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 June 26, 2009, we operated nine manufacturing facilities that sell homes through 81 company-owned retail sales centers and builder locations and over 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 provide property and casualty insurance for owners of manufactured homes through our subsidiary, Standard Casualty.

The prevailing economic uncertainties and depressed housing market have continued to challenge our industry and our business in the first quarter of fiscal 2010. Our revenues for the quarter are indicative of the weak demand for factory-built housing products, however, the year over year decline is not as severe as the overall pace of national industry shipments. Total industry shipments, including both HUD-code and modular products, were down almost 50% through the most recent reporting period. Our retail deliveries were down 36% as compared with the first quarter of fiscal 2009. The major portion of this decline continues to be from the key states of Florida, Arizona and California.

Despite the extremely challenging sales environment, our net sales increased 4.5% sequentially over the fourth quarter of fiscal 2009. We have also made considerable progress in reducing our operating costs and managing our business as efficiently as possible in this environment. Sequentially, our selling, general and administrative expenses decreased 15% and our operating loss decreased 47% from the fourth quarter of fiscal 2009.

With the decline in retail demand, we are aggressively pursuing key revenue growth initiatives. We have introduced our flexible products, which allow many homes to be sold from one model. This provides us with greater manufacturing flexibility and reduces our inventory costs. We continue to expand our commercial and military modular channels, which represent higher margin business than residential sales to independent retailers. We are the winning bidder of approximately $13.5 million in new government contracts for military installations to be completed in fiscal 2010. Our direct-to-consumer internet sales continue to gain momentum as this marketing strategy is capturing more retail sales through a cost-effective channel. Finally, our financial services segment continued to deliver profitable results in the first quarter of fiscal 2010.

Our floor plan agreement is with Textron who announced during the third quarter of fiscal 2009 that they are in the process of an orderly liquidation of their housing inventory finance business. In April 2009 (with an effective date of January 26, 2009), we agreed to an amendment which included a committed amount of $50 million, an expiration date of March 31, 2010, an interest rate of LIBOR plus 7.00%, and new financial covenants. In June 2009, as discussed in Note 6 to our condensed consolidated financial statements, we agreed to a further amendment which extended the expiration date to June 30, 2010 and lowered 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, among other things.

While we are currently exploring asset sales and other 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 or extension of the floor plan facility agreement.

                                                        Three Months Ended
                                                      June 26,       June 27,
                                                        2009           2008
    Net sales                                            100.0 %        100.0 %
    Cost of sales                                         76.6           75.4

    Gross profit                                          23.4           24.6
    Selling, general and administrative expenses          29.6           24.0

    Income (loss) from operations                         (6.2 )          0.6
    Interest expense                                      (6.0 )         (3.7 )
    Gain on repurchases of convertible senior notes         -             2.3
    Other income                                           0.3            0.4

    Loss before income taxes                             (11.9 )         (0.4 )
    Income tax expense                                    (0.2 )           -

    Net loss                                             (12.1 )%        (0.4 )%

The following table summarizes certain key sales statistics as of and for the three months ended June 26, 2009 and June 27, 2008.

                                                                   Three Months Ended
                                                                  June 26,     June 27,
                                                                    2009         2008
Homes sold through company-owned retail sales centers and
builder locations                                                       580          909
Homes sold to independent dealers, builders and developers              149          284
Total new factory-built homes sold                                      729        1,193
Average new manufactured home price - retail                     $   70,000    $  76,000
Average new manufactured home price - wholesale                  $   56,000    $  50,000
Average new modular home price - retail                          $  169,000    $ 172,000
Average new modular home price - wholesale                       $   75,000    $  79,000
Number of company-owned retail sales centers at end of period            77           83
Number of company-owned builder locations at end of period                4            4

Three Months Ended June 26, 2009 Compared to Three Months Ended June 27, 2008

Net Sales. Net sales decreased 36.6% to $82.4 million in the first quarter of fiscal 2010 from $130.0 million in the first quarter of fiscal 2009. This decrease is primarily the result of a $45.6 million decrease in factory-built housing net sales and a $2.0 million decrease in financial services net revenues. The decline in factory-built housing net sales is primarily due to a 38.9% decrease in the total number of factory-built homes sold coupled with decreases in the average selling prices of new manufactured and modular homes. The decrease in the total number of factory-built homes sold reflects the severe state of the factory-built housing industry, the

