CLAYTON HOMES INC, DEF 14A, 1997-09-24

CLAYTON HOMES INC
DEF 14A, 1997-09-24
MOBILE HOMES

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<PAGE> 1

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 (AMENDMENT NO. )

Filed by the Registrant [ ]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>

CLAYTON HOMES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[ ] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transaction applies:

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

[ ] Fee paid previously with preliminary materials:

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing Party:

(4) Date Filed:
<PAGE> 2

[Clayton Homes Logo]
623 MARKET STREET
KNOXVILLE, TENNESSEE 37902

---------------------

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
NOVEMBER 12, 1997
---------------------

The 1997 Annual Meeting of the Shareholders (the "Annual Meeting") of
Clayton Homes, Inc., a Delaware corporation (the "Company"), will be held at
10:30 a.m. EST, on Wednesday, November 12, 1997, at the Louise Mandrell Theatre,
2046 Parkway, Pigeon Forge, Tennessee 37863 for the following purposes:

1. To elect eight directors, each to hold office for a term of one
year and until a successor has been elected and qualified.

2. To adopt the 1997 Employee Stock Incentive Plan, a copy of which is
attached hereto as Exhibit A.

3. To transact such other business as may properly come before the
Annual Meeting or any adjournments thereof.

Holders of Common Stock of record as of the close of business on September
16, 1997 are entitled to notice of and to vote at the Annual Meeting. Transfer
books will not be closed.

Your vote is important. To ensure that your shares are represented at the
Annual Meeting, please complete, sign, date and mail the enclosed proxy promptly
in the enclosed postage-paid envelope. Shareholders attending the Annual Meeting
may revoke their proxies and vote in person if they so desire.

By order of the Board of Directors

/s/ JOHN J. KALEC

John J. Kalec
Secretary

Knoxville, Tennessee
September 26, 1997
<PAGE> 3

PROXY STATEMENT

CLAYTON HOMES, INC.
P. O. BOX 15169
KNOXVILLE, TN 37901
(mailing)

623 MARKET STREET
KNOXVILLE, TN 37902
(street)

This Proxy Statement and related proxy are furnished to the holders of
Common Stock, par value $.10 per share (the "Common Stock"), of Clayton Homes,
Inc., a Delaware corporation (the "Company"), in connection with the
solicitation of proxies by and on behalf of the Board of Directors of the
Company for use at the 1997 Annual Meeting of Shareholders to be held at 10:30
a.m. EST, on November 12, 1997, and any adjournments thereof (the "Annual
Meeting"). This Proxy Statement and the enclosed proxy are being first mailed to
shareholders of the Company on or about September 26, 1997. The Company's annual
report to shareholders for the year ended June 30, 1997, accompanies this Proxy
Statement.

The matters to be considered at the Annual Meeting are: (i) the election of
eight members of the Board of Directors of the Company; (ii) the adoption of the
1997 Employee Stock Incentive Plan and (iii) the transaction of such other
business as may properly come before the Annual Meeting or any adjournments
thereof.

VOTING RIGHTS AND PROXY SOLICITATION

Holders of Common Stock of record as of the close of business on September
16, 1997 are entitled to notice of and to vote at the Annual Meeting. As of such
date, the Company had issued and outstanding 118,737,418 shares of Common Stock.
The affirmative vote of a majority of the outstanding shares present in person
or by proxy at the Annual Meeting is required for the approval of any proposal
submitted to the shareholders at the Annual Meeting, except that directors shall
be elected by a plurality of the votes of the shares cast in the election. Each
shareholder is entitled to one vote per share on all matters to be considered at
the Annual Meeting, except that for the election of directors, each shareholder
has the right to vote the number of shares held for as many persons as there are
directors to be elected at the Annual Meeting. The certificate of incorporation
of the Company does not provide for cumulative voting for director nominees.

No specific provisions of the General Corporation Law of Delaware, the
Company's Charter or the Company's By-Laws address the issue of abstentions or
broker non-votes. Abstentions will be treated as shares that are present and
entitled to vote for purposes of determining whether a quorum is present, but
will not be counted as votes either in favor of or against a particular
proposal. If a broker or nominee holding shares in "street" name indicates on
the proxy that it does not have discretionary authority to vote on a particular
matter, those shares will not be voted with respect to that matter and will be
disregarded for the purpose of determining the total number of votes cast with
respect to a proposal.

A shareholder executing and returning a proxy may revoke such proxy by
notice in writing delivered to the Secretary of the Company prior to or at the
Annual Meeting, submitting a later dated proxy to the Secretary of the Company
prior to or at the Annual Meeting or appearing in person and voting in a
contrary manner at the Annual Meeting. However, a shareholder's attendance at
the Annual Meeting does not of itself serve to revoke a proxy executed by such
shareholder.

Proxies in the form enclosed, executed by shareholders of the Company and
returned to the proxyholder designated by the Board of Directors, will be voted
at the Annual Meeting in accordance with the instructions that appear thereon.
If no instructions are given, such proxies will be voted in favor of the
election of the nominees of the Board of Directors named in the Proxy Statement
and the approval of each matter proposed
<PAGE> 4

in the Proxy Statement. As of the date of this Proxy Statement, the Board of
Directors of the Company does not know of any business which will be presented
for consideration at the Annual Meeting other than as specified herein and in
the notice of the Annual Meeting, but if other matters are presented, it is the
intention of the person designated as proxyholder to vote in accordance with
their judgment on such matters.

The cost of soliciting proxies, including the preparation, printing and
mailing of the Proxy Statement, will be borne by the Company. Proxies may be
solicited by mail, telephone, telegram or personal contact by directors,
officers, or employees of the Company who will receive no additional
compensation therefor. The Company also will request brokers, custodians, and
other nominees to forward proxy solicitation material to the beneficial owners
of Common Stock, and will reimburse them for their reasonable out-of-pocket
expenses.

INDEPENDENT ACCOUNTANTS

Coopers & Lybrand served as independent accountants for the Company during
the fiscal year ended June 30, 1997. Representatives of Coopers & Lybrand will
be present at the Annual Meeting and will be given the opportunity to respond to
questions.

PROPOSAL 1

ELECTION OF DIRECTORS

The Board of Directors of the Company has nominated the eight persons named
below for election as directors at the Annual Meeting, to hold office until the
next annual meeting of shareholders and until their successors have been duly
elected and qualified. The Company's by-laws allow for a maximum of eight
directors. In the event that any nominee is unable to serve (which is not
anticipated), the person designated as proxyholder for the Company will vote for
the remaining nominees and for such other person(s) as the Board of Directors
may nominate. Each of the nominees is currently a director and was elected by
the shareholders at the last annual meeting, except for Thomas N. McAdams.
Wallace C. Doud, presently a director, is not standing for re-election.

The following table sets forth certain information with respect to the
nominees for election as directors at the Annual Meeting:

<TABLE>
<CAPTION>
NUMBER OF SHARES
AND PERCENT OF CLASS
OF COMMON STOCK
NAME, AGE, PRINCIPAL OCCUPATION AND YEAR FIRST BENEFICIALLY OWNED
MATERIAL POSITIONS DURING PAST FIVE YEARS ELECTED DIRECTOR AS OF AUGUST 31, 1997
----------------------------------------- ---------------- ---------------------
<S> <C> <C>
James L. Clayton, 63, Chairman and Chief Executive Officer, 1967 30,736,523(1)
since prior to 1993; Chairman, BankFirst; Director, 25.9%
Dollar General Corporation, and Chateau Communities, Inc.
B. Joe Clayton, 61, Chief Executive Officer, Clayton 1967 403,546(2)
Automotive
Group, since prior to 1993; Regional Director, *
First Tennessee Bank.
James D. Cockman, 64, Chairman and Chief Executive Officer, 1993 18,180(3)
American Culinary Equipment, Inc./ASF, since prior to *
1993.
Dan W. Evins, 61, co-founder and Chairman and Chief 1991 99,635(4)
Executive
Officer, Cracker Barrel Old Country Store, Inc., *
since prior to 1993.
Wilma H. Jordan, 49, Chief Executive Officer and 1994 14,531(5)
Co-Chairman,
The Jordan, Edmiston Group, Inc., since prior to 1993; *
Director, LIN Television Corporation.
Thomas N. McAdams, 44, Partner, Bernstein, Stair & McAdams, 1997 1,081
since prior to 1993; Director, Rafferty's, Inc. *
</TABLE>

2
<PAGE> 5

- ---------------

* Less than 1%
(1) Includes options for 40,036 shares presently exercisable; includes 8,105
shares held for the benefit of James L. Clayton in the Company's 401(k)
Plan; includes 1,092,430 shares held by The Clayton Family Foundation, a
non-profit corporation of which James L. Clayton is director and president.
(2) Includes options for 5,973 shares presently exercisable; includes 244,750
shares held in trusts of which B. Joe Clayton (brother of James L. Clayton)
is a trustee, but not beneficiary.
(3) Includes options for 15,739 shares presently exercisable.
(4) Includes options for 44,118 shares presently exercisable.
(5) Includes options for 8,124 shares presently exercisable.
(6) Includes options for 433,005 shares presently exercisable; includes 1,436
shares held for the benefit of Joseph H. Stegmayer in the Company's 401(k)
Plan.

