UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 30, 2005

Commission file number 0-26188

PALM HARBOR HOMES, INC.

(Exact name of registrant as specified in its charter)

Florida		59-1036634
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

15303 Dallas Parkway, Suite 800, Addison, Texas 75001-4600

(Address of principal executive offices)      (Zip code)

972-991-2422

(Registrant’s telephone number, including area code)

     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. þ Yes o No

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o

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

Indicate the number of shares outstanding of each of the issuer’ s classes of common stock, as of the latest practicable date.

Shares of common stock $.01 par value, outstanding on February 6, 2006 – 22,831,516.

 

 

PALM HARBOR HOMES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

		December 30,				March 25,
		2005				2005
		(Unaudited)				(Note 1)
Assets
Cash and cash equivalents		$	59,960			$	46,197
Restricted cash			18,168				15,352
Investments			26,063				21,516
Trade receivables			55,560				52,311
Consumer loans receivable, net			154,111				132,400
Inventories			132,051				128,420
Prepaid expenses and other assets			27,784				25,954
Property, plant and equipment, net			67,414				71,324
Goodwill			78,506				78,506
Total assets		$	619,617			$	571,980
Liabilities and shareholders’ equity
Accounts payable		$	26,680			$	30,319
Accrued liabilities			100,714				76,568
Floor plan payable			25,248				30,888
Warehouse revolving debt			22,778				106,298
Securitized financing			109,209				—
Convertible senior notes			75,000				75,000
Total liabilities			359,629				319,073
Commitments and contingencies
Shareholders’ equity:
Common stock, $.01 par value			239				239
Additional paid-in capital			54,149				54,149
Retained earnings			221,654				213,740
Accumulated other comprehensive income			308				1,214
			276,350				269,342
Less treasury shares			(16,196	)			(16,359	)
Unearned compensation			(166	)			(76	)
Total shareholders’ equity			259,988				252,907
Total liabilities and shareholders’ equity		$	619,617			$	571,980

See accompanying notes.

PALM HARBOR HOMES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

		Three Months Ended								Nine Months Ended
		December 30,				December 24,				December 30,				December 24,
		2005				2004				2005				2004
Net sales		$	193,193			$	154,624			$	530,359			$	462,827
Cost of sales			143,368				118,115				394,665				347,191
Selling, general and administrative expenses			40,909				41,539				118,882				118,981
Income (loss) from operations			8,916				(5,030	)			16,812				(3,345	)
Interest expense			(2,916	)			(2,285	)			(8,691	)			(6,312	)
Equity in earnings (loss) of limited partnership			200				(726	)			1,229				(483	)
Interest income and other			957				421				3,763				604
Income (loss) before income taxes			7,157				(7,620	)			13,113				(9,536	)
Income tax benefit (expense)			(2,885	)			2,973				(5,199	)			3,721
Net income (loss)		$	4,272			$	(4,647	)		$	7,914			$	(5,815	)
Net income (loss) per common share:
Basic		$	0.19			$	(0.20	)		$	0.35			$	(0.25	)
Assuming dilution		$	0.18			$	(0.20	)		$	0.35			$	(0.25	)
Weighted average common shares outstanding:
Basic			22,832				22,830				22,832				22,835
Assuming dilution			25,726				22,830				22,832				22,835

See accompanying notes.

PALM HARBOR HOMES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

		Nine Months Ended
		December 30,				December 24,
		2005				2004
Operating Activities
Net income (loss)		$	7,914			$	(5,815	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization			8,444				9,755
Provision for credit losses			2,486				2,048
Loss (gain) on disposition of assets			(1,540	)			1,051
Provision for long-term incentive plan			73				481
Deferred income taxes			(305	)			—
Equity in (earnings) loss of limited partnership			(1,229	)			483
Changes in operating assets and liabilities:
Restricted cash			(2,816	)			(10,581	)
Trade receivables			(3,334	)			(8,600	)
Loans originated			(40,043	)			(48,155	)
Principal payments on loans originated			15,167				15,007
Inventories			(3,631	)			(11,436	)
Prepaid expenses and other assets			(1,475	)			(269	)
Accounts payable and accrued expenses			20,212				(6,909	)
Net cash used in operating activities			(77	)			(62,940	)
Investing Activities
Purchases of property, plant and equipment, net of proceeds from disposition			(1,961	)			(1,087	)
Purchases of investments			(8,232	)			(5,765	)
Sales of investments			3,984				4,573
Net cash used in investing activities			(6,209	)			(2,279	)
Financing Activities
Net payments on floor plan payable			(5,640	)			(60,162	)
Net (payments on) proceeds from warehouse revolving debt			(83,520	)			28,958
Proceeds from securitized financing			118,440				—
Payments on securitized financing			(9,231	)			—
Proceeds from convertible senior notes, net of issuance costs			—				72,496
Principal payments on bonds payable			—				(2,377	)
Net cash provided by financing activities			20,049				38,915
Net increase (decrease) in cash and cash equivalents			13,763				(26,304	)
Cash and cash equivalents at beginning of period			46,197				50,915
Cash and cash equivalents at end of period		$	59,960			$	24,611
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	8,474			$	5,895
Income taxes			3,416				847

See accompanying notes.

PALM HARBOR HOMES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.			Basis of Presentation
			The condensed consolidated financial statements reflect all adjustments, which include only normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation in conformity with U.S. generally accepted accounting principles. Certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted. The condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended March 25, 2005. Results of operations for any interim period are not necessarily indicative of results to be expected for a full year.
			The balance sheet at March 25, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.
			The Company’s fiscal year ends on the last Friday in March. The three months ended December 30, 2005 contained 14 weeks and the three months ended December 24, 2004 contained 13 weeks. The nine months ended December 30, 2005 contained 40 weeks and the nine months ended December 24, 2004 contained 39 weeks.