Gross Profit. In the first quarter of fiscal 2010, gross profit decreased to 23.4% of net sales, or $19.3 million, from 24.6% of net sales, or $32.0 million in the first quarter of fiscal 2009. Gross profit for the factory-built housing segment decreased to 18.4% of net sales in the first quarter of fiscal 2010 from 19.9% in the first quarter of fiscal 2009. Factory-built housing margins were impacted by $1.1 million in charges associated with the closing of five retail sales centers and an increase in group medical expense. Gross profit for the financial services segment decreased $2.5 million in the first quarter of fiscal 2010 due to decreased net revenues as explained above in the net sales section.

Selling, General and Administrative Expenses. In dollars, selling, general and administrative expenses decreased $6.8 million to $24.4 million in the first quarter of fiscal 2010 from $31.2 million in the first quarter of fiscal 2009. Of this $6.8 million decrease, $6.6 million related to the factory-built housing segment and $0.6 million related to financial services and was offset by a $0.3 million increase in general corporate expenses. The decline in selling, general and administrative expenses related to the factory-built housing segment resulted from a reduction of six operating sales centers and one factory versus prior year, in addition to a 35% head count decrease and a major decrease in the fixed expenses of our ongoing operations. As a percentage of net sales, selling, general and administrative expenses increased to 29.6% of net sales in the first quarter of fiscal 2010 as compared to 24.0% of net sales in the first quarter of fiscal 2009.

Interest Expense. Interest expense increased 1.7% to $5.0 million in the first quarter of fiscal 2010 from $4.9 million in the first quarter of fiscal 2009. Interest expense increased due to noncash interest expense of $0.8 million related to warrants issued in connection with $4.5 million of short term Promissory Notes, offset by decreased interest expense of $0.3 million related to securitized financings and $0.3 million related to convertible senior notes.

Gain on Repurchases of Convertible Senior Notes. During the first quarter of fiscal 2009, we repurchased $10.8 million principal amount of our convertible senior notes, which had a book value of $9.3 million net of debt discount, for $6.3 million in cash. We recorded a gain of $3.0 million in connection with the repurchases.

Other Income. Other income decreased 60.8% to $0.2 million in the first quarter of fiscal 2010 from $0.6 million in the first quarter of fiscal 2009. This decrease is primarily due to a $0.2 million decrease in interest income.

Income Tax Expense. Income tax expense was $188,000 in the first quarter of fiscal 2010 as compared to $58,000 in the first quarter of fiscal 2009. Tax expense recorded in these periods related to taxes payable in various states we do business. We do not expect to record federal income tax expense for the remainder of fiscal 2010 due to the availability of net operating loss carryforwards.

Liquidity and Capital Resources

Cash and cash equivalents totaled $22.3 million at June 26, 2009, up $9.9 million from $12.4 million at March 27, 2009. Net cash provided by operating activities was $10.6 million in the first quarter of fiscal 2010 as compared to $59.8 million in the first quarter of fiscal 2009. The decrease in net cash provided by operating activities is primarily attributable to $53.7 million of consumer loans sold in the first quarter of fiscal 2009.

Net cash used in financing activities was $5.4 million in the first quarter of fiscal 2010 as compared to $56.3 million in the first quarter of fiscal 2009. Net cash used in financing activities in the first quarter of fiscal 2010 was primarily the result of $6.0 million used to pay down the floor plan facility, and $5.1 million used for payments on securitized financings. These cash outflows were offset by $4.5 million in proceeds from notes payable to related parties and $1.2 million in proceeds from borrowings on the construction lending line. Net cash used in financing activities in the first quarter of fiscal 2009 was primarily attributable to $42.2 million used to repay in full and terminate the warehouse borrowing facility, $8.8 million used for payments on securitized financings, and $6.3 million used to repurchase $10.8 million principal amount of our convertible senior notes.

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 June 4, 2009, we agreed to an amendment that included the following modifications:

• extends the expiration date from March 31, 2010 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 closing our fiscal quarter ending March 31, 2010 or April 30, 2010.

The facility has an interest rate of LIBOR plus 7.0%, 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. In order to borrow against the facility, we must comply with the following financial covenants: maximum quarterly net loss before taxes of $10 million, minimum annualized inventory turn of 2.75, and a maximum borrowing base requirement of 60% of eligible finished goods inventory.