The Company's primary counsel is Bernstein, Stair & McAdams, of which
Thomas N. McAdams is a partner. During fiscal 1997, payments received by
Bernstein, Stair & McAdams from the Company did not exceed five percent of the
gross revenues of Bernstein, Stair & McAdams.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE NOMINEES
LISTED ABOVE.

BOARD ATTENDANCE, FEES AND COMMITTEES

The Board of Directors held four meetings during the last fiscal year. Each
of the directors attended at least 75% of the meetings of the Board and
committees of which each was a member. Each director not employed by the Company
receives an annual retainer of $12,000, and $1,500 for each Board and $500 for
each committee meeting attended; $250 for each telephonic meeting; and
reimbursement for travel expenses to meetings. Committee chairpersons receive an
additional $250 for each such committee meeting attended. The Board of Directors
does not have separate nominating or executive committees.

AUDIT COMMITTEE

The Audit Committee consists of Dr. Neel (Chairman), Mr. Cockman, and Ms.
Jordan. The Audit Committee held one meeting during fiscal year 1997. The Audit
Committee has the responsibility to: (i) review annually and recommend to the
Board of Directors the firm to be engaged as independent accountants of the
Company for the next fiscal year; (ii) review with the Company's independent
accountants the plan and results of the auditing engagement; (iii) review the
scope and results of the Company's procedures for internal auditing; (iv)
inquire as to the adequacy of the Company's internal controls; and (v) consider
each professional service provided by the independent accountants and whether
the providing of such service affects the independence of the accountants.

COMPENSATION COMMITTEE

The Compensation Committee consists of Mr. Evins (Chairman), Mr. Doud and
Dr. Neel. It held one meeting during the last fiscal year. The Compensation
Committee is authorized to establish and fix the

3
<PAGE> 6

amount and form of compensation payable from time to time to all officers and
other key employees of the Company. It also administers the Company's stock
option plans.

PRINCIPAL SHAREHOLDER

James L. Clayton is the only shareholder who, as of the record date, owned
more than five percent of the outstanding Common Stock. His ownership consisted
of 30,736,523 shares, or 25.9% of the Common Stock. See "Election of Directors",
footnote (1), as to indirect ownership and stock options.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The goal of the Compensation Committee is to structure and administer the
Company's executive compensation programs in such a way that individual
compensation is largely dependent upon the Company's performance as measured by
increases in the per share value of Common Stock. The variable components of its
compensation programs are designed to attract and motivate results-oriented
people to achieve higher levels of performance while focusing on the goals of
the Company and its shareholders.

Company executives, including the Chief Executive Officer, receive base
salaries which are intended to support minimal managerial lifestyles. The
balance of the annual cash compensation for these executives is based upon the
percentage increase in fully diluted earnings per share (EPS) of the Common
Stock over the prior year. Increases in EPS within annually established ranges
result in corresponding increases in the percentage of base salary paid in the
form of bonuses. Conversely, declines in EPS would result in the reduction or
elimination of bonuses. Adjustments are made on an annual basis to base salary
and bonus programs to reflect individual performances.

Stock options are also granted to executive officers and other employees at
the fair market value of the Common Stock on the date of grant and become vested
over a specified period of employment. The number of shares granted is similarly
based upon the achievement of EPS growth targets and individual performance in
the previous year.

The fact that a significant portion of the compensation paid to the
Company's executive officers is based upon increases in earnings per share helps
to ensure that the Chief Executive Officer and other members of management are
sensitized to the needs and desires of the shareholders.

Dan W. Evins (Chairman)
Wallace C. Doud
Dr. C. Warren Neel

COMPENSATION COMMITTEE INTERLOCK AND INSIDER PARTICIPATION

During fiscal year 1997, the Compensation Committee consisted of Mr. Evins
(Chairman), Mr. Doud and Dr. Neel, none of whom has been an officer or employee
of the Company. In addition, there are no relationships among the Company's
executive officers, members of the Compensation Committee or entities whose
executives serve on the Board of Directors or the Compensation Committee that
require disclosure under applicable Security and Exchange Commission
regulations.

4
<PAGE> 7

COMPENSATION OF MANAGEMENT TABLE

The following table sets forth certain information with respect to the
compensation paid by the Company during the 1997, 1996 and 1995 fiscal years to
the executive officers of the Company, including the Chief Executive Officer
(the "named executive officers"):

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ----------------------------------
FISCAL -------------------- OPTIONS OTHER ANNUAL
NAME AND POSITION YEAR SALARY BONUS (# OF SHARES)(1) COMPENSATION(2)
----------------- ------ --------- --------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
James L. Clayton 1997 $275,000 $274,400 31,250 $ 7,367
Chairman and Chief Executive Officer 1996 $250,000 $410,000 39,062 $10,481
1995 $200,000 $400,000 19,531 $ 8,226
Joseph H. Stegmayer 1997 $245,000 $274,400 25,000 $ 7,767
Vice-Chairman and 1996 $225,000 $385,000 54,687 $10,624
Chairman of the Executive Committee 1995 $200,000 $400,000 97,656 $ 4,794
Kevin T. Clayton 1997 $175,000 $198,000 25,000 $ 6,494
President(3) 1996 $125,000 $255,000 31,250 $ 8,126
President, Financial Services 1995 $ 93,000 $182,000 39,062 $ 8,392
David M. Booth 1997 $175,000 $198,000 25,000 $ 6,862
Executive Vice-President 1996 $150,000 $265,000 31,250 $10,095
President, Retail 1995 $115,000 $285,000 39,062 $ 8,460
John J. Kalec 1997 $125,000 $ 54,800 25,000 $ 1,232
Senior Vice President 1996 -- -- -- --
Chief Financial Officer 1995 -- -- -- --
and Secretary
</TABLE>

- ---------------

(1) Adjusted for applicable stock splits.
(2) Represents Company contributions and reallocated forfeitures in the
Company's 401(k) Plan, health, life and disability insurance premiums.
(3) Son of James L. Clayton and nephew of B. Joe Clayton.

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth certain information with respect to stock
options granted to the named executive officers during the fiscal year ended
June 30, 1997:

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------- POTENTIAL REALIZABLE
PERCENT OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OF FOR OPTION TERM(1)
OPTIONS IN FISCAL DATE BASE PRICE EXPIRATION ----------------------
NAME GRANTED(2) YEAR 1997 GRANTED ($/SHARE)(2) DATE 5% 10%
- ---- ---------- ---------------- -------- ------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
James L. Clayton............ 31,250 5.5% 11/14/96 $12.90 11/14/06 $328,750 $762,188
Joseph H. Stegmayer......... 25,000 4.4% 11/14/96 $12.90 11/14/06 $263,000 $609,750
Kevin T. Clayton............ 25,000 4.4% 11/14/96 $12.90 11/14/06 $263,000 $609,750
David M. Booth.............. 25,000 4.4% 11/14/96 $12.90 11/14/06 $263,000 $609,750
John J. Kalec............... 25,000 4.4% 11/14/96 $12.90 11/14/06 $263,000 $609,750
</TABLE>

- ---------------

(1) Dollar gains reflected in these columns result from calculations assuming 5%
and 10% rates of annual growth as set by Securities and Exchange Commission
Regulations for the full ten-year option term and are not intended to
forecast future price appreciation of the Company's Common Stock. This
approach does not give effect to the impact of future world, domestic or
industry market or economic conditions, or the termination of the optionee's
employment during the option period (which results in a loss of the options
not then vested) and other factors that may not reasonably be foreseen. The
gains reflect a future value based upon growth at these prescribed rates. It
is important to note that options have value to listed

5
<PAGE> 8

executives and to all option recipients only if the stock price advances
beyond the base price on the date of grant shown in the table during the
effective option period.
(2) Adjusted for applicable stock split.