2.			Inventories
			Inventories consist of the following (in thousands):

		December 30,				March 25,
		2005				2005
Raw materials		$	15,449			$	12,704
Work in process			6,685				6,248
Finished goods — factory-built			8,431				4,069
Finished goods — retail			101,486				105,399
		$	132,051			$	128,420

3.			Investment in Limited Partnership
			In June 2002, the Company invested $3.0 million to become the sole limited partner and 50% owner of an existing mortgage banking firm, BSM Financial L.P. (“BSM”) which is being accounted for using the equity method of accounting. The following table represents the condensed income statements for BSM for the three and nine month periods ending December 30, 2005 and December 24, 2004 (in thousands):

		Three Months Ended								Nine Months Ended
		December 30,				December 24,				December 30,				December 24,
		2005				2004				2005				2004
Revenues		$	14,398			$	8,115			$	42,430			$	29,703
Net income (loss)			396				(1,452	)			2,458				(966	)

PALM HARBOR HOMES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

4.			Consumer Loans Receivable and Allowance for Loan Losses
			Consumer loans receivable, net of allowance for loan losses, consist of the following (in thousands):

		December 30,				March 25,
		2005				2005
Consumer loans held for investment		$	32,803			$	141,660
Consumer loans securitzed			132,278				—
Less: Financed loan points			(4,644	)			(3,895	)
Less: Allowance for loan losses			(6,326	)			(5,365	)
Consumer loans receivable, net		$	154,111			$	132,400

The allowance for loan losses and related additions and deductions to the allowance during the nine months ended December 30, 2005 and December 24, 2004 are as follows (in thousands):

		December 30,				December 24,
		2005				2004
Allowance for loan losses, beginning of period		$	5,365			$	3,597
Provision for credit losses			2,486				2,048
Loans charged off, net of recoveries			(1,525	)			(564	)
Allowance for loan losses, end of period		$	6,326			$	5,081

5.			Floor Plan Payable
			The Company has an agreement with a financial institution for a $70.0 million floor plan facility. The advance rate for the facility is 90% of manufacturer’s invoice. This facility is used to finance a portion of the new home inventory at the Company’s retail superstores and is secured by new home inventory and a portion of receivables from financial institutions. The interest rate on the facility is prime (7.25% at December 30, 2005) or prime plus 1.0% to 3.0% for aged units, of which the Company has none as of December 30, 2005. The floor plan facility contains certain provisions requiring the Company to maintain minimum amounts of liquidity, profitability, inventory turns and tangible net worth in order to borrow against the facility. As of December 30, 2005, the Company was in compliance with these provisions. Subsequent to December 30, 2005, the Company amended the agreement with the financial institution to revise one of these provisions, to change the interest rate to prime plus 0.6% and to extend the expiration of the agreement from May 25, 2007 to March 30, 2009. The Company had $25.2 million and $30.9 million outstanding under its floor plan credit facility at December 30, 2005 and March 25, 2005, respectively.

6.			Debt Obligations
			On July 12, 2005, the Company, through its subsidiary CountryPlace, completed its initial securitization for approximately $141.0 million of loans, which was funded by issuing bonds totaling approximately $118.4 million. The bonds were issued in four different classes: Class A-1 totaling $36.3 million with a coupon rate of 4.23%; Class A-2 totaling $27.4 million with a coupon rate of 4.42%; Class A-3 totaling $27.3 million with a coupon rate of 4.80%; and Class A-4 totaling $27.4 million with a coupon rate of 5.20%. Maturity of the bonds is at varying dates beginning in 2006 through 2015 and were issued with a weighted average maturity of 4.66 years. The proceeds from the securitization were used to repay

PALM HARBOR HOMES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

			approximately $115.7 million of borrowings on the Company’s warehouse revolving debt with the remaining proceeds being used for general corporate purposes, including future origination of new loans. For accounting purposes, this transaction was structured as a securitized borrowing.
			The Company, through its subsidiary CountryPlace, has an agreement with a financial institution for a $200.0 million warehouse borrowing facility to fund chattel loans originated by Company-owned retail superstores. The facility is collateralized by specific consumer loans receivable pledged to the facility. The facility terminates on March 18, 2006; however, amounts outstanding under the facility are effectively settled and re-borrowed on a monthly basis. The Company anticipates that it will renew the facility with similar terms upon expiration in March 2006, although no assurances can be made that it will be successful in this regard. Simultaneously with the completion of the securitization, the warehouse facility was amended to increase the advance against the outstanding principal balance of eligible consumer loans receivable from 80% to 82% and to decrease the interest rate from LIBOR (4.4375% at December 30, 2005) plus 2.00% to LIBOR plus 1.25%. CountryPlace had outstanding borrowings under the warehouse facility of $22.8 million and $106.3 million as of December 30, 2005 and March 25, 2005, respectively. The facility contains certain requirements relating to the performance and composition of the consumer loans receivable pledged to the facility and financial covenants regarding the maintenance of a certain loan delinquency ratio, minimum ratio of liabilities to stockholder’s equity for CountryPlace and a minimum capitalization for CountryPlace, which are customary in the industry. As of December 30, 2005, CountryPlace was in compliance with these requirements. In connection with the warehouse borrowing facility, Palm Harbor agreed to fund in cash to CountryPlace, a yield maintenance payment based on the number of loans funded and up to 30% of each loan loss incurred. During the nine months ended December 30, 2005, the Company funded $849,000 to CountryPlace as a yield maintenance payment and $300,000 for the loan losses incurred. As CountryPlace continues to expand and draw down on its warehouse facility, the Company will fund 18% of any additional loan originations. Should CountryPlace increase its borrowings under the facility to the maximum $200.0 million, CountryPlace will have to originate an additional $82.7 million of new loans, of which $14.9 million will have to be funded through the Company’s operations.
			Upon completion of the securitization, CountryPlace extinguished its interest rate swap agreement on $75.0 million of its variable rate debt which was used to hedge against an increase in variable interest rates. The agreement previously fixed the interest rate on $75.0 million of CountryPlace’s variable rate, long-term warehouse revolving debt to 4.07% per annum. CountryPlace recorded the hedge instrument at fair value as of the end of each fiscal quarter with the effective offsetting portion of the hedge being recorded as a component of accumulated other comprehensive income and the ineffective portion, if any, of the hedge being recorded in the Company’s consolidated statement of operations. During the nine months ended December 30, 2005, CountryPlace had no significant ineffectiveness. The fair value of the hedge upon its extinguishment in fiscal 2006 was immaterial.
			On May 5, 2004, the Company issued $65.0 million aggregate principal amount of 3.25% Convertible Senior Notes due 2024 (the “Notes”) in a private, unregistered offering. Interest on the Notes is payable semi-annually in May and November. On June 8, 2004, the initial purchaser of the Notes exercised its option to purchase an additional $10.0 million aggregate principal amount of the Notes. On September 15, 2004, for the benefit of the Note holders, the Company filed a shelf registration statement covering resales of the Notes

