on the Company's consolidated financial position, future results
of operations or liquidity. However, investors should also be aware of factors
which could have a negative impact on prospects and the consistency of
progress. These include political, economic or other factors such as inflation
rates, recessionary or expansive trends, taxes and regulations and laws
affecting the business in each of the Company's markets; competitive product,
advertising, promotional and pricing activity; dependence on the rate of
development and degree of acceptance of new product introductions in the market
place; and the difficulty of forecasting sales at certain times in certain
markets.

Recent Accounting Pronouncements

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" which
will become effective in fiscal 1998. SFAS No. 128 will eliminate the
disclosure of primary earnings per share which includes the dilutive effect of
stock options, warrants and other convertible securities ("Common Stock
Equivalents") and instead requires reporting of "basic" earnings per share,
which will exclude Common Stock Equivalents. Additionally, SFAS No. 128 changes
the methodology for fully diluted earnings per share. In the opinion of the
Company's management, it is not anticipated that the adoption of this new
accounting standard will have a material effect on the reported earnings per
share of the Company.

[CHART] [CHART] [CHART]

Palm Harbor Homes 17

<PAGE> 6

CONSOLIDATED BALANCE SHEETS

(In thousands of dollars)

<TABLE>
<CAPTION>
March 29, March 28,
1996 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 23,441 $ 26,346
Investments 5,087 5,752
Trade accounts receivable 33,052 53,424
Due from affiliate 3,848
Inventories 18,863 66,275
Prepaid expenses and other assets 1,111 1,447
Deferred income taxes 3,582 4,291
-----------------------------------
Total current assets 88,984 157,535

Investments in and advances to affiliate 9,715
Notes receivable 5,905 2,278
Other assets, net 3,272 32,490
Tax benefits purchased 643 565
-----------------------------------
19,535 35,333
Property, plant and equipment, at cost:
Land and improvements 5,698 9,614
Buildings and improvements 24,746 38,085
Machinery and equipment 17,203 20,498
Construction in progress 3,275 7,093
-----------------------------------
50,922 75,290
Accumulated depreciation 15,729 21,823
-----------------------------------
35,193 53,467
-----------------------------------
Total assets $ 143,712 $ 246,335
-----------------------------------

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 30,800 $ 37,276
Floor plan payable 3,948 45,255
Accrued liabilities 31,323 35,572
Current portion of long-term debt 186 200
-----------------------------------
Total current liabilities 66,257 118,303
Long-term debt, less current portion 3,784 3,583
Deferred income taxes 4,689 4,500
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 2,000,000
Issued and outstanding shares - none
Common stock, $.01 par value:
Authorized shares - 20,000,000
Issued shares - 10,863,598 at March 29, 1996, and 15,109,752
at March 28, 1997 109 151
Additional paid-in capital 23,012 48,994
Retained earnings 46,272 71,011
-----------------------------------
69,393 120,156
Less treasury shares - 13,281 at March 29, 1996, and 13,444
at March 28, 1997 (205) (194)
Notes receivable from shareholders (206) (13)
-----------------------------------
Total shareholders' equity 68,982 119,949
-----------------------------------
Total liabilities and shareholders' equity $ 143,712 $ 246,335
-----------------------------------
</TABLE>
See accompanying notes.

Palm Harbor Homes 18

<PAGE> 7

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

<TABLE>
<CAPTION>
Year Ended
-----------------------------------------------------
March 31, March 29, March 28,
1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 330,547 $ 417,214 $ 563,192

Cost of sales 275,848 345,508 436,850
Selling, general and administrative expenses 40,776 52,676 87,983
-----------------------------------------------------
Income from operations 13,923 19,030 38,359

Interest expense (395) (751) (2,029)
Other income 514 1,276 2,250
-----------------------------------------------------
Income before income from affiliate and income taxes 14,042 19,555 38,580

Income from affiliate 2,745 2,995 1,049
-----------------------------------------------------
Income before income taxes 16,787 22,550 39,629

Income tax expense 5,562 7,572 14,890
-----------------------------------------------------

Net income $ 11,225 $ 14,978 $ 24,739
-----------------------------------------------------
Earnings per common share $ .93 $ 1.18 $ 1.68
-----------------------------------------------------
Weighted average common shares and common equivalents 12,099 12,718 14,737
-----------------------------------------------------

</TABLE>
See accompanying notes.

