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 March 27, 2009, we operated nine manufacturing facilities that sell homes through 86 company-owned retail sales centers and builder locations and approximately 150 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 or sold to investors. We also provide property and casualty insurance for owners of manufactured homes through our subsidiary, Standard Casualty.

Our results for fiscal 2009 were heavily influenced by the severe state of the factory-built housing industry, the weakness in the overall housing market and the prevailing economic uncertainties and credit crisis. There was a drastic slowdown in demand for factory-built housing products and decline in retail traffic during fiscal 2009. Industry shipments for calendar year 2008 (through November) were down approximately 14% from the prior year's already historically low levels. The three significant (to both us and the industry) manufactured housing states of Florida, California and Arizona were down a combined 41%. 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. While we expect these conditions to worsen and expect our performance to improve in fiscal 2010, we are likely to still incur a net loss.

With the decline in retail demand, we have focused on new areas of business, including commercial and military projects, which present new revenue opportunities for us. These institutions are looking for a quality provider and we are well positioned as a preferred supplier to meet this demand. During fiscal 2009, we produced barracks and other housing for three military bases.

In light of the current economic crisis and with no near-term signs of recovery for the factory-built housing industry, our top priorities are cash generation and cash preservation in every area of our business. During fiscal 2009, we focused on these priorities through the following:

• We sold $51.3 million of CountryPlace's warehoused portfolio of chattel and mortgage loans for a gain of $1.3 million. We used the proceeds to repay in full and terminate the warehouse borrowing facility scheduled to expire on April 30, 2008.

• Through CountryPlace, we obtained a $10.0 million construction lending line to use for financing mortgage loans.

• We completed two sale leaseback transactions totaling $6.5 million in cash for 13 of our retail properties.

• We retired $21.2 million of our convertible senior notes for $10.6 million of cash, resulting in a gain of $10.6 million and lower interest costs.

• We closed three less-than-efficient manufacturing facilities and one retail sales center.

• We reduced inventories by $26.2 million and receivables by $8.2 million.

• We have continued to reduce our overhead costs and employed other cash management steps.

• We accomplished all the above and still funded $20 million in committed pipeline loans from working capital when our warehouse lender exited the business.

• We have been working with a financial advisor to leverage $100 million of our unlevered assets.

For the near term, the outlook for housing, both site-built and factory-built, remains extremely challenging. A number of issues must be resolved for any recovery to gain traction, and until inventories decline, housing prices stabilize, credit is restored and general economic fundamentals improve, we do not expect any short-term improvement. In the meantime, our strategy is to manage our operations more efficiently and become a stronger and leaner company. Accordingly, we remain focused on three critical areas in our business for fiscal 2010. Our top priority is to manage our cash and leverage our balance sheet to maintain adequate liquidity through this uncertain business climate. We are also streamlining our operations to reduce both marginal costs and selling, general and administrative expenses, consistent with expected revenues. And finally, we continue to look for new sources of revenue by pursuing our creative efforts like flexible products, commercial and military modular products, and targeted Internet marketing strategies. Regardless of market conditions, we will continue to leverage our core strengths-the most trusted brand name in the industry, a diverse and high-quality product line, manufacturing excellence and exceptional customer service.

During the third quarter of fiscal 2009, our floor plan lender, Textron Financial Corporation (Textron), announced that they are in the process of an orderly liquidation of certain commercial loan business including their housing finance business. As further discussed in Note 5 of our consolidated financial statements, in April 2009, we agreed to an amendment to our floor plan facility which includes a lower total commitment amount (from $70 million to $50 million), a new expiration date of March 31, 2010, new interest rates and new financial covenants. In addition, as discussed in Note 5 of our consolidated financial statements, we agreed to a further amendment dated June 4, 2009, which extends the expiration date to June 30, 2010, among other things.

