UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a)

of the Securities Exchange Act of 1934

Filed by the Registrant  x

Filed by a Party other than the Registrant  ¨

Check the appropriate box:

PALM HARBOR HOMES, INC.

(Name of Registrant as Specified in Its Charter)

Not Applicable

(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):

$

PALM HARBOR HOMES, INC.

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

July 25, 2007

To Our Shareholders:

You are invited to attend the annual meeting of shareholders of Palm Harbor Homes, Inc. which will be held at the Company’s headquarters, 15303 Dallas Parkway, Suite 800, Addison, Texas, on Wednesday, July 25, 2007, at 10:00 a.m., Dallas time. The purpose of the meeting is to vote on the following proposals:

The board of directors has fixed the close of business on May 29, 2007 as the record date for determining shareholders entitled to receive notice of and to vote at the annual meeting. A form of proxy card and a copy of our Annual Report to Shareholders for the fiscal year ended March 30, 2007 are enclosed with this notice of annual meeting and proxy statement.

Your vote is important. Accordingly, you are asked to vote whether or not you plan to attend the annual meeting. You may vote (i) by mail by marking, signing, dating and returning the accompanying proxy card in the postage-paid envelope we have provided, or returning it to Palm Harbor Homes, Inc. c/o AST, 59 Maiden Lane, Plaza Level, New York, New York 10273-0923, (ii) by the Internet at www.voteproxy.com, (iii) by phone by calling 1-800-776-9437 or (iv) attending the annual meeting in person. If you plan to attend the annual meeting to vote in person and your shares are registered with our transfer agent, American Stock Transfer & Trust Company, or in the name of a broker or bank, you must secure a proxy from the broker or bank assigning voting rights to you for your shares.

BY ORDER OF THE BOARD OF DIRECTORS

Kelly Tacke

Executive Vice President and Secretary

June 12, 2007

Addison, Texas

PROXY STATEMENT

ANNUAL MEETING OF SHAREHOLDERS

July 25, 2007

Palm Harbor Homes, Inc.

15303 Dallas Parkway, Suite 800

Addison, Texas 75001

The board of directors is soliciting proxies to be used at the 2007 annual meeting of shareholders to be held at the Company’s headquarters, 15303 Dallas Parkway, Suite 800, Addison, Texas, on Wednesday, July 25, 2007, at 10:00 a.m., Dallas time. This proxy statement, accompanying proxy and annual report to shareholders for the fiscal year ended March 30, 2007 are first being mailed to shareholders on or about June 20, 2007. Although the annual report is being mailed to shareholders with this proxy statement, it does not constitute part of this proxy statement.

Who Can Vote

Only shareholders of record as of the close of business on May 29, 2007 are entitled to notice of and to vote at the annual meeting. As of May 29, 2007, we had 22,851,793 outstanding shares of common stock, our only outstanding voting security. Each shareholder of record of our common stock on the record date is entitled to one vote on each matter properly brought before the annual meeting for each share of common stock held. If you hold shares of our common stock through any of our stock purchase or savings plans, you will receive voting instructions from the plans’ administrator. Please sign and return those instructions promptly to assure that your shares are represented at the annual meeting.

In accordance with our bylaws, a list of shareholders entitled to vote at the annual meeting will be available at the annual meeting and for 10 days prior to the annual meeting, between the hours of 9:00 a.m. and 4:00 p.m. local time at our offices located at 15303 Dallas Parkway, Suite 800, Addison, Texas.

How You May Vote

You may vote using any of the following methods:

You may revoke your proxy at any time before it is exercised by:

Voting by proxy will in no way limit your right to vote at the annual meeting if you later decide to attend in person. If you hold common shares through any of our share purchase or saving plans, you will receive voting instructions. Please sign and return those instructions promptly to assure that your shares are represented at the annual meeting. If your shares are held in the name of a bank, broker or other holder of record, you must obtain a proxy, executed in your favor, to be able to vote at the annual meeting. If no direction is given and the proxy is validly executed, the shares represented by the proxy will be voted as recommended by the board of directors. The persons authorized under the proxies will vote upon any other business that may properly come before the annual meeting according to their best judgment to the same extent as the person delivering the proxy would be entitled to vote. We do not anticipate that any other matters will be raised at the annual meeting.