PALM HARBOR HOMES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

and the shares of the Company’s common stock issuable upon the conversion of the Notes. The Notes are senior, unsecured obligations and rank equal in right of payment to all of the Company’s existing and future unsecured and senior indebtedness. Each $1,000 in principal amount of the Notes is convertible, at the option of the holder, at a conversion price of $25.92, or 38.5803 shares of the Company’s common stock upon the satisfaction of certain conditions and contingencies.

7.

Other Comprehensive Income (Loss)

The difference between net income (loss) and total comprehensive income (loss) for the three and nine months ended December 30, 2005 and December 24, 2004 is as follows (in thousands):

		Three Months Ended								Nine Months Ended
		December 30,				December 24,				December 30,				December 24,
		2005				2004				2005				2004
Net income (loss)		$	4,272			$	(4,647	)		$	7,914			$	(5,815	)
Unrealized gain (loss) on securities available-for-sale, net of tax			(125	)			152				183				(640	)
Change in fair value of interest rate hedge, net of tax			—				—				(1,089	)			—
Comprehensive income (loss)		$	4,147			$	(4,495	)		$	7,008			$	(6,455	)

8.			Commitments and Contingencies
			The Company is contingently liable under the terms of repurchase agreements covering independent retailers’ floor plan financing. Under such agreements, the Company agrees to repurchase homes at declining prices over the term of the agreement, generally 12 to 18 months. At December 30, 2005, the Company estimates that its potential obligations under all repurchase agreements were approximately $22.0 million. It is management’s opinion that no material loss will occur from the 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 or cash flows of the Company.

9.			Accrued Product Warranty Obligations
			The Company provides the retail homebuyer a one-year limited warranty covering defects in material or workmanship in home structure, plumbing and electrical systems. The amount of warranty reserves recorded are estimated future warranty costs relating to homes sold, based upon the Company’s assessment of historical experience factors, such as actual number of warranty calls and the average cost per warranty call.

PALM HARBOR HOMES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

The accrued product warranty obligation is classified as accrued liabilities in the condensed consolidated balance sheets. The following table summarizes the changes in accrued product warranty obligations during the nine months ended December 30, 2005 and December 24, 2004 (in thousands):

		December 30,				December 24,
		2005				2004
Accrued warranty balance, beginning of period		$	5,406			$	4,008
Net warranty expense provided			14,067				12,253
Cash warranty payments			(13,705	)			(11,134	)
Accrued warranty balance, end of period		$	5,768			$	5,127

10.			Computation of Earnings Per Share
			Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted net income (loss) per common share is adjusted for any potential dilutive securities that were outstanding during the period. Potential dilutive securities consist of convertible senior notes, regardless of whether the market price trigger has been met. For the three and nine months ended December 24, 2004, and the nine months ended December 30, 2005, the effect of converting the senior notes to 2,894,000 shares of common stock was anti-dilutive, and was, therefore, not considered in determining diluted earnings per share.

For the three months ended December 30, 2005, basic and diluted earnings per share were calculated as follows:

		Three months Ended
		December 30,
		2005
Net income		$	4,272
Interest on contingently convertible senior notes, net of tax			436
Net income for diluted earnings per share calculation		$	4,708
Weighted average number of common shares outstanding — basic			22,832
Incremental share effect from:
Contingently convertible senior notes			2,894
Weighted average number of common shares outstanding — assuming dilution			25,726
Net income per common share:
Basic		$	0.19
Diluted		$	0.18

PALM HARBOR HOMES, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

11. Business Segment Information

The Company operates principally in two segments: (1) factory-built housing, which includes manufactured housing, modular housing and retail operations and (2) financial services, which includes finance and insurance. The following table details net sales and income (loss) from operations by segment for the three and nine months ended December 30, 2005 and December 24, 2004, respectively (in thousands):

		Three Months Ended								Nine Months Ended
		December 30,				December 24,				December 30,				December 24,
		2005				2004				2005				2004
Net sales
Factory-built housing		$	185,629			$	147,676			$	507,697			$	442,108
Financial services			7,564				6,948				22,662				20,719
		$	193,193			$	154,624			$	530,359			$	462,827
Income (loss) from operations
Factory-built housing		$	10,339			$	(3,747	)		$	21,567			$	(223	)
Financial services			3,796				3,351				10,426				9,404
General corporate expenses			(5,219	)			(4,634	)			(15,181	)			(12,526	)
		$	8,916			$	(5,030	)		$	16,812			$	(3,345	)
Interest expense		$	(2,916	)		$	(2,285	)		$	(8,691	)		$	(6,312	)
Equity in earnings (loss) of limited partnership			200				(726	)			1,229				(483	)
Interest income and other			957				421				3,763				604
Income (loss) before income taxes		$	7,157			$	(7,620	)		$	13,113			$	(9,536	)

PART I. Financial Information

Item 1. Financial Statements

See pages 1 through 9.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview

We are one of the nation’s leading manufacturers and marketers of factory-built homes. We market nationwide through vertically integrated operations, encompassing manufactured and modular housing, chattel and mortgage bank financing, as well as insurance. As of December 30, 2005, we operated 18 manufacturing facilities that sell homes through 115 company-owned retail superstores and builder locations and approximately 350 independent retail dealers, builders and developers. Through our 80% owned subsidiary, CountryPlace, we offer chattel and non-conforming land/home mortgages to purchasers of manufactured homes sold by Company-owned retail superstores. Through our investment as the 50% sole limited partner in BSM, we offer conforming and non-conforming mortgages for both modular and manufactured homes. We also provide property and casualty insurance for owners of manufactured and modular homes through our wholly-owned subsidiary, Standard Casualty.

During the second quarter of fiscal 2006, the Federal Emergency Management Agency (“FEMA”) contracted with Palm Harbor to purchase all of our retail inventory of single-section homes at wholesale prices. Additionally, we received a purchase order from FEMA to produce and deliver 400 single-section housing units by December 1, 2005. During the third quarter, 445 homes were shipped to FEMA and revenues were boosted by $12.3 million. As of December 30, 2005, we had shipped 533 homes totaling $15.4 million to FEMA.

Our modular products continued to gain momentum during the third quarter of fiscal 2006 as the favorable response from dealers and builders has begun to translate into an increasing number of customer orders. Sales of our modular products were up over 15 percent from the third quarter of fiscal 2005 and now account for over 25 percent of our recurring revenues. We expect this percentage to increase in future quarters as our modular backlog is produced.

Through the first nine months of fiscal 2006, our revenues were up 15% and operating income was up 600%. Excluding the FEMA business, revenues were up 12% and operating income was up over 500%. Selling, general and administrative expenses were flat with the prior year. The streamlining actions we took in the third quarter of fiscal 2005 have made us more operationally efficient and our efforts in expanding our product line to new markets are gradually improving our revenues. We have now experienced four consecutive quarters of improved profitability.

On July 12, 2005, through our subsidiary CountryPlace, we successfully completed our initial securitization for approximately $141.0 million of loans, which were funded by issuing bonds totaling approximately $118.4 million. The assets are chattel mortgages originated by company-owned retail locations with the collateral being Palm Harbor manufactured homes built in company-owned factories. See “Liquidity and Capital Resources” for further details on this transaction.

The securitization completes another step towards our strategy of expanding our consumer financing capabilities through CountryPlace and our partnership in BSM. During the third quarter of fiscal 2006, CountryPlace originated 596 loans and BSM originated 4,136 loans, 267 of which were

for Palm Harbor customers. For the current quarter, 37% of our retail customers were financed by either CountryPlace or BSM.

During the fourth quarter of fiscal 2005, we began to serve as a general contractor with respect to virtually all aspects of the sale and construction process in certain regions of the country. This could include foundation work, driveways, landscape installations and other amenities the customer requests to complete the home. We anticipate expanding this role to additional geographic regions in future periods.

The following table sets forth certain items of the Company’s condensed consolidated statements of operations as a percentage of net sales for the periods indicated.

		Three Months Ended								Nine months Ended
		December 30,				December 24,				December 30,				December 24,
		2005				2004				2005				2004
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of sales			74.2				76.4				74.4				75.0
Gross profit			25.8				23.6				25.6				25.0
Selling, general and administrative expenses			21.2				26.9				22.4				25.7
Income (loss) from operations			4.6				(3.3	)			3.2				(0.7	)
Interest expense			(1.5	)			(1.5	)			(1.6	)			(1.4	)
Equity in earnings (loss) of limited Partnership			0.1				(0.4	)			0.2				(0.1	)
Interest income and other			0.5				0.3				0.7				0.1
Income (loss) before income taxes			3.7				(4.9	)			2.5				(2.1	)
Income tax benefit (expense)			(1.5	)			1.9				(1.0	)			0.8
Net income (loss)			2.2	%			(3.0	)%			1.5	%			(1.3	)%

The following table summarizes certain key sales statistics as of and for the three and nine months ended December 30, 2005 and December 24, 2004.

		Three Months Ended								Nine months Ended
		December 30,				December 24,				December 30,				December 24,
		2005				2004				2005				2004
Homes sold through Company-owned retail superstores and builder locations			1,154				1,145				3,421				3,734
Homes sold to independent dealers, builders and developers			1,524				853				3,375				2,357
Total new factory-built homes sold			2,678				1,998				6,796				6,091
Average new manufactured home price — retail		$	70,000			$	71,000			$	74,000			$	73,000
Average new manufactured home price — wholesale		$	57,000			$	56,000			$	59,000			$	54,000
Average new modular home price — retail		$	151,000			$	130,000			$	147,000			$	131,000
Average new modular home price — wholesale		$	76,000			$	71,000			$	75,000			$	71,000
Number of Company-owned retail superstores at end of period			111				122				111				122
Number of Company-owned builder locations at end of period			4				4				4				4

The Company’s fiscal year ends on the last Friday in March. The three months ended December 30, 2005 contained 14 weeks and the three months ended December 24, 2004 contained 13 weeks. The nine months ended December 30, 2005 contained 40 weeks and the nine months ended December 24, 2004 contained 39 weeks.

Three Months Ended December 30, 2005 Compared to Three Months Ended December 24, 2004

     Net Sales. Net sales increased 24.9% to $193.2 million in the third quarter of fiscal 2006 from $154.6 million in the third quarter of fiscal 2005. Net sales for the factory-built housing segment increased $12.3 million due to selling 445 homes to FEMA and $25.7 million due to an 11.8% increase in new factory-built homes sold (excluding FEMA business) and an increase in the average selling price of modular homes. The increase in homes sold, net of FEMA, stemmed from increased market share and the increase in average selling prices resulting from customers purchasing larger, more complex homes and the pass through of higher raw material costs. The average retail selling price of a new modular home increased 16.2% from $130,000 in the third quarter of fiscal 2005 to $151,000 in the third quarter of fiscal 2006 and the average wholesale selling price of a new modular home increased 7.0% from $71,000 in the third quarter of fiscal 2005 to $76,000 in the third quarter of fiscal 2006. Financial services revenue increased $0.6 million reflecting an increase in interest income resulting from an increase in consumer loans receivable from $127.9 million at December 24, 2004 to $154.1 million at December 30, 2005.

     Gross Profit. In the quarter ended December 30, 2005, gross profit increased to $49.8 million, or 25.8% of net sales, from $36.5 million, or 23.6% of net sales, in the quarter ended December 24, 2004. Gross profit for the factory-built housing segment increased to 23.7% of net sales in the third quarter of fiscal 2006 compared to 21.2% of net sales in the third quarter of fiscal 2005. This improvement reflects a strengthening of gross margin at our retail superstores, reduced availability of repossessed homes at discounted prices and increased sales prices due to the pass through of higher raw material costs. In addition, gross margin for the third quarter of fiscal 2005 was reduced $2.7 million due to our closing 12 of our least productive sales centers and streamlining our retail operations. An increase in financial services revenue as described above accounts for a $0.6 million increase in gross profit for the financial services segment.

     Selling, General and Administrative Expenses. As a percentage of net sales, selling, general and administrative expenses decreased to 21.2% in the third quarter of fiscal 2006 from 26.9% in the third quarter of fiscal 2005. Selling, general and administrative expenses decreased to $40.9 million in the quarter ended December 30, 2005 from $41.5 million in the quarter ended December 24, 2004. Selling, general and administrative expenses for factory-built housing decreased $1.2 million and were offset by an increase of $0.5 million for general corporate purposes and $0.1 million for financial services. Factory-built selling, general and administrative expenses decreased due to operating 11 fewer company-owned retail superstores and builder locations at December 30, 2005 compared to December 24, 2004 while general corporate expenses increased primarily due to increases in compensation-related expenses and sales incentives.

     Interest Expense. Interest expense increased 27.6% to $2.9 million in the third quarter of fiscal 2006 as compared to $2.3 million in the third quarter of fiscal 2005. This increase was primarily due to $1.3 million in interest expense related to the securitization offset by a $0.8 million decrease in interest expense on the warehouse revolving debt. The warehouse revolving debt interest decreased due to a significant decline in the warehouse revolving debt balance after $115.7 million of borrowings were repaid with proceeds from the securitization.

     Equity in Earnings (Loss) of Limited Partnership. Equity in earnings (loss) of limited partnership increased to $0.2 million of earnings in the third quarter of fiscal 2006 as compared to a loss of $0.7 million in the third quarter of fiscal 2005. This increase was due to a 51.7% increase in the number of loan originations from 2,726 in the third quarter of fiscal 2005 to 4,136 in the third quarter of fiscal 2006.

     Interest Income and Other. Interest income and other increased $0.5 million to $0.9 million in the third quarter of fiscal 2006 as compared to $0.4 in the third quarter of 2005. This increase resulted from increased interest and dividend income due to larger cash and cash equivalents and investments balances as well as higher interest rates.

Nine Months Ended December 30, 2005 Compared to Nine Months Ended December 24, 2004

     Net Sales. Net sales increased 14.6% to $530.4 million in the first nine months of fiscal 2006 from $462.8 million in the first nine months of fiscal 2005. Net sales for the factory-built housing segment increased $15.4 million due to selling 533 homes to FEMA and $50.2 million due to a 2.8% increase in new factory-built homes sold (excluding FEMA business) and an increase in the average selling price of manufactured and modular homes. The increase in homes sold, net of FEMA, stemmed from increased market share and the increase in average selling prices resulting from customers purchasing larger, more complex homes and the pass through of higher raw material costs. The average retail selling price of a new modular home increased 12.2% from $131,000 in the first nine months of fiscal 2005 to $147,000 in the first nine months of fiscal 2006

and the average wholesale selling price of a new modular home increased 5.6% from $71,000 in the first nine months of fiscal 2005 to $75,000 in the first nine months of fiscal 2006. Financial services revenue increased $1.9 million reflecting an increase in interest income resulting from an increase in consumer loans receivable from $127.9 million at December 24, 2004 to $154.1 million at December 30, 2005.

     Gross Profit. For the nine months ended December 30, 2005, gross profit as a percentage of net sales increased to 25.6%, or $135.7 million, from 25.0%, or $115.6 million, in the nine months ended December 24, 2004. Gross profit for the factory-built housing segment increased from 22.8% of net sales for the first nine months of fiscal 2005 to 23.5% for the first nine months of fiscal 2006. This improvement reflects a strengthening of gross margin at our retail superstores, reduced availability of repossessed homes at discounted prices and increased sales prices due to the pass through of higher raw material costs. In addition, gross margin for the first nine months of fiscal 2005 was reduced $2.7 million due to our closing 12 of our least productive sales centers and streamlining our retail operations. An increase in financial services revenue as described above accounts for a $1.5 million increase in gross profit for the financial services segment.

     Selling, General and Administrative Expenses. As a percentage of net sales, selling, general and administrative expenses decreased to 22.4% in the first nine months of fiscal 2006 from 25.7% in the first nine months of fiscal 2005. Selling, general and administrative expenses remained relatively flat at $119.0 million in the nine months ended December 24, 2004 compared to $118.9 million in the nine months ended December 30, 2005. Selling, general and administrative expenses for factory-built housing decreased $2.4 million and were offset by increases in selling, general and administrative expenses for general corporate purposes of $1.9 million and financial services of $0.4 million. The decrease in factory-built housing expenses is the result of operating 11 fewer company-owned retail superstores and builder locations at December 30, 2005 as compared to December 24, 2004. The increase in general corporate expenses is due primarily to increases in compensation-related costs, insurance premiums and sales incentives.

     Interest Expense. Interest expense increased 37.7% to $8.7 million for the nine months ended December 30, 2005 from $6.3 million for the nine months ended December 24, 2004. This increase was primarily due to $2.5 million in interest expense related to the securitization and $0.4 million in interest expense incurred on the $75.0 million convertible senior notes that were issued during the first quarter of fiscal 2005. The increase was offset by a $0.6 million decrease in interest expense on the warehouse revolving debt. The warehouse revolving debt interest decreased due to a significant decline in the warehouse revolving debt balance after $115.7 million of borrowings were repaid with proceeds from the securitization.

     Equity in Earnings (Loss) of Limited Partnership. Equity in earnings (loss) of limited partnership increased to earnings of $1.2 million in the first nine months of fiscal 2006 as compared to a loss of $0.5 million in the first nine months of fiscal 2005. This increase is primarily due to a 43.0% increase in the number of loan originations from 8,484 in the first nine months of fiscal 2005 to 12,136 in the first nine months of fiscal 2006.

     Interest Income and Other. Interest income and other increased $3.2 million to $3.8 million for the nine months ended December 30, 2005 as compared to $0.6 million for the nine months ended December 24, 2004. This increase was primarily due to income earned on a real estate investment totaling $1.5 million and increased interest income of $1.4 million in fiscal 2006. The increase in interest income was due to a larger cash and cash equivalents balance as well as higher interest rates.

Liquidity and Capital Resources

     Net cash used in operating activities decreased to $0.1 million in the first nine months of fiscal 2006 from $62.9 million in the first nine months of fiscal 2005. The decrease in net cash used in operating activities is due to higher profitability, less cash used for originating loans and management of our working capital. We managed our working capital through a decrease in days receivable outstanding, faster cash collections, which resulted from increased sales to independent retailers, increased customer deposits, as evidenced by our increase in backlog and traffic at our retail sales centers, and increases in our days payable outstanding and deferred revenue.

     Net cash used in investing activities increased to $6.2 million in the first nine months of fiscal 2006 as compared to $2.3 million in the first nine months of fiscal 2005. This increase is primarily due to the purchase of an additional $3.0 million of available-for-sale securities in the first nine months of fiscal 2006 as compared to the first nine months of fiscal 2005.

     Net cash provided by financing activities totaled $20.0 million in the first nine months of fiscal 2006 compared to $38.9 million in the first nine months of fiscal 2005. In fiscal 2006, we issued $75.0 million in convertible senior notes and used a portion of the proceeds to reduce our floor plan payable, while in fiscal 2006, we completed our initial securitization by issuing bonds totaling $118.4 million and used a portion of the proceeds to reduce our warehouse revolving debt.

     We have an agreement with a financial institution for a $70.0 million floor plan facility. The advance rate for the facility is 90% of manufacturer’s invoice. This facility is used to finance a portion of the new home inventory at our retail superstores and is secured by new home inventory and a portion of receivables from financial institutions. The interest rate on the facility is prime (7.25% at December 30, 2005) or prime plus 1.0% to 3.0% for aged units, of which we had none as of December 30, 2005. The floor plan facility contains certain provisions requiring us to maintain minimum amounts of liquidity, profitability, inventory turns and tangible net worth in order to borrow against the facility. As of December 30, 2005, we were in compliance with these provisions. Subsequent to December 30, 2005, we amended the agreement with the financial institution to revise one of these provisions, to change the interest rate to prime plus 0.6% and to extend the expiration of the agreement from May 25, 2007 to March 30, 2009. We had $25.2 million and $30.9 million outstanding under our floor plan credit facility at December 30, 2005 and March 25, 2005, respectively.

     On May 5, 2004, Palm Harbor issued $65.0 million aggregate principal amount of 3.25% Convertible Senior Notes due 2024 (the “Notes”) in a private, unregistered offering. Interest on the Notes is payable semi-annually in May and November. On June 8, 2004, the initial purchaser of the Notes exercised its option to purchase in additional $10.0 million aggregate principal amount of the Notes. On September 15, 2004, for the benefit of the Note holders, we filed a shelf registration statement covering resales of the Notes and the shares of Palm Harbor’s common stock issuable upon the conversion of the Notes. The Notes are senior, unsecured obligations and rank equal in right of payment to all of our existing and future unsecured and senior indebtedness. Each $1,000 in principal amount of the Notes is convertible, at the option of the holder, at a conversion price of $25.92, or 38.5803 shares of Palm Harbor’s common stock upon the satisfaction of certain conditions and contingencies.

     On July 12, 2005, we, through our subsidiary CountryPlace, completed our initial securitization for approximately $141.0 million of loans, which was funded by issuing bonds totaling approximately $118.4 million. The bonds were issued in four different classes: Class A-1 totaling

$36.3 million with a coupon rate of 4.23%; Class A-2 totaling $27.4 million with a coupon rate of 4.42%; Class A-3 totaling $27.3 million with a coupon rate of 4.80%; and Class A-4 totaling $27.4 million with a coupon rate of 5.20%. Maturity of the bonds is at varying dates beginning in 2006 through 2015 with a weighted average maturity of 4.66 years. The proceeds from the securitization were used to repay approximately $115.7 million of borrowings on our warehouse revolving debt with the remaining proceeds being used for general corporate purposes, including future origination of new loans. For accounting purposes, this transaction was structured as a securitized borrowing.

     CountryPlace has an agreement with a financial institution for a $200.0 million warehouse facility to fund chattel loans originated by Company-owned retail superstores, replacing its previous warehouse facility. The facility is collateralized by specific consumer loans receivable pledged to the facility. The facility terminates on March 18, 2006, however amounts outstanding under the facility are effectively settled and re-borrowed on a monthly basis. We anticipate that we will renew the facility with similar terms upon expiration in March 2006, although no assurances can be made that we will be successful in this regard. Simultaneously with the completion of the securitization, the warehouse facility was amended to increase the advance against the outstanding principal balance of eligible consumer loans receivable from 80% to 82% and to decrease the interest rate from LIBOR (4.4375% at December 30, 2005) plus 2.00% to LIBOR plus 1.25%. CountryPlace had outstanding borrowings under the warehouse facility of $22.8 million and $106.3 million as of December 30, 2005 and March 25, 2005, respectively. The facility contains certain requirements relating to the performance and composition of the consumer loans receivable pledged to the facility and financial covenants regarding the maintenance of a certain loan delinquency ratio, minimum ratio of liabilities to stockholder’s equity for CountryPlace and a minimum capitalization for CountryPlace, which are customary in the industry. As of December 30, 2005, CountryPlace was in compliance with these requirements. In connection with the warehouse borrowing facility, we agreed to fund in cash to CountryPlace, a yield maintenance payment based on the number of loans funded and up to 30% of each loan loss incurred. During the first nine months of fiscal 2006, we funded $849,000 to CountryPlace as a yield maintenance payment and $300,000 for the loan losses incurred. As CountryPlace continues to expand and draw down on its warehouse facility, we will fund 18% of any additional loan originations. Should CountryPlace increase its borrowings under the facility to the maximum $200.0 million, CountryPlace will have to originate an additional $82.7 million of new loans, of which $14.9 million will have to be funded through our operations.

     Upon completion of the securitization, CountryPlace extinguished its interest rate swap agreement on $75.0 million of its variable rate debt which it used to hedge against an increase in variable interest rates. The agreement previously fixed the interest rate on $75.0 million of CountryPlace’s variable rate, long-term warehouse revolving debt to 4.07% per annum. CountryPlace recorded the hedge instrument at fair value as of the end of each fiscal quarter with the effective offsetting portion of the hedge being recorded as a component of accumulated other comprehensive income and the ineffective portion, if any, of the hedge being recorded in our consolidated statement of operations. During the nine months ended December 30, 2005, CountryPlace had no significant ineffectiveness. The fair value of the hedge upon its extinguishment in fiscal 2006 was immaterial.

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

Critical Accounting Policies

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

     Details regarding our critical accounting policies are described fully in our fiscal year 2005 Form 10-K filed with the Securities and Exchange Commission. Beginning in the second quarter of fiscal 2006, management believes the following critical accounting policy also affects its more significant judgments and estimates used in the preparation of its consolidated financial statements.

     Securitized Financing. Through CountryPlace, we engage in securitizations to finance our loan originations related to the retail sale of our manufactured homes. The securitized asset remains on our consolidated balance sheets along with the recorded liability that evidences the securitized transaction. Interest income and servicing fees received on the securitized loans are recorded as income when earned. An allowance for loan losses is maintained on the loans.

Forward-Looking Information/Risk Factors

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

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

     Our retail customers generally secure financing from third party lenders, which have been negatively affected by adverse loan experience. Conseco Finance Servicing Corp. and The Associates, which had provided financing for our customers, have withdrawn from the manufactured housing finance business. Reduced availability of such financing is currently having an adverse effect on the manufactured housing business and our home sales. Availability of financing is dependent on the lending practices of financial institutions, financial markets, governmental policies and economic conditions, all of which are largely beyond our control. Quasi-governmental agencies such as Fannie Mae, Freddie Mac and HUD, which are important purchasers of loans from financial institutions, have tightened standards relating to the manufactured housing loans that they will buy. Additionally, the manufactured housing portfolios of these agencies are somewhat unseasoned and if they do not perform, our results of operations could be adversely affected. Most states classify manufactured homes as personal property rather than real property for purposes of taxation and lien perfection, and interest rates for manufactured homes are generally higher and the terms of the loans shorter than for site-built homes. Financing for the purchase of manufactured homes is often

more difficult to obtain than conventional home mortgages. There can be no assurance that affordable retail financing for manufactured homes will continue to be available on a widespread basis. If third party financing were to become unavailable or were to be further restricted, this could have a material adverse effect on our results of operations.

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

     Although CountryPlace has originated loans since 1995, it has limited loan servicing and collections experience. In 2002, it implemented new systems to service and collect the portfolio of loans it originates. The management of CountryPlace has industry experience in managing, servicing and collecting loan portfolios; however, many borrowers require notices and reminders to keep their loans current and to prevent delinquencies and foreclosures. A substantial increase in the delinquency rate that results from improper servicing or mortgage loan performance in general could adversely affect the profitability and cash flow from the loan portfolio in CountryPlace.

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

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

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

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

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

     Our results of operations can be affected by the pricing and availability of raw materials. In fiscal 2005 and 2004, for example, we experienced an increase in prices of our raw materials of approximately 6% and 14%, respectively. Although we attempt to increase the sales prices of our homes in response to higher materials costs, such increases typically lag behind the escalation of materials costs. Three of the most important raw materials used in our operations, lumber, gypsum wallboard and insulation, have experienced significant price fluctuations in the past fiscal year. Although we have not experienced any shortage of such building materials today, there can be no assurance that sufficient supplies of lumber, gypsum wallboard and insulation, as well as other materials, will continue to be available to us on terms we regard as satisfactory.

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

     We finance a portion of our new inventory at our retail superstores through wholesale “floor plan” financing arrangements. Through these arrangements, financial institutions provide us with a loan for the purchase price of the home. Since the beginning of the industry downturn in 1999,

several major floor plan lenders have exited the floor plan financing business. Although we currently have a floor plan facility with a financial institution totaling $70 million, there can be no assurance that we will continue to have access to such facility or that we will not be forced to reduce our new home inventory at our retail superstores.

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

     In accordance with customary practice in the manufactured housing industry, we enter into repurchase agreements with various financial institutions pursuant to which we agree, in the event of a default by an independent retailer in its obligation to these credit sources, to repurchase manufactured homes at declining prices over the term of the agreements, typically 12 to 18 months. The difference between the gross repurchase price and the price at which the repurchased manufactured homes can then be resold, which is typically at a discount to the original sale price, is an expense to us. Thus, if we were obligated to repurchase a large number of manufactured homes in the future, this would increase our costs, which could have a negative effect on our earnings. Tightened credit standards by lenders and more aggressive attempts to accelerate collection of outstanding accounts with retailers could result in defaults by retailers and consequently repurchase obligations on our part may be higher than has historically been the case. During the third quarter of fiscal 2006 and 2005, net losses incurred under these repurchase agreements totaled $71,000 and $92,000, respectively.

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

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

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

     Approximately 54% of our outstanding common stock is beneficially owned or controlled by our Chairman Emeritus, Lee Posey and Capital Southwest Corporation and its affiliates. As a result, these shareholders, acting together, are able to determine the outcome of elections of our directors and thereby control the management of our business.

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

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

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

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

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

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

	•		access to capital markets
	•		the level and stability of interest rates;
	•		unemployment trends;
	•		the availability of retail financing;
	•		the availability of wholesale financing;
	•		housing supply and demand;
	•		industry availability of used or repossessed manufactured homes;
	•		international tensions and hostilities;
	•		levels of consumer confidence;
	•		inventory levels;
	•		regulatory and zoning matters; and
	•		changes in general economic conditions.

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

We are concentrated geographically, which could harm our business.

          In the third quarter of fiscal 2006, approximately 28% of our revenues were generated in Florida, approximately 17% of our revenues were generated in Texas and approximately 10% of our revenues were generated in Arizona. A decline in the demand for manufactured housing in these three states and/or a decline in the economies of these three states could have a material adverse effect on our results of operations.

We are a limited partner in BSM Financial, L.P. and if its business is adversely affected, our results of operations may also be adversely affected.

          We have an investment of approximately $5.4 million in a mortgage banking firm, BSM Financial L.P. (“BSM”). Through our investment as the sole limited partner in BSM, we offer conforming and non-conforming mortgages. As a limited partner, we do not have the legal authority to manage or control BSM’s operations. Therefore, if BSM’s operations are not financially successful or their portfolio does not perform as expected, our results of operations may also be adversely affected and we could lose some or all of our investment in BSM.

Item 3. Quantitive and Qualitative Disclosure About Market Risk

We are exposed to market risks related to fluctuations in interest rates on our variable rate debt, which consists primarily of our liabilities under retail floor plan financing arrangements and warehouse revolving debt, and our fixed rate convertible senior notes and loans receivable balances.

For variable interest rate obligations, changes in interest rates generally do not impact fair market value, but do affect future earnings and cash flows. Assuming our and CountryPlace’s level of variable rate debt as of December 30, 2005 is held constant, each one percentage point increase in interest rates occurring on the first day of the year would result in an increase in interest expense for the coming year of approximately $0.5 million.

For fixed rate loans receivable, changes in interest rates do not change future earnings and cash flows from the receivables. However, changes in interest rates could affect the fair market value of the loan portfolio. Assuming CountryPlace’s level of loans held for investment as of December 30, 2005 is held constant, a 10% increase in average interest rates would decrease the fair value of CountryPlace’s portfolio by approximately $3.7 million. This decrease in fair value is not linear to changes in interest rates and may or may not have any impact on the realizable amount of the receivables. For our fixed rate convertible senior notes and securitized borrowings, changes in interest rates could affect the fair market value of the related debt. Assuming the amount of convertible senior notes and securitized borrowings as of December 30, 2005 is held constant, a 10% decrease in interest rates would increase the fair value of the notes by approximately $4.2 million.

CountryPlace is exposed to market risk related to the accessibility and terms of financing in the asset-backed securities market. On July 12, 2005, CountryPlace successfully completed its initial secruitized financing of approximately $141.0 million of loans. CountryPlace intends to continue to build its loan portfolio as a means to obtain long term fixed interest rate funding. The inability to continue to securitize its loans would require CountryPlace to seek other sources of funding or to reduce or eliminate its loan originations if other sources of funding are not available.

Item 4. Controls and Procedures

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), the effectiveness of the design and operation of the Company’s our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934). Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures are adequately designed to ensure that the information required to be disclosed in this report has been accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding such required disclosure and to ensure that the Company’s disclosure controls and procedures are functioning effectively.

During the fiscal quarter ended December 30, 2005, there were no changes to the internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. Other Information

Item 1. Legal Proceedings — Not applicable

Item 2. Unregistered Sales of Equity in Securities and Use of Proceeds — Not applicable

Item 3. Defaults upon Senior Securities — Not applicable

Item 4. Submission of Matters to a Vote of Security Holders — Not applicable

Item 5. Other information — Not applicable

Item 6. Exhibits

                  (a) The following exhibits are filed as part of this report:

		Exhibit No.				Description
			31.1			Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
			31.2			Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
			32.1			Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
			32.2			Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements 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.

Date: February 6, 2006		Palm Harbor Homes, Inc.
		(Registrant)