We were in compliance with our new financial covenants as of March 27, 2009. In addition, management believes that new quarterly financial covenants covering maximum net loss before taxes levels, annualized inventory turn and maximum borrowing base, all as defined in the recent amendments, for fiscal 2010 are achievable based upon our fiscal 2010 operating plan. Management has also identified other actions within their control that could be implemented, as necessary, to help us meet these quarterly requirements. However, there can be no assurance that these actions will be successful.

Additionally, in light of market conditions, it is possible that we may be unable to comply with the new financial covenants during fiscal 2010. Textron could also declare a loan violation due to a material adverse change, as defined in the agreement. As a result, if a loan violation were to occur and not be remedied in accordance with the terms of the floor plan facility, Textron could declare an event of default and demand that the full amount of the facility be paid in full prior to maturity. Such a demand would result in, among other things, a cross default of our convertible senior notes described in Note 6 of our consolidated financial statements.

While we are currently exploring asset sales and other types of capital raising alternatives in order to generate liquidity, there can be no assurance that such activities will be successful or generate cash resources adequate to fully retire the Textron floor plan facility at maturity. In this event, there can be no assurance that Textron will consent to a further amendment of the floor plan facility agreement.

Results of Operations

The following table sets forth the items in our Statements of Operations as a percentage of net sales for the periods indicated.

                                                                Fiscal Year Ended
                                                  March 27,         March 28,         March 30,
                                                    2009              2008              2007
Net sales                                             100.0 %           100.0 %           100.0 %
Cost of sales                                          76.3              75.9              76.1

Gross profit                                           23.7              24.1              23.9
Selling, general and administrative expenses           29.4              27.1              24.2
Goodwill impairment                                      -               14.2                -

Loss from operations                                   (5.7 )           (17.2 )            (0.3 )
Interest expense                                       (3.8 )            (3.3 )            (2.4 )
Gain on repurchase of convertible senior
notes                                                   2.5                -                 -
Equity in loss of limited partnership and
impairment charges                                       -                 -               (0.7 )
Other income                                            0.5               0.7               0.7

Loss before income taxes                               (6.5 )           (19.8 )            (2.7 )
Income tax benefit (expense)                             -               (2.5 )             0.9

Net loss                                               (6.5 )%          (22.3 )%           (1.8 )%

The following table summarizes certain key sales statistics as of and for the period indicated.

                                                                 Fiscal Year Ended
                                                        March 27,    March 28,    March 30,
                                                           2009         2008         2007
Homes sold through company-owned retail sales centers
and builder locations                                        2,932        3,763        4,003
Homes sold to independent dealers, builders and
developers                                                     954        1,686        2,734
Total new factory-built homes sold                           3,886        5,449        6,737
Average new manufactured home price-retail              $   73,000   $   76,000   $   79,000
Average new manufactured home price-wholesale           $   54,000   $   61,000   $   66,000
Average new modular home price-retail                   $  175,000   $  176,000   $  165,000
Average new modular home price-wholesale                $   72,000   $   80,000   $   80,000
Number of company-owned retail sales centers and
builder locations at end of period                              86           87          107

2009 Compared to 2008

Net Sales. Net sales decreased 26.3% to $409.3 million in fiscal 2009 as compared to $555.1 million in fiscal 2008. This decrease is primarily the result of a $140.3 million decrease in factory-built housing net sales and a $5.5 million decrease in financial services net revenues. The decline in factory-built housing net sales is primarily due to a 28.7% decrease in the total number of factory-built homes sold coupled with decreases in the average selling prices of new modular and manufactured homes. The decrease in the total number of factory-built homes sold reflects the severe state of the factory-built housing industry, the prevailing economic uncertainties, credit crisis and general consumer paralysis that has kept potential homebuyers on the sidelines. Also, we were operating 20 fewer retail stores and four less factories than last year. Homes sold to independent dealers, builders and developers decreased 43.4% in fiscal 2009 largely due to slowdowns in sales to Lifestyle Communities in the three key states of Florida, California and Arizona, which historically were some of our most profitable states. The reduction in independent sales was bolstered by $16.7 million in commercial and military modular sales. The

decrease in the average selling prices is the result of our lower-priced products. The decrease in financial services net revenues reflects a decline in the average consumer loans balance from $248.0 million for fiscal 2008 to $229.6 million for fiscal 2009, resulting from the sale of approximately $51.3 million of loans in April 2008.