Required Vote

The presence, in person or represented by proxy, of the holders of a majority of our outstanding common stock (11,425,897 shares) entitled to vote at the annual meeting is necessary to constitute a quorum at the annual meeting. However, if a quorum is not present at the annual meeting, the shareholders, present in person or represented by proxy, have the power to adjourn the annual meeting until a quorum is present or represented. Abstentions and broker “non-votes” are counted as present and entitled to vote for purposes of determining a quorum at the annual meeting. A broker “non-vote” occurs when a nominee holding common shares for a beneficial owner does not vote on a particular proposal because the nominee does not have discretionary voting power with respect to that item and has not received instructions from the beneficial owner.

A plurality of the votes duly cast is required for the election of directors (i.e., the nominees receiving the greatest number of votes will be elected). Abstentions and broker non-votes are not counted for purposes of the election of directors. All of the nominees for director served as our directors during the fiscal year ended March 30, 2007. In order to ratify the appointment of Ernst & Young LLP as our independent auditors for the year ending March 28, 2008, the proposal must receive the favorable vote of a majority of the shares of common stock entitled to vote and represented at the annual meeting.

Cost of Proxy Solicitation

The cost of soliciting proxies will be borne by us. Proxies may be solicited on our behalf by our directors, officers or employees in person, by telephone, facsimile or by other electronic means. They will not be separately compensated for their services. In accordance with SEC regulations and the regulations of The Nasdaq Stock Market, we will also reimburse brokerage firms and other custodians, nominees and fiduciaries for their expenses incurred in sending proxies and proxy materials to the beneficial owners of shares of our common stock and soliciting proxies from them.

PROPOSAL ONE: ELECTION OF DIRECTORS

At the annual meeting, 10 directors will be elected by the shareholders to serve until their successors have been duly elected and qualified, or until the earliest of their death, resignation or retirement.

The persons named in the enclosed proxy will vote your shares as you specify on the enclosed proxy. If you return your properly executed proxy but fail to specify how you want your shares voted, the shares will be voted in favor of the nominees listed below. The non-employee directors have proposed the following nominees for election as directors at the annual meeting. Each of the nominees, other than Mr. Ashbaugh, is currently a member of the board of directors.

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Nominees

Larry H. Keener, Chairman of the Board of Directors since March 2005. Director since 1995. Chief Executive Officer since June 1997 and President since June 1994. Chief Operating Officer from June 1994 to June 1997. Division President from June 1989 to May 1994. Director from 1980 to May 1994. Age: 57.

Lee Posey, Chairman Emeritus since March 2005. Chairman of the Board of Directors from December 1977 to March 2005. Chief Executive Officer from December 1977 to June 1997. President from December 1977 to December 1993. President of Redman Industries, Inc. from 1967 to 1977. Age: 72.

William M. Ashbaugh, Vice President from August 2001 to July 2005 and Senior Vice President of Capital Southwest Corporation since July 2005. Managing Director of Hoak Breedlove Wesneski & Co. from April 1998 to August 2001. Managing Director of Principal Financial Securities, Inc. from March 1997 to February 1998. Managing Director of Southwest Securities from October 1995 to March 1997. Director of CMI Holding Company, Inc., Dennis Tool Company and Via Holdings, Inc. Age: 52.

Jerry D. Mallonee, Director since 2000. Retired from Arthur Andersen & Co. in December 1998 as the Tax Managing Partner of Pacific Northwest. Mr. Mallonee had been employed by Arthur Andersen from February 1967 until his retirement. Since July 2002, Mr. Mallonee has been a financial advisor for Carter Financial Management. Age: 66.

Frederick R. Meyer, Director since 1994. Chairman of the Board of Aladdin Industries LLC from July 1985 to March 2005. President and Chief Executive Officer of Aladdin Industries LLC from October 1995 to May 1999 and from May 1987 to September 1994. President of Tyler Technologies, Inc. from July 1983 to December 1986. Director of SWS Group, Inc. and Westwood Holdings Group, Inc. Age: 79.

Elysia Holt Ragusa, Director since October 2005. President and Chief Operating Officer of The Staubach Company since 2001. President of Staubach Southwest Corporate Services from 1994 through 2001. Age: 56.