Palm Harbor Homes 19

<PAGE> 8

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands of dollars)

Notes
Additional Receivable
Common Stock Paid-In Retained Treasury Shares From
Shares Amount Capital Earnings Shares Amount Shareholders Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------
Balance at March 25, 1994 3,663,790 $ 36 $ 3,610 $19,513 -- -- $(423) $ 22,736
Net income -- -- -- 11,225 -- -- -- 11,225
Shares issued 3,750 -- 9 -- -- -- -- 9
Treasury shares purchased
and canceled (203,099) (4) (1,615) -- -- -- -- (1,619)
Payments on and
cancellation of
shareholder notes (202,500) -- (423) -- -- -- 423 --
Unrealized gain on
marketable securities,
net of taxes -- -- -- 556 -- -- -- 556
1.25 to 1 stock split 815,760 9 (9) -- -- -- -- --
------------------------------------------------------------------------------------------------
Balance at March 31, 1995 4,077,701 41 1,572 31,294 -- -- -- 32,907
Net income -- -- -- 14,978 -- -- -- 14,978
Shares issued:
offerings 1,302,700 13 19,316 -- -- -- -- 19,329
warrants 5,483,197 55 2,124 -- -- -- -- 2,179
Treasury shares purchased -- -- -- -- (13,281) $(205) -- (205)
Shareholders' notes-net
of payments -- -- -- -- -- -- (206) (206)
------------------------------------------------------------------------------------------------
Balance at March 29, 1996 10,863,598 109 23,012 46,272 (13,281) (205) (206) 68,982
Net income -- -- -- 24,739 -- -- -- 24,739
1.25 to 1 stock split 2,733,408 27 (27) -- (2,586) -- -- --
Issuance related
to acquisitions 1,512,746 15 25,983 -- -- -- -- 25,998
Treasury shares
purchased-net of sales -- -- 26 -- 2,423 11 -- 37
Payments on shareholders'
notes -- -- -- -- -- -- 193 193
------------------------------------------------------------------------------------------------
Balance at March 28, 1997 15,109,752 $ 151 $ 48,994 $71,011 (13,444) $(194) $ (13) $ 119,949
------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes.

Palm Harbor Homes 20

<PAGE> 9

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of dollars)

<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------
March 31, March 29, March 28,
1995 1996 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 11,225 $ 14,978 $ 24,739
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,246 3,147 6,149
Deferred income tax benefit (1,373) (944) (898)
Income from affiliate (2,745) (2,995) (1,049)
(Gain) loss on disposition of assets (16) 26 (32)
Changes in operating assets and liabilities:
Trade accounts receivable (6,637) (11,917) (4,868)
Due from affiliate 1,299 (1,973) 3,848
Inventories (5,049) (2,369) (20,973)
Notes receivable (164) (4,183) --
Prepaid expenses and other current assets (251) (53) (20)
Other assets (19) (1,381) 6,202
Accounts payable and accrued expenses 13,804 15,319 (7,169)
----------------------------------------
Net cash provided by operating activities 12,320 7,655 5,929

Investing Activities
Purchases of property, plant and equipment (13,277) (6,765) (21,608)
Purchase of Energy Efficient Housing, Inc.,
Standard Casualty Company and Newco Homes, Inc.
(net of cash acquired and stock issued) -- -- (3,284)
Purchases of investments (803) (4,820) (10,206)
Sales of investments -- 536 12,195
Proceeds from disposition of assets 16 201 35
----------------------------------------
Net cash used in investing activities (14,064) (10,848) (22,868)

Financing Activities
Net proceeds from (payments on) floor plan payable 970 (154) 19,801
Proceeds from notes payable and long-term borrowings 7,000 -- --
Principal payments on notes payable and long-term debt (1,000) (5,730) (187)
Proceeds from sale of stock, net 10 21,508 --
Net (purchases) sales of treasury stock (1,619) (205) 37
Notes receivable from shareholders, net -- (206) 193
----------------------------------------
Net cash provided by financing activities 5,361 15,213 19,844
----------------------------------------

Net increase in cash and cash equivalents 3,617 12,020 2,905
Cash and cash equivalents at beginning of year 7,804 11,421 23,441
----------------------------------------
Cash and cash equivalents at end of year $ 11,421 $ 23,441 $ 26,346
----------------------------------------

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 542 $ 670 $ 1,988
Income taxes $ 6,415 $ 8,169 $ 16,190

Supplemental schedule of non-cash investing activities:
Common stock issuance for acquisition of Energy
Efficient Housing, Inc. and Newco Homes, Inc. $ 25,998

</TABLE>

See accompanying notes.