OPTION EXERCISES AND YEAR-END VALUE TABLE

The following table sets forth certain information with respect to the
exercise of options during the fiscal year ended June 30, 1997, and the value of
unexercised options held as of June 30, 1997, by the named executive officers:

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF IN-THE-MONEY
UNEXERCISED OPTIONS UNEXERCISED OPTIONS
SHARES AT FISCAL YEAR-END(#) AT FISCAL YEAR-END(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James L. Clayton.......................... -- -- 40,036 80,323 $ 166,743 $140,042
Joseph H. Stegmayer....................... -- -- 433,005 128,565 $2,187,406 $356,661
Kevin T. Clayton.......................... -- -- 31,514 76,306 $ 147,271 $177,425
David M. Booth............................ -- -- 109,439 94,313 $ 714,961 $271,860
John J. Kalec............................. -- -- -- 25,000 -- $ 36,875
</TABLE>

- ---------------

(1) Market value of underlying securities at June 30, 1997, minus exercise
price.

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth certain information with respect to Common
Stock beneficially owned by the named executive officers, and by the directors
and executive officers of the Company as a group, as of August 31, 1997:

<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME BENEFICIALLY OWNED PERCENT OF CLASS
- ---- ------------------ ----------------
<S> <C> <C>
James L. Clayton....................................... 30,736,523(1) 25.9%
Joseph H. Stegmayer.................................... 556,810(2) *
Kevin T. Clayton....................................... 657,205(3) *
David M. Booth......................................... 112,979(4) *
John J. Kalec.......................................... -- *
All Directors and Executive Officers as a Group(13
persons)............................................. 32,637,792(5) 27.5%
</TABLE>

- ---------------

* Less than 1%
(1) See footnote (1) under "Election of Directors."
(2) See footnote (6) under "Election of Directors."
(3) Includes options for 31,514 shares presently exercisable; includes 3,453
shares held for the benefit of Kevin T. Clayton in the Company's 401(k)
Plan; includes 4,880 shares held in a trust of which Kevin T. Clayton is
trustee and beneficiary; includes 373,152 shares held in trusts of which
Kevin T. Clayton is a trustee, but not a beneficiary; does not include
1,092,430 shares held by a non-profit corporation of which Kevin T. Clayton
is a director.
(4) Includes options for 109,439 shares presently exercisable; includes 3,540
shares held for the benefit of David M. Booth in the Company's 401(k) Plan.
(5) Includes options to purchase 713,957 shares presently exercisable; includes
17,411 shares held for the benefit of the executive officers in the
Company's 401(k) Plan; includes 4,880 shares held in trusts of which an
executive officer is trustee and beneficiary; does not include 617,902 held
in trusts of which directors or executive officers are trustees, but not
beneficiaries; includes 1,092,430 shares held by a non-profit corporation of
which certain executive officers are directors.

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<PAGE> 9

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN

The following table sets forth certain information with respect to the
Company's cumulative total shareholder return during the previous five years as
compared with the Standard & Poor's Corporation S & P Midcap 400 composite stock
price index and a "peer group" comprised of the following manufactured housing
companies: Cavalier Homes, Inc., Fleetwood Enterprises, Inc., Liberty Homes,
Inc., Oakwood Homes Corporation, Schult Homes Corp., and Skyline Corporation.

[GRAPH]

<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) Clayton Homes S&P Midcap 400 Peer Group
<S> <C> <C> <C>
1992 100.00 100.00 100.00
1993 149.35 122.69 147.18
1994 143.06 122.62 154.38
1995 166.77 150.01 161.57
1996 255.59 182.38 266.59
1997 230.85 224.93 268.95
</TABLE>

PROPOSAL 2

1997 EMPLOYEE STOCK INCENTIVE PLAN

The Company currently has a stock-based incentive compensation plan -- the
1991 Stock Option Plan, which will expire November 12, 2001. As of August 31,
1997, this plan had 155,008 shares available for grant to officers and key
employees.

In order to provide greater flexibility in adapting to changing economic
and competitive conditions and to implement stock-based compensation strategies
which will assist in attracting and retaining personnel who are important to the
long term success of the Company, the Board requests the adoption of the 1997
Employee Stock Incentive Plan (the "1997 Plan"). This proposal should be read in
conjunction with, and is qualified in its entirety by reference to, the complete
text of the 1997 Employee Stock Incentive Plan, which is attached hereto as
Exhibit A. The 1997 Plan will become effective in November 1997 and will
terminate ten years after that date. The 1997 Plan is substantially identical to
the 1991 Plan, and its adoption will permit the issuance of options for an
additional 5,000,000 shares.

Shares. The 1997 Plan will be authorized initially for 5,000,000 shares of
the Company Common Stock. If shares subject to an option under the 1997 Plan
cease to be subject to such option, or if shares awarded under the 1997 Plan are
forfeited, or otherwise terminate without a payment being made to the
participant in the form of the Company Common Stock, such shares again will be
available for future distribution under the 1997 Plan.

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<PAGE> 10

Participation. 1997 Plan awards may be made to key employees, including
officers of the Company, its subsidiaries and affiliates, but may not be granted
to any director who is a member of the Committee (as defined in the 1997 Plan)
or to any other director unless the director also is a regular employee of the
Company, its subsidiaries or affiliates. The 1997 Plan imposes no limit on the
number of officers and other key employees to whom awards may be made. The
number of employees participating in the 1997 Plan may be greater than the
number of employees who have participated in the Company's stock plans in the
past.

Administration. The 1997 Plan will be administered by a Committee of no
less than three disinterested individuals to be appointed by the Board (the
"Committee"). It is expected that such Committee will be the Compensation
Committee.

Awards Under the 1997 Plan. The Committee will have the authority to grant
the following type of awards under the 1997 Plan: (1) Stock Options; (2) Stock
Appreciation Rights; (3) Restricted Stock; (4) Deferred Stock and (5) Other
Stock-Based Awards.

1. Stock Options. Incentive stock options ("ISO") and non-qualified stock
options may be granted for such number of shares as the Committee will determine
and may be granted alone, in conjunction with, or in tandem with other awards
under the 1997 Plan and/or cash awards outside the 1997 Plan.

A stock option will be exercisable at such times and subject to such terms
and conditions as the Committee will determine and over a term to be established
by the Committee, which term will be no more than ten years after the date of
grant. The option price for any incentive stock option will not be less than
100% (110% in the case of certain 10% shareholders) of the fair market value of
the Company Common Stock as of the date of grant and for any non-qualified stock
option will be not less than 85% of the fair market value as of the date of
grant. Payment of the option price (in the case of an incentive stock option)
may be in cash, or, as determined by the Committee, by unrestricted Company
Common Stock having a fair market value equal to the option price. For
non-qualified stock options, payment, as determined by the Committee, may also
be made in the form of restricted or deferred stock.

Upon termination of an employee for cause, such employee's stock options
will terminate. If the employee is involuntarily terminated without cause or
resigns, stock options will be exercisable for 30 days following termination or
until the end of the option period, whichever is shorter. On the disability or
retirement of the employee, stock options will be exercisable within the lesser
of the remainder of the option period or one year from the date of disability or
retirement. Upon death of an employee, stock options will be exercisable by the
deceased employee's representative within the lesser of the remainder of the
option period or one year from the date of the employee's death. Only options
which are exercisable on the date of termination, death, disability, or
retirement may be subsequently exercised.

Stock options will not be transferable except by will or the laws of
descent and distribution.

2. Stock Appreciation Rights. Stock Appreciation Rights ("SAR's") may be
granted in conjunction with all or part of a stock option and will be
exercisable only when the underlying stock option is exercisable. Once an SAR
has been exercised, the related portion of the stock option underlying the SAR
will terminate.

Upon the exercise of an SAR, the Committee will pay to the employee in
cash, Common Stock or a combination thereof (the method of payment to be at the
discretion of the Committee), an amount of money equal to the excess between the
fair market value of the stock on the exercise date and the option price,
multiplied by the number of SAR's being exercised.

SAR's are transferable only to the extent that the underlying stock option
is transferable, i.e., upon the holder's death.

3. Restricted Stock. Restricted stock may be granted alone, in conjunction
with, or in tandem with other awards under the 1997 Plan and/or cash awards
outside of the 1997 Plan and may be conditioned upon the attainment of specific
performance goals or such other factors as the Committee may determine. The
provisions attendant to a grant of restricted stock may vary from participant to
participant.