Gross Profit. In fiscal 2009, gross profit decreased to 23.7% of net sales, or $96.8 million, from 24.1% of net sales, or $133.7 million in fiscal 2008. Gross profit for the factory-built housing segment decreased to 18.8% of net sales in fiscal 2009 from 19.7% in fiscal 2008. The decline in factory-built housing margin is primarily the result of increased manufacturing costs driven by rapidly rising material costs. This decline is partially offset by an increase in margin resulting from the impact of the restructuring actions taken in the fourth quarter of fiscal 2008 to close 18 under-performing sales centers and three less than efficient plants coupled with an increase in the internalization rate (the percentage of factory-built homes we manufactured and sold through our company-owned retail stores and builder locations) from 64% in fiscal 2008 to 69% in fiscal 2009. Gross profit for the financial services segment decreased $5.8 million in fiscal 2009 due to decreased net revenues as explained above in the net sales section. However, the financial services segment produced gross profit of $27.1 million in fiscal 2009 and positively contributed to our cash flow.

Selling, General and Administrative Expenses. As a percentage of net sales, selling, general and administrative expenses increased to 29.4% of net sales in fiscal 2009 from 27.1% of net sales in fiscal 2008. This increase resulted from the larger percentage decline in net sales. In dollars, selling, general and administrative expenses decreased $30.2 million to $120.4 million in fiscal 2009 from $150.6 million in fiscal 2008. Of this $30.2 million decrease, $21.5 million related to the factory-built housing segment, $1.9 million related to the financial services segment and $6.8 million related to general corporate expenses. The majority of the reductions in selling, general and administrative expenses related to the factory-built housing segment 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, plus a reduction in performance based compensation expense. The decrease in selling, general and administrative expenses for the financial services segment relates to a $1.5 million one-time performance-based compensation payment in fiscal 2008. The payment was based on CountryPlace profitability from inception (2002) through 2007.

Goodwill Impairment. Goodwill impairment was $78.5 million for fiscal 2008. Due to the difficult market environment and our operating losses, 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 to fully impair the goodwill related to our factory-built housing segment.

Interest Expense. Interest expense decreased 17.4% to $15.4 million in fiscal 2009 as compared to $18.7 million in fiscal 2008. Of this decrease, $1.7 million related to decreased interest expense on the average balance of the warehouse facility which was terminated April 30, 2008 and $1.4 million related to decreased interest expense on the average balance of the securitized loans resulting from reduced securitization financing balances in fiscal 2009 as compared to fiscal 2008.

Gain on Repurchase of Convertible Senior Notes. During fiscal 2009, we repurchased $21.2 million of our convertible senior notes for $10.6 million in cash, resulting in a gain of $10.6 million.

Other Income. Other income decreased 42.2% to $2.1 million in fiscal 2009 from $3.6 million in fiscal 2008 primarily due to a $2.2 million decrease in interest and dividend income resulting from reduced rates of return coupled with lower average cash and cash equivalent balances. This is offset by a $0.4 million increase on income earned on a real estate investment.

Income Tax Benefit (Expense). Income tax benefit was $8,000 in fiscal 2009 as compared to expense of $13.9 million in fiscal 2008. The $13.9 million of income tax expense for fiscal 2008 related to our recording a valuation allowance against all of our net deferred tax assets due to the uncertainty of realizing the tax benefits associated with these assets.

2008 Compared to 2007

Net Sales. Net sales decreased 16.1% to $555.1 million in fiscal 2008 from $661.2 million in fiscal 2007. This decrease is primarily the result of a $111.6 million decrease in factory-built housing net sales offset by a $5.4 million increase 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 and decreases in the average retail and wholesale selling prices of new manufactured homes offset by an increase in the average retail selling price of a new modular home. The decrease in the total number of factory-built homes sold is largely due to a 38.3% 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 (see Executive Overview section above for more details). These states have been especially impacted by decreased manufactured home sales to manufactured housing retirement communities. The decrease in the average retail and wholesale selling prices of new manufactured homes is the result of our new lower-priced products. The increase in the average selling prices of a new modular home is the result of customers purchasing larger modular homes. The increase in financial services net revenues primarily reflects an increase in interest income resulting from an increase in consumer loans receivable as of March 31, 2008 as compared March 31, 2007.