Walter D. Rosenberg, Jr., Director since 1977. Managed his personal portfolio since June 1991. Chairman of the Board and Chief Executive Officer of Duro Metal Manufacturing Company, Inc. from December 1957 to June 1991. Age: 80.

A. Gary Shilling, Director since 1995. President of A. Gary Shilling & Co., Inc. since 1978. Senior Vice President and Chief Economist of White, Weld & Co., Inc. from 1972 to 1978. Director of Heartland Funds. Age: 70.

W. Christopher Wellborn, Director since July 2005. Chief Operating Officer of Mohawk Industries, Inc. since November 2005. President of Dal-Tile, Inc. from March 2002 through October 2005. Executive Vice President, Chief Financial Officer and Assistant Secretary of Dal-Tile, Inc. from August 1997 through March 2002. Senior Vice President and Chief Financial Officer of Lenox, Inc. from June 1993 to August 1997. Director of Mohawk Industries, Inc. Age: 52.

John H. Wilson, Director since 1994. President of U.S. Equity Corporation since 1983. Director of Capital Southwest Corporation, Xponential, Inc. and Encore Wire Corporation. Age: 64.

The board of directors has determined that Messrs. Ashbaugh, Mallonee, Meyer, Rosenberg, Shilling, Wellborn, Wilson and Ms. Ragusa are “independent” as defined by the Nasdaq Stock Market Listing Standards and that Messrs. Keener and Posey are not independent because they are our employees.

Pursuant to the terms of a Credit Modification Agreement dated July 31, 1995, entered into by us and Capital Southwest Corporation and Capital Southwest Venture Corporation, we agreed that so long as Capital Southwest and Capital Southwest Venture Corporation own in the aggregate at least 5% of our common stock, we will cause a designee of Capital Southwest to be elected to our board of directors. Mr. Ashbaugh is Capital Southwest’s designee.

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The board of directors unanimously recommends that you vote FOR the election of directors as set forth in Proposal One.

GOVERNANCE OF THE COMPANY

Pursuant to the Florida Business Corporation Act, our articles of incorporation and our bylaws, our business, property and affairs are managed under the direction of the board of directors. During the fiscal year ended March 30, 2007, the board of directors held four meetings. No director attended less than 75% of the total number of board meetings and meetings of committees on which he served that were held while the director was a committee member. Our directors are strongly encouraged to attend our annual meeting and all of our 2006 directors attended our 2006 annual meeting of shareholders.

Committees of the Board of Directors

During the fiscal year ended March 30, 2007, the board of directors had three ongoing committees: an audit committee, a compensation committee and a nominating committee. The members of our board committees are as follows:

Audit Committee

Our audit committee members are Jerry Mallonee (chairman), Frederick Meyer and John Wilson, all “independent directors” as required and defined by the Sarbanes-Oxley Act of 2002 and The Nasdaq Stock Market Listing Standards. Our board has adopted a written charter for the audit committee setting forth the duties and responsibilities of the committee. A copy of the audit committee charter is available on our website at www.palmharbor.com.

The audit committee assists the board with its oversight responsibilities to shareholders by monitoring (1) the quality and integrity of our financial statements; (2) the independence, qualification and performance of our independent auditors; (3) our accounting and financial reporting processes; and (4) audits of our financial statements. The committee has the responsibility for selecting our independent auditors and pre-approving audit and non-audit services. The audit committee met four times during the fiscal year ended March 30, 2007. The board has determined that Frederick Meyer meets the definition of audit committee financial expert promulgated by the Securities and Exchange Commission and is independent, as defined in the Nasdaq Stock Market Listing Standards.

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Any complaint regarding accounting, internal accounting controls or auditing matters should be mailed to the Chairman of the Palm Harbor Homes Audit Committee c/o Craddock Reneker and Davis LLP, 3100 Monticello Avenue, Suite 550, Dallas, Texas 75205. Written complaints may be submitted anonymously.