Palm Harbor Homes 21

<PAGE> 10

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 its 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 1995,
1996 and 1997 contained 53, 52 and 52 weeks, respectively.

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

Revenue recognition

Revenue is recognized on sales to independent retailers when the home is
shipped which is when the title passes to the retailer. Revenue on retail sales
is recognized when the title passes to the customer and, in the case of credit
sales, when a down payment and required documentation are received.

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

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 equity securities and are stated at fair
value. Marketable 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

Inventories are valued at the lower of cost (first-in, first-out method
which approximates actual cost) or market.

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.

Other assets

Other assets include goodwill which is the excess of cost over fair value of
net assets of businesses acquired and is amortized on the straight-line method
over the expected periods to be benefited. The Company evaluates the existence
of goodwill impairment on the basis of whether the goodwill is fully
recoverable from projected, undiscounted future cash flows.

Product 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 to the
retailer.

Palm Harbor Homes 22

<PAGE> 11

Start-up costs

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

Earnings per share

Earnings per share are computed based upon the weighted average number of
common stock and common stock equivalents outstanding during the periods
presented, adjusted for subsequent common stock splits and include common share
equivalents arising from stock warrants. Historical earnings per share data
have been adjusted to reflect the effects of the 1.25 to 1 stock splits
effective as of March 31, 1995 and July 26, 1996.

Reclassifications

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

Recent accounting pronouncements

2. Public offerings

On July 31, 1995, the Company completed an initial public offering of
302,700 shares of common stock at $12 per share to its employees, officers,
directors and certain of its retailers, vendors and consultants. An additional
752,142 shares were distributed by a significant shareholder of the Company to
its shareholders. Further, principal shareholders exercised warrants to
purchase 5,483,197 shares of common stock at $.39744 per share. Proceeds to the
Company approximated $5,400,000.

On October 30, 1995, the Company completed a secondary public offering of
1,000,000 shares of common stock at $17 per share. Net proceeds to the Company
approximated $15,900,000.

3. Acquisitions

On April 12, 1996, the Company acquired Energy Efficient Housing, Inc., a
retailer consisting of eight superstores in North Carolina, for a combination
of cash and 68,301 common shares of the Company.

On May 31, 1996, the Company acquired Standard Casualty Company, a property
and casualty insurer of manufactured homes headquartered in Texas.

On August 1, 1996, the Company acquired the remaining 58.4% of Newco Homes,
Inc. ("Newco"), a Texas-based retailer of manufactured homes. The Company had
previously owned 41.6% of Newco's outstanding shares. The purchase price for
the remaining 58.4% of Newco's outstanding shares consisted of $17.3 million
cash and 1,444,445 shares of the Company's common stock. Goodwill relating to
the acquisition totaled approximately $25.8 million at March 28, 1997, is being
amortized over 20 years and is included in other assets. Prior to the
acquisition of the remaining 58.4% of Newco, the Company recorded its 41.6%
equity interest in the net earnings of Newco as income from affiliate.

Palm Harbor Homes 23

<PAGE> 12

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. Inventories

Inventories consist of the following:

<TABLE>
<CAPTION>
March 29, March 28,
1996 1997
- --------------------------------------------------------
(in thousands)
<S> <C> <C>
Raw materials $ 7,014 $ 7,966
Work in process 2,405 2,600
Finished goods - manufacturing 1,062 463
Finished goods - retail 8,382 55,246
------------------------
$18,863 $66,275
------------------------
</TABLE>

5. Investments

The Company's investments, which totaled $5,087,000 and $5,752,000 at March
29, 1996 and March 28, 1997, respectively, consist of marketable equity
securities and municipal bonds with original maturities beyond three months.

Investments in and advances to affiliate consisted of the Company's 41.6%
equity investment in Newco which totaled $9.7 million at March 29, 1996.

Summarized financial information with respect to Newco is as follows:

<TABLE>
<CAPTION>
Year Ended March 31,
1995 1996
- ---------------------------------------------------------------
(in thousands)
<S> <C> <C>
Income statement data:
Net sales $141,852 $ 178,657
Net income 6,576 7,651

</TABLE>

March 31,
1996
- ----------------------------------------------
(in thousands)
<S> <C>
Balance sheet data:
Total assets $45,246
Shareholders' equity 23,482
</TABLE>

On August 1, 1996, the Company acquired the remaining 58.4% of Newco and
consolidated Newco's operating results with the Company's operations beginning
in the second quarter of fiscal 1997 (see Note 3).