Gross Profit. In fiscal 2008, gross profit decreased to $133.7 million, or 24.1% of net sales, from $157.8 million, or 23.9% of net sales in fiscal 2007. Gross profit for the factory-built housing segment decreased to 19.7% of net sales in fiscal 2008 from 20.8% in fiscal 2007. Factory-built housing gross profit for fiscal 2008 includes $2.9 million in restructuring charges related to closing 18 under-performing sales centers and 3 less than efficient plants and for fiscal 2007 includes $2.4 million in restructuring charges related to closing 13 sales centers and 2 plants in fiscal 2007. Excluding these charges, gross profit for the factory-built housing segment would have been 20.3% in fiscal 2008 and 21.2% in fiscal 2007. This decrease was the result of a decline in the factory utilization rates coupled with continued pressure on our manufactured housing wholesale margins in Florida, California and Arizona and offset by an increase in the internalization rate from 58% in fiscal 2007 to 64% in fiscal 2008. Gross profit for the financial services segment increased $4.9 million in fiscal 2008 primarily due to increased interest income as explained above in the net sales section.

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $150.6 million in fiscal 2008 as compared to $160.0 million in fiscal 2007. As a percentage of net sales, selling, general and administrative expenses increased to 27.1% for fiscal 2008 from 24.2% for fiscal 2007. Of this $9.5 million decrease, $12.4 million related to the factory-built housing segment and was offset by a $2.9 million increase in financial services (general corporate expenses were essentially flat with the prior year). Factory-built housing expenses include $5.4 million in charges related to closing 18 under-performing sales centers and 3 less than efficient plants in fiscal 2008 and $3.7 million in restructuring charges related to closing 13 sales centers and 2 plants in fiscal 2007. Excluding these charges, selling, general and administrative expenses for the factory-built housing segment decreased $14.0 million. This decrease is largely the result of the cost savings steps we put in place during fiscal 2007 plus a reduction in performance based compensation costs and operating fewer manufacturing facilities and sales centers. Selling, general and administrative expenses related to the financial services segment increased in fiscal 2008 due to a $1.5 million one-time performance-based compensation payment. The payment was based on CountryPlace profitability from inception (2002) through 2007.

Goodwill Impairment. Goodwill impairment was $78.5 million for fiscal 2008. Due to the difficult market environment, particularly the recent fallout in the sub-prime market, and our recent losses, 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 our factory-built housing segment goodwill balance.

Interest Expense. Interest expense increased 18.9% to $18.7 million in fiscal 2008 as compared to $15.7 million in fiscal 2007. As a result of the completion of CountryPlace's second securitization in March 2007, our interest expense on securitized financings increased $4.4 million and was offset by a $2.7 million decrease in interest expense on our warehouse revolving debt. Also, interest expense on floor plan payable increased $0.8 million. The interest rate on the warehouse revolving debt and the floor plan payable is variable.

Equity in Loss of Limited Partnership and Impairment Charges. Equity in loss of limited partnership and impairment charges was zero in fiscal 2008 as compared to a $4.7 million loss in fiscal 2007. The $4.7 million loss in fiscal 2007 includes the write off of our investment in BSM of $4.4 million effective September 29, 2006. On May 19, 2007, we executed an agreement to terminate our partnership with BSM effective June 7, 2007. Under the termination agreement, we have no further financial obligation to BSM.

Interest Income and Other. Interest income and other decreased 26.0% to $3.6 million in fiscal 2008 as compared to $4.9 million in fiscal 2007. The $1.3 million decrease was primarily the result of a $0.8 million decrease in interest and dividend income and a $0.4 million impairment charge on investment securities in fiscal 2008. The impairment on investment securities related to the write down of an other-than-temporary loss on an available-for-sale investment security. Interest income in 2008 was also impacted by reduced rates of return.