We were in compliance with our new financial covenants as of June 26, 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 the remaining quarters of 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 7.

While we are currently exploring asset sales and other 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 or extension of the floor plan facility agreement.

In January 2009, CountryPlace obtained a $10.0 million construction lending line to use for financing mortgage loans during the construction period. There is no expiration period for the agreement, but CountryPlace is obligated to repurchase individual loans within 180 days from the date of original purchase of each respective loan by the financial institution. Historically, the construction period has been approximately ninety days. The construction lender has full discretion to accept or decline each individual loan purchase requested by CountryPlace. The maximum advance for loans purchased is 92% of the loan amount. The interest rate on unpaid amounts advanced is 10%. CountryPlace had outstanding unpaid advances under the facility of $4.8 million as of June 30, 2009. The facility contains certain requirements relating to the documentation of the loans purchased and amounts drawn during the construction period of each individual loan, which are customary in the industry. CountryPlace funds the difference between the amounts advanced under the facility and the balance of any additional loan.

On April 27, 2009, we issued warrants to each of Capital Southwest Venture Corporation, Sally Posey and the Estate of Lee Posey (collectively, the lenders) to purchase up to an aggregate of 429,939 shares of our common stock at a price of $3.14 per share, which was the closing price of our common stock on April 24, 2009. The Black-Scholes method was used to value the warrants, which resulted in us recording $0.8 million in non-cash interest expense in the first quarter of fiscal 2010. The warrants were granted in connection with a loan made by the lenders to us of an aggregate of $4.5 million pursuant to senior subordinated secured promissory notes between us and each of the lenders (collectively, the Promissory Notes). The proceeds were used for working capital purposes. The Promissory Notes were repaid in full on June 29, 2009. The warrants, which expire on April 24, 2019, contain anti-dilution provisions and other customary provisions. The Promissory Notes bore interest at the rate of LIBOR plus 2.0% and were secured by 150,000 shares of Standard's common stock.

We believe that our cash on hand and the proceeds from floor plan financing, conforming mortgage sales, and any other available borrowing alternatives will be adequate to support our working capital needs and currently planned capital expenditure needs for the foreseeable future. However, our top priorities are cash generation and conservation throughout our operations to help support these cash needs as well. Because future cash flows and the availability of financing will depend on a number of factors, including prevailing economic and financial conditions, business, credit market conditions, and other factors beyond our control, no assurances can be given in this regard.

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:

We are currently experiencing an extreme crisis in the national and global economy generally as well as in the housing market specifically. This crisis has materially impacted liquidity in the financial markets, making terms for certain financings less attractive, and in certain cases has resulted in the unavailability of certain types of financing. Continued uncertainty in the credit and equity markets may negatively impact our ability to access additional financing at reasonable terms or at all, which may negatively affect our ability to conduct our operations or refinance our existing debt. Disruptions in the equity markets may also make it more difficult for us to raise capital through the issuance of additional shares of our common stock. In light of this economic crisis and the challenging business conditions that we are currently facing, we are focusing a significant amount of effort on cash generation and preservation. We currently have in excess of $100 million of unlevered assets and we are working with a financial advisor to leverage these assets to generate cash. However, there can be no guarantee that these efforts or any other efforts we take to increase our liquidity will be successful. If the current economic crisis continues for an extended period of time, or if the crisis worsens, we may have insufficient liquidity to meet our financial obligations in the future.

Reduced availability of wholesale financing could have a material adverse effect on us.

We finance a portion of our new inventory at our retail sales centers 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. We have a floor plan facility with Textron. During our third quarter, 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. 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 June 26, 2009. Although management believes the new covenant levels for fiscal 2010 are achievable based upon our fiscal 2010 operating plan, there can be no assurances that we will be in compliance.

Additionally, in light of market conditions, 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 as described in Note 6 of our consolidated financial statements. While we are currently exploring asset sales and other 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 at maturity. In this event, there can be no assurance that Textron will consent to a further amendment or extension of the floor plan facility.

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.

Changes in laws or other events that adversely affect liquidity in the secondary mortgage market could hurt our business.

The government-sponsored enterprises, principally Fannie Mae and Freddie Mac, play a significant role in buying home mortgages and creating investment . . .