6. Notes receivable

Notes receivable consist principally of floor plan financing receivables
from certain of the Company's retailers. The notes are collateralized by
manufactured homes. Interest rates are approximately prime plus one-half
percent (9.0% at March 28, 1997). Interest income relating to these notes for
the fiscal years ended March 31, 1995, March 29, 1996 and March 28, 1997
approximated $189,000, $424,000 and $210,000, respectively.

Palm Harbor Homes 24

<PAGE> 13

7. Other assets

Other assets include goodwill of $28,684,000 at March 28, 1997 and $892,000
at March 29, 1996, with accumulated amortization of $1,251,000 and $74,000,
respectively.

8. Floor plan

The Company has floor plan credit facilities totaling $21,000,000 and
$68,500,000 from financial institutions as of March 29, 1996 and March 28,
1997, respectively, 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 cash in transit from financial institutions.
Interest rates range from prime (8.5% at March 28, 1997) to prime plus .75%.
The Company had $3,948,000 and $45,255,000 outstanding on these lines of credit
at March 29, 1996 and March 28, 1997, respectively.

9. Accrued liabilities

Accrued liabilities consist of the following:

March 29, March 28,
1996 1997
- ---------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Sales incentives $ 8,169 $ 5,670
Salaries, wages and benefits 11,645 13,148
Warranty 5,564 6,593
Other 5,945 10,161
---------------------------
$31,323 $35,572
---------------------------

</TABLE>

10. Notes payable and long-term debt

Long-term debt consists of the following:

March 29, March 28,
1996 1997
- ---------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Economic development revenue bonds; interest payable monthly at 7.54%;
monthly interest and principal payments of $40,029 through January 2006;
final payment of $2,002,040 in February 2006 $3,970 $3,783
Less current portion 186 200
---------------------
$3,784 $3,583
---------------------
</TABLE>

The revenue bonds require the maintenance of certain financial statement
ratios, prohibit the payment of dividends and are collateralized by certain
fixed assets having an approximate carrying value as of March 28, 1997 of $6.4
million.

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

<TABLE>
<S> <C>
1997 $ 200
1998 216
1999 233
2000 243
2001 and thereafter 2,891
</TABLE>

Palm Harbor Homes 25

<PAGE> 14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company obtained a commitment in April 1997 from a financial institution
for a $25.0 million unsecured revolving line of credit for general corporate
purposes. The line of credit will bear interest at the LIBOR rate plus .625% or
the prime rate minus 1.0%.

11. Income taxes

The income tax provisions for the 1995,1996 and 1997 fiscal years are
determined by the liability method.

<TABLE>
<CAPTION>
March 31, March 29, March 28,
1995 1996 1997
- -----------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Current:
Federal $ 5,821 $ 7,381 $ 14,010
State 895 1,303 1,888

Deferred (1,154) (1,112) (1,008)
------------------------------------------------
Total income taxes $ 5,562 $ 7,572 $ 14,890
------------------------------------------------
</TABLE>

Components of deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>
March 29, March 28,
1996 1997
- ----------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Deferred tax liabilities:
Tax benefits purchased $3,541 $3,372
Property and equipment 701 1,128
Unremitted earnings of affiliate 677 --
--------------------------
Total deferred tax liabilities 4,919 4,500

Deferred tax assets:
Warranty reserves 1,907 2,307
Accrued liabilities 1,348 1,090
Inventory 304 308
Unrecognized income -- 338
Other 253 248
--------------------------
Total deferred tax assets 3,812 4,291
--------------------------
Net deferred income tax liability $1,107 $ 209
--------------------------
</TABLE>

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.

Palm Harbor Homes 26

<PAGE> 15

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

<TABLE>
<CAPTION>
March 31, March 29, March 28,
1995 1996 1997
- ---------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Tax at statutory rate $ 5,875 $ 7,892 $ 13,873
Add (deduct):
Equity in earnings of affiliate (769) (839) (367)
State taxes - net of federal tax benefit 581 847 1,227
Goodwill -- -- 400
Jobs tax credit (84) -- --
Tax exempt interest (80) (234) (230)
Other 39 (94) (13)
------------------------------------------
Income tax provision $ 5,562 $ 7,572 $ 14,890
------------------------------------------
Effective tax rate 33.1% 33.6% 37.6%
------------------------------------------

</TABLE>

12. 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.

