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, financing and insurance. As of September 26, 2008, we operated 11 manufacturing facilities that sell homes through 87 company-owned retail sales centers and builder locations and approximately 220 independent retail dealers, builders and developers. Through our subsidiary, CountryPlace, we currently offer conforming mortgages to purchasers of factory-built homes sold by company-owned retail sales centers and certain independent retail dealers, builders and developers. The loans originated through CountryPlace are either held for our own investment portfolio, sold to investors, or included as part of securitized financing transactions. We provide property and casualty insurance for owners of manufactured homes through our subsidiary, Standard Casualty.

Our results for the second quarter were heavily influenced by very difficult industry conditions and the prevailing economic environment and credit crisis. The factory-built housing industry continues to be plagued by the downturn that began in mid-1999 with the tightening of credit standards, limited availability of retail and wholesale financing, increased levels of repossessions, excessive retail inventory levels and manufacturing capacity. Industry shipments continue to decline with calendar year 2008 shipments (through August) down approximately 10% from the prior year and the three significant (to both us and the industry) manufactured housing states of Florida, California and Arizona down a combined 32%. Consumer concerns about the economy and the lack of available credit are keeping potential homebuyers on the sidelines; therefore affecting the demand for factory-built housing.

As a result of these difficult conditions, our revenues for the second quarter declined $33.9 million, or 23.5%, as compared to the prior year and caused the net loss we reported. Of the $33.9 million revenue decline, approximately $15 million, or 44%, was expected and resulted from the operation of 18 fewer retail stores and three fewer factories than last year. Approximately $6 million, or 18%, was unplanned and resulted from the delayed deliveries of homes in the last week of the quarter as Hurricane Ike hit the Gulf region and a "no name" storm hit the Atlantic coast. The remainder was due to a general weakening in retail traffic as customers who were concerned about the economy, their jobs and the cost of living, were not out shopping for new homes.

In response to the current conditions and expected demand, we idled one production line in Martinsville, Virginia during the second quarter and are in the process of idling another production line in Austin, Texas. We remain focused on managing the aspects of our business that we can control - reducing operating expenses, conserving cash and working to increase revenues through our expanded product and marketing plans - even if the overall direction of the industry remains uncertain.

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                           Six Months Ended
                                   September 26,         September 28,         September 26,         September 28,
                                       2008                  2007                  2008                  2007
Net sales                                  100.0 %               100.0 %               100.0 %               100.0 %
Cost of sales                               75.9                  74.8                  75.7                  75.4

Gross profit                                24.1                  25.2                  24.3                  24.6
Selling, general and
administrative expenses                     28.1                  25.9                  25.9                  25.9
Goodwill impairment                           -                   54.3                    -                   27.3

Loss from operations                        (4.0 )               (55.0 )                (1.6 )               (28.6 )
Interest expense                            (3.4 )                (3.2 )                (3.3 )                (3.2 )
Gain on repurchase of
convertible senior notes                     1.3                    -                    2.4                    -
Other income                                 0.5                   1.0                   0.5                   0.9

Loss before income taxes                    (5.6 )               (57.2 )                (2.0 )               (30.9 )
Income tax expense                          (0.2 )               (10.6 )                (0.1 )                (4.7 )

Net loss                                    (5.8 )%              (67.8 )%               (2.1 )%              (35.6 )%

The following table summarizes certain key sales statistics as of and for the three and six months ended September 26, 2008 and September 28, 2007.

                                             Three Months Ended                      Six Months Ended
                                      September 26,       September 28,      September 26,      September 28,
                                           2008               2007               2008               2007
Homes sold through company-owned
retail sales centers and builder
locations                                         828                995              1,737              1,935
Homes sold to independent
dealers, builders and developers                  312                478                596                949
Total new factory-built homes
sold                                            1,140              1,473              2,333              2,884
Average new manufactured home
price - retail                       $         74,000    $        74,000    $        75,000    $        75,000
Average new manufactured home
price - wholesale                    $         53,000    $        65,000    $        52,000    $        63,000
Average new modular home price -
retail                               $        171,000    $       183,000    $       172,000    $       181,000
Average new modular home price -
wholesale                            $         67,000    $        78,000    $        73,000    $        79,000
Number of company-owned retail
sales centers at end of period                     83                104                 83                104
Number of company-owned builder
locations at end of period                          4                  4                  4                  4