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<PAGE> 11

In making an award of restricted stock, the Committee will determine the
periods during which the stock is subject to forfeiture, and may grant such
stock at a purchase price equal to or less than the par value of the Company
Common Stock.

During the restriction period, the employee may not sell, transfer, pledge
or assign the restricted stock. The certificate evidencing the restricted stock
will remain in the possession of the Company until the restrictions have lapsed.

Upon termination of the employee for any reason during the restriction
period, all restricted stock either will vest or be subject to forfeiture, in
accordance with the terms and conditions of the initial award. During the
restriction period, the employee will have the right to vote the restricted
stock and to receive any cash dividends. At the time of award, the Committee may
require the deferral and reinvestment of any cash dividends in the form of
additional shares of restricted stock. Stock dividends will be treated as
additional shares of restricted stock and will be subject to the same terms and
conditions as the initial grant.

At the time of the award of the restricted stock, the Committee may provide
for other awards, payable either in stock or cash, to be made to the employee so
as to ensure payment of a minimum value at the time the restrictions lapse on
the restricted stock, subject to such performance, service and/or other terms
and conditions as the Committee may specify.

4. Deferred Stock. Deferred stock may be granted alone, in conjunction
with, or in tandem with other awards under the 1997 Plan and/or cash awards
outside of the 1997 Plan and may be conditioned upon the attainment of specific
performance goals or such other factors as the Committee may determine. The
provisions attendant to a grant of deferred stock may vary from participant to
participant.

In making an award of deferred stock, the Committee will determine the
periods during which the stock is subject to forfeiture, and may grant such
stock without payment therefor. Upon vesting, the award will be settled in
shares of the Company's common stock.

During the deferral period as set by the Committee, the employee may not
sell, transfer, pledge or assign the deferred stock award. At the end of the
deferral period, shares of common stock equal to the number covered by the award
of deferred stock will be delivered to the employee.

Upon termination of the employee for any reason during the deferral period,
all deferred stock either will vest or be subject to forfeiture, in accordance
with the terms and conditions of the initial award.

During the deferral period, and as determined by the Committee at the time
of award, the amount equivalent to any dividends that would have been paid had
the shares of deferred stock covered by a given award been issued will be paid
to the employee, or deemed reinvested in additional shares of deferred stock.
Deferred stock will carry no voting rights until such time as the stock is
actually issued.

At the time of the award of the deferred stock, the Committee may provide
for other awards, payable either in stock or cash, to be made to the employee so
as to ensure payment of a minimum value of the time the deferral limitations
lapse on the deferred stock, subject to such performance, service and/or other
terms and conditions as the Committee may specify.

5. Other Stock-Based Awards. The Committee also may grant other types of
awards that are valued, in whole or in part, by reference to or otherwise based
on the Company Common Stock. These awards may be granted alone, in addition to,
or in tandem with stock options, SAR's, restricted stock, deferred stock and/or
cash awards outside of the 1997 Plan. Such awards will be made upon terms and
conditions as the Committee may in its discretion provide.

Amendment. The 1997 Plan may be amended by the Board of Directors, except
that the Board may not, without the approval of the Company's shareholders,
increase the number of shares available for distribution, change the pricing
rule applicable for stock options, change the class of employees eligible to
receive awards under the 1997 Plan, or extend the term of any award.

Adjustment. In the case of a stock split, stock dividend,
reclassification, recapitalization, merger, reorganization, or other changes in
the Company's structure affecting the Common Stock, appropriate

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adjustments will be made by the Committee, in its sole discretion, in the number
of shares reserved under the 1997 Plan and in the number of shares covered by
options and other awards then outstanding under the 1997 Plan and, where
applicable, the exercise price for awards under the 1997 Plan.

VOTE REQUIRED

Under Delaware law and applicable regulations of the Securities and
Exchange Commission and requirements of the New York Stock Exchange, the
affirmative vote of a majority of the shares present in person or by proxy at
the annual meeting of shareholders is required for approval of the 1997 Employee
Stock Incentive Plan.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE 1997 EMPLOYEE
STOCK INCENTIVE PLAN.

COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers and directors ("reporting persons") to file initial reports
of ownership of Common Stock and reports of changes in ownership with the
Securities and Exchange Commission. Executive officers and directors are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file. Based solely on a review of the copies of such forms
furnished to the Company and written representations from such reporting persons
with respect to the period from July 1, 1996 through June 30, 1997, all filing
requirements applicable to reporting persons have been met.

ANNUAL REPORT ON FORM 10-K

The Company will provide without charge, at the written request of any
beneficial shareholder of record on September 16, 1997, a copy of the Company's
Annual Report on Form 10-K, including the financial statements and financial
statement schedules, as filed with the Securities and Exchange Commission,
except exhibits thereto. The Company will provide copies of the exhibits, should
they be requested by eligible shareholders, and the Company may impose a
reasonable fee for providing such exhibits. Requests for copies of the Company's
Annual Report on Form 10-K should be mailed to:

CLAYTON HOMES, INC.
623 Market Street
Knoxville, Tennessee 37902
Attention: Investor Relations

SHAREHOLDER PROPOSALS

Any shareholder proposals intended to be presented at the Company's 1998
Annual Meeting of Shareholders must be received by the Company at its corporate
offices no later than May 31, 1998, in order to be considered by the Board of
Directors for inclusion in the proxy statement and form of proxy relating to
such meeting.

OTHER MATTERS

The Board of Directors knows of no other matters to be brought before the
Annual Meeting. However, if any other matter properly comes before the Annual
Meeting or any adjournment thereof, it is intended that the person named in the
enclosed Proxy will vote such Proxy on such matter in accordance with her best
judgment.

JOHN J. KALEC
Secretary

September 26, 1997

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EXHIBIT A

CLAYTON HOMES, INC.

1997 EMPLOYEE STOCK INCENTIVE PLAN

SECTION 1. PURPOSE; DEFINITIONS.

The purpose of the Clayton Homes, Inc. 1997 Employee Stock Incentive Plan
(the "Plan") is to enable Clayton Homes, Inc. (the "Company") to attract, retain
and reward key employees of the Company and its Subsidiaries and Affiliates, and
strengthen the mutuality of interests between such key employees and the
Company's shareholders, by offering such key employees performance-based stock
incentives and/or other equity interests or equity-based incentives in the
Company, as well as performance-based incentives payable in cash.

For purposes of the Plan, the following terms shall be defined as set forth
below:

A. "Affiliate" means any entity other than the Company and its
Subsidiaries that is designated by the Board as a participating employer
under the Plan, provided that the Company directly or indirectly owns at
least 20% of the combined voting power of all classes of stock of such
entity or at least 20% of the ownership interests in such entity.

B. "Board" means the Board of Directors of the Company.

C. "Book Value" means, as of any given date, on a per share basis (i)
the Shareholders' Equity in the Company as of the end of the immediately
preceding fiscal year as reflected in the Company's consolidated balance
sheet, subject to such adjustments as the Committee shall specify at or
after grant, divided by (ii) the number of then outstanding shares of Stock
as of such year-end date (as adjusted by the Committee for subsequent
events).

D. "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto.

E. "Committee" means the Committee referred to in Section 2 of the
Plan. If at any time no Committee shall be in office, then the functions of
the Committee specified in the Plan shall be exercised by the Board.

F. "Company" means Clayton Homes, Inc., a corporation organized under
the laws of the State of Delaware or any successor corporation.

G. "Deferred Stock" means an award made pursuant to Section 8 of the
right to receive Stock at the end of a specified deferral period.

H. "Disability" means disability as determined under procedures
established by the Committee for purposes of this Plan.

I. "Disinterested Person" shall have the meaning set forth in Rule
16b-3(d)(3) as promulgated by the Securities and Exchange Commission under
the Securities Exchange Act of 1934, or any successor definition adopted by
the Commission.

J. "Early Retirement" means retirement, with the express consent for
purposes of this Plan of the Company at or before the time of such
retirement, from active employment with the Company and any Subsidiary or
Affiliate pursuant to the early retirement provisions of the applicable
pension plan of such entity.

K. "Fair Market Value" means, as of any given date, unless otherwise
determined by the Committee in good faith, the reported closing price of
the Stock on the New York Stock Exchange composite index or, if no such
sale of Stock is reported on the New York Stock Exchange or other national
reporting exchange system on such date, the fair market value of the Stock
as determined by the Committee in good faith.