Income Tax Benefit (Expense). Income tax expense was $13.9 million in fiscal 2008 as compared to a benefit of $6.1 million in fiscal 2007. Due to the difficult market environment, particularly the recent fallout in the sub-prime market, and our recent losses, we reviewed the recoverability of our deferred tax assets and determined that realization of the deferred tax benefits were uncertain. In fiscal 2008, we recorded a $31.1 million valuation allowance against all of our net deferred tax assets resulting in income tax expense for fiscal 2008 of $13.9 million. In fiscal 2007, we recorded a $6.1 million benefit on our loss before income taxes of $17.7 million.

Liquidity and Capital Resources

Cash and cash equivalents totaled $12.4 million at March 27, 2009, down from $28.2 million at March 28, 2008. Net cash provided by operating activities was $56.1 million in fiscal 2009 as compared to net cash used of $32.8 million in fiscal 2008. The cash provided by operating activities in fiscal 2009 is primarily attributable to the proceeds from the sale of consumer loans and principal payments on consumer loans originated. Also, the amount of net cash used for consumer loans has decreased as a result of CountryPlace not accepting applications for chattel loans and non-conforming mortgages.

Net cash provided by investing activities was $5.9 million in fiscal 2009 as compared to net cash net cash used of $0.2 million in fiscal 2008. This increase in cash provided by investing activities is primarily due to an increase in net cash received from divesting available-for-sale securities as well as a decrease in cash used for capital expenditures.

Net cash used in financing activities was $77.8 million in fiscal 2009 as compared to net cash provided by financing activities of $16.9 million in 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 with Citigroup, $10.6 million used to repurchase $21.2 million of our convertible senior notes and $10.0 million used to pay down our floor plan payable.

We have an agreement with Textron for a floor plan facility. During the third quarter of fiscal 2009, Textron announced that they are in the process of an orderly liquidation of certain of their commercial finance businesses, including their housing inventory finance business. On April 28, 2009 (with an effective date of January 26, 2009), we agreed to an amendment which includes the following modifications: a new committed amount of $50 million (reduced from $70 million) which will gradually be reduced to $40 million by December 31, 2009, a new facility expiration date of March 31, 2010, a new interest rate of LIBOR plus 7.00%, and new financial

covenants. The new financial covenants we had to comply with as of March 27, 2009 were a maximum quarterly net loss before taxes of $15 million, a minimum inventory turn of 2.75, and a maximum borrowing base requirement of 60% of eligible finished goods inventory. For the remaining quarters of fiscal 2010, the aggregate maximum net loss before taxes covenant requirement is reduced to $10 million. The facility has an advance rate of 90% of manufacturer's invoice and is principally secured by new home inventory and a portion of receivables from financial institutions. As of March 27, 2009 and March 28, 2008, we had $49.4 million and $59.4 million, respectively, outstanding under the floor plan credit facility.

We agreed to a further amendment dated June 4, 2009, which includes the following:

• extends the expiration date to June 30, 2010,

• lowers the committed amount from $50 million to $45 million and further lowers it to $40 million upon the earlier of the sale of certain assets or December 31, 2009,

• alters the maximum quarterly net loss before taxes covenant to exclude any interest expense reflected on the financial statements due to 2009 accounting changes, and

• requires a prepayment of principal equal to any amounts of cash and cash equivalents greater than $20 million as of March 31, 2010 no later than the earlier of 10 business days after the closing of our fiscal quarter ending March 31, 2010 or April 30, 2010.

We were in compliance with our new financial covenants as of March 27, 2009. In addition, management believes that new quarterly financial covenants covering maximum net loss before taxes levels, annualized inventory turn and maximum borrowing base, all as defined in the recent amendments, for fiscal 2010 are achievable based upon our fiscal 2010 operating plan. Management has also . . .