Compensation Committee

The compensation committee members are William Thomas (chairman), John H. Wilson and Frederick Meyer, all independent directors. Upon Mr. Thomas’ retirement effective July 25, 2007, and if elected, Mr. Ashbaugh shall become chairman of the compensation committee. The compensation committee (1) discharges the board’s responsibilities to establish the compensation of our executives; (2) produces an annual report on executive compensation for inclusion in our annual proxy statement; and (3) provides general oversight for our compensation structure, including our compensation plans and benefits programs. The compensation committee met once during the fiscal year ended March 30, 2007. Our compensation committee charter is posted on our website at www.palmharbor.com.

Nominating Committee

The nominating committee members are Dr. A. Gary Shilling (chairman) and Mr. Walter D. Rosenberg, Jr., both independent directors, as defined by the Nasdaq Stock Exchange Listing Standards. The nominating committee has the responsibility to (1) oversee the nomination of individuals to the board; (2) identify individuals qualified to become board members and recommend such nominees; and (3) insure that the board is appropriately constituted including advising the board on matters of board membership and committee membership. The nominating committee will consider nominations made by shareholders. Shareholders should send nominations to our corporate Secretary, Kelly Tacke. Any shareholder nominations proposed for consideration by the nominating committee should include the nominee’s name and qualifications for board membership. See “Shareholder Proposals” on page 14. The nominating committee’s charter is available on our website at www.palmharbor.com.

The nominating committee seeks to identify, and the board of directors selects, director candidates who (1) have significant business or public experience that is relevant and beneficial to the board of directors and the company, (2) are willing and able to make a sufficient time commitment to the company’s affairs in order to perform effectively the duties of a director, including regular attendance of board of directors meetings and committee meetings, (3) are committed to the company’s long-term growth and profitability, (4) are individuals of character and integrity, (5) are individuals with inquiring minds who are willing to speak their minds and challenge and stimulate management and (6) represent the interests of the company as a whole and not only the interests of a particular shareholder or group. The evaluation process for nominees is the same regardless of the source of the recommendation. The nominating committee met once during the fiscal year ended March 30, 2007.

Pricing Committee

The pricing committee is authorized to exercise all the powers of the board of directors in connection with the offering, issuance and sale of our securities. The pricing committee did not meet in fiscal 2007.

Communication With Directors

Shareholders who wish to send communications to the board should address such communications to the Chairman of the Palm Harbor Homes Audit Committee c/o Craddock Reneker and Davis LLP, 3100 Monticello Avenue, Suite 550, Dallas, TX 75205. Communications to the board will be referred to Jerry Mallonee or other director specified provided that advertisements, solicitations for periodicals or other subscriptions, and similar communications generally are not forwarded to board members.

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Compensation of Directors

Our non-employee directors receive an annual retainer fee of $20,000. For each board meeting attended in person, they receive $2,500 and they receive $500 for each committee meeting attended (other than committee meetings held on the same day as board meetings).

Compensation Committee Interlocks and Insider Participation

None of our executive officers served as a member of the compensation committee of our board of directors. None of our executive officers served as a director of any other entity whose executive officer served as a member of our compensation committee.

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SHARE OWNERSHIP OF PRINCIPAL SHAREHOLDERS,

DIRECTORS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial ownership of our shares of common stock as of May 29, 2007 by (1) each person known by us to own beneficially more than 5% of our outstanding common stock, (2) each current director and each nominee for director, (3) each named executive officer, and (4) all current directors and named executive officers as a group. Unless otherwise indicated, the shares listed in the table are owned directly by the individual or entity, or by both the individual and the individual’s spouse. Except as otherwise noted, the individual or entity had sole voting and investment power as to shares shown or, in the case of the individual, the voting power is shared with the individual’s spouse.

Certain of the shares listed below are deemed to be owned beneficially by more than one shareholder under SEC rules. Unless otherwise indicated, the address of each person listed below is c/o Palm Harbor Homes, Inc., 15303 Dallas Parkway, Suite 800, Addison, Texas 75001.

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Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than 10% of our common stock, to file reports of holdings and transactions in our securities with the SEC and to furnish us with copies of all such reports. Mr. Welborn, one of our directors, was late in filing one Form 4 with the SEC. Based solely upon a review of the reports furnished to us with respect to the fiscal year ended March 30, 2007, we believe that all of our other directors and executive officers timely complied with all SEC filing requirements.

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EXECUTIVE OFFICERS

Our executive officers serve at the discretion of the board of directors and are appointed annually by the board of directors. Set forth below are the names, ages and positions of our executive officers.

Information concerning the business experience of Mr. Keener is provided in “Proposal One: Election of Directors.” Set forth below is a description of the background of Ms. Tacke. There is no family relationship between any of our directors or executive officers.

Kelly Tacke has served as Executive Vice President since June 2005 and Chief Financial Officer since October 1993, and as Secretary since March 1997. From August 1979 through September 1993, Ms. Tacke was employed by PriceWaterhouseCoopers LLP where she most recently served as a Senior Audit Manager.

EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

Overview of Compensation Program

Our compensation committee (for purposes of this analysis, the “Committee”) of the board has responsibility for establishing, implementing and monitoring adherence with our compensation philosophy. The Committee ensures that the total compensation paid to our executive leadership team is fair and reasonable. Generally, the types of compensation and benefits provided to members of the executive leadership team, including the named executive officers, are similar to those provided to other executive officers. Throughout this proxy statement, the individuals who served as President and Chief Executive Officer and Chief Financial Officer during fiscal 2007, are referred to as the “named executive officers.”

Role of Executive Officers in Compensation Decisions

The Committee makes all compensation decisions for our executive officers (which includes the named executive officers).

Larry Keener, our Chief Executive Officer, annually reviews the performance of our Chief Financial Officer. The conclusions reached and recommendations based on these reviews, including with respect to salary adjustments and annual bonus and equity award amounts, are presented to the Committee. The Committee can exercise its discretion in modifying any recommended adjustment or award. The Committee reviews the performance of our Chief Executive Officer.

Annual Cash Compensation

We pay our named executive officers commensurate with their experience and responsibilities. Cash compensation for our Chief Executive Officer for fiscal 2007 consisted of base salary and a guaranteed quarterly bonus. Our Chief Financial Officer also received an award of shares.

Base Salary. Each of our named executive officers receives a base salary to compensate him or her for services performed during the year. When determining the base salary for each of our named executive officers, the Committee considers the performance of the executive officer and the experience of the executive officer in his or her position. The base salaries of our named executive officers are established annually by the Committee. The named executive officers are eligible for annual increases in their base salaries as a result of company

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performance, individual performance and any added responsibility since the last salary increase. The base salaries paid to our named executive officers in fiscal 2007 are set forth below in the “Executive Compensation — Summary of Compensation Table.”

Annual Bonus. In light of the unfavorable condition of the manufactured housing industry and its effect on the company’s operating results, the Committee paid each of the named executive officers a quarterly bonus in an amount believed to be appropriate in view of the company’s financial limitations and sufficient to insure their continued service as employees of the company. Mr. Keener received a bonus of $112,482 for the first quarter, no bonus in the second quarter and $50,000 in each of the third and fourth quarters of fiscal 2007. Ms. Tacke’s quarterly bonuses were based upon the recommendation of Mr. Keener to the Committee.

Perquisites and Other Personal Benefits

Mr. Keener receives a $6,000 car allowance and both of our named executive officers receive matching contributions with respect to our 401(k) retirement savings plans. Executive officers are also eligible to participate in all of our employee benefit plans, such as medical, dental, group life, disability and accidental death and dismemberment insurance, in each case on the same basis as other employees.

REPORT OF THE COMPENSATION COMMITTEE

The committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the committee recommended to the board of directors that Compensation Discussion and Analysis be included in this proxy statement.

Summary Compensation Table

The following table summarizes the compensation paid by us for the fiscal year ended March 30, 2007 to the Chief Executive Officer and the executive officers who received a total annual salary and bonus in excess of $100,000 in fiscal year ended March 30, 2007.

Summary Compensation Table

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OUTSTANDING EQUITY AWARDS

The following tables sets forth certain information as of March 30, 2007 with respect to the value of all stock awards held by the named executive officers.

Outstanding Equity Awards at Fiscal Year-End

STOCK VESTED

The following table sets forth certain information with respect to shares awarded to the named executive officers that vested during the year ended March 30, 2007.

Compensation Arrangements

Pursuant to the compensation agreement we entered into with Lee Posey, our Chairman Emeritus, Mr. Posey will receive $100,000 per year for his services to our Company for the eight years from July 1, 2005 through June 30, 2013. The agreement further provides that Mr. Posey’s beneficiary shall receive payments in the same amount and frequency in the event of Mr. Posey’s death prior to June 30, 2013.

Section 162(m) of the Internal Revenue Code of 1986, as amended, enacted in 1993, precludes a public corporation from taking a deduction in 1994 or subsequent years for compensation in excess of $1 million paid to its chief executive officer or any of its four other highest-paid officers unless such compensation is performance-based compensation as defined in Section 162(m) of the Code. Our corporate bonus plan is a performance-based plan.

Indemnification Agreements

We have entered into indemnification agreements with certain of our officers and each of our directors, requiring us to indemnify such persons against judgments, claims, damages, losses and expenses incurred as a result of the fact that such officer or director, in his or her capacity as such, is made or threatened to be made a party to any suit or proceeding, to the maximum extent permitted by Florida law. The indemnification agreements provide for the advancement of expenses to such officers and directors in connection with any such suit or proceeding.

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REPORT OF THE AUDIT COMMITTEE

The audit committee is composed of three independent directors and operates under a written charter adopted by the board of directors. The board has determined that each committee member is independent as defined by the Sarbanes-Oxley Act of 2002 and the Nasdaq listing standards as currently in effect.

Pursuant to the audit committee charter, the audit committee will assist the board of directors in monitoring (1) the integrity of the financial statements of the company, (2) the independence, qualifications, performance of the company independent auditors, (3) the company’s accounting and financial reporting processes; and (4) audits of the company’s financial statements. Management has the primary responsibility for the financial reporting process, including the system of internal controls, and for the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). Our independent registered public accounting firm is responsible for auditing those financial statements and expressing an opinion as to their conformity with GAAP. The committee’s responsibility is to oversee and review these processes. We held four meetings during fiscal 2007. The meetings were designed, among other things, to facilitate and encourage communication among the committee, management, the internal audit function and our independent registered pubic accounting firm, Ernst & Young LLP. We discussed with Ernst & Young LLP the overall scope and plans for their audit. We met with Ernst & Young LLP, with and without management present, to discuss the results of their examinations and their evaluations of our internal controls. The audit committee reviewed the audited annual financial statements with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements.

The audit committee reviewed the audited annual consolidated financial statements with management and Ernst & Young LLP, who are responsible for expressing an opinion on the conformity of the company’s audited financial statements with GAAP, their judgment as to the quality, not just the acceptability, of the company’s accounting principles and such other matters as are required to be discussed with the audit committee under generally accepted auditing standards and SAS 61 (codification of Statements on Auditing Standards). The committee also discussed with management and Ernst & Young LLP the process used to support certifications by the company’s Chief Executive Officer and Chief Financial Officer that are required by the SEC and the Sarbanes-Oxley Act of 2002 to accompany the company’s periodic filings with the SEC. In addition, we reviewed and discussed the company’s compliance with Section 404 of the Sarbanes-Oxley Act of 2002, including the Public Company Accounting Oversight Board’s (PCAOB) Auditing Standard No. 2 regarding the audit of internal control over financial reporting.

In discharging its oversight responsibility as to the audit process, the audit committee obtained from the independent auditors a formal written statement describing all relationships between the auditors and the company that might bear on Ernst & Young LLP’s independence consistent with Independent Standards Board Standard No. 1, “Independence Discussions with Audit Committees,” discussed with the auditors any relationships that may impact their objectivity and independence and satisfied itself as to the auditors’ independence.

The committee reviewed with Ernst & Young LLP the overall scope and plans for their audit. The committee met with the independent auditors, with and without management present, to discuss the results of their examination, their evaluations of the company’s internal controls, and the overall quality of the company’s financial reporting.

In reliance on the reviews and discussions referred to above, the audit committee recommended to the board of directors (and the board of directors has approved) that the audited financial statements be included in the Annual Report on Form 10-K for the year ended March 30, 2007 for filing with the SEC. The audit committee, subject to shareholder ratification, intends to retain Ernst & Young LLP as independent auditors for the fiscal year ending March 28, 2008, pending receipt of a satisfactory engagement letter. If the audit committee cannot reach agreement with Ernst & Young, LLP, it may engage a different auditing firm.

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The full responsibilities of the audit committee are set forth in our charter. A copy of the audit committee charter is available on our website at www.palmharbor.com.

PROPOSAL TWO: RATIFICATION OF INDEPENDENT AUDITORS

The shareholders are urged to ratify the appointment by our audit committee of Ernst & Young LLP as independent registered public accounting firm for the fiscal year ending March 28, 2008. Ernst & Young LLP has served as our independent auditors since our inception and is familiar with our affairs and financial procedures. Representatives from Ernst & Young LLP are expected to be present at the meeting and will have the opportunity to respond to appropriate questions.

Aggregate Ernst & Young LLP fees for the fiscal year ended March 30, 2007 and March 31, 2006 were:

The audit committee has considered whether the provision of these services by Ernst & Young LLP is compatible with maintaining the principal accountant’s independence and has determined that such services have not adversely affected Ernst & Young LLP’s independence.

In accordance with its charter, the audit committee approves in advance all audit and non-audit services to be provided by Ernst & Young LLP. In other cases, the chairman of the audit committee has the delegated authority from the committee to pre-approve certain additional services, and such pre-approvals are communicated to the full committee at its next meeting. During fiscal year 2007, all non-audit services were pre-approved by the audit committee in accordance with this policy.

The Board of Directors unanimously recommends that you vote FOR this proposal.

OTHER MATTERS

As of the mailing date of this proxy statement, the board of directors knows of no other matters to be presented at the meeting. Should any of the matters requiring a vote of the shareholders arise at the meeting, the persons named in the proxy will vote the proxies in accordance with their best judgment.

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SHAREHOLDER PROPOSALS

Any shareholder who intends to present a proposal at the annual meeting in the year 2008, and who wishes to have the proposal included in our proxy statement and proxy for that meeting, must deliver the proposal to our corporate Secretary, Kelly Tacke, at 15303 Dallas Parkway, Suite 800, Addison, Texas 75001 by February 20, 2008. All proposals must meet the requirements set forth in the rules and regulations of the SEC in order to be eligible for inclusion in the proxy statement for that meeting.

Any shareholder who intends to bring business before the annual meeting in the year 2008 in a form other than a shareholder proposal in accordance with the preceding paragraph must give written notice to our corporate secretary at the address set forth in the preceding paragraph on or before May 4, 2008.

ANNUAL REPORT

We have provided without charge a copy of the annual report to shareholders for fiscal year ended March 30, 2007 to each person being solicited by this proxy statement. Upon the request by any person being solicited by this proxy statement, we will provide without charge a copy of the Annual Report on Form 10-K as filed with the SEC (excluding exhibits, for which a reasonable charge shall be imposed). All requests should be directed to: Kelly Tacke, Executive Vice President, at Palm Harbor Homes, Inc., 15303 Dallas Parkway, Suite 800, Addison, Texas 75001. This information is also available via the Internet at our web site (www.palmharbor.com) and the EDGAR version of such report (with exhibits) is available at the SEC’s web site (www.sec.gov).

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ANNUAL MEETING OF SHAREHOLDERS OF

PALM HARBOR HOMES, INC.

July 25, 2007

Please date, sign and mail

your proxy card in the

envelope provided as soon

as possible.

¯  Please detach and mail in the envelope provided.  ¯

PALM HARBOR HOMES, INC.

The undersigned shareholder of Palm Harbor Homes, Inc. does hereby nominate, constitute and appoint Kelly Tacke and Colleen Rogers, or either one of them, as Proxies, each with full power to appoint her substitute, to represent and vote all of the shares of Common Stock of Palm Harbor Homes, Inc. held of record by the undersigned at the Annual Meeting of shareholders to be held at 10:00 a.m. Dallas time on July 25, 2007 at the Company Headquarters, 15303 Dallas Parkway, Suite 800, Addison, Texas, 75001, and at any adjournments thereof, as follows:

(Continued and to be signed on the reverse side)

ANNUAL MEETING OF SHAREHOLDERS OF

PALM HARBOR HOMES, INC.

July 25, 2007

You may enter your voting instructions at 1-800-PROXIES or www.voteproxy.com up until 11:59 PM Eastern Time the day before the cut-off or meeting date.

¯  Please detach and mail in the envelope provided IF you are not voting via telephone or the Internet.  ¯