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L. "Incentive Stock Option" means any Stock Option intended to be and
designated as an "Incentive Stock Option" within the meaning of Section
422A of the Code.

M. "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.

N. "Normal Retirement" means retirement from active employment with
the Company and any Subsidiary or Affiliate on or after age 65.

O. "Other Stock-Based Award" means an award under Section 9 that is
valued in whole or in part by reference to, or is otherwise based on Stock.

P. "Plan" means this Clayton Homes, Inc. 1997 Employee Stock Incentive
Plan, as hereinafter amended from time to time.

Q. "Restricted Stock" means an award of shares of Stock that is
subject to restrictions under Section 7.

R. "Retirement" means normal or early retirement.

S. "Stock" means the Common Stock, $.10 par value per share, of the
Company.

T. "Stock Appreciation Right" means the right pursuant to an award
granted under Section 6 to surrender to the Company all (or a portion) of a
Stock Option in exchange for an amount equal to the difference between (i)
the Fair Market Value, as of the date such Stock Option (or such portion
thereof) is surrendered, of the shares of Stock covered by such Stock
Option (or such portion thereof), subject, where applicable, to the pricing
provisions in Section 6(b)(ii); and (ii) the aggregate exercise price of
such Stock Option (or such portion thereof).

U. "Stock Option" or "Option" means any option to purchase shares of
Stock (including Restricted Stock and Deferred Stock, if the Committee so
determines) granted pursuant to Section 5.

V. "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations (other than the last corporation in the unbroken chain) owns
stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in the chain.

In addition, the term "Cause" shall have the meaning set forth in Section
5(i) below.

SECTION 2. ADMINISTRATION.

The Plan shall be administered by a Committee of not less than three
Disinterested Persons, who shall be appointed by the Board of Directors of the
Company (the "Board") and who shall serve at the pleasure of the Board. The
functions of the Committee specified in the Plan shall be exercised by the
Board, if and to the extent that no Committee exists which has the authority to
so administer the Plan.

The Committee shall have full authority to grant, pursuant to the terms of
the Plan, to officers and other key employees eligible under Section 4; (i)
Stock Options, (ii) Stock Appreciation Rights, (iii) Restricted Stock, (iv)
Deferred Stock and/or (v) Other Stock-Based Awards.

In particular, the Committee shall have the authority:

(i) to select the officers and other key employees of the Company and
its Subsidiaries and Affiliates to whom Stock Options, Stock Appreciation
Rights, Restricted Stock, Deferred Stock and/or Other Stock-Based Awards
may from time to time be granted hereunder;

(ii) to determine whether and to what extent Incentive Stock Options,
Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock,
Deferred Stock and/or Other Stock-Based Awards, or any combination thereof,
are to be granted hereunder to one or more eligible employees;

(iii) to determine the number of shares to be covered by each such
award granted hereunder;

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<PAGE> 15

(iv) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder (including, but not
limited to, the share price and any restriction or limitation, or any
vesting acceleration or waiver of forfeiture restrictions regarding any
Stock Option or other award and/or the shares of Stock relating thereto,
based in each case on such factors as the Committee shall determine, in its
sole discretion);

(v) to determine whether and under what circumstances a Stock Option
may be settled in cash, Restricted Stock and/or Deferred Stock under
Section 5(k) or (l), as applicable, instead of Stock;

(vi) to determine whether, to what extent and under what circumstances
Option grants and/or other awards under the Plan and/or other cash awards
made by the Company are to be made, and operate, on a tandem basis
vis-a-vis other awards under the Plan and/or cash awards made outside of
the Plan, or on an additive basis;

(vii) to determine whether, to what extent and under what
circumstances Stock and other amounts payable with respect to an award
under this Plan shall be deferred either automatically or at the election
of the participant (including providing for and determining the amount (if
any) of any deemed earnings on any deferred amount during any deferral
period); and

(viii) to determine the terms and restrictions applicable to the Stock
purchased by exercising such Rights.

The Committee shall have the authority to adopt, alter and repeal such
guidelines and practices governing the Plan as it shall, from time to time, deem
advisable; to interpret the terms and provisions of the Plan and any award
issued under the Plan (and any agreements relating thereto); and to otherwise
supervise the administration of the Plan.

All decisions made by the Committee pursuant to the provisions of the Plan
shall be made in the Committee's sole discretion and shall be final and binding
on all persons, including the Company and Plan participants.

SECTION 3. STOCK SUBJECT TO PLAN.

The total number of shares of Stock reserved and available for distribution
under the Plan shall be five million (5,000,000) shares. Such shares may
consist, in whole or in part, of authorized and unissued shares.

Subject to Section 6(b)(iv) below, if any shares of Stock that have been
optioned cease to be subject to a Stock Option, or if any such shares of Stock
that are subject to any Restricted Stock or Deferred Stock award, or Other
Stock-Based Award granted hereunder are forfeited or any such award otherwise
terminates without a payment being made to the participant in the form of Stock,
such shares shall again be available for distribution in connection with future
awards under the Plan.

In the event of any merger, reorganization, consolidation,
recapitalization, Stock dividend, Stock split or other change in corporate
structure affecting the Stock, such substitution or adjustment shall be made in
the aggregate number of shares reserved for issuance under the Plan, in the
number and option and/or purchase price of shares subject to outstanding Options
and other awards granted under the Plan, as may be determined to be appropriate
by the Committee, in its sole discretion, provided that the number of shares
subject to any award shall always be a whole number. Such adjusted option price
shall also be used to determine the amount payable by the Company upon the
exercise of any Stock Appreciation Right associated with any Stock Option.

SECTION 4. ELIGIBILITY.

Officers and other key employees of the Company and its Subsidiaries and
Affiliates (but excluding members of the Committee and any person who serves
only as a director) who are responsible for or contribute to the management,
growth and/or profitability of the business of the Company and/or its
Subsidiaries and Affiliates are eligible to be granted awards under the Plan.

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SECTION 5. STOCK OPTIONS.

Stock Options may be granted alone, in addition to, or in tandem with other
awards granted under the Plan and/or cash awards made outside of the Plan. Any
Stock Option granted under the Plan shall be in such form as the Committee may
from time to time approve.

Stock Options granted under the Plan may be of two types: (i) Incentive
Stock Options and (ii) Non-Qualified Stock Options.

The Committee shall have the authority to grant to any optionee Incentive
Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in
each case with or without Stock Appreciation Rights).

Options granted under the Plan shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable:

(a) Option Price. The option price per share of Stock purchasable
under a Stock Option shall be determined by the Committee at the time of
grant but shall be not less than 100% (or, in the case of an employee who
owns stock possessing more than 10 percent of the total combined voting
power of all classes of stock of the Company or of any of its subsidiary or
parent corporations, not less than 110%) of the Fair Market Value of the
Stock at grant, in the case of Incentive Stock Options, and not less than
85% of the Fair Market Value of the Stock at grant, in the case of
Non-Qualified Stock Options.

(b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Stock Option shall be exercisable more than ten years
(or, in the case of an employee who owns stock possessing more than 10
percent of the total combined voting power of all classes of stock of the
Company or any of its subsidiary or parent corporations, more than five
years) after the date the Option is granted.

(c) Exercisability. Stock Options shall be exercisable at such time
or times and subject to such terms and conditions as shall be determined by
the Committee at or after grant; provided, however, that, except as
provided in Section 5(f) and (g), unless otherwise determined by the
Committee at or after grant, no Stock Option shall be exercisable prior to
the first anniversary date of the granting of the Option. If the Committee
provides, in its sole discretion, that any Stock Option is exercisable only
in installments, the Committee may waive such installment exercise
provisions at any time at or after grant in whole or in part, based on such
factors as the Committee shall determine, in its sole discretion.

(d) Method of Exercise. Subject to whatever installment exercise
provisions apply under Section 5(c), Stock Options may be exercised in
whole or in part at any time during the option period, by giving written
notice of exercise to the Company specifying the number of shares to be
purchased.

Such notice shall be accompanied by payment in full of the purchase
price, either by check, note or such other instrument as the Committee may
accept. As determined by the Committee, in its sole discretion, at or after
grant, payment in full or in part also may be made in the form of
unrestricted Stock already owned by the optionee or, in the case of the
exercise of a Non-Qualified Stock Option, Restricted Stock or Deferred
Stock subject to an award hereunder (based, in each case, on the Fair
Market Value of the Stock on the date the option is exercised, as
determined by the Committee).