Net Sales. Net sales decreased 23.5% to $110.7 million in the second quarter of fiscal 2009 as compared to $144.6 million in the second quarter of fiscal 2008. This decrease is comprised of a $32.4 million decrease in factory-built housing net sales and a $1.5 million decrease in financial services net revenues. The decline in factory-built housing net sales is primarily due to a 22.6% decrease in the total number of factory-built homes sold coupled with decreases in the average wholesale selling prices of new manufactured and modular homes as well as decreases in the average retail selling price of a new modular home. The decrease in the total number of factory-built homes sold is the result of operating 18 fewer retail stores and three less factories than last year, delayed deliveries of homes sold in the last week of the quarter as Hurricane Ike hit the Gulf region and a "no name" storm hit the Atlantic coast, and a 34.7% decrease in homes sold to independent dealers, builders and developers, the majority of which related to shipments to the states of Florida, California and Arizona, which prior to 2006 were typically some of our most profitable states. These states have been especially impacted by decreased manufactured home sales to retirement age buyers. The decrease in the average selling prices is the result of our new lower-priced products. The decrease in financial services net revenues primarily reflects a decline in the average consumer loans balance from $245.2 million for the second quarter of fiscal 2008 to $203.8 million for the second quarter of fiscal 2009, resulting from the sale of approximately $51.3 million of loans in April 2008.

Gross Profit.In the second quarter of fiscal 2009, gross profit decreased to 24.1% of net sales, or $26.6 million, from 25.2% of net sales, or $36.5 million, in the second quarter of fiscal 2008. Gross profit for the factory-built housing segment decreased to 20.4% of net sales in the second quarter of fiscal 2009 from 21.4% in the second quarter of fiscal 2008. The decline in factory-built housing margin is primarily the result of increased manufacturing costs driven by rapidly rising material costs offset by an increase in the internalization rate from 62% in the second quarter of fiscal 2008 to 67% in the second quarter of fiscal 2009. Gross profit for the financial services segment decreased $1.9 million in the second quarter of fiscal 2009 due to decreased net revenues as explained above in the net sales section and a $0.8 million reserve recorded for uninsured losses estimated for Standard Casualty's share of Hurricane Ike claims.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $31.1 million, or 28.1% of net sales, in the second quarter of fiscal 2009 from $37.5 million, or 25.9% of net sales, in the second quarter of fiscal 2008. Of this $6.4 million decrease, $5.9 million related to the factory-built housing segment, $0.5 million related to general corporate expenses and financial services was essentially flat. The majority of the reductions in selling, general and administrative expenses related to factory-built housing and general corporate expenses resulted from the restructuring actions taken in the fourth quarter of fiscal 2008 to close 18 under-performing sales centers and three less than efficient plants.

Goodwill Impairment. Goodwill impairment was $78.5 million in the second quarter of fiscal 2008. Due to the difficult market environment and the losses we recorded during fiscal 2007 and early 2008, we determined that an interim test to assess the recoverability of goodwill was necessary. With the assistance of an independent valuation firm, we performed an interim goodwill impairment analysis and concluded that the goodwill relating to our factory-built housing reporting unit was impaired. As a result, during the second quarter of fiscal 2008, we recorded a non-cash impairment charge of $78.5 million related to the write-off of our entire goodwill balance.

Gain on Repurchase of Convertible Senior Notes. During the second quarter of fiscal 2009, we repurchased $3.6 million of our convertible senior notes for $2.2 million resulting in a gain of $1.4 million.

Other Income. Other income decreased 60.0% to $0.6 million in the second quarter of fiscal 2009 from $1.5 million in the second quarter of fiscal 2008 primarily due to a $0.5 million decrease in interest and dividend income resulting from lower cash and cash equivalent balances coupled with reduced rates of return. The remaining $0.4 million decrease resulted from a gain on sale of stock in the second quarter of fiscal 2008.

Income Tax Expense. Income tax expense was $0.2 million in the second quarter of fiscal 2009 as compared to $15.3 million in the second quarter of fiscal 2008. The $0.2 million of income tax expense for the second quarter of fiscal 2009 related to taxes payable in various states we do business. The $15.3 million of income tax expense for the second quarter of fiscal 2008 related to our recording a valuation allowance against all of our net deferred tax assets.

Six Months Ended September 26, 2008 Compared to Six Months Ended September 28, 2007

Net Sales. Net sales decreased 16.4% to $240.7 million in the first six months of fiscal 2009 as compared to $287.9 million in the first six months of fiscal 2008. This decrease is primarily the result of a $46.5 million decrease in factory-built housing net sales and a $0.7 million decrease in financial services net revenues. The decline in factory-built housing net sales is primarily due to a 19.1% decrease in the total number of factory-built homes sold coupled with decreases in the average wholesale selling prices of new modular and manufactured homes as well as decreases in the average retail selling price of new modular homes. The decrease in the total number of factory-built homes sold is the result of operating 18 fewer retail stores and three less factories than last year, delayed deliveries of homes sold in the last week of the second quarter as Hurricane Ike hit the Gulf region and a "no name" storm hit the Atlantic coast, and a 37.2% decrease in the homes sold to independent dealers, builders and developers, the majority of which related to shipments to the states of Florida, California and Arizona, which prior to 2006 were typically some of our most profitable states. These states have been especially impacted by decreased manufactured home sales to retirement age buyers. The reduction in independent sales was bolstered by $9.8 million in commercial and military modular sales. The decrease in the average selling prices is the result of our new lower-priced products. The decrease in financial services net revenues reflects a decline in the average consumer loans balance from $239.5 million for the six months ended September 28, 2007 to $233.7 million for the six months ended September 26, 2008, resulting from the sale of approximately $51.3 million of loans in April 2008.

Gross Profit. In the first six months of fiscal 2009, gross profit decreased to 24.3% of net sales, or $58.6 million, from 24.6% of net sales, or $70.9 million in the first six months of fiscal 2008. Gross profit for the factory-built housing segment decreased to 20.1% of net sales in the first six months of fiscal 2009 from 20.9% in the first six months of fiscal 2008. The decline in factory-built housing margin is primarily the result of increased manufacturing costs driven by rapidly rising material costs offset by an increase in the internalization rate from 63% in the first six months of

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $12.3 million to $62.3 million, or 25.9% of net sales, in the first six months of fiscal 2009 from $74.6 million, or 25.9% of net sales, in the first six months of fiscal 2008. Of this $12.3 million decrease, $9.5 million related to the factory-built housing segment and $3.1 million related to general corporate expenses and was offset by a $0.3 million increase in financial services. The majority of the reductions in selling, general and administrative expenses related to factory-built housing and general corporate expenses resulted from the restructuring actions taken in the fourth quarter of fiscal 2008 to close 18 under-performing sales centers and three less than efficient plants.

Goodwill Impairment. Goodwill impairment was $78.5 million in the first six months of fiscal 2008. Due to the difficult market environment and the losses we recorded during fiscal 2007 and early 2008, we determined that an interim test to assess the recoverability of goodwill was necessary. With the assistance of an independent valuation firm, we performed an interim goodwill impairment analysis and concluded that the goodwill relating to our factory-built housing reporting unit was impaired. As a result, during the second quarter of fiscal 2008, we recorded a non-cash impairment charge of $78.5 million related to the write-off of our entire goodwill balance.

Interest Expense. Interest expense decreased 13.9% to $7.9 million in the first six months of fiscal 2009 as compared to $9.2 million in the first six months of fiscal 2008. Of this decrease, $0.5 million related to decreased interest expense on the average balance of the warehouse facility which was terminated April 30, 2008 and $0.7 million related to decreased interest expense on the average balance of the securitized loans resulting from reduced securitization financing balances in the first six months of fiscal 2009 as compared to the first six months of fiscal 2008.

Gain on Repurchase of Convertible Senior Notes. During the first six months of fiscal 2009, we repurchased $14.4 million of our convertible senior notes for $8.5 million resulting in a gain of $5.8 million.

Other Income. Other income decreased 53.3% to $1.2 million in the first six months of fiscal 2009 from $2.5 million in the first six months of fiscal 2008 primarily due to a $1.1 million decrease in interest and dividend income resulting from lower cash and cash equivalent balances coupled with reduced rates of return. The remaining $0.2 million decrease resulted from a decrease in the gains on sales of stock in the first six months of fiscal 2009 as compared to the first six months of fiscal 2008.

Income Tax Expense. Income tax expense was $0.2 million in the first six months of fiscal 2009 as compared to $13.5 million in the first six months of fiscal 2008. The $0.2 million of income tax expense for the first six months of fiscal 2009 related to taxes payable in various states we do business. The $13.5 million of income tax expense for the first six months of fiscal 2008 related to our recording a valuation allowance against all of our net deferred tax assets.

Liquidity and Capital Resources

Cash and cash equivalents totaled $29.8 million at September 26, 2008, up $1.6 million from $28.2 million at March 28, 2008. Net cash provided by operating activities was $60.0 million in the

Net cash provided by investing activities was $1.2 million in the first six months of fiscal 2009 as compared to $1.7 million of net cash used in the first six months of fiscal 2008. This increase in cash provided by investing activities is due to an increase in net cash received from divesting in available-for-sale securities offset by an increase in cash used to purchase property, plant and equipment.

Net cash used in financing activities was $59.6 million in the first six months of 2009 as compared to $10.4 million provided by financing activities in the first six months of fiscal 2008. Net cash used in financing activities is primarily the result of $42.2 million used to repay in full and terminate the warehouse borrowing facility coupled with $8.5 million used to repurchase $14.4 million of our convertible senior notes.

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 sales centers and is secured by new home inventory and a portion of receivables from financial institutions. During the first quarter of fiscal 2009, we renegotiated and amended the agreement to extend it until March 31, 2011, change the interest rate to LIBOR plus 3.75% and alter certain covenant levels (loan to collateral value is 55% for the second quarter of fiscal 2009 and is reduced to 50% for the third quarter of fiscal 2009 and thereafter, tangible net worth is reduced to $110.0 million for the second and third quarters of fiscal 2009 and is increased to $115.0 million for the fourth quarter of fiscal 2009 and thereafter, and fiscal 2009 operating cash flow is increased to $15.0 million). We must maintain certain covenant requirements in order to borrow against the facility. For the second quarter of fiscal 2009, we had to comply with a loan to collateral value, as defined, of 55% and minimum liquidity amount, as defined, of $30.0 million. As of September 26, 2008, the loan to collateral value, as reported, was 56% and, therefore, we had to meet additional covenants related to minimum inventory turns of 2.75 and tangible net worth of $110.0 million. In the event that we are not in compliance with any of our floor plan facility covenant requirements in future periods, we would seek a waiver of any default from the lending institution and, if no waiver was obtained, maturities of outstanding debt would be accelerated. As of September 26, 2008, we were in compliance with these additional covenants. We had $65.5 million and $59.4 million outstanding under these floor plan credit facilities at September 26, 2008 and March 28, 2008, respectively.

During the first six months of fiscal 2009, we repurchased $14.4 million of the Notes for $8.5 million in cash resulting in a gain of $5.8 million. In addition, for the six month periods ended September 26, 2008 and September 28, 2007, the effect of converting the senior notes to approximately 2.3 million and 2.9 million, respectively, shares of common stock was anti-dilutive, and therefore, was not considered in determining diluted earnings per share.

On April 25, 2008, CountryPlace sold approximately $51.3 million of its $69.4 million warehoused portfolio of chattel and mortgage loans. Approximately $41.5 million of the proceeds were used to repay in full and terminate its warehouse borrowing facility scheduled to expire on April 30, 2008. The remaining cash proceeds were used for general corporate purposes. The transaction resulted in a gain of $1.3 million. CountryPlace is currently considering alternatives for short-term and long-term financing of its loan portfolio, including construction financing for mortgage loans. During the fourth quarter of fiscal 2008, CountryPlace ceased originating chattel and non-conforming mortgage loans until it determines that a term financing market exists or can be developed for such products.

Forward-Looking Information/Risk Factors

Certain statements contained in this 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:

Recent turmoil in the credit markets and the financial services industry may reduce the demand for our homes and the availability of home mortgage financing, among other things.

Recently, the credit markets and the financial services industry have been experiencing a period of unprecedented turmoil and upheaval characterized by the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the United States federal government. While the ultimate outcome of these events cannot be predicted, it may have a material adverse effect on us, our liquidity, our ability to borrow money to finance our operations from our existing lenders or otherwise, and could also adversely impact the availability of financing to our customers.

Deterioration in economic conditions in general could further reduce the demand for homes and, as a result, could reduce our earnings and adversely affect our financial condition.

Changes in national and local economic conditions could have a negative impact on our business. Adverse changes in employment levels, job growth, consumer confidence and income, interest rates and population growth may further reduce demand, depress prices for our homes and cause homebuyers to cancel their agreements to purchase our homes, thereby possibly reducing earnings and adversely affecting our business and results of operations. Recent changes in these economic variables have had an adverse affect on consumer demand for, and the pricing of, our homes, causing our revenues to decline and future deterioration in economic conditions could have further adverse effects.

The government-sponsored enterprises, principally Fannie Mae and Freddie Mac, play a significant role in buying home mortgages and creating investment securities that they either sell to investors or hold in their portfolios. These organizations provide liquidity to the secondary mortgage market. Fannie Mae and Freddie Mac have recently experienced financial difficulties. Any new federal . . .