On June 1, 1992, the Company provided interest bearing notes receivable to
an officer for the purchase of shares of common stock for $2.75 per share. On
June 25, 1994, in connection with the officer's resignation, the Company
repurchased the officer's outstanding shares and canceled the outstanding
balance of the notes.

In connection with the Company's initial public offering, approximately 100
employees purchased stock whereby the Company accepted notes receivable for
half of the purchase. Such notes totaled $13,000 at March 28, 1997 and are
payable over two years from date of purchase with interest at 9%.

13. Employee plan

The Company sponsors an employee savings plan (the "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
Plan. The Company matches 50% of the first 6% deferred by employees. Employees
are eligible to participate after three months of employment and employer
contributions, which begin one year after employment, are vested after five
years of service. Contribution expense was $596,000, $700,000 and $1,099,000 in
fiscal years 1995, 1996 and 1997, respectively.

Palm Harbor Homes 27

<PAGE> 16

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. Commitments and contingencies

Future minimum lease payments for all noncancelable operating leases having
a remaining term in excess of one year at March 28, 1997, are as follows (in
thousands):

<TABLE>
<S> <C>
1998 $ 3,666
1999 2,692
2000 1,522
2001 845
2002 and thereafter 1,427
----------
$10,152
----------
</TABLE>

Rent expense (net of sublease income) was $1,644,000, $2,337,000 and
$3,211,000 for the years ended March 31, 1995, March 29, 1996 and March 28,
1997, respectively.

The Company is contingently liable under the terms of repurchase agreements
covering retailers' floor plan financing. Under such agreements, the Company
agrees to repurchase homes at declining prices over the term of the agreement,
generally 12 to 18 months. At March 28, 1997, the Company estimates that its
potential obligations under such repurchase agreements were approximately $121
million. However, it is management's opinion that no material loss will occur
from the repurchase agreements. During the past three fiscal years, no
significant costs have been incurred relating to such repurchase agreements.

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.

15. Related party transaction

In conjunction with the acquisition of Newco, the Company purchased certain
properties from significant shareholders of the Company. The purchase price of
$1,603,000 approximated the independent appraised values.

16. Quarterly financial data (unaudited)

The following table sets forth certain unaudited quarterly financial
information for the fiscal years ended March 29, 1996 and March 28, 1997.

<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
- ---------------------------------------------------------------------------------------------------
(in thousand, except per share data)
<S> <C> <C> <C> <C> <C>
Fiscal Year Ended March 29, 1996
Net sales $ 98,766 $103,247 $104,976 $110,225 $417,214
Gross profit 16,334 17,267 17,685 20,420 71,706
Income from operations 4,233 4,522 4,576 5,699 19,030
Net income 3,436 3,617 3,581 4,344 14,978
Earnings per share .29 .30 .27 .32 1.18

Fiscal Year Ended March 28, 1997
Net sales $120,735 $152,717 $150,796 $138,944 $563,192
Gross profit 22,655 34,456 33,381 35,850 126,342
Income from operations 6,723 9,670 10,105 11,861 38,359
Net income 5,464 6,301 6,019 6,955 24,739
Earnings per share .40 .42 .40 .46 1.68

</TABLE>

Palm Harbor Homes 28

<PAGE> 17

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 29, 1996 and March
28, 1997, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three fiscal years in the period ended
March 28, 1997. 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 generally accepted auditing
standards. 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 29, 1996 and March 28, 1997, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended March 28, 1997, in conformity with
generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Dallas, Texas
May 2, 1997

Palm Harbor Homes 29

<PAGE> 18

DIRECTORS, EXECUTIVE OFFICERS AND TEAM MEMBERS

Directors

<TABLE>
<S> <C> <C>
Scott W. Chaney Lee Posey William R. Thomas(1)(2)
Executive Vice President Chairman of the Board Chairman and President,
Palm Harbor Homes, Inc. Palm Harbor Homes, Inc. Capital Southwest
(venture capital)
Larry H. Keener Walter D. Rosenberg
President and Chief Operating Officer (private investments) John H. Wilson(1)
Palm Harbor Homes, Inc. President, U.S. Equity Corporation
A. Gary Shilling(1) (venture capital)
Frederick R. Meyer (2) President, A. Gary Shilling & Co., Inc.
Chairman of the Board, (economic consulting)
Aladdin Industries, Inc. (1) Member of Audit Committee
(a diversified manufacturer) (2) Member of Compensation Committee
</TABLE>

Executive Officers

<TABLE>
<S> <C>
Lee Posey Scott W. Chaney
Chairman of the Board and Chief Executive Vice President
Executive Officer
Kelly Tacke
Larry H. Keener Vice President-Finance, Chief
President and Chief Operating Officer Financial Officer and Secretary
</TABLE>

Executive Announcement

Change accompanies any company's progress. During 1997 Scott Chaney joined Palm
Harbor in the new position of Executive Vice President as a result of the
acquisition of Newco Homes. Effective June 1, 1997, Larry Keener will add the
responsibilities of Chief Executive Officer to his position as President. Lee
Posey will remain Chairman of the Board. Larry and Scott bring accomplished
backgrounds with Palm Harbor to their new responsibilities, and these moves
signal a planned advancement in the executive management of Palm Harbor.

The Palm Harbor Team

<TABLE>
<S> <C> <C> <C> <C>
John Albrecht Chad Cotton Pattie Keath Tony Miller Hazem Sadek
Keith Alexander Mike Draper Larry Keener Rick Minor Jim Shelor
Gene Anderson John Dulweber Bert Kessler David Moore Kelly Tacke
Art Archibald Gene Fahey Joe Kesterson John Moss Howard Thomas
Woody Bell Chris Finke Tom Kesterson Richard Peck Denny Vick
Jeff Benoist Don Fisher Casper Koble Joe Pequignot Kenny Wallace
Kevin Breedlove Kevin Fisher Butch Lane Lee Posey Danny Warrick
Rick Boles Warren French Pat Leverett Ron Powell Robin West
Hubert Brewer Mike Frericks Ed Lewis Ken Rarick Mike Wnek
Howard Broughton John Hodge Marge Lewis Allen Reitmeier Jon Zimmermn
Scott Chaney Jane Holcomb Howard McGirt Tony Rickard
Fred Chozick Blake Jackson Allen McKemie Ralph Russell
David Christian Blake Johnson Dwayne Miller Gavin Ryan
</TABLE>

Palm Harbor Homes 30

<PAGE> 1

Exhibit 21.1

Subsidiaries

<TABLE>
<CAPTION>
Name Jurisdiction of Organization
---- ----------------------------
<S> <C>
Palm Harbor Finance Corporation Texas
Palm Harbor G.P., Inc. Nevada
Standard Casualty Corp. Texas
Energy Efficient Housing, Inc. Nevada
Better Homes Systems, Inc. Washington
Palm Harbor Investments, Inc. Nevada
Palm Harbor Holding, Inc. Nevada
Standard Insurance Agency, Inc. Texas
CountryPlace Mortgage, Ltd. Texas
Palm Harbor Homes I, L.P. Texas
Western Insurance Managers, Inc. Texas
</TABLE>

<PAGE> 1
Exhibit 23.1

We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Palm Harbor Homes, Inc. and subsidiaries of our report dated May 2, 1997,
included in the 1997 Annual Report to Shareholders of Palm Harbor Homes, Inc.

/s/ Ernst & Young LLP

June 17, 1997
Dallas, Texas

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AS OF MARCH 28, 1997 AND CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED MARCH 28, 1997 LOCATED IN THE COMPANY'S
1997 ANNUAL REPORT TO SHAREHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-28-1997
<PERIOD-START> MAR-30-1996
<PERIOD-END> MAR-28-1997
<CASH> 26,346
<SECURITIES> 5,752
<RECEIVABLES> 53,424
<ALLOWANCES> 0
<INVENTORY> 66,275
<CURRENT-ASSETS> 157,535
<PP&E> 53,467
<DEPRECIATION> 0
<TOTAL-ASSETS> 246,335
<CURRENT-LIABILITIES> 118,303
<BONDS> 3,583
0
0
<COMMON> 151
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<SALES> 563,192
<TOTAL-REVENUES> 563,192
<CGS> 436,850
<TOTAL-COSTS> 436,850
<OTHER-EXPENSES> 0
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<INCOME-PRETAX> 38,580
<INCOME-TAX> 14,890
<INCOME-CONTINUING> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,739
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.68

</TABLE>