If payment of the option exercise price of a Non-Qualified Stock
Option is made in whole or in part in the form of Restricted Stock or
Deferred Stock, such Restricted Stock or Deferred Stock (and any
replacement shares relating thereto) shall remain (or be) restricted or
deferred, as the case may be, in accordance with the original terms of the
Restricted Stock award or Deferred Stock award in question, and any
additional Stock received upon the exercise shall be subject to the same
forfeiture restrictions or deferral limitations, unless otherwise
determined by the Committee, in its sole discretion, at or after grant.

No shares of Stock shall be issued until full payment therefore has
been made. An optionee generally shall have the rights to dividends or
other rights of a shareholder with respect to shares subject

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<PAGE> 17

to the Option when the optionee has given written notice of exercise, has
paid in full for such shares, and, if requested, has given the
representation described in Section 12(a).

(e) Non-Transferability of Options. No Stock Option shall be
transferable by the optionee otherwise than by will or by the laws of
descent and distribution, and all Stock Options shall be exercisable,
during the optionee's lifetime, only by the optionee or the optionee's
guardian or legal representative.

(f) Termination by Death. Subject to Section 5(j), if an optionee's
employment by the Company and any Subsidiary or Affiliate terminates by
reason of death, any Stock Option held by such optionee may thereafter be
exercised, to the extent such option was exercisable at the time of death,
by the legal representative of the estate or by the legatee of the optionee
under the will of the optionee, for a period of one year from the date of
such death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter.

(g) Termination by Reason of Disability. Subject to Section 5(j), if
an optionee's employment by the Company and any Subsidiary or Affiliate
terminates by reason of Disability, any Stock Option held by such optionee
may thereafter be exercised by the optionee, to the extent it was
exercisable at the time of termination for a period of one year from the
date of such termination of employment or until the expiration of the
stated term of such Stock Option, whichever period is the shorter;
provided, however, that, if the optionee dies within such one-year period,
any unexercised Stock Option held by such optionee shall thereafter be
exercisable to the extent to which it was exercisable at the time of death
for a period of one year from the date of such death or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter. In the event of termination of employment by reason of Disability,
if an Incentive Stock Option is exercised after the expiration of the
exercise periods that apply for purposes of Section 422A of the Code, such
Stock Option will thereafter be treated as a Non-Qualified Stock Option.

(h) Termination by Reason of Retirement. Subject to Section 5(j), if
an optionee's employment by the Company and any Subsidiary or Affiliate
terminates by reason of Normal or Early Retirement, any Stock Option held
by such optionee may thereafter be exercised by the optionee, to the extent
it was exercisable at the time of such Retirement, for a period of one year
from the date of such termination of employment or the expiration of the
stated term of such Stock Option, whichever period is the shorter;
provided, however, that, if the optionee dies within such one-year period
any unexercised Stock Option held by such optionee shall thereafter be
exercisable, to the extent to which it was exercisable at the time of
death, for a period of one year from the date of such death or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter. In the event of termination of employment by reason of Retirement,
if an Incentive Stock Option is exercised after the expiration of the
exercise periods that apply for purposes of Section 422A of the Code, the
option will thereafter be treated as a Non-Qualified Stock Option.

(i) Other Termination. If an optionee's employment by the Company and
any Subsidiary or Affiliate terminates for any reason other than death,
Disability or Normal or Early Retirement, the Stock Option shall thereupon
terminate, except that such Stock Option may be exercised, to the extent
otherwise then exercisable, for the lesser of 30 days or the balance of
such Stock Option's term if the optionee is involuntarily terminated by the
Company and any Subsidiary or Affiliate without Cause or resigns. For
purposes of this Plan, "Cause" means a felony conviction of a participant
or the failure of a participant to contest prosecution for a felony, or a
participant's willful misconduct or dishonesty, any of which is directly
and materially harmful to the business or reputation of the Company or any
Subsidiary or Affiliate.

(j) Incentive Stock Options. Anything in the Plan to the contrary
notwithstanding, no term of this Plan relating to Incentive Stock Options
shall be interpreted, amended or altered, nor shall any discretion or
authority granted under the Plan be so exercised, so as to disqualify the
Plan under Section 422A of the Code, or, without the consent of the
optionee(s) affected, to disqualify any Incentive Stock Option under such
Section 422A.

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To the extent permitted under Section 422A of the Code or the
applicable regulations thereunder or any applicable Internal Revenue
Service pronouncement if (A) a participant's employment is terminated by
reason of death, Disability or Retirement and (B) the portion of any
Incentive Stock Option that is otherwise exercisable during the
post-termination period specified under Section 5(f), (g) or (h), applied
without regard to the $100,000 limitation contained in Section 422A(b)(7)
of the Code, is greater than the portion of such option that is immediately
exercisable as an "incentive stock option" during such post-termination
period under Section 422A, such excess shall be treated as a Non-Qualified
Stock Option.

(k) Buyout Provisions. The Committee may at any time offer to buy out
for a payment in cash, Stock, Deferred Stock or Restricted Stock an option
previously granted, based on such terms and conditions as the Committee
shall establish and communicate to the optionee at the time that such offer
is made.

(l) Settlement Provisions. If the option agreement so provides at
grant or is amended after grant and prior to exercise to so provide (with
the optionee's consent), the Committee may require that all or part of the
shares to be issued with respect to the spread value of an exercised Option
take the form of Deferred or Restricted Stock, which shall be valued on the
date of exercise on the basis of the Fair Market Value (as determined by
the Committee) of such Deferred or Restricted Stock determined without
regard to the deferral limitations and/or forfeiture restrictions involved.

SECTION 6. STOCK APPRECIATION RIGHTS.

(a) Grant and Exercise. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under the Plan. In the
case of a Non-Qualified Stock Option, such rights may be granted either at or
after the time of the grant of such Stock Option. In the case of an Incentive
Stock Option, such rights may be granted only at the time of the grant of such
Stock Option.

A Stock Appreciation Right or applicable portion thereof granted with
respect to a given Stock Option shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock Option, subject to such
provisions as the Committee may specify at grant where a Stock Appreciation
Right is granted with respect to less than the full number of shares covered by
a related Stock Option.

A Stock Appreciation Right may be exercised by an optionee, subject to
Section 6(b), in accordance with the procedures established by the Committee for
such purpose. Upon such exercise, the optionee shall be entitled to receive an
amount determined in the manner prescribed in Section 6(b). Stock Options
relating to exercised Stock Appreciation Rights shall no longer be exercisable
to the extent that the related Stock Appreciation Rights have been exercised.

(b) Terms and Conditions. Stock Appreciation Rights shall be subject to
such terms and conditions, not inconsistent with the provisions of the Plan, as
shall be determined from time to time by the Committee, including the following:

(i) Stock Appreciation Rights shall be exercisable only at such time
or times and to the extent that the Stock Options to which they relate
shall be exercisable in accordance with the provisions of Section 5 and
this Section 6 of the Plan; provided, however, that any Stock Appreciation
Right granted to an optionee subject to Section 16(b) of the Securities
Exchange Act of 1934 (the "Exchange Act") subsequent to the grant of the
related Stock Option shall not be exercisable during the first six months
of its term, except that this special limitation shall not apply in the
event of death or Disability of the optionee prior to the expiration of the
six-month period. The exercise of Stock Appreciation Rights held by
optionees who are subject to Section 16(b) of the Exchange Act shall comply
with Rule 16(b)-3 thereunder, to the extent applicable.

(ii) Upon the exercise of a Stock Appreciation Right, an optionee
shall be entitled to receive an amount in cash and/or shares of Stock equal
in value to the excess of the Fair Market Value of one share of Stock over
the option price per share specified in the related Stock Option multiplied
by the number of shares in respect of which the Stock Appreciation Right
shall have been exercised, with the Committee having the right to determine
the form of payment. When payment is to be made in shares, the number of
shares to be paid shall be calculated on the basis of the Fair Market Value
of the shares on the date of

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<PAGE> 19

exercise. When payment is to be made in cash, such amount shall be
calculated on the basis of the average of the highest and lowest quoted
selling price, regular way, of the Stock on the New York Stock Exchange
during the applicable period referred to in Rule 16b-3(e) under the
Exchange Act.

(iii) Stock Appreciation Rights shall be transferable only when and to
the extent that the underlying Stock Option would be transferable under
Section 5(e) of the Plan.

(iv) Upon the exercise of a Stock Appreciation Right, the Stock Option
or part thereof to which such Stock Appreciation Right is related shall be
deemed to have been exercised for the purpose of the limitation set forth
in Section 3 of the Plan on the number of shares of Stock to be issued
under the Plan, but only to the extent of the number of shares issued under
the Stock Appreciation Right at the time of exercise based on the value of
the Stock Appreciation Right at such time.

SECTION 7. RESTRICTED STOCK.

(a) Administration. Shares of Restricted Stock may be issued either alone,
in addition to or in tandem with other awards granted under the Plan and/or cash
awards made outside the Plan. The Committee shall determine the eligible persons
to whom, and the time or times at which, grants of Restricted Stock will be
made, the number of shares to be awarded, the price (if any) to be paid by the
recipient of Restricted Stock (subject to Section 7(b)), the time or times
within which such awards may be subject to forfeiture, and all other terms and
conditions of the awards.

The Committee may condition the grant of Restricted Stock upon the
attainment of specified performance goals or such other factors as the Committee
may determine, in its sole discretion.

The provisions of restricted Stock awards need not be the same with respect
to each recipient.

(b) Awards and Certificates. The prospective recipient of a Restricted
Stock award shall not have any rights with respect to such award, unless and
until such recipient has executed an agreement evidencing the award and has
delivered a fully executed copy thereof to the Company, and has otherwise
complied with the applicable terms and conditions of such award.

(i) The purchase price for shares of Restricted Stock shall be equal
to or less than their par value and may be zero.

(ii) Awards of Restricted Stock must be accepted within a period of 60
days (or such shorter period as the Committee may specify at grant) after
the award date, by executing a Restricted Stock Award Agreement and paying
whatever price (if any) is required under Section 7(b)(i).

(iii) Each participant receiving a Restricted Stock award shall be
issued a stock certificate in respect of such shares of Restricted Stock.
Such certificate shall be registered in the name of such participant, and
shall bear an appropriate legend referring to the terms, conditions, and
restrictions applicable to such award.

(iv) The Committee shall require that the stock certificates
evidencing such shares be held in custody by the Company until the
restrictions thereon shall have lapsed, and that, as a condition of any
Restricted Stock award, the participant shall have delivered a stock power,
endorsed in blank, relating to the Stock covered by such award.

(c) Restrictions and Conditions. The shares of Restricted Stock awarded
pursuant to this Section 7 shall be subject to the following restrictions and
conditions:

(i) Subject to the provisions of this Plan and the award agreement,
during a period set by the Committee commencing with the date of such award
(the "Restriction Period"), the participant shall not be permitted to sell,
transfer, pledge or assign shares of Restricted Stock awarded under the
Plan. Within these limits, the Committee, in its sole discretion, may
provide for the lapse of such restrictions in installments and may
accelerate or waive such restrictions in whole or in part, based on
service, performance and/or such other factors or criteria as the Committee
may determine, in its sole discretion.

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<PAGE> 20

(ii) Except as provided in this paragraph (ii) and Section 7(c)(i),
the participant shall have, with respect to the shares of Restricted Stock,
all of the rights of a shareholder of the Company, including the right to
vote the shares, and the right to receive any cash dividends. The
Committee, in its sole discretion, as determined at the time of award, may
permit or require the payment of cash dividends to be deferred and, if the
Committee so determines, reinvested, subject to Section 12(e), in
additional Restricted Stock to the extent shares are available under
Section 3, or otherwise reinvested. Pursuant to Section 3 above, Stock
dividends issued with respect to Restricted Stock shall be treated as
additional shares of Restricted Stock that are subject to the same
restrictions and other terms and conditions that apply to the shares with
respect to which such dividends are issued.

(iii) Subject to the applicable provisions of the award agreement and
this Section 7, upon termination of a participant's employment with the
Company and any Subsidiary or Affiliate for any reason during the
Restriction Period, all shares still subject to restriction will vest, or
be forfeited, in accordance with the terms and conditions established by
the Committee at or after grant.

(iv) If and when the Restriction Period expires without a prior
forfeiture of the Restricted Stock subject to such Restriction Period,
certificates for an appropriate number of unrestricted shares shall be
delivered to the participant promptly.

(d) Minimum Value Provisions. In order to better ensure that award
payments actually reflect the performance of the Company and service of the
participant, the Committee may provide, in its sole discretion, for a tandem
performance-based or other award designed to guarantee a minimum value, payable
in cash or Stock to the recipient of a restricted stock award, subject to such
performance, future service, deferral and other terms and conditions as may be
specified by the Committee.

SECTION 8. DEFERRED STOCK.

(a) Administration. Deferred Stock may be awarded either alone, in
addition to or in tandem with other awards granted under the Plan and/or cash
awards made outside of the Plan. The Committee shall determine the eligible
persons to whom and the time or times at which Deferred Stock shall be awarded,
the number of shares of Deferred Stock to be awarded to any person, the duration
of the period (the "Deferral Period") during which, and the conditions under
which, receipt of the Stock will be deferred, and the other terms and conditions
of the award in addition to those set forth in Section 8(b).

The Committee may condition the grant of Deferred Stock upon the attainment
of specified performance goals or such other factors or criteria as the
Committee shall determine, in its sole discretion.

The provisions of Deferred Stock awards need not be the same with respect
to each recipient.

(b) Terms and Conditions. The shares of Deferred Stock awarded pursuant to
this Section 8 shall be subject to the following terms and conditions:

(i) Subject to the provisions of this Plan and the award agreement
referred to in Section 8(b)(vi) below, Deferred Stock awards may not be
sold, assigned, transferred, pledged or otherwise encumbered during the
Deferral Period. At the expiration of the Deferral Period (or the Elective
Deferral Period referred to in Section 8(b)(v), where applicable), share
certificates shall be delivered to the participant, or his legal
representative, in a number equal to the shares covered by the Deferred
Stock award.

(ii) Unless otherwise determined by the Committee at grant, amounts
equal to any dividends declared during the Deferral Period with respect to
the number of shares covered by a Deferred Stock award will be paid to the
participant currently, or deferred and deemed to be reinvested in
additional Deferred Stock, or otherwise reinvested, all as determined at or
after the time of the award by the Committee, in its sole discretion.

(iii) Subject to the provisions of the award agreement and this
Section 8, upon termination of a participant's employment with the Company
and any Subsidiary or Affiliate for any reason during the

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<PAGE> 21

Deferral Period for a given award, the Deferred Stock in question will
vest, or be forfeited, in accordance with the terms and conditions
established by the Committee at or after grant.

(iv) Based on service, performance and/or such other factors or
criteria as the Committee may determine, the Committee may, at or after
grant, accelerate the vesting of all or any part of any Deferred Stock
award and/or waive the deferral limitations for all or any part of such
award.

(v) A participant may elect to further defer receipt of an award (or
an installment of an award) for a specified period or until a specified
event (the "Elective Deferral Period"), subject in each case to the
Committee's approval and to such terms as are determined by the Committee,
all in its sole discretion. Subject to any exceptions adopted by the
Committee, such election generally must be made at least 12 months prior to
completion of the Deferral Period for such Deferred Stock award (or such
installment).

(vi) Each award shall be confirmed by, and subject to the terms of, a
Deferred Stock agreement executed by the Company and the participant.

(c) Minimum Value Provisions. In order to better ensure that award
payments actually reflect the performance of the Company and the service of the
participant, the Committee may provide, in its sole discretion, for a tandem
performance-based or other award designed to guarantee a minimum value, payable
in cash or Stock to the recipient of a deferred stock award, subject to such
performance, future service, deferral and other terms and conditions as may be
specified by the Committee.

SECTION 9. OTHER STOCK-BASED AWARDS.

(a) Administration. Other awards of Stock and other awards that are valued
in whole or in part by reference to, or are otherwise based on, Stock ("Other
Stock-Based Awards"), including, without limitation, performance shares,
convertible preferred stock, convertible debentures, exchangeable securities and
Stock awards or options valued by reference to Book Value or subsidiary
performance, may be granted either alone or in addition to or in tandem with
Stock Options, Stock Appreciation Rights, Restricted Stock, or Deferred Stock
granted under the Plan and/or cash awards made outside of the Plan.

Subject to the provisions of the Plan, the Committee shall have authority
to determine the persons to whom and the time or times at which such awards
shall be made, the number of shares of Stock to be awarded pursuant to such
awards, and all other conditions of the awards. The Committee may also provide
for the grant of Stock upon the completion of a specified performance period.

The provisions of other Stock-Based Awards need not be the same with
respect to each recipient.

(b) Terms and Conditions. Other Stock-Based Awards made pursuant to this
Section 9 shall be subject to the following terms and conditions:

(i) Subject to the provisions of this Plan and the award agreement
referred to in Section 9(b)(v) below, shares subject to awards made under
this Section 9 may not be sold, assigned, transferred, pledged or otherwise
encumbered prior to the date on which the shares are issued, or, if later,
the date on which any applicable restriction, performance or deferral
period lapses.

(ii) Subject to the provisions of this Plan and the award agreement
and unless otherwise determined by the Committee at grant, the recipient of
an award under this Section 9 shall be entitled to receive, currently or on
a deferred basis, interest or dividends or interest or dividend equivalents
with respect to the number of shares covered by the award, as determined at
the time of the award by the Committee, in its sole discretion, and the
Committee may provide that such amounts (if any) shall be deemed to have
been reinvested in additional Stock or otherwise reinvested.

(iii) Any award under this Section 9 and any Stock covered by any such
award shall vest or be forfeited to the extent so provided in the award
agreement, as determined by the Committee, in its sole discretion.

19
<PAGE> 22

(iv) In the event of the participant's Retirement, Disability or
death, or in cases of special circumstances, the Committee may, in its sole
discretion, waive in whole or in part any or all of the remaining
limitations imposed hereunder (if any) with respect to any or all of an
award under this Section 9.

(v) Each award under this Section 9 shall be confirmed by, and subject
to the terms of, an agreement or other instrument by the Company and by the
participant.

(vi) Stock (including securities convertible into Stock) issued on a
bonus basis under this Section 9 may be issued for no cash consideration.
Stock (including securities convertible into Stock) purchased pursuant to a
purchase right awarded under this Section 9 shall be priced at least 50% of
the Fair Market Value of the Stock on the date of grant.

SECTION 10. AMENDMENTS AND TERMINATION.

The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made which would impair the rights of an
optionee or participant under a Stock Option, Stock Appreciation Right,
Restricted or Deferred Stock award or Other Stock-Based Award theretofore
granted, without the optionee's or participant's consent or which, without the
approval of the Company's shareholders, would:

(a) except as expressly provided in this Plan, increase the total
number of shares reserved for the purpose of the Plan;

(b) change the pricing terms of Section 5(a);

(d) extend the maximum term under Section 14 of the Plan.

The Committee may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, but, subject to Section 3
above, no such amendment shall impair the rights of any holder without the
holder's consent. The Committee also may substitute new Stock Options for
previously granted Stock Options (on a one for one or other basis), including
previously granted Stock Options having higher option exercise prices.

Subject to the above provisions, the Board shall have broad authority to
amend the Plan to take into account changes in applicable securities and tax
laws and accounting rules, as well as other developments.

SECTION 11. UNFUNDED STATUS OF PLAN.

The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained herein shall give any
such participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Stock or payments in lieu of or with respect to awards
hereunder; provided, however, that, unless the Committee otherwise determines
with the consent of the affected participant, the existence of such trusts or
other arrangements is consistent with the "unfunded" status of the Plan.

SECTION 12. GENERAL PROVISIONS.

(a) The Committee may require each person purchasing shares pursuant to a
Stock Option or other award under the Plan to represent to and agree with the
Company in writing that the optionee or participant is acquiring the shares
without a view to distribution thereof. The certificates for such shares may
include any legend which the Committee deems appropriate to reflect any
restrictions on transfer.

All certificates for shares of Stock or other securities delivered under
the Plan shall be subject to such stock-transfer orders and other restrictions
as the Committee may deem advisable under the rules, regulations,

20
<PAGE> 23

and other requirements of the Securities and Exchange Commission, any stock
exchange upon which the Stock is then listed, and any applicable Federal or
state securities law, and the Committee may cause a legend or legends to be put
on any such certificates to make appropriate reference to such restrictions.

(b) Nothing contained in this Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to stockholder approval
if such approval is required; and such arrangements may be either generally
applicable or applicable only in specific cases.

(c) The adoption of the Plan shall not confer upon any employee of the
Company or any Subsidiary or Affiliate any right to continued employment with
the Company or a Subsidiary or Affiliate, as the case may be, nor shall it
interfere in any way with the right of the Company or a Subsidiary or Affiliate
to terminate the employment of any of its employees at any time.

(d) No later than the date as of which an amount first becomes includable
in the gross income of the participant for Federal income tax purposes with
respect to any award under the Plan, the participant shall pay to the Company,
or make arrangements satisfactory to the Committee regarding the payment of, any
Federal, state, or local taxes of any kind required by law to be withheld with
respect to such amount. Unless otherwise determined by the Committee,
withholding obligations may be settled with Stock, including Stock that is part
of the award that gives rise to the withholding requirement. The obligations of
the Company under the Plan shall be conditional on such payment or arrangements
and the Company and its Subsidiaries or Affiliates shall, to the extent
permitted by law, have the right to deduct any such taxes from any payment of
any kind otherwise due to the participant.

(e) The actual or deemed reinvestment of dividends or dividend equivalents
in additional Restricted Stock (or in Deferred Stock or other types of Plan
awards) at the time of any dividend payment only shall be permissible if
sufficient shares of Stock are available under Section 3 for such reinvestment
(taking into account then outstanding Stock Options and other Plan awards).

(f) The Plan and all awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Delaware.

SECTION 13. EFFECTIVE DATE OF PLAN.

The Plan shall be effective as of November 12, 1997, upon the approval of
the Plan by a majority of the votes cast by the holders of the Company's Common
Stock at the 1997 annual shareholders' meeting.

SECTION 14. TERM OF PLAN.

No Stock Option, Stock Appreciation Right, Restricted Stock award, Deferred
Stock award or Other Stock-Based Award shall be granted pursuant to the Plan on
or after the tenth anniversary of the date of shareholder approval, but awards
granted prior to such tenth anniversary may extend beyond that date.

21
<PAGE> 24

CLAYTON HOMES, INC.
P.O. BOX 15169
KNOXVILLE, TN 37901
(mailing)

623 MARKET STREET
KNOXVILLE, TN 37902
(street)

423-970-7200
<PAGE> 25
Appendix A

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER HEREIN
DIRECTED BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THE SHARE(S)
REPRESENTED BY THIS PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2.

1. ELECTION OF DIRECTORS.

<TABLE>
<S> <C>
[ ]FOR ALL NOMINEES LISTED BELOW [ ]WITHHOLD AUTHORITY to vote for all
(except as marked to the nominees listed below
contrary below)
</TABLE>

To withhold authority to vote for any individual nominee, draw a line
through the nominee's name in the list below.

James L. Clayton, B. Joe Clayton, James D. Cockman, Thomas N. McAdams, Dan
W. Evins, Wilma H. Jordan, C. Warren Neel, Joseph H. Stegmayer.

2. TO ADOPT THE 1997 EMPLOYEE STOCK INCENTIVE PLAN.

[ ] FOR [ ] AGAINST [ ] ABSTAIN

3. IN THEIR DISCRETION, THE PROXY IS AUTHORIZED TO VOTE UPON SUCH BUSINESS AS
MAY COME BEFORE THE MEETING.

CLAYTON HOMES, INC. PROXY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS

The undersigned hereby acknowledges receipt of the Notice of Annual Meeting
of Shareholders of November 12, 1997, and related Proxy Statement, and appoints
Rebecca J. Hoag the true and lawful agent and proxy of the undersigned (the
"Proxy"), having full power of substitution, to represent the undersigned and to
vote all shares of Clayton Homes, Inc., owned and held by the undersigned, or
which the undersigned would be entitled to vote if personally present at the
Annual Meeting of Shareholders of Clayton Homes, Inc., to be held at the Louise
Mandrell Theater, 2046 Parkway, Pigeon Forge, Tennessee 37863 at 10:30 a.m. EST,
November 12, 1997, or any adjournment thereof.

This Proxy must be signed exactly as
name appears. When shares are held by
joint tenants, both should sign. When
signing as attorney or as trustee,
executor or guardian, please give
full title as such. If a corporation,
please sign, in full, corporate name
by the President or other authorized
officer. If a partnership, please
sign in partnership name by
authorized person.

Dated: ________________________, 1997

-------------------------------------
(Signature)

-------------------------------------
(Signature, if held jointly)

PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.

[ ] PLEASE CHECK BOX IF YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON.