CAVALIER HOMES INC
10-Q, 1998-08-10
MOBILE HOMES
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                                  UNITED STATES
                        SECURITIES & EXCHANGE COMMISSION
                             Washington, D. C. 20549


                                    FORM 10-Q
                                    ---------


(Mark One)

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the quarterly period ended      June 26, 1998
                                         ------------------------
                                       OR

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         For the transition period from                to
                                        --------------     --------------
                          Commission File Number 1-9792

                              Cavalier Homes, Inc.
              ----------------------------------------------------
             (Exact name of Registrant as specified in its charter)


        Delaware                                                63-0949734
- ----------------------------                              ----------------------
(State or other jurisdiction                                  (IRS Employer
    of incorporation or                                   Identification Number)
      organization)



            Highway 41 North & Cavalier Road, Addison, Alabama 35540
            --------------------------------------------------------
                    (Address of principal executive offices)
                                   (Zip Code)


                                 (256) 747-0044
               -------------------------------------------------
              (Registrant's telephone number, including area code)


- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last year)


         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes  X  No
                                             -----  -----

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock, as of the close of the latest practicable date.

          Class                                    Outstanding at August 7, 1998
- ----------------------------                       -----------------------------
Common Stock, $.10 Par Value                             20,105,322 Shares


<PAGE>
                      CAVALIER HOMES, INC. AND SUBSIDIARIES


                                      INDEX
                                      -----

                                                                        Page No.
Part I.  Financial Information  (Unaudited)
                                                                        --------
         Consolidated Condensed Balance Sheets -                           3
         June 26, 1998  and December 31, 1997

         Consolidated Condensed Statements of Income -                     4
         Thirteen and Twenty-six Weeks Ended June 26, 1998
         and June 27, 1997

         Consolidated Condensed Statements of Cash Flows -                 5
         Twenty-six Weeks Ended June 26, 1998  and
         June 27, 1997

         Notes to Consolidated Condensed Financial Statements              6

         Management's Discussion and Analysis of Financial                 9
         Condition and Results of Operations

Part II. Other Information

         Item 1.  Legal Proceedings                                       14

         Item 4.  Submission of Matters to a Vote of Security             14
                  Holders

         Item 5.  Other Matters                                           14

         Item 6.  Exhibits and Reports on Form 8-K                        15

         Signatures                                                       17













Certain  items in the report  that  follows  are marked  with an  asterisk  (*),
indicating  that they are  subject  to the  "Safe  Harbor"  Statement  under the
Private  Securities  Litigation  Reform  Act of  1995  found  on page 16 of this
report.

                                      -2-
<PAGE>
<TABLE>
<CAPTION>
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                             (Dollars in Thousands)
                                   (UNAUDITED)

<S>                                                                             <C>            <C>
                                                                                   June 26,      December 31,
 ASSETS                                                                              1998            1997
 CURRENT ASSETS:                                                                _____________   ____________
      Cash and cash equivalents                                                 $    45,456     $    37,276
      Certificates of deposit, maturing within one year                                   -           4,000
      Accounts receivable, less allowance for                                                              
             losses of $1,185 (1998) and $1,175 (1997)                               35,254           8,449
      Notes and installment contracts receivable - current                            1,231           1,561
      Inventories                                                                    34,820          29,697
      Deferred income taxes                                                           7,770           7,240
      Other current assets                                                            2,318           1,292
                                                                                _____________   ____________
             Total current assets                                                   126,849          89,515
                                                                                _____________   ____________
 PROPERTY, PLANT AND EQUIPMENT (Net)                                                 54,603          53,434
                                                                                _____________   ____________
 INSTALLMENT CONTRACTS RECEIVABLE, less
     allowance for credit losses of $813 (1998)
     and $1,272 (1997)                                                               23,326          46,614
                                                                                _____________   ____________
 GOODWILL, less accumulated amortization of
     $3,610 (1998) and $3,102 (1997)                                                 20,003          19,551
                                                                                _____________   ____________
 OTHER ASSETS                                                                         2,522           2,440
                                                                                _____________   ____________
 TOTAL                                                                          $   227,303    $    211,554
                                                                                =============   ============
 LIABILITIES AND STOCKHOLDERS' EQUITY
 CURRENT LIABILITIES:
      Current portion of long-term debt                                         $       392    $      3,271
      Notes payable                                                                   2,446               -
      Accounts payable                                                               21,279           9,575
      Amounts payable under dealer incentive programs                                15,579          14,614
      Accrued compensation and related withholdings                                   9,269           4,294
      Estimated warranties                                                           12,100          11,700
      Accrued merger and related costs                                                1,871           5,178
      Other accrued expenses                                                         17,048          12,399
                                                                                _____________   ____________
           Total current liabilities                                                 79,984          61,031
                                                                                _____________   ____________
 DEFERRED INCOME TAXES                                                                  431             297
                                                                                _____________   ____________
 LONG-TERM DEBT                                                                       3,881          15,808
                                                                                _____________   ____________
 OTHER LONG-TERM LIABILITIES                                                          1,096             867
                                                                                _____________   ____________
 STOCKHOLDERS' EQUITY:
      Series A Junior Participating Preferred Stock, $.01 par value;
         200,000 shares authorized, none issued
      Preferred stock, $.01 par value;
         300,000 shares authorized, none issued
      Common stock, $.10 par value; authorized
         50,000,000 shares; issued 20,079,751 (1998)
         and 19,941,357 (1997) shares                                                 2,008           1,994
      Additional paid-in capital                                                     58,662          57,228
      Retained earnings                                                              81,241          74,329
                                                                                _____________   ____________
          Total stockholders' equity                                                141,911         133,551
                                                                                _____________   ____________
 TOTAL                                                                          $   227,303    $    211,554
                                                                                =============   ============

<FN>
            See Notes to Consolidated Condensed Financial Statements
</FN>
</TABLE>
                                      -3-
<PAGE>
<TABLE>
<CAPTION>
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                   CONSOLIDATED CONDENSED STATEMENTS OF INCOME
                 (Dollars in Thousands Except Per Share Amounts)
                                   (UNAUDITED)

<S>                                              <C>             <C>            <C>             <C>
                                                        Thirteen Weeks Ended          Twenty-six Weeks Ended
                                                    ____________________________  ___________________________
                                                       June 26,       June 27,       June 26,        June 27,
                                                         1998           1997           1998            1997
 REVENUES:                                          ____________    ____________  ___________    ____________
      Net sales                                    $    166,586    $    159,629   $   289,739   $    285,701
      Financial services                                  1,027           1,296         3,453          2,438
                                                    ____________    ____________  ___________    ____________
                                                        167,613         160,925       293,192        288,139
                                                    ____________    ____________  ___________    ____________

 COST OF SALES                                          136,153         133,652       238,908        239,068


 SELLING, GENERAL AND ADMINISTRATIVE:
     Manufacturing                                       22,474          17,589        39,248         32,401
     Financial services                                     780             745         1,728          1,420
                                                    ____________    ____________  ___________    ____________
                                                        159,407         151,986       279,884        272,889
                                                    ____________    ____________  ___________    ____________
 OPERATING PROFIT                                         8,206           8,939        13,308         15,250
                                                    ____________    ____________  ___________    ____________
 OTHER INCOME(EXPENSE):
     Interest expense:
        Manufacturing                                      (131)           (173)         (273)          (423)
        Financial services                                    2            (221)         (281)          (323)
     Life Insurance Proceeds                                  -           1,500             -          1,500
     Other, net                                             492             367           884            865
                                                    ____________    ____________  ___________    ____________
                                                            363           1,473           330          1,619
                                                    ____________    ____________  ___________    ____________
 INCOME BEFORE INCOME TAXES                               8,569          10,412        13,638         16,869
                                                    ____________    ____________  ___________    ____________
 INCOME TAXES                                             3,500           3,532         5,527          6,096
                                                    ____________    ____________  ___________    ____________
 NET INCOME                                      $        5,069    $      6,880    $    8,111   $     10,773
                                                    ============    ============  ===========    ============
 BASIC NET INCOME PER SHARE                      $          .25    $        .35    $      .41   $        .54
                                                    ============    ============  ===========    ============
 DILUTED NET INCOME PER SHARE                    $          .25    $        .34    $      .40   $        .54
                                                    ============    ============  ===========    ============
 WEIGHTED AVERAGE SHARES OUTSTANDING                 20,044,585      19,807,235    20,006,292     19,785,208
                                                    ============    ============  ===========    ============
 WEIGHTED AVERAGE SHARES OUTSTANDING,
    ASSUMING DILUTION                                20,427,558      19,999,103    20,294,047     19,989,861
                                                    ============    ============  ===========    ============













<FN>
            See Notes to Consolidated Condensed Financial Statements
</FN>
</TABLE>
                                      -4-
<PAGE>
<TABLE>
<CAPTION>
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                             (Dollars in Thousands)
                                   (UNAUDITED)

<S>                                                                             <C>            <C>
                                                                                     Twenty-six Weeks Ended
                                                                                ______________________________
                                                                                    June 26,        June 27,
                                                                                      1998            1997
 OPERATING ACTIVITIES:                                                          _____________   ______________
   Net income                                                                   $     8,111    $     10,773
   Adjustments to reconcile net income to net cash used in operating activities:
        Depreciation and amortization                                                 4,005           3,738
        Provision for credit losses and repurchase commitments                         (469)            234
        Gain on sale of installment contracts                                        (1,283)              -
        (Gain) loss on sale of property, plant and equipment                             (1)            284
        Equity in net income of unconsolidated affiliates                              (101)           (187)
        Minority interest in net income of consolidated subsidiaries                    229              40
        Compensation related to issuance of stock options                               119              72
        Changes in assets and liabilities provided (used) cash, net of effects
        of acquisitions:
             Accounts receivable                                                    (26,731)        (21,095)
             Inventories                                                             (2,276)         (3,660)
             Accounts payable                                                        11,645           4,999
             Other assets and liabilities                                             6,219           3,227
                                                                                _____________   ______________
        Net cash used in operating activities                                          (533)         (1,575)
                                                                                _____________   ______________
 INVESTING ACTIVITIES:
   Proceeds from the sale of property, plant and equipment                               32              28
   Net cash paid in connection with acquisitions                                     (1,199)           (871)
   Capital expenditures                                                              (4,420)         (4,956)
   Purchases of certificates of deposit                                              (6,044)              -
   Maturities of certificates of deposit                                             10,044           2,743
   Distribution from equity investments                                                  66             248
   Proceeds from sale or maturity of marketable securities                                -           1,097
   Purchases and originations of notes and installment contracts                     (7,245)        (10,934)
   Proceeds from sale of installment contracts                                       29,662               -
   Principal collected on notes and installment contracts                             2,901           2,017
                                                                                _____________   ______________
        Net cash provided by (used in) investing activities                          23,797         (10,628)
                                                                                _____________   ______________
 FINANCING ACTIVITIES:
   Proceeds from long-term borrowings                                                     -           8,552
   Net payments on notes payable                                                       (408)              -
   Payments on long-term debt                                                       (14,806)         (5,213)
   Cash dividends paid                                                               (1,199)           (731)
   Proceeds from exercise of stock options                                              165               4
   Net proceeds from sales of common stock                                            1,164             956
                                                                                _____________   ______________
        Net cash provided by (used in) financing activities                         (15,084)          3,568
                                                                                _____________   ______________
 NET DECREASE IN CASH AND CASH EQUIVALENTS                                            8,180          (8,635)
                                                                                _____________   ______________
 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                      37,276          29,751
                                                                                _____________   ______________
 CASH AND CASH EQUIVALENTS, END OF PERIOD                                       $    45,456    $     21,116
                                                                                =============   ==============




<FN>
            See Notes to Consolidated Condensed Financial Statements
</FN>
</TABLE>
                                      -5-

<PAGE>
                                     PART I.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
              Notes to Consolidated Condensed Financial Statements
                  For the Thirteen and Twenty-six Week Periods
                      Ended June 26, 1998 and June 27, 1997
                (Dollars in Thousands, Except Per Share Amounts)

1.        BUSINESS COMBINATION AND BASIS OF PRESENTATION

                   On December 31, 1997,  Belmont Homes,  Inc.  ("Belmont")  was
                  merged  with and into a  subsidiary  of Cavalier  Homes,  Inc.
                  ("Cavalier"),  and 7,555,121 shares of Cavalier's common stock
                  were  issued in  exchange  for all of the  outstanding  common
                  stock of Belmont. The merger was accounted for as a pooling of
                  interests,  and,  accordingly,  the accompanying  consolidated
                  condensed  financial  statements have been restated to include
                  the financial  position,  results of operations and cash flows
                  of Belmont  for all  periods  presented.  Previously  reported
                  amounts for the  individual  companies  have been adjusted for
                  the  effect of former  equity  investments  in  unconsolidated
                  joint ventures which are now consolidated subsidiaries and for
                  reclassification  of  certain  Belmont  amounts  to conform to
                  Cavalier's presentation.

                   The accompanying  consolidated condensed financial statements
                  have been prepared in compliance  with Form 10-Q  instructions
                  and thus do not include all of the  information  and footnotes
                  required  by  generally  accepted  accounting  principles  for
                  complete financial  statements.  In the opinion of management,
                  these statements contain all adjustments  necessary to present
                  fairly the Company's  financial  position as of June 26, 1998,
                  and the results of its  operations  and its cash flows for the
                  thirteen and  twenty-six  week periods ended June 26, 1998 and
                  June 27, 1997, respectively.  All adjustments are of a normal,
                  recurring nature.

                   The results of  operations  for the thirteen  and  twenty-six
                  week  periods   ended  June  26,  1998  are  not   necessarily
                  indicative of the results to be expected for the full year.

                   During  February  1997,  the Financial  Accounting  Standards
                  Board  ("FASB")  issued  Statement  of  Financial   Accounting
                  Standards  ("SFAS")  No.  128,  Earnings  per Share,  which is
                  effective  for all  financial  statements  issued for  periods
                  ending after December 15, 1997,  including interim periods. In
                  accordance with this Standard,  the Company is now required to
                  report two  separate  earnings  per share  numbers,  basic and
                  diluted.  Both are  computed  by  dividing  net  income by the
                  weighted  average  common  shares  outstanding  (basic EPS) or
                  weighted average common shares  outstanding  assuming dilution
                  (diluted EPS) as detailed below:

         <TABLE>
<S>                                         <C>             <C>             <C>             <C>
                                                Thirteen Weeks Ended             Twenty-six Weeks Ended
                                            ---------------------------     ----------------------------
                                              June 26,        June 27,         June 26,        June 27,
                                                1998            1997             1998            1997
                                            ------------    -----------     ------------    ------------
 BASIC & DILUTED
      Net Income                            $     5,069     $     6,880     $     8,111     $    10,773
                                            ============    ===========     ============    ============
 SHARES:


  Weighted average common shares
     outstanding (basic)                      20,044,585      19,807,235     20,006,292      19,785,208

  Dilutive effect if stock options
     were exercised                              382,973         191,868        287,755         204,653
                                            ------------    -----------     ------------    ------------
  Weighted average common shares
     outstanding,assuming dilution (diluted)  20,427,558      19,999,103     20,294,047      19,989,861
                                            ============    ===========     ============    ============
</TABLE>


                 - Inventories consist primarily of raw materials and are stated
                  at the lower of cost (first-in, first-out method) or market.

                 - Certain amounts from the prior periods have been reclassified
                  to conform to the 1998 presentation.

                 - In April 1998, the Company purchased substantially all of the
                  assets and assumed  certain  existing  liabilities of The Home
                  Place, Inc. for a net cash payment of $1,199.

                                      -6-
<PAGE>
                                     PART I.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
              Notes to Consolidated Condensed Financial Statements
                  For the Thirteen and Twenty-six Week Periods
                      Ended June 26, 1998 and June 27, 1997
                (Dollars in Thousands, Except Per Share Amounts)

2.       ACCOUNTING STANDARD NOT YET ADOPTED

         In June 1997, the FASB issued SFAS No. 131,  Disclosures about Segments
         of an Enterprise and Related  Information.  This statement is effective
         for  financial  statements  issued for  fiscal  years  beginning  after
         December 15, 1997.  The adoption of the provisions of this Statement is
         expected to result only in increased disclosures on segment information
         and will not impact the amounts in the financial statements.


3.       SUPPLEMENTAL CASH FLOW DISCLOSURES          Twenty-Six Weeks Ended
                                                  ------------------------------
                                                   June 26,            June 27,
                                                     1998                1997
                                                  ----------          ----------
         Cash paid for:    Interest               $   553             $   712
                           Income taxes           $ 4,576             $ 5,146

4.        CREDIT ARRANGEMENTS

         In June  1998,  the  Company  executed  an amended  $35,000  revolving,
         warehouse  and term-loan  agreement  (the "Credit  Facility")  with its
         primary bank, whose president is a director of the Company.  The Credit
         Facility  contains  a  revolving  line of  credit  which  provides  for
         borrowings  (including  letters  of credit) of up to 80% and 50% of the
         Company's  eligible (as defined)  accounts  receivable and inventories,
         respectively, up to a maximum of $10,000. Interest is payable under the
         revolving  line of credit at the bank's  prime rate  (8.50% at June 26,
         1998),  or, if elected by the Company,  the 90-day LIBOR Rate plus 2.5%
         (8.19% at June 26, 1998).

         The warehouse and term-loan agreements contained in the Credit Facility
         provide  for  borrowings  of up to 80% of the  Company's  eligible  (as
         defined)  installment  sale  contracts,  up to a  maximum  of  $25,000.
         Interest  on term  notes  is  fixed  for a period  of five  years  from
         issuance  at a rate  based on the  weekly  average  yield on  five-year
         treasury  securities  averaged over the preceding 13 weeks, plus 1.95%,
         and floats for the  remaining  two years at a rate  (subject to certain
         limits)  equal to the  bank's  prime  rate  plus  .75%.  The  warehouse
         component  of the Credit  Facility  provides  for  borrowings  of up to
         $25,000 with interest  payable at the bank's prime rate, or, if elected
         by the Company,  the 90-day LIBOR Rate plus 2.5%.  However, in no event
         may the  aggregate  outstanding  borrowings  under  the  warehouse  and
         term-loan agreement exceed $25,000.

         The  Credit  Facility   contains  certain   restrictive  and  financial
         covenants,  which, among other things,  limit the aggregate of dividend
         payments and  purchases of treasury  stock to 50% of  consolidated  net
         income  for the two most  recent  years,  contain  restrictions  on the
         Company's ability to pledge assets,  incur additional  indebtedness and
         make capital expenditures,  and require the Company to maintain certain
         defined financial ratios. Amounts outstanding under the Credit Facility
         are secured by the accounts  receivable and inventories of the Company,
         loans  purchased  and  originated  by Cavalier  Acceptance  Corporation
         ("CAC"), and the capital stock of certain of the Company's consolidated
         subsidiaries.  The bank's  commitment under the Credit Facility expires
         in April 2000.

         No amounts were outstanding under the Credit Facility at June 26, 1998.

5.        STOCKHOLDERS' EQUITY

         Cash  dividends  were paid during this quarter and the  previous  three
         quarters as follows (all amounts are per share):


               Record Date              Payment Date            Dividend Paid
               -----------              ------------            -------------
             April 30, 1998            May 15, 1998              $      .030
             January 30, 1998          February 16, 1998         $      .030
             October 31, 1997          November 14, 1997         $      .018
             July 31, 1997             August 15, 1997           $      .019

                                      -7-
<PAGE>
                                     PART I.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
              Notes to Consolidated Condensed Financial Statements
                  For the Thirteen and Twenty-six Week Periods
                      Ended June 26, 1998 and June 27, 1997
                (Dollars in Thousands, Except Per Share Amounts)

6.       COMMITMENTS AND CONTINGENCIES

             -     It is customary  practice for  companies in the  manufactured
                  housing  industry to enter into  repurchase and other recourse
                  agreements  with  lending  institutions  which  have  provided
                  wholesale floor plan financing to dealers.  Substantially  all
                  of the Company's sales are made to dealers  located  primarily
                  in the southeast,  southwest and midwest regions of the United
                  States and are pursuant to repurchase  agreements with lending
                  institutions.   These   agreements   generally   provide   for
                  repurchase  of  the   Company's   products  from  the  lending
                  institutions  for  the  balance  due  them  in  the  event  of
                  repossession upon a dealer's default.  Although the Company is
                  contingently  liable for an amount  estimated  to be  $193,000
                  under these  agreements as of June 26, 1998, such  contingency
                  is mitigated by the fact that (i) sales of manufactured  homes
                  are spread over a relatively large number of dealers; (ii) the
                  price the Company is  obligated  to pay under such  repurchase
                  agreements   generally   declines   over  the  period  of  the
                  agreement;  and (iii) the  Company  may be able to reduce  its
                  losses by the resale  value of the homes which may be required
                  to be repurchased.  The Company has an allowance for losses of
                  $1,185   based  on  prior   experience   and  current   market
                  conditions.  Management  expects no material loss in excess of
                  the allowance.*

             -     The Company's workmen's  compensation,  product liability and
                  general  liability  insurance  coverages  are  provided  under
                  incurred  loss,  retrospectively  rated premium  plans.  Under
                  these plans, the Company incurs insurance  expenses based upon
                  various  rates  applied  to current  payroll  costs and sales.
                  Annually,  such insurance expenses are adjusted by the carrier
                  for loss  experience  factors  subject to minimum  and maximum
                  premium  calculations.  At June  26,  1998,  the  Company  was
                  contingently   liable   for   future   retrospective   premium
                  adjustments  up to a  maximum  of  $5,700  in the  event  that
                  additional losses are reported related to prior periods.

             -     The Company is engaged in various legal  proceedings that are
                  incidental to and arise in the course of its business. Certain
                  of the cases filed  against  the  Company and other  companies
                  engaged in  businesses  similar to the Company  allege,  among
                  other  things,  breach  of  contract  and  warranty,   product
                  liability,  personal  injury  and  fraudulent,   deceptive  or
                  collusive practices in connection with their businesses. These
                  kinds of suits are  typical  of suits  that have been filed in
                  recent years,  and they sometimes seek  certification as class
                  actions,  the imposition of large amounts of compensatory  and
                  punitive  damages  and  trials  by  jury.  In the  opinion  of
                  management,  the ultimate  liability,  if any, with respect to
                  the proceedings in which the Company is currently  involved is
                  not presently  expected to have a material  adverse  effect on
                  the Company. * However, the potential exists for unanticipated
                  material adverse judgments against the Company.

             -     The Company and certain of its equity  partners  have jointly
                  and severally guaranteed revolving notes for two companies and
                  a letter of credit for one company in which the  Company  owns
                  various  equity  interests.  The  guarantees  are  limited  to
                  various  percentages of the  outstanding  debt up to a maximum
                  guaranty of $1,500.  At June 26, 1998,  $3,000 was outstanding
                  under  the  various  guarantees,  of  which  the  Company  had
                  guaranteed $720.

                                      -8-

- ---------------------------------------
* See Safe Harbor Statement on page 16.
<PAGE>
                                     PART I.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations
                                  June 26, 1998

General

The  principal  business of the Company since its inception in 1984 has been the
design, production and sale of manufactured homes. In the first quarter of 1992,
the  Company,  through  its  wholly  owned  subsidiary,  CAC,  commenced  retail
installment sale financing operations,  and by the end of 1993, these operations
had become significant enough to require segment reporting by the Company.

Effective  December  31,  1997,  the Company  completed a merger (the  "Merger")
involving  Belmont  Homes,  Inc.  ("Belmont"),  whose  shares were traded on The
Nasdaq National Market under the symbol "BHIX". In the Merger,  Belmont became a
wholly  owned  subsidiary  of the  Company,  and each  Belmont  share issued and
outstanding  immediately prior to the effective time of the Merger was converted
into the right to receive 0.80 shares of the common  stock of the  Company.  The
Company  issued  7,555,121  shares of its common stock in the Merger in exchange
for the outstanding shares of Belmont common stock. The Merger was accounted for
as a pooling of interests and,  accordingly,  the Company's financial statements
have been restated to include the financial position,  results of operations and
cash flows of Belmont  for all  periods  presented.  The  information  herein is
presented on a combined basis.

The Company's business is cyclical and seasonal and is influenced by many of the
same economic and demographic factors that affect the housing market as a whole.
According  to the  Manufactured  Housing  Institute  ("MHI"),  the  manufactured
housing  industry  posted  gains in  shipments  from  1992  through  1996,  with
approximate  total annual  shipments  of 211,000  (1992)  increasing  to 363,000
(1996), and with the greatest gains occurring in the southeastern United States.
The Company  conducts a substantial  portion of its business in the southeastern
United States and attributes  past years' strong  shipment growth to a reduction
of alternative housing,  increased  availability of retail financing,  increased
consumer  confidence and continuing  strength in the national economy.  However,
the  manufactured  housing  industry  has,  over the past  several  years,  also
experienced  increases  in both the number of retail  dealers and  manufacturing
capacity,  which the Company  believes is currently  resulting in slower  retail
turnover,  higher dealer inventories and increased price competition.  According
to MHI,  industry  statistics  reflected a decrease in home shipments of 2.8% in
1997 as compared to 1996, with approximate  shipments of 353,000 (1997) compared
to 363,000 (1996), and with large declines occurring in Alabama, Mississippi and
South  Carolina,  all substantial  markets for the Company.  It is possible that
these  developments  may  signal  a  return  to  seasonality  in  the  Company's
manufacturing  business,  which was not a  significant  factor during the period
from 1992  through  1996,  with sales of homes being  stronger in April  through
October and weaker  during the first and last part of the  calendar  year.* As a
whole, the industry appears to have improved year-to-date through May 1998, with
MHI reporting industry  shipments  increased over 1997 by 3.4%. While several of
the  Company's  core states,  including  Alabama and Texas,  reported  increased
shipments  through May 1998, North and South Carolina as well as other states in
which the Company does significant business reported declines in shipments.  The
Company  is  uncertain  at this  time as to the  extent  and  duration  of these
developments  and as to what effect  these  factors  will have on the  Company's
future sales and earnings. *

The Company's major marketing strategy remains focused on building  distribution
through exclusive dealer relationships. In addition, the Company currently plans
to supplement the  independent  dealer network with  franchise  dealerships  and
company sales centers in key markets where  penetration is inadequate.  In April
1998, the Company  purchased one retailer with two locations in the  Birmingham,
Alabama market area, and subsequent to the end of the second  quarter,  acquired
another retailer with one location in Panama City,  Florida.  These acquisitions
were  in key  markets  where  retailers  wanted  to  grow  and  increase  market
penetration,  and the Company provided the necessary  capital. The Company  may,
in the future,  acquire other  retailers  where it believes there is a strategic
fit.*

                                      -9-
- ---------------------------------------
* See Safe Harbor Statement on page 16.
<PAGE>
                                     PART I.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations
                                  June 26, 1998


Results of Operations
The following  tables set forth,  for the periods and dates  indicated,  certain
financial and operating data,  including,  as applicable,  the percentage of net
sales or total revenue:

<TABLE>
<S>                                                  <C>               <C>       <C>               <C>       <C>              <C>
STATEMENT OF INCOME SUMMARY                                                      For the Thirteen Weeks Ended
                                                     _______________________________________________________________________________
(Dollars in Thousands)                                      June 26, 1998               June 27, 1997               Difference
                                                     _________________________   _________________________   _______________________
Net Sales                                            $     166,586     100.0%    $     159,629     100.0%    $       6,957     4.4%
Cost of Sales                                              136,153      81.7%          133,652      83.7%            2,501     1.9%
                                                     ______________    _______   ______________    _______   ______________
     Gross Profit on Sales                           $      30,433      18.3%    $      25,977      16.3%    $       4,456    17.2%
                                                     ==============              ==============              ==============
Net Sales                                            $     166,586               $     159,629               $       6,957     4.4%
Financial Services                                           1,027                       1,296                        (269)  -20.8%
                                                     ______________              ______________              ______________
     Total Revenue                                   $     167,613     100.0%    $     160,925     100.0%    $       6,688     4.2%
                                                     ==============              ==============              ==============
Selling, General and Administrative                  $      23,254      13.9%    $      18,334      11.4%    $       4,920    26.8%
Operating Profit                                     $       8,206       4.9%    $       8,939       5.6%    $        (733)   -8.2%
Other Income                                         $         363       0.2%    $       1,473       0.9%    $      (1,110)  -75.4%
Net Income                                           $       5,069       3.0%    $       6,880       4.3%    $      (1,811)  -26.3%

STATEMENT OF INCOME SUMMARY                                                      For the Twenty-Six Weeks Ended
                                                     _______________________________________________________________________________
(Dollars in Thousands)                                      June 26, 1998               June 27, 1997               Difference
                                                     _________________________   _________________________   _______________________
Net Sales                                            $     289,739     100.0%    $     285,701     100.0%    $       4,038     1.4%
Cost of Sales                                              238,908      82.5%          239,068      83.7%             (160)   -0.1%
                                                     ______________    _______   ______________    _______   ______________
     Gross Profit on Sales                           $      50,831      17.5%    $      46,633      16.3%    $       4,198     9.0%
                                                     ==============              ==============              ==============
Net Sales                                            $     289,739               $     285,701               $       4,038     1.4%
Financial Services                                           3,453                       2,438                       1,015    41.6%
                                                     ______________              ______________              ______________
     Total Revenue                                   $     293,192     100.0%    $     288,139     100.0%    $       5,053     1.8%
                                                     ==============              ==============              ==============
Selling, General and Administrative                  $      40,976      14.0%    $      33,821      11.7%    $       7,155    21.2%
Operating Profit                                     $      13,308       4.5%    $      15,250       5.3%    $      (1,942)  -12.7%
Other Income                                         $         330       0.1%    $       1,619       0.6%    $      (1,289)  -79.6%
Net Income                                           $       8,111       2.8%    $      10,773       3.7%    $      (2,662)  -24.7%
</TABLE>

<TABLE>
<S>                                                <C>               <C>              <C>              <C>
                                                       For the Thirteen Weeks           For the Twenty-Six Weeks
OPERATING DATA SUMMARY                                         Ended                             Ended
                                                   ______________________________    ______________________________
(Dollars in Thousands)                             June 26, 1998    June 27, 1997    June 26, 1998    June 27, 1997
                                                   _____________    _____________    _____________    _____________
Installment Loan Purchases                           $   4,272       $    4,628       $    6,989       $   10,491
Capital Expenditures                                 $   2,863       $    3,334       $    4,420       $    4,956
Home Shipments                                           6,719            6,907           11,814           12,323
Floor Shipments                                         10,000            9,587           17,544           17,192
Independent Exclusive Dealer Locations                     189              134              189              134
Home Manufacturing Facilities                               22               22               22               22
</TABLE>

Net Sales.  Net sales of  manufactured  homes for the thirteen week period ended
June 26, 1998 increased  $6,957,000 or 4.4% as compared to the second quarter of
1997,  and the Company  experienced  an  increase in net sales of  approximately
$4,038,000 or 1.4%, for the twenty-six  week period ended June 26, 1998 over the
comparable  period in 1997. The increase in sales for both periods over 1997 are
in part attributable to industry trends. Floor shipments increased by 413 floors
and 352 floors,  respectively;  however,  homes sold for the second  quarter and
year-to-date  decreased  from the  comparable  periods  in the prior year by 188
homes and 509 homes,  respectively,  as the  Company's  product mix continued to
shift from  single-section  homes to  multi-section  homes.  During the thirteen
weeks ended June 26, 1998,  49% of the Company's  homes sold were  multi-section
homes,  compared  to  39%  for  the  previous  year's  comparable  period,  with
year-to-date  multi-section home sales increasing to 49% compared to 40% for the
twenty-six  week period ended June 27, 1997. As part of the Company's  marketing
program,  the exclusive dealer  distribution system has grown to 189 independent
exclusive  dealer  locations,  up from 134  dealer  locations  at the end of the
second quarter of 1997.

                                      -10-

                                     PART I.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations
                                  June 26, 1998

Financial  Services  Revenue.  Financial  services  revenue  during  the current
thirteen  week  period  decreased  $269,000  over the  comparable  period in the
previous  year,  due  primarily to a reduced loan  portfolio,  but  increased by
$1,015,000  for the  twenty-six  week  period  ended  June  26,  1998  over  the
comparable period in 1997, primarily due to the sale of a significant portion of
CAC's loan portfolio.  The effect of these  transactions  on financial  services
revenue has been to reduce the amount of  interest  income on the portion of the
portfolio  sold,  offset by a gain on  installment  contracts sold of $1,126,000
during the first  quarter of 1998 and of $157,000  during the second  quarter of
1998.

Selling,  General  and  Administrative.  The  growth  in  selling,  general  and
administrative  expense during the current  thirteen and twenty-six week periods
of $4,920,000 and $7,155,000,  respectively, over the previous year's comparable
periods is  primarily  attributable  to the  expenses  related to the  Company's
expanded  marketing  programs  including the  independent  dealer  program,  one
additional  manufacturing  plant, a supply  distribution  company and two retail
locations.  Selling, general and administrative expense as a percentage of total
revenue was 13.9% and 11.4% of sales for the thirteen week period ended June 26,
1998 and June 27, 1997,  respectively.  Year to date expense as a percentage  of
total  revenue was 14% and 11.7% of sales for the  periods  ending June 26, 1998
and June 27, 1997, respectively.

Other Income (Expense).

Interest  Expense.  Interest expense decreased by $265,000 for the thirteen week
period ended June 26, 1998, as compared to the  applicable  1997 period,  and by
$192,000 for the twenty-six  week period ended June 26, 1998, as compared to the
1997  twenty-six  week  period,  due to  decreased  borrowings  relating  to the
financial  services  debt  which was paid with the  proceeds  from the sale of a
portion of CAC's loan portfolio.

Life Insurance  Proceeds.  The Company  experienced a non-recurring gain on life
insurance  proceeds  during the thirteen weeks ended June 27, 1997 of $1,500,000
million  as a result of the death of  Belmont's  President  and Chief  Executive
Officer, Jerold Kennedy.

Other,  net. Other, net increased by $125,000 for the thirteen week period ended
June 26, 1998, as compared to the applicable 1997 period,  and increased $19,000
for the  twenty-six  week  period  ended  June  26,  1998,  as  compared  to the
applicable 1997 period.  Other,  net is primarily  comprised of interest income,
gains  or  losses  on sales  of  investments,  equity  earnings  in  investments
accounted for on the equity basis of accounting,  and  applicable  allocation of
minority  interest.  The increase in other,  net is  primarily  due to increased
interest  income  on earnings of the cash proceeds from  the sale of installment
contracts.

Net Income. The Company was impacted during the second quarter by the continuing
competition in the manufactured housing industry, increased selling, general and
administrative expenses as discussed above, as well as the impact of the process
of  integrating  Belmont and  Cavalier.  Diluted net income per share during the
current  thirteen  week period was $.25 as  compared  to $.34 from the  previous
year's  comparable  period.  Second  quarter and year to date  earnings for 1997
include $1,500,000 of life insurance proceeds,  or $.07 per share. Earnings were
off  slightly  in the  second  quarter as the  Company  continued  to  integrate
Belmont's  operations with its own. The Company is pleased with this acquisition
even though it was slightly dilutive to earnings per share during the first half
of 1998. However, as the Company continues during the second half of the year to
reap the benefits of the  combination,  the  acquisition  is expected to have an
accretive effect on earnings.*

Two primary  assumptions in the Belmont  acquisition  were (i) the Company could
implement an exclusive  dealer program for Belmont and (ii) material costs could
be lowered through combined  purchasing  volume.* As discussed above, the number
of exclusive dealer locations increased to 189 at June 26, 1998, from 132 at the
beginning of the year, 27 of which are Belmont  exclusive  dealers.  The Company
has implemented  approximately 80% of new raw material vendor contracts, many of
which will go into effect during the second half of 1998. It appears the Company
will meet its goal of one percent of revenues  cost  reduction in raw  materials
which should also benefit earnings during 1999.*

Installment Loan Purchases.  During the second quarter of 1998, installment loan
purchases were  $4,272,000  compared to $4,628,000 for the comparable  period in
1997;  for the  twenty-six  week  period  ended June 26, 1998  installment  loan
purchases were $6,989,000 compared to $10,491,000 for the twenty-six week period
ended  June 27,  1997.  Installment  loan  purchases  were  lower as a result of
increasingly competitive conditions,  due, in part, to dealer incentives offered
by other financing sources.
                                      -11-
- ---------------------------------------
* See Safe Harbor Statement on page 16.

<PAGE>
                                     PART I.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations
                                  June 26, 1998

Liquidity and Capital Resources

The  following  table sets forth certain items  relating to the  measurement  of
liquidity  and  capital  resources  from the  Company's  consolidated  condensed
financial statements for the dates indicated:

<TABLE>
<S>                                                <C>               <C>              <C>              <C>

BALANCE SHEET SUMMARY                                               Balances as of
                                                     ________________________________________________
(Dollars in Thousands)                               June 26, 1998                  December 31, 1997
                                                     _________________              _________________
Cash and Cash Equivalents                            $      45,456                     $      37,276
Certificates of deposit maturing within one year     $           -                     $       4,000
Accounts Receivable                                  $      35,254                     $       8,449
Working Capital                                      $      46,865                     $      28,484
Current Ratio                                            1.6 to 1                          1.5 to 1
Long-Term Debt                                       $       3,881                     $      15,808
Ratio of Long-Term Debt to Equity                          1 to 37                            1 to 8
Installment Loan Portfolio                           $      24,968                     $      49,146
</TABLE>

The  increase  in working  capital,  increase  in  current  ratio,  decrease  in
long-term  debt,  decrease in ratio of long-term  debt to equity and decrease in
the  installment  loan  portfolio  is  primarily  due to sales  during 1998 of a
portion of CAC's loans having an  outstanding  principal  balance of $28,559,000
for cash of $29,842,000,  of which  approximately $14 million was used to retire
debt.

The increase in accounts  receivable from December 31, 1997 to June 26, 1998, is
a normal  seasonal  occurrence.  As is customary  for the  Company,  most of its
manufacturing  operations  are idle  during  the final two weeks of the year for
vacations,  holidays  and reduced  product  demand,  and during  this time,  the
Company collects the majority of its outstanding receivables.

The  Company's  capital  expenditures  were  approximately  $4,420,000  for  the
twenty-six  weeks  ended  June 26,  1998,  as  compared  to  $4,956,000  for the
comparable period of 1997.  Capital  expenditures  during these periods included
normal  property,  plant  and  equipment  additions  and  replacements,  and the
continued expansion and modernization of certain of the Company's  manufacturing
facilities.

The  Company's   primary   business  segment  is  the  production  and  sale  of
manufactured  housing.  In 1992, the Company began the operations of CAC to fund
the purchase of installment sale contracts  originated with the retail customers
of  the  Company's  independent  exclusive  dealers.  As the  operations  of CAC
expanded,  in February 1994, the Company entered into a credit facility with its
primary  lender (the  "Credit  Facility")  (see  footnote 4 to the  consolidated
condensed financial  statements included herein) to provide additional funds for
CAC's growth.

The Credit Facility presently consists of a $35 million revolving, warehouse and
term-loan  agreement.  The Credit  Facility  contains a revolving line of credit
which provides for borrowings (including letters of credit) of up to 80% and 50%
of the Company's  eligible (as defined)  accounts  receivable  and  inventories,
respectively,  up to a maximum of $10  million.  Interest  is payable  under the
revolving  line of credit at the  bank's  prime  rate,  or,  if  elected  by the
Company, the 90-day LIBOR Rate plus 2.5%.

The warehouse and term-loan  agreements contained in the Credit Facility provide
for borrowings of up to 80% of the Company's  eligible (as defined)  installment
sales contracts,  up to a maximum of $25 million.  Interest on the term notes is
fixed for a period of five  years  from  issuance  at a rate based on the weekly
average yield on five-year  treasury  securities  averaged over the preceding 13
weeks,  plus 1.95%, with a floating rate for the remaining two years (subject to
certain  limits)  equal to the  bank's  prime  rate  plus  .75%.  The  warehouse
component of the Credit  Facility  provides for  borrowings of up to $25 million
with interest  payable at the bank's prime rate,  or, if elected by the Company,
the 90-day LIBOR Rate plus 2.5%.

The Credit Facility contains certain  restrictive  covenants which limit,  among
other things,  the Company's ability to (i) make dividend payments and purchases
of treasury stock in an aggregate  amount which exceeds 50% of consolidated  net
income for the two most  recent  years,  (ii)  mortgage or pledge  assets  which
exceed, in the aggregate, $1 million without written notice to the lender, (iii)
incur additional indebtedness,  including lease obligations, which exceed in the
aggregate  $10  million  and (iv)  make  capital  expenditures  in excess of $14
million.  In addition,  the Credit Facility contains certain financial covenants
requiring the

                                      -12-
<PAGE>
                                     PART I.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                     Management's Discussion and Analysis of
                  Financial Condition and Results of Operations
                                  June 26, 1998

Liquidity and Capital Resources (Continued)

Company to  maintain  on a  consolidated  basis  certain  defined  levels of net
working capital (at least $3.5 million), tangible net worth (which must increase
at least $2 million per year,  subject to a carryover for increases in excess of
$2 million in the prior  year),  debt to equity ratio (not to exceed 2 to 1) and
cash flow to debt  service  ratio (not less than 1.5 to 1). The Credit  Facility
also requires CAC to comply with certain  specified  restrictions  and financial
covenants.

Since its  inception,  CAC has been  restricted in the amounts of loans it could
purchase  based  on  conservative   underwriting   standards,  as  well  as  the
availability  of working  capital and funds  borrowed under its credit line with
its primary lender. In February 1998, CAC entered into an agreement (the "Retail
Finance Agreement"),  with another lender providing for the periodic resale of a
portion of CAC's loans that meet established criteria. As of the twenty-six week
period ended June 26, 1998,  CAC sold loans to this lender having an outstanding
principal amount of approximately $29 million for cash in the approximate amount
of $30  million,  of which $14  million was used to retire  debt.  The effect of
these  transactions  on net income  has been to reduce  the amount of  financial
services revenue for interest income on this portion of the portfolio, offset by
reduced interest expense on retired debt and earnings on the remaining proceeds.
The Company believes the periodic sale of installment contracts receivable under
the Retail Finance  Agreement will reduce  requirements for both working capital
and borrowings,  increase the Company's liquidity, reduce the Company's exposure
to interest  rate  fluctuations  and enhance the ability of CAC to increase  its
volume of loan purchases. * There can be no assurance,  however, that additional
sales will be made under this  agreement,  or that CAC and the  Company  will be
able to realize the expected benefits from such agreement.*

The Company's  growth  strategy  currently  includes the continued  expansion of
financial  services,  component supply  operations,  and its independent  dealer
network and the pursuit of additional  acquisitions.  Accordingly,  it is likely
that the Company will incur  additional  debt, or other forms of  financing,  in
order to continue to fund the pursuit of such growth  strategies.  * The Company
currently believes existing cash and investment balances (which include proceeds
from the sale of a portion of its installment  loan portfolio  described  above)
and funds  available under the Credit  Facility,  together with cash provided by
operations,  will be adequate to fund the Company's operations and plans for the
next twelve months.* In order to provide  additional funds for continued pursuit
of the Company's  growth  strategies and for operations,  the Company may incur,
from time to time,  additional  short and long-term  bank  indebtedness  and may
issue, in public or private  transactions,  its equity and debt securities,  the
availability  and terms of which will depend upon market and other  conditions.*
The Company may  continue  to engage in other  transactions,  such as selling or
securitizing  all or  portions  of its  installment  loan  portfolio,  that  are
designed to  facilitate  the ability of the Company to  originate  an  increased
volume  of  loans  and  to  reduce  the  Company's  exposure  to  interest  rate
fluctuations  and has  entered  into such a  transaction  pursuant to the Retail
Finance  Agreement,  as further described above.* There can be no assurance that
such possible additional financing, or the aforementioned potential transactions
involving the Company's  installment loan portfolio,  will be available on terms
acceptable  to the Company.  It is possible that a future lack of financing or a
prolonged downturn in industry conditions could cause the Company to curtail the
expansion of financial services or otherwise alter its growth strategies. *


                                      -13-
- ---------------------------------------
* See Safe Harbor Statement on page 16.
<PAGE>
                                    PART II.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                                Other Information
                                  June 26, 1998

ITEM 1            LEGAL PROCEEDINGS

Reference is made to the legal proceedings  previously reported in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 under the
heading "Item 3 - Legal  Proceedings."  With respect to the suit against Belmont
Homes, Inc. and certain other defendants referenced therein, on May 6, 1998, the
Circuit  Court of  Madison  County,  Alabama,  upon  motion  of the  defendants,
transferred  the case to the Circuit  Court of  Franklin  County,  Alabama.  The
description of legal  proceedings  in the Company's Form 10-K otherwise  remains
unchanged.

ITEM 4            SUBMISSION OF MATTERS TO A  VOTE OF SECURITY HOLDERS

The Company's  Annual  Meeting of  Stockholders  was held on May 20, 1998.  Each
person who was then serving as a member of the Board of Directors was re-elected
for another year. The votes for each nominee were cast as follows:

<TABLE>
                                                                 Shares Voting
                                                     ----------------------------------
                                                          For        Against   Withheld
                                                     ----------------------------------
                  <S>                                <C>               <C>      <C>
                  Thomas A. Broughton, III           16,211,551        -0-      132,889

                  Barry Donnell                      16,211,957        -0-      132,483

                  Lee Roy Jordan                     16,211,957        -0-      132,483

                  A. Douglas Jumper, Sr.             16,211,665        -0-      132,775

                  Mike Kennedy                       16,211,665        -0-      132,775

                  John W Lowe                        16,211,957        -0-      132,483

                  Gerald W. Moore                    16,211,957        -0-      132,483

                  Michael R. Murphy                  16,211,665        -0-      132,775

                  David A. Roberson                  16,211,665        -0-      132,775
</TABLE>

The  stockholders  ratified the Board of  Director's  appointment  of Deloitte &
Touche LLP as Independent  Certified  Public  Accountants  for the Company.  The
appointment  was  ratified by a vote of  16,292,125  shares for,  14,453  shares
against, and 37,862 abstentions.

ITEM 5            OTHER MATTERS

The Board of Directors has declared its regular  quarterly cash dividend of $.03
per share payable on August 14, 1998 to stockholders of record on July 31, 1998.

Pursuant to recently  adopted changes to Rule 14a-4 of the Proxy Rules under the
Securities Exchange Act of 1934, if a stockholder fails to notify the Company on
or before  February  24, 1999 of a proposal  which such  stockholder  intends to
present at the  Company's  May 1999  Annual  Meeting  by a means  other than the
inclusion of such  proposal in the Company's  proxy  materials for that meeting,
then if the  proposal  is  presented  at such  annual  meeting,  the  holders of
management's  proxies  at  such  meeting  may  use  their  discretionary  voting
authority with respect to such proposal,  regardless of whether the proposal was
discussed in the Company's proxy statement for such meeting. Stockholders should
also note that under the Company's By-laws,  in order to be timely,  with regard
to  nominations  of  persons  for  election  to the  board of  directors  of the
corporation  and proposals of business to be  considered at the annual  meeting,
notice of such  nominations  or other  business must be delivered to the Company
between February 19, 1999 and March 21, 1999.

                                      -14-
<PAGE>
                                    PART II.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                                Other Information
                                  June 26, 1998

ITEM 6            EXHIBITS AND REPORTS ON FORM 8-K

The exhibits required to be filed with this report are listed below. The Company
will  furnish  upon  request the  exhibit  listed upon the receipt of $15.00 per
exhibit,  plus $.50 per page,  to cover the cost to the Company of providing the
exhibit.

         (a)  (3) Articles of Incorporation and By-laws.
                  a)  The Amended and Restated  Certificate of  Incorporation of
                      the Company, filed as Exhibit 3(a) to the Company's Annual
                      Report on Form 10-K for the year ended  December 31, 1993,
                      and the  amendment  thereto,  filed as Exhibit 3(b) to the
                      Company's  Quarterly  Report on Form 10-Q for the  quarter
                      ended June 27, 1997, is incorporated herein by reference.
                  b)  The Amended and Restated By-laws of the Company,  filed as
                      Exhibit  3(d) to the  Company's  Quarterly  Report on Form
                      10-Q  for  the  quarter  ended  June  27,  1997,  and  the
                      amendment  thereto  filed as Exhibit 3(e) to the Company's
                      Quarterly  Report  on  Form  10-Q  for the  quarter  ended
                      September 26, 1997, is incorporated herein by reference.
                  c)  The   Certificate   of  Designation  of  Series  A  Junior
                      Participating  Stock of Cavalier Homes, Inc. as filed with
                      the Office of the  Delaware  Secretary of State on October
                      24,  1996  and  filed as  Exhibit  A to  Exhibit  4 to the
                      Company's  Registration  Statement  on Form  8-A  filed on
                      October 30, 1996, is incorporated herein by reference.

              (4) Instruments Defining the Rights of Security Holders.
                  (a) Articles four, six, seven, eight and nine of the Company's
                      Amended and  Restated  Certificate  of  Incorporation,  as
                      amended, included in Exhibit 3(a) above.
                  (b) Article  II,  Sections  2.1  through  2.18;  Article  III,
                      Sections  3.1 and 3.2;  Article IV,  Sections 4.1 and 4.3;
                      Article  VI,  Sections  6.1  through  6.5;  Article  VIII,
                      Sections  8.1 and 8.2;  and  Article  IX of the  Company's
                      Amended and  Restated  By-laws,  included in Exhibit  3(c)
                      above.
                  (c) Rights Agreement  between  Cavalier Homes,  Inc. and Chase
                      Mellon  Shareholder  Services,  LLC, filed as Exhibit 4 to
                      the Company's Current Report on Form 8-K dated October 30,
                      1996, is incorporated herein by reference.

             (10) Material Contracts.
                  (a) Split Dollar  Agreement dated May 15, 1998, by and between
                      the  Company  and  Jerry F. Wilson, Jr.  as Trustee of the
                      David Allen Roberson Family Trust.
                  (b) Second  Amendment to  Revolving,  Warehouse  and Term Loan
                      Agreement among Cavalier Homes, Inc., and First Commercial
                      Bank dated June 1, 1998.
                  (c) Assumption  Agreement among Cavalier Homes, Inc. and First
                      Commercial Bank dated June 1, 1998.
                  (d) Cavalier Homes, Inc. Deferred Compensation  Plan effective
                      April 1, 1998. 
                  (e) Cavalier Homes, Inc. Amended and Restated Dealership Stock
                      Option   Plan   filed  as  Appendix  A  to  the  Company's
                      Registration  Statement  on  Form  S-3,  Amendment  No. 2,
                      Registration   No.  33-62487,  dated  June  18,  1998,  is
                      incorporated herein by reference.
                  (f) Cavalier   Homes,  Inc.  Flexible  Option  Plan  filed  as
                      Exhibit 4(e) to  the  Company's Registration  Statement on
                      Form S-8, Registration No. 333-57743, dated June 28,  1998
                      is incorporated herein by reference.

             (11) Statement re: Computation of Net Income per Common Share.

             (27) Article 5 - Financial  Data  Schedule and  Restated  Financial
                  Data  Schedule  for Form 10-Q  submitted  as  Exhibit 27 as an
                  EDGAR filing only.

         (b) Current Report on Form 8-K.

                  None.

                                      -15-
<PAGE>
                                    PART II.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                                Other Information
                                  June 26, 1998

                "Safe Harbor" Statement under the Private Securities Litigation 
Reform Act of 1995:

With the exception of historical factual information, the matters and statements
discussed,  made or incorporated by reference in this Annual Report on Form 10-K
(including statements regarding trends in the industry,  the business and growth
and financing  strategies of the Company,  the Company's plans and  expectations
regarding  the merger  with  Belmont  and the  achievement  of cost  savings and
synergies,  and the Company's anticipation regarding results in future periods),
as well as those  statements  specifically  designated  with an asterisk (*), or
which  contain  the  words  "estimates",   "projects",   "intends",  "believes",
"anticipates",   "expects",  "may,  "appears",  and  words  of  similar  import,
constitute  forward-looking  statements, are based upon current expectations and
are made  pursuant  to the safe  harbor  provisions  of the  Private  Securities
Litigation Reform Act of 1995. Such forward-looking statements and words involve
known and unknown assumptions,  risks, uncertainties and other factors which may
cause the actual  results,  performance  or  achievements  of the  Company to be
materially  different  from any future  results,  performance,  or  achievements
expressed  or  implied  by  such  forward-looking   statements  or  words.  Such
assumptions,  risks,  uncertainties  and factors  include those  included in the
Company's  Annual  Report on Form 10-K for the period  ended  December  31, 1997
under the heading "Item 1. Business - Risk  Factors" and those  associated  with
general  economic  and  business  conditions;  manufactured  housing  and retail
consumer financing industry trends, cyclicality and seasonality; availability of
consumer  and dealer  financing;  changes  and  volatility  and  uncertainty  in
interest rates; the sufficiency of reserves established for installment contract
receivables;  warranty,  product  liability,  workers'  compensation  and  other
litigation  arising in the course of the Company's  manufacturing  and financial
services business; contingent repurchase and guaranty obligations; dependence on
key personnel and favorable  relationships with employees;  demographic changes;
whether the  current and  emerging  generations  of retirees  will have the same
interest in purchasing manufactured homes;  competition;  raw material and labor
costs and availability; import protection and regulation; relationships with and
dependence  on  customers,  distributors  and  dealers;  changes in the business
strategy  or  development  plans of the  Company;  the  availability,  terms and
deployment  of  capital;  changes in or the  failure to comply  with  government
regulations;  and the inability or failure to identify or consummate  successful
acquisitions  or to assimilate  the operations of any acquired  businesses  with
those of the Company;  and other assumptions,  risks,  uncertainties and factors
reflected  from time to time in the Company's  filings with the  Securities  and
Exchange  Commission.  The Company expressly  disclaims any obligation to update
any forward-looking  statements as a result of developments  occurring after the
filing of this report.

                                      -16-
<PAGE>
                                    PART II.
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                                Other Information
                                  June 26, 1998



SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


                                            Cavalier Homes, Inc.
                                            ------------------------------------
                                            Registrant




Date: August 10, 1998                       /s/ David A. Roberson
                                            ------------------------------------
                                            David A. Roberson - President
                                            and Chief Executive Officer


Date: August 10, 1998                       /s/ Michael R. Murphy
                                            ------------------------------------
                                            Michael R. Murphy -
                                            Chief Financial Officer (Principal
                                            Financial and Accounting Officer)


                                      -17-
<PAGE>
<TABLE>
<CAPTION>
                              PART II. - EXHIBIT 11
                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                   COMPUTATION OF NET INCOME PER COMMON SHARE


<S>                                            <C>             <C>            <C>            <C>
                                                        Thirteen Weeks Ended          Twenty-Six Weeks Ended
                                                  ______________________________ _______________________________
                                                       June 26,       June 27,       June 26,        June 27,
                                                         1998           1997           1998            1997
                                                  _____________    _____________ _____________     _____________
 BASIC & DILUTED
      Net Income                               $    5,069,000   $   6,880,000    $   8,111,000  $    10,773,000
 SHARES:                                          =============    ============= =============     =============


   Weighted average common shares                  20,044,585      19,807,235       20,006,292      19,785,208
       outstanding (basic)
                                                  =============    ============= =============     =============
   Dilutive effect if stock options
     were exercised                                   382,973         191,868          287,755         204,653
                                                   ____________    _____________ _____________     _____________
  Weighted average common shares
       outstanding, assuming dilution (diluted)    20,427,558      19,999,103       20,294,047      19,989,861
                                                  =============    ============= =============     =============



   Basic net income per share                  $          .25   $         .35    $         .41  $          .54
                                                  =============    ============= =============     =============
   Diluted net income per share                $          .25   $         .34    $         .40  $          .54
                                                  =============    ============= =============     =============
</TABLE>
                                      -18-

                           SPLIT DOLLAR AGREEMENT


                    This Split Dollar  Agreement (the  "Agreement") is made this
  15th  day of May,  1998  by and  between  Cavalier  Homes,  Inc.  (hereinafter
  referred to as the "Corporation'), and Jerry F. Wilson, Jr., as Trustee of the
  David Allen Roberson Family Trust dated May 15, 1998 (hereinafter  referred to
  as the "Owner"),


                                    RECITALS:

                    WHEREAS,  David  Allen  Roberson  ("Mr.  Roberson")  has and
continues to  perform valuable services  as the  Chief Executive  Officer of the
Corporation; and

                    WHEREAS,  in recognition of the past and continued  valuable
  services of Mr. Roberson to the Corporation,  the Corporation  wishes to enter
  into a Split Dollar plan to provide life insurance  protection for the benefit
  of Mr. Roberson (hereinafter referred to as the "Insured").

                    NOW,  THEREFORE,  in  consideration  of the mutual covenants
  contained herein, the parties hereto agree as follows:

                                    ARTICLE I
                  PURCHASE OF INSURANCE AND PAYMENT OF PREMIUMS

                    A. The Owner shall purchase a life insurance policy insuring
  the life of the  Insured  (the  "Policy"),  which is  described  in Schedule A
  attached  hereto and by this reference is made a part hereof. The Policy shall
  be  issued  by  General American Life Insurance Company (the "Insurer") in the
  amount of $2,000,000.
 
                    B.  Until the  termination  of this  Agreement  pursuant  to
  Article IV, the  Corporation  shall be  responsible  for the remittance of the
  entire  premium  due on the Policy on or before the date the premium is due or
  within the grace period  allowed by the Policy for the payment of said premium
  and, if requested,  shall give proof of the timely  payment of each premium to
  the Owner.

                    C.  Unless  and  until  this  Agreement  is  modified,   the
  Corporation shall pay the PS-58 portion of the gross premium,  with the result
  that the Insured  shall  report as income the amount of the  economic  benefit
  received by him as a result of the Corporation's payment of such premiums, and
  the  Insured  shall be deemed  to have made a gift to the Owner of such  PS-58
  cost,  which  shall not be  entitled to the  $10,000  annual  exclusion  under
  Section  2503(b) of the Internal  Revenue Code of 1986, as amended.  The PS-58
  portion shall be the amount equal to the cost of term insurance coverage based
  on the age of the Insured,  as determined by the insurance company issuing the
  Policy.



<PAGE>


                                   ARTICLE II
                POLICY OWNERSHIP PROVISIONS AND RIGHTS OF PARTIES

                    A. The Policy shall be the exclusive  property of the Owner,
  who shall  possess and may  exercise all the rights,  titles and  incidents of
  ownership with respect thereto,  subject only to the security  interest of the
  Corporation as expressed in this  Agreement,  notwithstanding  anything to the
  contrary in the Policy, or endorsement and riders thereto.

                  B. The  Owner  agrees  to grant  the  Corporation  a  security
interest in said Policy, and the Owner shall  collaterally  assign the Policy to
the Corporation whereby the Corporation shall have the following rights:

                           1.       To  receive  out  of  any amount  payable on
account  of the  death of  the  Insured an  amount equal  to its  total  premium
payments.

                           2.       To  obtain, upon surrender  of the Policy by
the assignor, an amount of the cash  surrender proceeds up to an amount equal to
its total premium payments.

                  C. The Corporation shall not exercise any rights in the Policy
in any way that might impair or defeat the rights and interest of the Owner,  as
Owner or beneficiaries of the Policy, or their designees.

                  D. The  Corporation  shall have its interest  first  satisfied
from the cash values of the paid up additions to the Policy.

                  E. The Corporation shall not be entitled to any payments under
this  Agreement  until the earlier of (i) the death of the Insured,  or (ii) the
cancellation of the Policy by the Owner.

                  F.  The   Corporation   shall  provide  the  Owner  an  annual
accounting detailing the liability owed to the Corporation by the Owner.


                                   ARTICLE III
                         FIDUCIARY AND CLAIMS PROCEDURE

                  A.   Michael R. Murphy,  as Secretary of the  Corporation,  is
hereby  designated as the  "named fiduciary"  under this plan and  shall control
and manage the operation of the plan. Such responsibilities may be allocated  to
other persons,  named in a  written instrument  executed  by the parties  hereto
spelling  out to whom  and  which  responsibilities  have  been delegated.

                  B. The Owner and Corporation shall make claim and execute such
forms as  required  under the  Policy for  collection  of the  proceeds  due and
payable  upon the death of the  Insured.  The  Corporation  will be  entitled to
receive the amount of its  premiums in  accordance  with Section B of Article 11
hereof.  The Owner shall be  entitled  to receive  the balance of such  proceeds
after payment to the Corporation.

                                                         2



<PAGE>


                                   ARTICLE IV
                     TERMINATION AND AMENDMENT OF AGREEMENT

                    A. The Agreement may be altered, amended or modified only by
  a written  agreement  signed by the parties  hereto,  This Agreement  shall be
  terminated upon the occurrence of any of the following events:

                    1.  Surrender of the Policy by the Owner.

                    2.  Termination  of  Mr.  Roberson's   employment  with  the
  Corporation  for any  reason  whatsoever  other  than  Mr.  Roberson's  death,
  disability,  retirement,  or  termination  after a change  in  control  of the
  Corporation.

                    3. Mutual agreement of the Owner and the Corporation.

                    4. The payment of death benefits under the Policy.

                    5. The total  cessation of the business of the  Corporation,
  or the bankruptcy or dissolution of the Corporation.

                    B. Upon termination of this Agreement, the Corporation shall
  not be  required to make  further  premium  payments  on the  Policy,  and the
  obligations  of the Owner to pay the  amounts due the  Corporation  under this
  Agreement shall survive the termination of this Agreement.


                                    ARTICLE V
                     LIABILITY OF LIFE INSURANCE CORPORATION

         General American Life Insurance Company shall not (A) be  deemed  to be
a party of this Agreement for any purposes nor in any way be responsible for its
validity; (B) be  obligated to  inquire as  to the  distribution  of any  monies
payable or paid by it under the  Policy;  and (C) shall be fully discharged from
any and all liability  under the terms  of any policy or policies  issued by it,
which is  subject  to the  terms  of  this  Agreement,  upon  payment  or  other
performance  of its  obligations in  accordance  with the  terms of such policy.


                                   ARTICLE VI
                                BINDING AGREEMENT

                    This Agreement shall be binding upon the parties hereto, and
  their heirs, assigns, successors, executors and administrators.




                                                         3



<PAGE>


                                   ARTICLE VII
                                  GOVERNING LAW

                  This  Agreement  shall be  subject to and  shall be  construed
under the laws of the State of Alabama.



                  IN WITNESS WHEREOF, the parties hereto have hereunto set their
hands and seals,  or cause these  presents to be duly  executed by their  proper
corporate officers, as of the day and year first written above,


ATTEST:                                        CAVALIER HOMES, INC.


/s/ Wendrell W. Dye                            By: /s/ Michael R. Murphy
______________________________                    ______________________________
                                               Its:      Vice President
                                                   _____________________________


WITNESS:


/s/ Robert F. Blake                            /s/ Jerry F. Wilson, Jr.
______________________________                 _________________________________
                                                Jerry F. Wilson, Jr., as Trustee
                                        of the David Allen Roberson Family Trust

                               SECOND AMENDMENT TO
                  REVOLVING, WAREHOUSE AND TERM LOAN AGREEMENT


                  THIS  SECOND   AMENDMENT  (this   "Amendment")  to  Revolving,
Warehouse and Term Loan  Agreement  made by and among  Cavalier  Homes,  Inc., a
Delaware  corporation  ("Cavalier  Homes"),  Cavalier  Manufacturing,   Inc.,  a
Delaware corporation ("CMI"), Cavalier Industries,  Inc., a Delaware corporation
("CII"),  Belmont  Homes,  Inc., a Mississippi  corporation  ("Belmont"),  Delta
Homes,  Inc., a  Mississippi  corporation  ("Delta"),  Spirit  Homes,  Inc.,  an
Arkansas  corporation  ("Spirit"),  Bellcrest Homes, Inc., a Georgia corporation
("Bellcrest"),  and  Cavalier  Acceptance  Corporation,  an Alabama  corporation
("Cavalier  Acceptance")   (collectively,   the  "Participating   Subsidiaries";
Cavalier Homes and the  Participating  Subsidiaries,  together with all entities
who hereafter become Participating  Subsidiaries or Participating  Partnerships,
being  sometimes  collectively  referred  to  as  the  "Borrowers"),  and  First
Commercial Bank, an Alabama state banking corporation ("Lender"), is dated as of
the 1st day of June, 1998.


                                R E C I T A L S :


                  Cavalier Homes,  the Initial  Participating  Subsidiaries  (as
defined in the  Agreement  hereinafter  defined)  and Lender  entered  into that
certain  Revolving,  Warehouse and Term Loan Agreement  dated as of February 17,
1994,  as amended by that certain First  Amendment to  Revolving,  Warehouse and
Term  Loan  Agreement  dated as of March 14,  1996 (as  heretofore  amended  the
"Agreement"),  pursuant to which Lender made available, subject to the terms and
conditions thereof, to such Borrowers, a revolving loan in the maximum principal
amount of up to $5,000,000 (the "Revolving Loan"), and to Cavalier Acceptance, a
warehouse and term loan facility of up to $18,000,000  (the "Warehouse Loan" and
the "Term Loans", respectively).


                  Pursuant  to that  certain  Assumption  Agreement  dated as of
January 2, 1997, by and among CMI, CII,  Cavalier Homes (for itself and as agent
for the other Borrowers) and Lender,  CMI and CII became obligated as Borrowers,
jointly and severally,  with the other  Participating  Subsidiaries and Cavalier
Homes  with  respect  to  the  Agreement,  the  Revolving  Loan  and  the  other
Obligations (as defined in the Agreement).


                  Pursuant to that certain Assumption Agreement dated as of June
1, 1998, by and among Belmont,  Delta,  Spirit,  Bellcrest,  Cavalier Homes (for
itself and as agent for the other Borrowers) and Lender,  Belmont, Delta, Spirit
and Bellcrest  became  obligated as Borrowers,  jointly and severally,  with the
other  Participating  Subsidiaries  and  Cavalier  Homes  with  respect  to  the
Agreement, the Revolving Loan and the other Obligations.



                                                         1

<PAGE>



                  The  Revolving  Loan is  currently  evidenced  by that certain
Revolving Note in the original principal amount of $5,000,000 dated February 17,
1994, as amended by that certain Revolving Note Modification  Agreement dated as
of March  14,  1996 (as  heretofore  amended,  the  "Revolving  Note"),  and the
Warehouse  Loan is currently  evidenced by that  certain  Warehouse  Note in the
original  principal  amount of $2,000,000 dated February 17, 1994, as amended by
that certain Warehousing Note Modification  Agreement dated as of March 14, 1996
(as heretofore amended, the "Warehouse Note").


                  Borrowers  have  requested  that  Lender  agree to extend  the
availability  of Advances  under the Revolving  Loan and the  Warehouse  Loan to
April 15, 2000, to increase the maximum aggregate  principal amount available to
the  Borrowers  under the  Revolving  Loan to  $10,000,000,  and to increase the
maximum  aggregate  principal  amount  available  to Cavalier  Acceptance  under
Article III of the Agreement  from  $18,000,000  to  $25,000,000,  and Lender is
willing  to do so,  but  only  on the  express  condition,  among  others,  that
Borrowers  enter into this  Amendment,  pursuant to which the Agreement shall be
amended and modified.


                  NOW,  THEREFORE, the parties hereto do hereby agree, each with
the other, as follows:


                  1. If not  otherwise  defined  herein or the context shall not
expressly indicate otherwise,  all capitalized terms which are used herein shall
have their respective meanings given to them in the Agreement.

                  2.  Schedule I of the  Agreement is hereby  amended to add the
following definitions thereto:

                           "Banking  Day" with respect to LIBOR Rate Loans means
                  a day on  which  banks  are open for the  general  conduct  of
                  business in London,  England and the state in which Lender has
                  its main office,  and on which dealings in Dollars are carried
                  on in the offshore  interbank market;  and with respect to the
                  Floating  Rate Loans,  means a day on which Lender is open for
                  the general conduct of business at its main office.

                           "Base LIBOR Rate" for any  Interest  Period means the
                  rate  per  annum  equal  to the  quotient  of (a) the rate for
                  deposits  in  U.S.  Dollars  for a  period  of the  applicable
                  Interest   Period   which   appears  on  Telerate   Page  3750
                  ("USD-LIBOR-  BBA") as of 11:00  a.m.  London  time on the day
                  that  is two  Banking  Days  preceding  the  first  day of the
                  applicable Interest Period, for a deposit amount corresponding
                  to the amount of the LIBOR Rate Loan to be outstanding  during
                  such  Interest  Period,  divided by (b) a number equal to 1.00
                  minus  the  aggregate  of the  rates  (expressed  as a decimal
                  fraction) of the Reserve Requirement current on the date two

                                                         2

<PAGE>



                  Banking Days prior to the beginning of such  Interest  Period.
                  If the rate described in clause (a), above, does not appear on
                  Telerate  Page 3750,  the rate under (a),  above,  will be the
                  rate (stated as an annual  percentage  rate rounded  upward to
                  the  nearest  one-sixteenth  of  one  percent)  determined  by
                  Lender,  in its reasonable  judgment,  to be the rate at which
                  Lender would acquire  Dollar  deposits in the London,  England
                  interbank  eurodollar  market for delivery on the first day of
                  such Interest Period for the number of days comprised  therein
                  and in an amount equal to the amount of the LIBOR Rate Loan to
                  be  outstanding  during such Interest  Period.  The Base LIBOR
                  Rate calculated in this manner shall be adjusted upward to the
                  nearest  one-hundredth  of one  percent.  The Base  LIBOR Rate
                  shall be adjusted  automatically,  upward or downward,  as the
                  case may be, on and as of the effective  date of any change in
                  the Reserve Requirement.

                           "Borrowing Date" means any date on which  Borrower(s)
                  receive or propose to receive an Advance  under the  Revolving
                  Loan or the Warehouse Loan pursuant to this Agreement.

                           "Borrowing  Notice" or "Request for Advance" means an
                  irrevocable written (including facsimile), telex or telephonic
                  notice, in substantially the form of Exhibit B or Exhibit B-1,
                  as   appropriate,   to  the  Agreement,   by  the  appropriate
                  Borrower(s),  to Lender specifying (A) that the notice relates
                  to  making  a new  Advance  under  the  Revolving  Loan or the
                  Warehouse  Loan, as the case may be, (B) the  Borrowing  Date,
                  (C) the  amounts of  Floating  Rate Loans and LIBOR Rate Loans
                  comprising such new Advance and (D) the commencement  date and
                  duration of the Interest  Period  applicable to any such LIBOR
                  Rate Loan.

                  "Dollars" and "$" each mean United States Dollars.

                           "Floating   Rate"  means  (i)  with  respect  to  the
                  Revolving  Loan, the Revolving  Rate, and (ii) with respect to
                  the Warehouse Loan, the Warehouse Rate.

                           "Floating  Rate Loan"  means (i) with  respect to the
                  Revolving  Loan,  an Advance  thereon or part of the Revolving
                  Loan with an interest  rate based on the  Floating  Rate,  and
                  (ii) with respect to the Warehouse Loan, an Advance thereon or
                  part of the Warehouse  Loan with an interest rate based on the
                  Floating Rate.

                           "Governmental   Authority"   means   any   nation  or
                  government,  any state and any political  subdivision thereof,
                  and any entity exercising  executive,  legislative,  judicial,
                  regulatory  or  administrative  functions of or  pertaining to
                  government, which has or asserts jurisdiction over Lender, any
                  Borrower, or over the property of any of them.

                                                         3

<PAGE>



                           "Green   Tree    Contract"    means   Chattel   Paper
                  underwritten  by Cavalier  Acceptance in  conformity  with the
                  Green Tree Underwriting Guidelines.

                           "Green  Tree  Underwriting  Guidelines"  means  those
                  underwriting  guidelines  set forth on Exhibit A to Schedule 1
                  to this Agreement.

                           "Interest  Period"  with respect to a LIBOR Rate Loan
                  means a LIBOR  Rate  Interest  Period,  as such  period may be
                  shortened  upon  suspension  of the LIBOR  Rate  option  under
                  Sections 2.5.13, 2.5.14, 3.6(A).13 or 3.6(A).14.

                           "Lending  Installation"  means  any  office,  branch,
                  subsidiary or affiliate of Lender or any Participant. 

                           "LIBOR Rate" means the Base LIBOR Rate plus 250 basis
                  points   (2.50%).   The   LIBOR   Rate   shall   be   adjusted
                  automatically,  upward or downward, as the case may be, on and
                  as of the effective  date of any change in the Base LIBOR Rate
                  resulting from a change in the Reserve Requirement.

                           "LIBOR Rate Interest  Period" means a period of three
                  months (90 days), or such longer or shorter period as Cavalier
                  Homes, on behalf of itself and the other Borrowers, and Lender
                  may agree from time to time.  A month means a period of thirty
                  (30) days. If any LIBOR Interest Period would otherwise end on
                  a day which is not a Banking  Day,  the  LIBOR  Rate  Interest
                  Period shall end on the next Banking Day.

                           "LIBOR  Rate  Loan"   means  an  Advance   under  the
                  Revolving Loan or the Warehouse  Loan, as applicable,  with an
                  interest rate based on the Base LIBOR Rate.

                           "Local Time"  means  the time of day at Lender's main
                  office.

                           "Rate Selection Notice" means an irrevocable  written
                  (including   facsimile),   telex  or  telephonic   notice,  in
                  substantially  the  form  of  Exhibit  B or  Exhibit  B-1,  as
                  appropriate, to the Agreement, by the appropriate Borrower(s),
                  to  Lender  specifying  (a) that  the  notice  relates  to the
                  selection of a rate option for the outstanding  Revolving Loan
                  or  Warehouse  Loan,  as the case may be,  pursuant to Section
                  2.5.3 or 3.6(A).3,  as the case may be, (b) the effective date
                  of such  selection  (c)  the  amounts,  individual  and in the
                  aggregate,  of any  Floating  Rate  Loans and LIBOR Rate Loans
                  comprising the selection and (d) the commencement date and the
                  duration of the Interest Period applicable to any LIBOR Rate.


                                                         4

<PAGE>



                           "Regulation  D" means  Regulation  D of the  Board of
                  Governors of the Federal Reserve System as now or from time to
                  time  hereafter in effect,  and shall include any successor or
                  other regulation or official  interpretation  of said Board of
                  Governors  relating  to  reserve  requirements  applicable  to
                  member banks of the Federal Reserve System.

                           "Requirement  of Law" for any person or entity  means
                  the  certificate  of   incorporation   and  by-laws  or  other
                  organization  or governing  documents of such person or entity
                  and any law, treaty,  rule or regulation,  or determination of
                  an arbitrator or a court or other Governmental  Authority,  in
                  each case  applicable to or binding upon such person or entity
                  or any of its  property  or to which such  person or entity or
                  any of its property is subject.

                           "Reserve  Requirements"  with  respect to an Interest
                  Period means the weighted  average during the Interest  Period
                  of the maximum  aggregate reserve  requirement  (including all
                  basic,  supplemental,  marginal,  emergency and other reserves
                  and taking into account any transitional  adjustments or other
                  scheduled changes in reserve  requirements during the Interest
                  Period)  which is imposed  under  Regulation D or by any other
                  Governmental   Authority  having   jurisdiction  with  respect
                  thereto and which is applicable to the class of banks of which
                  Lender  is  a  member,  for  LIBOR  Rate  Loan  purposes,   on
                  "eurocurrency  liabilities",   as  that  term  is  defined  in
                  Regulation D or by any such Governmental Authority.

                  3.  Schedule I of the Agreement is hereby  further  amended to
delete the  definition of  "$18,000,000  Loan"  therefrom in its entirety and to
substitute the following definition of "$25,000,000 Loan" therefor:

                           "$25,000,000   Loan"  means  the   aggregate   unpaid
                  principal balance of all Advances made pursuant to Article III
                  of the Agreement, whether in the form of the Warehouse Loan or
                  Term Loan(s).

                  4.  Schedule I of the Agreement is hereby  further  amended to
restate the definitions of "Contracts Borrowing Base" and "Eligible Contract" to
read in their entireties as follows:

                           "Contracts  Borrowing  Base" means, at any time, with
                  respect to the  $25,000,000  Loan, the amount  computed on the
                  Compliance  Certificate for the $25,000,000 Loan most recently
                  delivered to, and accepted by,  Lender in accordance  with the
                  Agreement and equal to the aggregate of:

                  (A)  Eighty   percent  (80%)  of  the  aggregate   outstanding
                  principal balance of Eligible  Contracts that are rated higher
                  than a C-Rated Contract from a credit-quality standpoint (that

                                                         5

<PAGE>



                  is,  that  are  rated   "A"  or  "B"   from  a  credit-quality
                  standpoint); plus

                  (B)  Seventy  percent  (70%)  of  the  aggregate   outstanding
                  principal  balance  of  Eligible  Contracts  that are  C-Rated
                  Contracts; plus

                  (C)  Seventy  percent  (70%)  of  the  aggregate   outstanding
                  principal  balance of Eligible  Contracts  that are Green Tree
                  Contracts.

                  Provided,  however,  no more than fifteen percent (15%) of the
                  total  Contracts  Borrowing  Base may be  comprised of C-rated
                  Contracts.

                           "Eligible Contract" means, at any time, Chattel Paper
                  upon which lender has a property  perfected  security interest
                  and that  conforms and continues to conform to each and all of
                  the following conditions:

                  (A) The  representations  contained in Section 6.2 and Section
                  6.3 of the Agreement are true and correct in all respects with
                  respect to the Chattel Paper;

                  (B) The  Chattel  Paper  arose out of the retail sale of a new
                  home  manufactured  by one of the  Borrowers  or the sale of a
                  manufactured home repossessed by Cavalier Acceptance;

                  (C) The Chattel  Paper  evidences  the  obligation of a retail
                  customer to repay Indebtedness incurred to purchase a new home
                  manufactured  by  one  of  the  Borrowers  or  the  sale  of a
                  manufactured home repossessed by Cavalier Acceptance;

                  (D) The Chattel  Paper has been duly assigned to, and is owned
                  by, Cavalier Acceptance;

                  (E) The  Chattel  Paper is not more than ninety (90) days past
                  due in payment and the Chattel Paper has not been re-dated;

                  (F) The Chattel  Paper  evidences  an amount  financed  not in
                  excess of $70,000;

                  (G) The portfolio  index score used by Cavalier  Acceptance to
                  underwrite such Chattel Paper was not less than 70;  provided,
                  however,  that for Chattel  Paper  originated  after March 14,
                  1996,  up to fifteen  percent  (15%) of all such Chattel Paper
                  may have a portfolio  index score of (a) at least 56, but less
                  than 70 or (b) such  other  credit  score  which  causes  such
                  Chattel   Paper  to  be  rated  a  C-Rated   Contract  from  a
                  credit-quality  standpoint (or the equivalent score or rating,
                  as the  case  may be,  under  the Fair  Isaac  credit  scoring
                  system,  as such  equivalence  is  determined by Lender in its
                  sole discretion);  provided,  further, however, that GreenTree
                  Contracts need only meet or exceed the Green Tree Underwriting
                  Guidelines to satisfy this clause (G);

                  (H) The Chattel Paper was funded by Cavalier  Acceptance on or
                  after January 1, 1994; and

                  (I) The Chattel Paper has been reviewed and approved by Lender
                  in its sole discretion.

                  In the event of any dispute under the foregoing criteria about
whether  Chattel  Paper is or has ceased to be an  Eligible  Contract,  the sole
decision and discretion of Lender shall control.

                  5.  Schedule I of the Agreement is hereby  further  amended by
amending and restating the definition of "Loan Termination Date" in its entirety
to read as follows:

                           "Loan  Termination  Date" means,  (i) with respect to
                  the Revolving  Loan, the earliest of (A) April 15, 2000 or (B)
                  upon  demand by Lender;  (ii) with  respect  to the  Warehouse
                  Loan,  the  earliest  of (A) April 15, 2000 or (B) the date to
                  which the maturity of the  Warehouse  Note may be  accelerated
                  pursuant  to  Section  9.2 of the  Agreement;  and (iii)  with
                  respect to any Term Loan, the earlier of (A) the maturity date
                  of the  applicable  Term  Note or (B) the  date to  which  the
                  maturity  of the  applicable  Term  Note  may  be  accelerated
                  pursuant to Section 9.2 of the Agreement.

                  6.  Schedule I of the Agreement is hereby  further  amended by
deleting the term "5,000,000" from the definition of "Revolving Loan Commitment"
and substituting the term "$10,000,000" therefor.

                  7.  Schedule I of the Agreement is hereby  further  amended by
amending and restating the definitions of "Revolving  Rate" and "Warehouse Rate"
in their entireties to read as follows:

                           "Revolving Rate" means the per annum rate of interest
                  equal to the  Prime  Rate in effect  from  time to time  until
                  maturity of the Revolving  Note, and two percent (2.00%) above
                  the Prime Rate in effect  from time to time after  maturity of
                  the  Revolving  Note,  whether  by  demand,   acceleration  or
                  otherwise.   Each  time  the  Prime  Rate  shall  change,  the
                  Revolving Rate shall change  concurrently  with such change in
                  the Prime Rate.

                           "Warehouse Rate" means the per annum rate of interest
                  equal to the  Prime  Rate in effect  from  time to time  until
                  maturity of the Warehouse  Note, and two percent (2.00%) above
                  the Prime Rate in effect  from time to time after  maturity of
                  the  Warehouse  Note,  whether  by  demand,   acceleration  or
                  otherwise.   Each  time  the  Prime  Rate  shall  change,  the

                                                         6

<PAGE>



                  Warehouse Rate shall change  concurrently  with such change in
                  the Prime Rate.

                  8. To increase the standard for reporting litigation and other
claims pending against  Cavalier Homes and the other  Borrowers,  Section 6.1(I)
and Section  7.1(J)(1) are each amended and restated in their entireties to read
as follows:

                  Section  6.1(I):  Except as disclosed in the  footnotes to the
                  Financial  Statements  delivered  to  Lender,  or  in  Exhibit
                  II.6.1(I) attached hereto and incorporated  herein, and except
                  for  matters  in which an insurer  has  accepted  the  defense
                  without  reservation  of rights,  there is no  pending  order,
                  notice, claim, litigation, proceeding or investigation against
                  or affecting Cavalier Homes or any Consolidated Entity, except
                  such  order,   notice,   claim,   litigation,   proceeding  or
                  investigation  that, in the good-faith  judgment of management
                  of  Cavalier  Homes  or  such  Consolidated   Entity,  is  not
                  reasonably  likely to result in an adverse decision that would
                  require the payment of $1,000,000 or more;

                  Section  7.1(J)(1):  Any litigation or proceeding  (other than
                  matters in which an insurer has accepted  the defense  without
                  reservation of rights) in which it is a party, except any such
                  litigation or proceeding  where in the good-faith  judgment of
                  management of Cavalier Homes or such Consolidated Entity, such
                  matter  is not  reasonably  likely  to  result  in an  adverse
                  decision that would require the payment of $1,000,000 or more;
                  and

                  9. The Agreement  and the  Schedules and Exhibits  thereto are
hereby  amended (i) by deleting the term  "$18,000,000  Loan"  therefrom in each
place such term appears and  substituting  the term  "$25,000,000  Loan" in lieu
thereof and (ii) by deleting the term "$18,000,000" therefrom in each place such
term appears and substituting the term "$25,000,000" in lieu thereof,  and (iii)
by  incorporating  Exhibit  A to  Schedule  I  (setting  forth  the  Green  Tree
Underwriting Guidelines).

                  10.      Section 2.5 of  the  Agreement  is hereby amended and
restated to read in its entirety as follows:

                  2.5      Revolving Loan Borrowing Procedures, Interest Rates,
                           Payments of Interest and Related Provisions.

                  2.5.1    Borrowing Notices.

                           (A) Cavalier Homes, on behalf of itself and the other
                           Borrowers,  will give Lender an appropriate Borrowing
                           Notice not later than 10:00 a.m. Local Time three (3)
                           Banking  Days prior to the  Borrowing  Date for LIBOR
                           Rate Loans and not later  than 10:00 a.m.  Local Time
                           on the Borrowing Date for Floating Rate Loans.

                                                         7

<PAGE>



                           A  Borrowing  Notice  is  deemed  to  be  given  when
                           actually  received by Lender at its  Commercial  Loan
                           Department.

                           (B) Once  given to  Lender,  except  as  provided  in
                           Section  2.5.14  or  unless  Lender  shall  otherwise
                           consent,  such Borrowing  Notice shall not thereafter
                           be revocable by Borrowers.

                           (C)  On  the   Borrowing   Date,  if  all  terms  and
                           conditions of this Agreement have been complied with,
                           Lender shall make available the requested  Advance of
                           the Revolving Loan.

                           (D) If  requested by Lender,  Cavalier,  on behalf of
                           itself  and the other  Borrowers,  shall  deliver  to
                           Lender,  not later  than 12:00 noon Local Time on the
                           Borrowing Date, written  confirmation  (substantially
                           in the  form  of  Exhibit  B) of any  oral  Borrowing
                           Notice. Cavalier shall certify to the accuracy of the
                           information set forth thereon.

                  2.5.2 Interest  Rate.  Unless  Borrowers  shall have elected a
                  LIBOR  Rate  for  all  or a  portion  of  the  Advance  of the
                  Revolving  Loan as  provided  in  Section  2.5.3  hereof,  the
                  aggregate  unpaid  principal  amount  of each  Advance  of the
                  Revolving  Loan  shall  bear  interest  at a rate equal to the
                  Floating Rate with respect to the Revolving Loan.

                  2.5.3    Election of LIBOR Rate.

                           (A)  Subject to the  provisions  of  Sections  2.5.4,
                           2.5.13,  2.5.14 and 2.7, Cavalier Homes, on behalf of
                           itself  and the  other  Borrowers,  may  elect to pay
                           interest  on  all  or  part  of  an  Advance  of  the
                           Revolving  Loan or the  Revolving  Loan at the  LIBOR
                           Rate for an Interest Period by giving Lender

                                    (1)     An  appropriate   Borrowing   Notice
                                            specifying  a LIBOR  Rate not  later
                                            than 10:00 a.m. Local Time three (3)
                                            Banking Days prior to the  Borrowing
                                            Date (in the case of a new Advance);
                                            or

                                    (2)     An appropriate Rate Selection Notice
                                            specifying  a LIBOR  Rate not  later
                                            than 10:00 a.m. Local Time three (3)
                                            Banking  Days prior to the first day
                                            of the new  Interest  Period (in the
                                            case of the  outstanding  LIBOR Rate
                                            Loan); or

                                    (3)     An appropriate Rate Selection Notice
                                            specifying  a LIBOR  Rate not  later
                                            than 10:00 a.m. Local Time three (3)

                                                         8

<PAGE>



                                            Banking  Days prior to the first day
                                            of the Interest Period (in the  case
                                            of the conversion of any outstanding
                                            Floating  Rate Loan  to a LIBOR Rate
                                            Loan).

                           (B)      (1)     Borrowers may  obtain  estimates  of
                                            the interest rates on which the Base
                                            LIBOR   Rate   is   calculated    by
                                            telephoning  Lender's  rate  desk on
                                            any day Lender is open for business.
                                            Borrowers  may  obtain quotations of
                                            the interest rates on which the Base
                                            LIBOR   Rate   is   calculated    by
                                            telephoning   Lender's   rate   desk
                                            between  9:00  a.m. and  10:00  a.m.
                                            Local Time on  any  Banking  Day.  A
                                            Rate   Selection  Notice  is  deemed
                                            given  when  actually  received   by
                                            Lender   at   its   Commercial  Loan
                                            Department.   If the Rate  Selection
                                            Notice   is   initially   given   in
                                            writing,  it  shall  be   given   in
                                            substantially the form of Exhibit  B
                                            hereto.  If   the   Rate   Selection
                                            Notice is given in writing, Cavalier
                                            Homes,  on  behalf of itself and the
                                            other Borrowers,  shall  certify  to
                                            the accuracy of the  information set
                                            forth thereon.  If Borrowers fail to
                                            select a new rate option by giving a
                                            Rate Selection  Notice by 10:00 a.m.
                                            Local   Time   on   the  appropriate
                                            Banking    Day   pursuant   to   the
                                            provisions of Section  2.5.3 hereof,
                                            the Revolving Loan  or that  portion
                                            of the Revolving Loan covered by the
                                            expiring LIBOR  Rate option shall be
                                            a  Floating  Rate  Loan on and after
                                            the last day of the Interest  Period
                                            until the  Revolving Loan is paid or
                                            until  the effective  date of  a new
                                            Rate  Selection  Notice  pursuant to
                                            this section, whichever is the first
                                            to occur.

                                    (2)     If  requested  by  Lender,  Cavalier
                                            Homes,  on behalf of itself  and the
                                            other  Borrowers,  shall  deliver to
                                            Lender,  not later  than  12:00 noon
                                            Local  Time on the  first day of the
                                            Interest       Period,       written
                                            confirmation  (substantially  in the
                                            form of  Exhibit  B  hereto)  of any
                                            oral Rate Selection Notice. Cavalier
                                            Homes shall  certify to the accuracy
                                            of   the   information   set   forth
                                            thereon.

                  2.5.4 Restrictions on Interest Periods and Conversion to LIBOR
                  Rate.  Each new Advance of the  Revolving  Loan shall be in an
                  amount of at least  $500,000  and in an  integral  multiple of
                  $100,000  if a LIBOR Rate Loan and that part of each  Floating
                  Rate  Loan  or  LIBOR  Rate  Loan  which  is  converted to, or

                                                         9

<PAGE>



                  continued as, a LIBOR Rate Loan,  shall be in an amount  of at
                  least  $500,000  and  shall  be  in  an  integral  multiple of
                  $100,000.  No  Interest  Period  may  extend  beyond the  Loan
                  Termination  Date of the  Revolving Loan.  Borrowers  may  not
                  elect a LIBOR Rate if, on the effective date of such election,
                  there exists an Event of Default.

                  2.5.5    Interest Basis and Payment Dates.

                           (A)  Interest at the rates  determined  according  to
                           Sections  2.5.2 and 2.5.3 shall be  calculated on the
                           basis of a 360-day year and the actual number of days
                           elapsed.   Interest   shall   accrue  on  the  unpaid
                           principal  balance of all  Advances of the  Revolving
                           Loan at the  applicable  rate from and  including the
                           date the Advance is made to (but not  including)  the
                           date of any payment on the Revolving  Loan if payment
                           is received by Lender  prior to 2:00 p.m.  Local Time
                           and if not  received by such time,  then  through and
                           including the date payment is received.

                           (B) All interest  accrued on each  Floating Rate Loan
                           made under this  Article II shall be payable  monthly
                           on the first (1st) day of each  calendar  month;  and
                           all  interest  accrued  on each  LIBOR Rate Loan made
                           under  this  Article  II shall be payable on the last
                           day of the applicable LIBOR Rate Interest Period, and
                           if such LIBOR Rate Interest  Period exceeds three (3)
                           months, interest accrued on such LIBOR Rate Loan also
                           shall  be  payable  on the date  which  is three  (3)
                           months  after the first day of the  applicable  LIBOR
                           Rate   Interest   Period.   If  not  sooner  paid  in
                           accordance with the subsection 2.5.5(B),  all accrued
                           but unpaid  interest on the  Revolving  Loan shall be
                           due and payable on the Loan  Termination  Date of the
                           Revolving Loan.

                           (C) If any scheduled payment is late ten (10) days or
                           more,  Borrowers  agree to pay a late charge equal to
                           five percent (5%) of the amount of the payment  which
                           is late, but not more than the maximum amount allowed
                           by   applicable   Law  (the  "Late   Charge").   This
                           subparagraph  does not  extend any  payment  due date
                           expressly   stated  in  the  Agreement  or  any  Loan
                           Document  and  does not in any way  prevent  or estop
                           Lender  from  requiring  that  payments  be  made  by
                           Borrowers  strictly  when  due.  Unless  accepted  by
                           Lender,  and unless  accompanied by all other amounts
                           then due to  Lender,  the  tender of such  payment by
                           Borrowers does not cure the Event of Default  arising
                           from the payment  default upon which such Late Charge
                           was assessed.


                                                        10

<PAGE>



                           (D) If, at any time, the rate of interest accruing on
                           any Advance of the Revolving  Loan or the Late Charge
                           shall  be  deemed  by any  competent  court  of  law,
                           governmental agency or tribunal to exceed the maximum
                           rate of interest  permitted by any  applicable  Laws,
                           then,  for such  time as such  interest  rate or Late
                           Charge, as applicable, would be deemed excessive, its
                           application  shall be  suspended  and there  shall be
                           charged  instead on any such Advance the maximum rate
                           of  interest  permissible  under such  Laws,  and any
                           excess  interest  or charges  actually  collected  by
                           Lender shall be credited as a partial  prepayment  of
                           principal.

                           (E) The Floating Rate shall change  contemporaneously
                           with each change in the Revolving Rate.

                  2.5.6  Method  of  Payment.   Each  payment   (including   any
                  prepayment) of principal of and interest on the Revolving Loan
                  and   each   payment   of    Borrowers'    reimbursement    or
                  indemnification  obligations  under  Sections  2.5.8,  2.5.10,
                  2.5.11 or 10.3 or any other provision hereunder, shall be made
                  to Lender  without  set-off  or  counterclaim  in  Dollars  in
                  immediately  available  funds at Lender's  main office (or, in
                  the  case  of  LIBOR  Rate   Loans  at  such   other   Lending
                  Installation,  if any,  as may be  specified  in a  notice  to
                  Cavalier  Homes by Lender) by 2:00 p.m. Local Time on the date
                  when payment is due.

                  2.5.7 Application of Payments.  Any payment received by Lender
                  from Borrowers,  or any of them, with respect to the Revolving
                  Loan or  with  no  particular  Obligation  specified,  will be
                  applied by Lender to all  obligations  of  Borrowers to Lender
                  under the  Revolving  Note or this  Agreement,  with each such
                  payment to be applied in the following order unless Lender, at
                  its option,  designates  a different  order from time to time:
                  first to any sums (other than principal or interest) then due,
                  next to interest,  and the  remainder  (if any) to  principal,
                  with the most recent Advances of principal under the Revolving
                  Loan to be paid first.

                  2.5.8  Optional  Prepayments.  Borrowers  may, at any time and
                  from time to time, with respect to the Revolving Loan,  prepay
                  any Floating Rate Loan, in whole or in part,  without  premium
                  or  penalty.  Payment of  principal  owing upon any LIBOR Rate
                  Loan, in whole or in part,  is permitted  only on the last day
                  of the applicable  Interest Period.  If,  notwithstanding  the
                  provisions of this  section,  a LIBOR Rate Loan is prepaid for
                  any reason other than demand by Lender for payment, Borrowers,
                  jointly and severally,  shall  indemnify  Lender on demand for
                  any loss incurred  thereby,  including any loss in liquidating
                  or employing  deposits  acquired to fund or maintain the LIBOR
                  Rate Loan.


                                                        11

<PAGE>



                  2.5.9 Lending  Installations.  Lender and any  Participant may
                  book LIBOR Rate Loans at any Lending Installation  selected by
                  it, and may change the Lending Installation from time to time.
                  All terms of this  Agreement  shall apply to any such  Lending
                  Installation.

                  2.5.10  Failure to Pay or Borrow on Certain Dates; Taxes.

                           (A) If any  payment of a LIBOR Rate Loan  occurs on a
                           date which is not the last day of an Interest Period,
                           or if a  LIBOR  Rate  Loan is not  made  on the  date
                           specified in the Borrowing  Notice or Rate  Selection
                           Notice for any reason other than default of Lender or
                           a  Participant,  Borrowers,  jointly  and  severally,
                           shall   upon   demand   indemnify   Lender  and  each
                           Participant for any costs incurred by Lender and each
                           Participant  resulting therefrom,  including any loss
                           in liquidating as employing deposits acquired to fund
                           or maintain the LIBOR Rate Loan.

                           (B) If  and  to the  extent  that  any  deduction  is
                           required by law to be made from any payment to Lender
                           under this Agreement or the Revolving Note on account
                           of present or future  taxes of any nature  whatsoever
                           imposed  within the  United  States of America by any
                           Governmental  Authority,  Borrowers  shall  make  the
                           deduction  for the  account of Lender and make timely
                           payment  thereof  to  the  appropriate   Governmental
                           Authority.  Borrowers  shall  confirm  any payment of
                           such  taxes  by  sending  official  tax  receipts  or
                           certified  copies  thereof to Lender  promptly  after
                           payment.

                  2.5.11  Increased Cost and Reduced Return.

                           (A) If after  the date  hereof  the  adoption  of any
                           applicable  Requirement of Law or any change therein,
                           or any change in the interpretation or administration
                           thereof by any Governmental  Authority,  central bank
                           or comparable agency charged with the  interpretation
                           or administration thereof, or compliance by Lender or
                           any Participant (or any of their  applicable  Lending
                           Installations) with any request or directive (whether
                           or  not   having  the  force  of  law)  of  any  such
                           Governmental  Authority,  central bank or  comparable
                           agency:

                                    (1)     shall   subject    Lender   or   any
                                            Participant   (or   any   of   their
                                            applicable Lending Installations) to
                                            any tax,  duty or other  charge with
                                            respect  to LIBOR  Rate  Loans,  the
                                            Revolving   Note  or  any  of  their
                                            obligation to make or maintain LIBOR
                                            Rate  Loans,  or  shall  change  the
                                            basis of  taxation  of  payments  to
                                            Lender   or   any   Participant  (or

                                                        12

<PAGE>



                                            any  of  their  applicable   Lending
                                            Installation) of the principal of or
                                            interest on the LIBOR Rate Loans  or
                                            any  other  amounts  due  under this
                                            Agreement in respect  of LIBOR  Rate
                                            Loans or any  of  their   obligation
                                            to make or maintain  the LIBOR  Rate
                                            Loans (except  for  changes  in  the
                                            rate  of  tax  on  the  overall  net
                                            income of Lender, any Participant or
                                            any  of  their   applicable  Lending
                                            Installations); or

                                    (2)     shall   impose,   modify   or   deem
                                            applicable   any  reserve,   special
                                            deposit   or   similar   requirement
                                            (including,  without limitation, any
                                            such  requirement   imposed  by  the
                                            Board of  Governors  of the  Federal
                                            Reserve  System,  but excluding with
                                            respect  to any LIBOR  Rate Loan any
                                            such  requirement  included  in  the
                                            applicable  Reserve  Requirement  in
                                            calculating  the Base LIBOR Rate for
                                            such   loan)   against   assets  of,
                                            deposits with or for the account of,
                                            or credit extended by, Lender or any
                                            Participant   (or   any   of   their
                                            applicable Lending Installations) or
                                            on  the  London,  England  interbank
                                            eurodollar   market,  or  any  other
                                            condition  affecting  the LIBOR Rate
                                            Loans,   the   Revolving   Note   or
                                            Lender's   or   any    Participant's
                                            obligation to make or maintain LIBOR
                                            Rate Loans;

                  and the result of any of the foregoing is to increase the cost
                  to  Lender  or any  Participant  (or any of  their  applicable
                  Lending  Installations)  of making or maintaining a LIBOR Rate
                  Loan  (except to the extent such  increased  costs are already
                  included  in  the  determination  of the  applicable  interest
                  rate),  or to  reduce  the  amount  of  any  sum  received  or
                  receivable  by  Lender  of any  Participant  (or any of  their
                  applicable  Lending  Installations)  under this  Agreement  or
                  under the Revolving Note with respect thereto, or otherwise to
                  reduce the net yield to Lender or any  Participant on the Loan
                  by a material amount,  then,  within the time period specified
                  in Section  2.5.12 hereof and upon delivery to Cavalier  Homes
                  of  a  certificate   complying  with  Section  2.5.12  hereof,
                  Borrowers  shall  pay to  Lender  such  additional  amount  or
                  amounts   as  will   compensate   Lender   and  the   affected
                  Participants for such increased cost or reduction.

                           (B)  If  after   the  date   hereof   Lender  or  any
                           Participant shall have reasonably determined that the
                           adoption  of  any   applicable   Requirement  of  Law
                           regarding capital adequacy, or any change therein, or
                           any change in the  interpretation  or  administration
                           thereof by any Governmental  Authority,  central bank
                           or comparable agency charged  with the interpretation

                                                        13

<PAGE>



                           or administration thereof, or compliance by Lender or
                           any    Participant   (or    any  of   their   Lending
                           Installations)   with   any   request   or  directive
                           regarding capital adequacy (whether or not having the
                           force of law) of  any  such  Governmental  Authority,
                           central bank or  comparable agency,  has reduced  the
                           rate of return on capital of Lender (or any person or
                           entity  controlling  Lender) or any  Participant as a
                           consequence   of  Lender's  or   such   Participant's
                           obligations  hereunder  to a level  below that  which
                           Lender   (or   such   person   or   entity)  or  such
                           Participant   would   have   achieved  but  for  such
                           adoption, change, compliance, request or directive by
                           a material amount, then from time to time, within the
                           time specified in Section 2.15.12  hereof,  Borrowers
                           shall  pay  to  Lender  and  such   Participant  such
                           additional  amount  or  amounts  as  will  compensate
                           Lender   (or  such   person  or   entity)   and  such
                           Participant for such reduction.

                           (C) Lender will promptly notify Cavalier Homes of any
                           event of which it has knowledge,  occurring after the
                           date  hereof,   which  will  entitle  Lender  or  any
                           Participant to compensation  pursuant to this Section
                           2.5.11  and  will   designate  a  different   Lending
                           Installation if such  designation will avoid the need
                           for, or reduce the amount of, such  compensation  and
                           will  not,  in the  reasonable  judgment  of  Lender,
                           expose  Lender  or  any   Participant  to  additional
                           liability,  costs  or  reduction  in rate of  return.
                           Determinations  by  Lender  and any  Participant  for
                           purposes of this Section  2.5.11 of the effect of the
                           adoption of any applicable Requirement of Law, or any
                           change therein,  or any change in the  interpretation
                           or   administration   thereof  by  any   Governmental
                           Authority,  central bank or comparable agency charged
                           with the interpretation or administration thereof, of
                           compliance  by  Lender or any  Participant  (or their
                           applicable Lending Installations) with any request or
                           directive (whether or not having the force of law) of
                           any  such  Governmental  Authority,  central  bank or
                           comparable   agency   on  its   costs  of  making  or
                           maintaining   the   Revolving   Loan  or  on  amounts
                           receivable  by it in respect of the  Revolving  Loan,
                           and of the additional  amounts required to compensate
                           Lender  and  any   Participant   in  respect  of  any
                           increased costs or reduction in rate of return, shall
                           be conclusive,  provided that such determinations are
                           made on a  reasonable  basis and are  supported  by a
                           certificate complying with Section 2.5.12 hereof.

                  2.5.12  Lender's   Certificates;   Survival  of  Indemnity.  A
                  certificate  of  Lender,  any  Participant,   or  any  Lending
                  Installation,  as to the  amounts  due under  Sections  2.5.8,
                  2.5.10 or 2.5.11 and all other  determinations  by any of them
                  pursuant thereto,  shall, in the absence of manifest error and
                  so long as made on any  reasonable  basis,  be  presumed to be

                                                        14

<PAGE>



                  correct.  Determination of amounts payable under such sections
                  in connection with a LIBOR  Rate  Loan  shall be calculated as
                  though  Lender,  the  affected  Participants,  or the affected
                  Lending  Installation  funded the LIBOR Rate Loan  through the
                  purchase  of a  deposit  of  the  type,  amount  and  maturity
                  corresponding   to  the  deposit   used  as  a  reference   in
                  determining  the applicable Base LIBOR Rate for such loan. The
                  amount  specified in the  certificate  shall be payable at the
                  end of the applicable  Interest Period or within 15 days after
                  receipt by Cavalier  Homes of the  certificate,  whichever  is
                  later. In determining  amounts owed, any reasonable  averaging
                  and  attribution  methods may be used,  which methods shall be
                  specified   in  the   certificate   or   other   documentation
                  accompanying  the  demand  for  payment.  The  obligations  of
                  Borrowers  under  Sections  2.5.8,  2.5.10  and  2.5.11  shall
                  survive  payment of the Revolving Loan and termination of this
                  Agreement,  but such  obligations  shall  terminate  two years
                  after  the date  the  Revolving  Note is paid in full  unless,
                  prior  to the  end of  such  two-year  period,  Lender  or any
                  Participant  shall have given Cavalier Homes notice that claim
                  is made under any of such sections and the approximate  amount
                  of such claim.

                  2.5.13 Illegality  Affecting LIBOR Rate Loans. If, on or after
                  the date of this  Agreement,  the  adoption of any  applicable
                  Requirement  of Law, or any change  therein,  or any change in
                  the   interpretation   or   administration   thereof   by  any
                  Governmental  Authority,  central  bank or  comparable  agency
                  charged with the interpretation or administration  thereof, or
                  compliance  by  Lender  or any  Participant  (or any of  their
                  applicable   Lending   Installations)   with  any  request  or
                  directive (whether or not having the force of law) of any such
                  Governmental  Authority,  central  bank or  comparable  agency
                  shall  make  it  unlawful  or  impossible  for  Lender  or any
                  Participant (or any of their applicable Lending Installations)
                  to make,  maintain or fund LIBOR Rate Loans,  Lender  shall so
                  notify  Cavalier   Homes,   whereupon  until  Lender  notifies
                  Cavalier  Homes  that the  circumstances  giving  rise to such
                  suspension no longer exist,  the  obligation of Lender and any
                  Participant  to make or  maintain  LIBOR Rate  Loans  shall be
                  suspended. As a result of such suspension, the Advances of the
                  Revolving Loan shall instead  accrue  interest at the Floating
                  Rate.  Before  giving any  notice  pursuant  to this  section,
                  Lender  and  each  affected   Participant  shall  designate  a
                  different  Lending  Installation  for the LIBOR  Rate Loans if
                  such  designation  will avoid the need for giving  such notice
                  and  will  not,  in  the  judgment  of  Lender,  be  otherwise
                  disadvantageous to Lender or any Participant.

                  2.5.14  Availability  of Interest Rate;  Basis for Determining
                  Interest  Rate  Inadequate  or  Unfair.  If on or prior to the
                  first day of any Interest Period for any LIBOR Rate Loan:


                                                        15

<PAGE>



                           (A)  Lender  or  any  Participant  determines  or  is
                           advised that  deposits in Dollars (in the  applicable
                           amounts) are not being offered in the relevant market
                           for such Interest Period, or

                           (B)  Lender or any  Participant  determines  that the
                           LIBOR Rate will not adequately and fairly reflect the
                           cost to Lender or such  Participant  of  funding  the
                           LIBOR Rate Loan for such Interest Period,

                  Lender shall  forthwith give notice thereof to Cavalier Homes,
                  whereupon  until  Lender  notifies  Cavalier  Homes  that  the
                  circumstances  giving rise to such suspension no longer exist,
                  the  obligation to make or maintain  LIBOR Rate Loans shall be
                  suspended.  Unless Cavalier Homes notifies Lender at least two
                  Banking  Days before the date of any Advance of the  Revolving
                  Loan for which a Borrowing  Notice has  previously  been given
                  that the  Borrowers  elect not to borrow,  as a result of such
                  suspension, such Advances shall instead accrue interest at the
                  Floating Rate.

                  11.      Section 2.10  of the  Agreement is hereby amended and
restated to read in its entirety as follows:

                  2.10  Commitment and Non-Usage Fees for the Revolving Loan. At
                  Closing and upon the renewal (if  applicable) of the Revolving
                  Loan,  Borrowers  shall  pay  the  Commitment  Fee  (or  if at
                  renewal, such other commitment fee as shall be mutually agreed
                  upon by Cavalier Homes and Lender) for the Revolving  Loan. In
                  addition,  Borrowers  shall pay to Lender a non-usage fee (the
                  "Non-Usage  Fee") equal to one-quarter of one percent  (.0025)
                  times the Unused Line Amount (as hereinafter defined). As used
                  in this Section 2.10, the term "Unused Line Amount" shall mean
                  the  amount by which the  maximum  Revolving  Loan  Commitment
                  (which is  $10,000,000 as of June 1, 1998) exceeds the average
                  outstanding  principal  balance of the Revolving  Loan for the
                  preceding   12-month  period.   The  Unused  Line  Amount  and
                  Non-Usage  Fee shall be  computed  on April  15,  1999 for the
                  preceding  12-month  period ended April 15, 1999, and again on
                  each  subsequent  April 15 for the preceding  12-month  period
                  then ended.  The  Non-Usage  Fee shall be payable  each May 15
                  following the April 15  computation  date. If Borrowers do not
                  pay any Non-Usage Fee to Lender upon written  demand,  Lender,
                  at its option may,  but shall not be required  to, and without
                  further  notice or demand upon  Borrowers,  make an Advance on
                  the  Revolving  Loan for the  purpose  of paying to Lender the
                  amount of such  Non-Usage  Fee.  Any such  Advance  so made by
                  Lender shall for all purposes  under the  Agreement be treated
                  as an Advance under the  Revolving  Loan  Commitment,  and the
                  amount of any such  Advance  shall be  included as part of the
                  unpaid principal balance of the Revolving Loan. Alternatively,
                  Lender, at its option may, but shall not be required  to,  and

                                                        16

<PAGE>



                  without further  notice or  demand  upon any of the Borrowers,
                  charge against any deposit account of any of the Borrowers all
                  or any part of the Non-Usage Fee due hereunder.

                  12.      Section 3.1 of the  Agreement is  hereby  amended and
restated in its entirety to read as follows:

                  3.1      General Terms of the Warehouse Loan and Term Loans.

                           (A) Subject to the terms hereof,  Lender will lend to
                           Cavalier Acceptance, from time to time until the Loan
                           Termination Date for the Warehouse Loan, such sums in
                           integral multiples of $500,000 as Cavalier Acceptance
                           may request, but which shall not exceed, in aggregate
                           principal  amount  at any one time  outstanding,  the
                           lesser of:

                                    (1)     (a) $25,000,000    minus   (b)   the
                                            aggregate   outstanding    principal
                                            balance of all Terms Loans, or

                                    (2)     the Contracts Borrowing Base.

                  The above-described revolving line of credit made available to
                  Cavalier  Acceptance  is referred to in this  Agreement as the
                  "Warehouse  Loan." Subject to the provisions of subsection (C)
                  below,  indebtedness  outstanding under the Warehouse Loan may
                  be  converted  to a Term  Loan;  provided,  however,  that the
                  maximum principal amount  outstanding under the Warehouse Loan
                  and  all  Term  Loans  shall  not  exceed   $25,000,000   (the
                  outstanding  principal  balance of the Warehouse  Loan and all
                  Term Loans is herein  referred  to, in the  aggregate,  as the
                  "$25,000,000 Loan").

                           (B) Subject to the terms hereof,  Cavalier Acceptance
                           may borrow,  repay  without  penalty or premium,  and
                           reborrow under the Warehouse  Loan,  from the date of
                           this Agreement  until the Loan  Termination  Date for
                           the  Warehouse  Loan.  If  at  any  time  the  unpaid
                           principal  balance of the Warehouse  Loan exceeds the
                           amount Cavalier  Acceptance could borrow at such time
                           under the  formula  set forth in (A) above,  Cavalier
                           Acceptance  shall  immediately and without demand pay
                           such sums to Lender,  in  multiples of $10,000 to the
                           extent  necessary to reduce the Warehouse  Loan to an
                           amount which Cavalier Acceptance could borrow at that
                           time under such formula.

                           (C) Until the Loan Termination Date for the Warehouse
                           Loan,  and so long as no Event of Default  shall have
                           occurred  and  be  continuing,  and  subject  to  the
                           satisfaction of all conditions precedent contained in

                                                        17

<PAGE>



                           Article  IV,  indebtedness  owing under the Warehouse
                           Loan   may,   in   a  minimum   principal  amount  of
                           $2,000,000, be converted to a Term Loan. The Eligible
                           Contracts  delivered by Cavalier Acceptance to Lender
                           with  respect  to each  Term Loan  shall for  certain
                           purposes  hereunder  be  allocated  to such Term Loan
                           (the  "Allocated  Eligible   Contracts");   provided,
                           however,  that no more than fifteen  percent (15%) of
                           the Eligible  Contracts  allocated to any  applicable
                           Term Loan shall be C-Rated Contracts.

                           (D) If at any time the  unpaid  principal  balance of
                           any Term Loan shall exceed  eighty  percent  (80%) of
                           the aggregate  outstanding  principal  balance of the
                           Allocated Eligible Contracts for such Term Loan, then
                           Cavalier  Acceptance  shall  have  thirty  (30)  days
                           within which to (i) substitute a replacement Eligible
                           Contract  to  increase  the   aggregate   outstanding
                           balance of the Allocated  Eligible Contracts for such
                           Term Loan,  and/or  (2) pay such sums to  Lender,  in
                           multiples of $10,000, all as necessary to assure that
                           the outstanding  principal  balance of such Term Loan
                           is  not  more  than  eighty   percent  (80%)  of  the
                           aggregate   outstanding   principal  balance  of  the
                           Allocated  Eligible  Contracts  for such  Term  Loan;
                           provided,  however,  that  with  respect  to any such
                           Allocated  Eligible  Contracts  which are Green  Tree
                           Contracts,   Cavalier   Acceptance  agrees  that  the
                           loan-to-value threshold (at which Cavalier Acceptance
                           must either  substitute  a new  Eligible  Contract or
                           repay  principal  owing  on the Term  Loan)  shall be
                           seventy  percent  (70%)  rather than  eighty  percent
                           (80%).

                  13.      Section 3.5  of  the  Agreement is hereby amended and
restated to read in its entirety as follows:

                  3.5 Prepayment. The Term Loan(s) may be prepaid, in full or in
                  part,  upon not less  than  thirty  (30)  days  notice if such
                  prepayment is voluntary;  provided, however, that a prepayment
                  premium (the "Premium")  shall be payable on the Excess Amount
                  (as  hereinafter  defined)  if  such  prepayment(s)   (whether
                  voluntary  or  mandatory)  should occur within three (3) years
                  from the date of the applicable  Term Note(s) which  evidences
                  the Term Loan(s) upon which such  prepayment has been made, as
                  follows:  (1)  until the  first  anniversary  date of the Term
                  Note,  the Premium shall be equal to one and one-half  percent
                  (1.50%)   times  the  Excess   Amount;   (2)  from  the  first
                  anniversary date of the Term Note until the third  anniversary
                  date  thereof,  the  premium  shall be  equal  to one  percent
                  (1.00%)  times the Excess  Amount;  and (3) from and after the
                  third  anniversary  date of each Term Note,  there shall be no
                  Premium payable upon any prepayment of such Term Loan. As used
                  herein,  the  "Excess  Amount"  means the  amount by which the
                  principal  prepayments  made on any Term Note,  measured on an
                  annual  basis  for  the  applicable   Prepayment   Period  (as
                  hereinafter defined), shall exceed (A) the

                                                        18

<PAGE>



                  outstanding   principal  balance  on  the  first  day  of  the
                  Prepayment Period times (B) ten percent (10%). As used herein,
                  the "Prepayment  Period" (x) means the period beginning on the
                  date of the applicable Term Note and continuing until (but not
                  including)  the first  anniversary  date of such Term Note and
                  (y) on and after the first such  anniversary  date,  means the
                  period  commencing  on such  anniversary  date and  continuing
                  until  (but not  including)  the next  anniversary  date.  For
                  example,  if the outstanding  principal balance of a Term Note
                  on  the  first  day  of  the  Year-One  Prepayment  Period  is
                  $5,000,000,  then ten percent  (10%) of such  amount  would be
                  equal to $500,000, which would be the amount of principal that
                  could be prepaid during the Year-One Prepayment Period without
                  payment  of any  Premium.  If the  amount  prepaid  during the
                  Year-One  Prepayment  Period for such loan was $750,000,  then
                  the Excess Amount would be $250,000 ($750,000 - 500,000),  and
                  the applicable  Premium would be equal to$3,750.00 (1.5% times
                  $250,000).

                  For  partial  prepayments,  Lender  on  each  April  15  shall
                  calculate  the amount of Premium due on each Term Note for the
                  most  recently-ended  Prepayment Period occurring on or before
                  said April 15, and the amount of such premium shall be payable
                  by Cavalier  Acceptance  each May 15,  following  the April 15
                  computation  date. For prepayments in full, the premiums shall
                  be computed and payable on the date of prepayment. In addition
                  to  the  prepayments   specified  under  Section  3.1(D),  the
                  $25,000,000  Loan  shall  be  subject  to  certain   mandatory
                  prepayments in the event that Cavalier  Acceptance  shall have
                  received  prepayments to it of Chattel Paper which constitutes
                  Collateral  under this  Agreement  (regardless of whether such
                  Chattel  Paper is  classified  as an  Eligible  Contract),  as
                  follows:  (1) In the  event  that  Cavalier  Acceptance  shall
                  receive a  principal  prepayment  upon an  Allocated  Eligible
                  Contract,  then 80% of the amount of such prepayment  shall be
                  due to  Lender as a  prepayment  to Lender of the Term Loan to
                  which such Allocated Eligible Contract was allocated;  and (2)
                  in  the  event  that  Cavalier  Acceptance  should  receive  a
                  prepayment of any other Chattel Paper constituting  Collateral
                  under this Agreement,  then the full amount of such prepayment
                  shall be due to Lender as a prepayment to be applied by Lender
                  to such Indebtedness  outstanding upon the $25,000,000 Loan as
                  Lender may elect.

                  14.      Section 3.6(A) of the Agreement is hereby amended and
restated to read in its entirety as follows:

                  3.6(A)  Warehouse  Loan  Borrowing Procedures, Interest Rates,
                  Payments of Interest and Related Provisions.

                  3.6(A).1  Borrowing Notices.

                           (A)   Cavalier   Acceptance   will  give   Lender  an
                           appropriate  Borrowing  Notice  not later  than 10:00
                           a.m. Local Time  three (3) Banking  Days prior to the

                                                        19

<PAGE>



                           the Borrowing Date for LIBOR Rate Loans and not later
                           than 10:00 a.m. Local Time on the  Borrowing Date for
                           Floating Rate Loans.  A Borrowing Notice is deemed to
                           be  given  when  actually  received  by Lender at its
                           Commercial Loan Department.

                           (B) Once  given to  Lender,  except  as  provided  in
                           Section  3.6(A).14 or unless  Lender shall  otherwise
                           consent,  such Borrowing  Notice shall not thereafter
                           be revocable by Cavalier Acceptance.

                           (C)  On  the   Borrowing   Date,  if  all  terms  and
                           conditions of this Agreement have been complied with,
                           Lender shall make available the requested  Advance of
                           the Warehouse Loan.

                           (D) If requested by Lender, Cavalier Acceptance shall
                           deliver  to  Lender,  not later than 12:00 noon Local
                           Time  on the  Borrowing  Date,  written  confirmation
                           (substantially  in the form of  Exhibit  B- 1) of any
                           oral  Borrowing  Notice.  Cavalier  Acceptance  shall
                           certify to the accuracy of the  information set forth
                           thereon.

                  3.6(A).2 Interest Rate. Unless Cavalier  Acceptance shall have
                  elected a LIBOR  Rate for all or a portion  of the  Advance of
                  the Warehouse Loan as provided in Section 3.6(A).3 hereof, the
                  aggregate  unpaid  principal  amount  of each  Advance  of the
                  Warehouse  Loan  shall  bear  interest  at a rate equal to the
                  Floating Rate with respect to the Warehouse Loan.

                  3.6(A).3          Election of LIBOR Rate.

                           (A) Subject to the  provisions of Sections  3.6(A).4,
                           3.6(A).13, 3.6(A).14 and 3.8, Cavalier Acceptance may
                           elect to pay interest on all or part of an Advance of
                           the Warehouse Loan or the Warehouse Loan at the LIBOR
                           Rate for an Interest Period by giving Lender

                                    (1)     An  appropriate   Borrowing   Notice
                                            specifying  a LIBOR  Rate not  later
                                            than 10:00 a.m. Local Time three (3)
                                            Banking Days prior to the  Borrowing
                                            Date (in the case of a new Advance);
                                            or

                                    (2)     An appropriate Rate Selection Notice
                                            specifying  a LIBOR  Rate not  later
                                            than 10:00 a.m. Local Time three (3)
                                            Banking  Days prior to the first day
                                            of the new  Interest  Period (in the
                                            case of the  outstanding  LIBOR Rate
                                            Loan); or


                                                        20

<PAGE>



                                    (3)     An appropriate Rate Selection Notice
                                            specifying  a LIBOR  Rate not  later
                                            than 10:00 a.m. Local Time three (3)
                                            Banking  Days prior to the first day
                                            of the Interest  Period (in the case
                                            of the conversion of any outstanding
                                            Floating  Rate Loan to a LIBOR  Rate
                                            Loan).

                           (B)      (1)     Cavalier   Acceptance   may   obtain
                                            estimates of the  interest rates  on
                                            which   the   Base   LIBOR   Rate is
                                            calculated by  telephoning  Lender's
                                            rate desk on any  day Lender is open
                                            for  business.  Cavalier  Acceptance
                                            may   obtain   quotations   of   the
                                            interest  rates  on  which  the Base
                                            LIBOR    Rate   is   calculated   by
                                            telephoning   Lender's   rate   desk
                                            between  9:00 a.m.  and  10:00  a.m.
                                            Local  Time  on  any Banking Day.  A
                                            Rate  Selection  Notice  is   deemed
                                            given  when  actually   received  by
                                            Lender  at   its   Commercial   Loan
                                            Department.  If the  Rate  Selection
                                            Notice   is   initially   given   in
                                            writing,  it   shal   be   given  in
                                            substantially  the  form  of Exhibit
                                            B-1  hereto.  If the Rate  Selection
                                            Notice is given in writing, Cavalier
                                            Acceptance   shall  certify  to  the
                                            accuracy   of  the  information  set
                                            forth    thereon.     If    Cavalier
                                            Acceptance  fails  to  select  a new
                                            rate   option   by   giving  a  Rate
                                            Selection Notice by 10:00 a.m. Local
                                            Time on the appropriate  Banking Day
                                            Day  pursuant to  the provisions  of
                                            Section   3.6  (A).3   hereof,   the
                                            Warehouse Loan or  that  portion  of
                                            the  Warehouse  Loan covered  by the
                                            expiring LIBOR  Rate option shall be
                                            a Floating  Rate  Loan on  and after
                                            the last day of the Interest  Period
                                            until the  Warehouse Loan is paid or
                                            until  the  effective date of  a new
                                            Rate  Selection  Notice  pursuant to
                                            this section, whichever is the first
                                            to occur.

                                    (2)     If  requested  by  Lender,  Cavalier
                                            Acceptance  shall deliver to Lender,
                                            not later than 12:00 noon Local Time
                                            on the  first  day  of the  Interest
                                            Period,     written     confirmation
                                            (substantially   in  the   form   of
                                            Exhibit  B- 1  hereto)  of any  oral
                                            Rate  Selection   Notice.   Cavalier
                                            Acceptance   shall  certify  to  the
                                            accuracy  of  the   information  set
                                            forth thereon.

                  3.6(A).4  Restrictions  on Interest  Periods and Conversion to
                  LIBOR Rate. Each new Advance of the Warehouse Loan shall be in
                  an amount of at least $500,000 and in an integral  multiple of
                  $100,000 if a LIBOR  Rate Loan and that part of each  Floating

                                                        21

<PAGE>



                  Rate  Loan  or  LIBOR  Rate  Loan  which  is  converted to, or
                  continued  as, a LIBOR Rate Loan,  shall be in an amount of at
                  least  $500,000  and  shall be  in  an  integral  multiple  of
                  $100,000.  No  Interest  Period may  extend  beyond  the  Loan
                  Termination Date  of the Warehouse Loan.  Cavalier  Acceptance
                  may not elect a LIBOR Rate if,  on the effective  date of such
                  election,  there  exists  an Event of Default.

                  3.6(A).5          Interest Basis and Payment Dates.

                           (A)  Interest at the rates  determined  according  to
                           Sections 3.6(A).2 and 3.6(A).3 shall be calculated on
                           the basis of a 360-day year and the actual  number of
                           days  elapsed.  Interest  shall  accrue on the unpaid
                           principal  balance of all  Advances of the  Warehouse
                           Loan at the  applicable  rate from and  including the
                           date the Advance is made to (but not  including)  the
                           date of any payment on the Warehouse  Loan if payment
                           is received by Lender  prior to 2:00 p.m.  Local Time
                           and if not  received by such time,  then  through and
                           including the date payment is received.

                           (B) All interest  accrued on each  Floating Rate Loan
                           made under this Article III shall be payable  monthly
                           on the first (1st) day of each  calendar  month;  and
                           all  interest  accrued  on each  LIBOR Rate Loan made
                           under this  Article  III shall be payable on the last
                           day of the applicable LIBOR Rate Interest Period, and
                           if such LIBOR Rate Interest  Period exceeds three (3)
                           months, interest accrued on such LIBOR Rate Loan also
                           shall  be  payable  on the date  which  is three  (3)
                           months  after the first day of the  applicable  LIBOR
                           Rate   Interest   Period.   If  not  sooner  paid  in
                           accordance  with  the  subsection  3.6(A).5(B),   all
                           accrued  but unpaid  interest on the  Warehouse  Loan
                           shall be due and payable on the Loan Termination Date
                           of the Warehouse Loan.

                           (C) If any scheduled payment is late ten (10) days or
                           more, Cavalier Acceptance agrees to pay a late charge
                           equal  to  five  percent  (5%) of the  amount  of the
                           payment which is late,  but not more than the maximum
                           amount allowed by applicable Law (the "Late Charge").
                           This  subparagraph  does not extend any  payment  due
                           date  expressly  stated in the  Agreement or any Loan
                           Document  and  does not in any way  prevent  or estop
                           Lender  from  requiring  that  payments  be  made  by
                           Cavalier   Acceptance   strictly  when  due.   Unless
                           accepted  by Lender,  and unless  accompanied  by all
                           other amounts then due to Lender,  the tender of such
                           payment  by  Cavalier  Acceptance  does  not cure the
                           Event of Default  arising  from the  payment  default
                           upon which such Late Charge was assessed.


                                                        22

<PAGE>



                           (D) If, at any time, the rate of interest accruing on
                           any Advance of the Warehouse  Loan or the Late Charge
                           shall  be  deemed  by any  competent  court  of  law,
                           governmental agency or tribunal to exceed the maximum
                           rate of interest  permitted by any  applicable  Laws,
                           then,  for such  time as such  interest  rate or Late
                           Charge, as applicable, would be deemed excessive, its
                           application  shall be  suspended  and there  shall be
                           charged  instead on any such Advance the maximum rate
                           of  interest  permissible  under such  Laws,  and any
                           excess  interest  or charges  actually  collected  by
                           Lender shall be credited as a partial  prepayment  of
                           principal.

                           (E) The Floating Rate shall change  contemporaneously
                           with each change in the Warehouse Rate.

                  3.6(A).6  Method  of  Payment.  Each  payment  (including  any
                  prepayment) of principal of and interest on the Warehouse Loan
                  and each  payment of Cavalier  Acceptance's  reimbursement  or
                  indemnification    obligations   under   Sections    3.6(A).8,
                  3.6(A).10, 3.6(A).11 or 10.3 or any other provision hereunder,
                  shall be made to Lender  without  set-off or  counterclaim  in
                  Dollars in immediately available funds at Lender's main office
                  (or,  in the case of LIBOR Rate  Loans at such  other  Lending
                  Installation,  if any,  as may be  specified  in a  notice  to
                  Cavalier  Acceptance by Lender) by 2:00 p.m. Local Time on the
                  date when payment is due.

                  3.6(A).7  Application  of  Payments.  Any payment  received by
                  Lender from Cavalier  Acceptance with respect to the Warehouse
                  Loan or  with  no  particular  Obligation  specified,  will be
                  applied by Lender to all obligations of Cavalier Acceptance to
                  Lender under the Warehouse Note or this  Agreement,  with each
                  such  payment  to be  applied in the  following  order  unless
                  Lender, at its option,  designates a different order from time
                  to time:  first to any sums (other than principal or interest)
                  then due,  next to  interest,  and the  remainder  (if any) to
                  principal,  with the most recent  Advances under the Warehouse
                  Note of principal to be paid first.

                  3.6(A).8          Optional Prepayments.   Cavalier  Acceptance
                                    --------------------
                  may,  at  anytime  and  from time to time, with respect to the
                  Warehouse Loan, prepay  any Floating Rate Loan, in whole or in
                  part, without premium or penalty.   Payment of principal owing
                  upon any LIBOR Rate Loan,  in whole  or in part,  is permitted
                  only on the last day  of the  applicable Interest Period.  If,
                  notwithstanding  the provisions  of this section, a LIBOR Rate
                  Loan is prepaid for any reason other than demand by Lender for
                  payment, Cavalier  Acceptance shall indemnify Lender on demand
                  for  any  loss  incurred  thereby,  including  any   loss   in
                  liquidating or employing deposits acquired to fund or maintain
                  the LIBOR Rate Loan.


                                                        23

<PAGE>



                  3.6(A).9 Lending Installations. Lender and any Participant may
                  book LIBOR Rate Loans at any Lending Installation  selected by
                  it, and may change the Lending Installation from time to time.
                  All terms of this  Agreement  shall apply to any such  Lending
                  Installation.

                  3.6(A).10         Failure to  Pay or  Borrow on Certain Dates;
                                    Taxes.

                           (A) If any  payment of a LIBOR Rate Loan  occurs on a
                           date which is not the last day of an Interest Period,
                           or if a  LIBOR  Rate  Loan is not  made  on the  date
                           specified in the applicable  Borrowing Notice or Rate
                           Selection Notice for any reason other than default of
                           Lender or a Participant,  Cavalier  Acceptance  shall
                           upon demand indemnify Lender and each Participant for
                           any costs  incurred  by Lender  and each  Participant
                           resulting   therefrom,    including   any   loss   in
                           liquidating as employing deposits acquired to fund or
                           maintain the LIBOR Rate Loan.

                           (B) If  and  to the  extent  that  any  deduction  is
                           required by law to be made from any payment to Lender
                           under this Agreement or the Warehouse Note on account
                           of present or future  taxes of any nature  whatsoever
                           imposed  within the  United  States of America by any
                           Governmental  Authority,  Cavalier  Acceptance  shall
                           make the deduction for the account of Lender and make
                           timely   payment    thereof   to   the    appropriate
                           Governmental  Authority.  Cavalier  Acceptance  shall
                           confirm any payment of such taxes by sending official
                           tax  receipts or certified  copies  thereof to Lender
                           promptly after payment.

                  3.6(A).11         Increased Cost and Reduced Return.

                           (A) If after  the date  hereof  the  adoption  of any
                           applicable  Requirement of Law or any change therein,
                           or any change in the interpretation or administration
                           thereof by any Governmental  Authority,  central bank
                           or comparable agency charged with the  interpretation
                           or administration thereof, or compliance by Lender or
                           any Participant (or any of their  applicable  Lending
                           Installations) with any request or directive (whether
                           or  not   having  the  force  of  law)  of  any  such
                           Governmental  Authority,  central bank or  comparable
                           agency:

                                    (1)     shall   subject    Lender   or   any
                                            Participant   (or   any   of   their
                                            applicable Lending Installations) to
                                            any tax,  duty or other  charge with
                                            respect  to LIBOR  Rate  Loans,  the
                                            Revolving   Note  or  any  of  their
                                            obligation to make or maintain LIBOR
                                            Rate Loans, or shall

                                                        24

<PAGE>



                                            change  the  basis  of  taxation  of
                                            payments    to    Lender    or   any
                                            Participant   (or   any   of   their
                                            applicable Lending  Installation) of
                                            the  principal of or interest on the
                                            LIBOR   Rate   Loans  or  any  other
                                            amounts due under this  Agreement in
                                            respect  of LIBOR  Rate Loans or any
                                            of  their   obligation  to  make  or
                                            maintain   the  LIBOR   Rate   Loans
                                            (except  for  changes in the rate of
                                            tax on the  overall  net  income  of
                                            Lender,  any  Participant  or any of
                                            their       applicable       Lending
                                            Installations); or

                                    (2)     shall   impose,   modify   or   deem
                                            applicable   any  reserve,   special
                                            deposit   or   similar   requirement
                                            (including,  without limitation, any
                                            such  requirement   imposed  by  the
                                            Board of  Governors  of the  Federal
                                            Reserve  System,  but excluding with
                                            respect  to any LIBOR  Rate Loan any
                                            such  requirement  included  in  the
                                            applicable  Reserve  Requirement  in
                                            calculating  the Base LIBOR Rate for
                                            such   loan)   against   assets  of,
                                            deposits with or for the account of,
                                            or credit extended by, Lender or any
                                            Participant   (or   any   of   their
                                            applicable Lending Installations) or
                                            on  the  London,  England  interbank
                                            eurodollar   market,  or  any  other
                                            condition  affecting  the LIBOR Rate
                                            Loans,   the   Revolving   Note   or
                                            Lender's   or   any    Participant's
                                            obligation to make or maintain LIBOR
                                            Rate Loans;

                           and the result of any of the foregoing is to increase
                           the  cost to  Lender  or any  Participant  (or any of
                           their applicable Lending  Installations) of making or
                           maintaining  a LIBOR Rate Loan  (except to the extent
                           such  increased  costs are  already  included  in the
                           determination of the applicable interest rate), or to
                           reduce the amount of any sum  received or  receivable
                           by  Lender  of  any  Participant  (or  any  of  their
                           applicable   Lending    Installations)   under   this
                           Agreement  or under the  Warehouse  Note with respect
                           thereto,  or  otherwise  to  reduce  the net yield to
                           Lender or any  Participant  on the Loan by a material
                           amount,  then,  within the time period  specified  in
                           Section   3.6(A).12   hereof  and  upon  delivery  to
                           Cavalier  Acceptance of a certificate  complying with
                           Section 3.6(A).12 hereof,  Cavalier  Acceptance shall
                           pay to Lender  such  additional  amount or amounts as
                           will compensate Lender and the affected  Participants
                           for such increased cost or reduction.

                           (B)  If  after   the  date   hereof   Lender  or  any
                           Participant shall have reasonably determined that the
                           adoption    of    any     applicable   Requirement of

                                                        25

<PAGE>



                           Law    regarding    capital    adequacy,    or    any
                           change therein,  or any change in the  interpretation
                           or   administration   thereof  by  any   Governmental
                           Authority,  central bank or comparable agency charged
                           with the interpretation or administration thereof, or
                           compliance  by Lender or any  Participant  (or any of
                           their  Lending  Installations)  with any  request  or
                           directive  regarding capital adequacy (whether or not
                           having  the  force of law) of any  such  Governmental
                           Authority,  central bank or  comparable  agency,  has
                           reduced  the rate of return on  capital of Lender (or
                           any  person  or  entity  controlling  Lender)  or any
                           Participant  as a  consequence  of  Lender's  or such
                           Participant's  obligations hereunder to a level below
                           that which  Lender (or such person or entity) or such
                           Participant   would  have   achieved   but  for  such
                           adoption, change, compliance, request or directive by
                           a material amount, then from time to time, within the
                           time specified in Section 3.6(A).12 hereof,  Cavalier
                           Acceptance  shall pay to Lender and such  Participant
                           such additional  amount or amounts as will compensate
                           Lender   (or  such   person  or   entity)   and  such
                           Participant for such reduction.

                           (C) Lender will promptly notify  Cavalier  Acceptance
                           of any  event of which  it has  knowledge,  occurring
                           after the date hereof,  which will entitle  Lender or
                           any  Participant  to  compensation  pursuant  to this
                           Section  3.6(A).11  and will  designate  a  different
                           Lending  Installation if such  designation will avoid
                           the  need  for,   or  reduce  the  amount  of,   such
                           compensation and will not, in the reasonable judgment
                           of  Lender,  expose  Lender  or  any  Participant  to
                           additional  liability,  costs or reduction in rate of
                           return.  Determinations by Lender and any Participant
                           for purposes of this Section  3.6(A).11 of the effect
                           of the adoption of any applicable Requirement of Law,
                           or  any  change   therein,   or  any  change  in  the
                           interpretation  or  administration   thereof  by  any
                           Governmental  Authority,  central bank or  comparable
                           agency   charged   with   the    interpretation    or
                           administration  thereof,  of  compliance by Lender or
                           any   Participant   (or  their   applicable   Lending
                           Installations) with any request or directive (whether
                           or  not   having  the  force  of  law)  of  any  such
                           Governmental  Authority,  central bank or  comparable
                           agency  on its costs of  making  or  maintaining  the
                           Warehouse  Loan  or on  amounts  receivable  by it in
                           respect of the Warehouse  Loan, and of the additional
                           amounts   required  to  compensate   Lender  and  any
                           Participant  in  respect  of any  increased  costs or
                           reduction  in rate of  return,  shall be  conclusive,
                           provided  that  such  determinations  are  made  on a
                           reasonable  basis and are  supported by a certificate
                           complying with Section 3.6(A).12 hereof.


                                                        26

<PAGE>



                  3.6(A).12  Lender's  Certificates;  Survival of  Indemnity.  A
                  certificate  of  Lender,  any  Participant,   or  any  Lending
                  Installation,  as to the amounts due under Sections  3.6(A).8,
                  3.6(A).10 or 3.6(A).11 and all other  determinations by any of
                  them pursuant thereto, shall, in the absence of manifest error
                  and so long as made on any reasonable basis, be presumed to be
                  correct.  Determination of amounts payable under such sections
                  in  connection  with a LIBOR Rate Loan shall be  calculated as
                  though  Lender,  the  affected  Participants,  or the affected
                  Lending  Installation  funded the LIBOR Rate Loan  through the
                  purchase  of a  deposit  of  the  type,  amount  and  maturity
                  corresponding   to  the  deposit   used  as  a  reference   in
                  determining  the applicable Base LIBOR Rate for such loan. The
                  amount  specified in the  certificate  shall be payable at the
                  end of the applicable  Interest Period or within 15 days after
                  receipt by Cavalier  Acceptance of the certificate,  whichever
                  is  later.   In  determining   amounts  owed,  any  reasonable
                  averaging and attribution  methods may be used,  which methods
                  shall be specified in the  certificate or other  documentation
                  accompanying  the  demand  for  payment.  The  obligations  of
                  Cavalier  Acceptance  under Sections  3.6(A).8,  3.6(A).10 and
                  3.6(A).11  shall  survive  payment of the  Warehouse  Loan and
                  termination  of this  Agreement,  but such  obligations  shall
                  terminate two years after the date the Warehouse  Note is paid
                  in full  unless,  prior  to the end of such  two-year  period,
                  Lender or any Participant shall have given Cavalier Acceptance
                  notice that claim is made under any of such  sections  and the
                  approximate amount of such claim.

                  3.6(A).13  Illegality  Affecting  LIBOR Rate Loans.  If, on or
                  after  the  date  of  this  Agreement,  the  adoption  of  any
                  applicable  Requirement of Law, or any change therein,  or any
                  change in the interpretation or administration  thereof by any
                  Governmental  Authority,  central  bank or  comparable  agency
                  charged with the interpretation or administration  thereof, or
                  compliance  by  Lender  or any  Participant  (or any of  their
                  applicable   Lending   Installations)   with  any  request  or
                  directive (whether or not having the force of law) of any such
                  Governmental  Authority,  central  bank or  comparable  agency
                  shall  make  it  unlawful  or  impossible  for  Lender  or any
                  Participant (or any of their applicable Lending Installations)
                  to make,  maintain or fund LIBOR Rate Loans,  Lender  shall so
                  notify  the  Cavalier   Acceptance,   whereupon  until  Lender
                  notifies  Cavalier  Acceptance that the  circumstances  giving
                  rise to such  suspension  no longer exist,  the  obligation of
                  Lender  and any  Participant  to make or  maintain  LIBOR Rate
                  Loans shall be suspended. As a result of such suspension,  the
                  Advances of the Warehouse Loan shall instead  accrue  interest
                  at the Floating  Rate.  Before  giving any notice  pursuant to
                  this  section,  Lender  and each  affected  Participant  shall
                  designate a different Lending  Installation for the LIBOR Rate
                  Loans if such  designation will avoid the need for giving such
                  notice and will not, in the  judgment of Lender,  be otherwise
                  disadvantageous to Lender or any Participant.

                                                        27

<PAGE>



                  3.6(A).14 Availability of Interest Rate; Basis for Determining
                  Interest  Rate  Inadequate  or  Unfair.  If on or prior to the
                  first day of any Interest Period for any LIBOR Rate Loan:

                           (A)  Lender  or  any  Participant  determines  or  is
                           advised that  deposits in Dollars (in the  applicable
                           amounts) are not being offered in the relevant market
                           for such Interest Period, or

                           (B)  Lender or any  Participant  determines  that the
                           LIBOR Rate will not adequately and fairly reflect the
                           cost to Lender or such  Participant  of  funding  the
                           LIBOR Rate Loan for such Interest Period,

                  Lender  shall   forthwith  give  notice  thereof  to  Cavalier
                  Acceptance,   whereupon   until   Lender   notifies   Cavalier
                  Acceptance  that  the   circumstances   giving  rise  to  such
                  suspension no longer exist, the obligation to make or maintain
                  LIBOR  Rate  Loans  shall  be   suspended.   Unless   Cavalier
                  Acceptance  notifies  Lender at least two Banking  Days before
                  the date of any  Advance  of the  Warehouse  Loan for  which a
                  Borrowing  Notice has  previously  been  given  that  Cavalier
                  Acceptance   elects  not  to  borrow,  as  a  result  of  such
                  suspension, such Advances shall instead accrue interest at the
                  Floating Rate.


                  15.  Section  3.6(B)(1) of the Agreement is hereby  amended by
deleting  the first  sentence  thereof  in its  entirety  and  substituting  the
following sentences in lieu thereof:

                           Interest on the principal  balance of each Term Loan,
                  from time to time outstanding,  will be payable at a rate (the
                  "Term  Rate")  that  will be fixed  for five  years at the per
                  annum rate of interest  equal to (x) 240 basis points  (2.40%)
                  above  the  Five  Year  Treasury  in the  case of  Term  Loans
                  converted from the Warehouse Loan prior to March 14, 1996, (y)
                  200 basis points  (2.00%)  above the Five Year Treasury in the
                  case of Term Loans  converted  from the  Warehouse  Loan on or
                  after March 14,  1996,  but prior to June 1, 1998,  or (z) 195
                  basis points  (1.95%) above the Five Year Treasury in the case
                  of Term Loans  converted  from the Warehouse  Loan on or after
                  June 1, 1998.

                  16.  Section  3.10 of the  Agreement  (which  was added by the
First  Amendment to the Agreement) is hereby amended and restated to read in its
entirety as follows:

                  3.10 Non-Usage Fees for $25,000,000 Loan.  Cavalier Acceptance
                  shall  pay to Lender a  non-usage  fee (the  "Non-Usage  Fee")
                  equal to  one-quarter  of one  percent  (.0025)  of the Unused
                  Commitment  Amount (as hereinafter  defined).  As used in this
                  Section   3.10,   the   term   "Unused    Commitment   Amount"

                                                        28

<PAGE>



                  shall  mean  the  amount   by  which  the   maximum  Warehouse
                  and Term Loan  Commitment  (which is $25,000,000 as of June 1,
                  1998) exceeds the average outstanding principal balance of the
                  $25,000,000 Loan for the preceding 12-month period. The Unused
                  Commitment  Amount and the  Non-Usage Fee shall be computed on
                  April 15, 1999 for the  12-month  period  ended April 15, 1999
                  and  again  on each  subsequent  April  15 for  the  preceding
                  12-month  period then ended.  If Cavalier  Acceptance does not
                  pay any Non-Usage Fee when due,  Lender at its option may, but
                  shall not be required to, and without further notice or demand
                  upon  Cavalier  Acceptance,  make an Advance on the  Warehouse
                  Loan for the  purpose  of paying to Lender  the amount of such
                  Non-Usage  Fee,  any such  Advance so made by Lender shall for
                  all  purposes  under the  Agreement  be  treated as an Advance
                  under the Warehouse and Term Loan  Commitment,  and the amount
                  of any such  Advance  shall be  included as part of the unpaid
                  balance of the Warehouse Loan.  Alternatively,  Lender, at its
                  option may, but shall not be required to, and without  further
                  notice or demand upon Cavalier  Acceptance  charge against any
                  deposit account of Cavalier  Acceptance all or any part of the
                  Non-Usage Fee due hereunder.

                  17.  Sections  4.3(B)  and  (C) of the  Agreement  are  hereby
amended and restated in their entireties to read as follows:

                           (B) The  original  principal  amount of any Term Note
                           shall not be less than $2,000,000;

                           (C) The  original  principal  amount of any Term Note
                           shall not exceed the Contracts Borrowing Base for the
                           Allocated   Eligible   Contracts   furnished  to  and
                           accepted as collateral for such Term Note by Lender;

                  18.  Section  7.2(L) of the  Agreement  is hereby  amended  to
delete the term  "$2,000,000"  therefrom and to substitute the term "$3,000,000"
in lieu thereof,  with the intended  effect of such change being to increase the
maximum "lease" (as defined  therein)  obligations from $2,000,000 to $3,000,000
in any fiscal year of Cavalier Homes.

                  19.      Section 7.2(U) is hereby amended and restated in  its
entirety to read as follows:

                           Neither   Cavalier   Homes,   nor  the   Consolidated
                  Entities,  will make capital  expenditures for any fiscal year
                  in excess of $14,000,000 in the aggregate.

                  20.  Section  7.2(H) of the  Agreement is hereby to delete the
term  "$2,500,000"  from  subsection  (6)  thereof  and to  substitute  the term
"$10,000,000" in lieu thereof;


                                                        29

<PAGE>



                  21.  Exhibits B, B-1, C, and C-1 of the  Agreement  are hereby
amended and restated in their  entireties  to read in the form of Annex B, Annex
B-1, Annex C and Annex C-1 attached hereto.

                  22. Prior to the execution of this  Amendment,  Borrowers have
paid to  Lender  all  Usage  Fees and  Non-Usage  Fees due to be paid  under the
Agreement  prior to this Amendment.  In connection  with this Amendment,  Lender
acknowledges  its receipt of (i) a Commitment  Fee from Cavalier  Homes equal to
one-quarter of one percent (.0025) of the Revolving Loan Commitment ($25,000.00)
and (ii) a Commitment Fee from Cavalier Acceptance equal to three- sixteenths of
one  percent  (.001875)  of the  aggregate  Warehouse  and Term Loan  Commitment
($46,875.00).  Each of the Borrowers acknowledges that such Commitment Fees have
been fully- earned by Lender and are non-refundable.

                  23. As  conditions  to the  effectiveness  of this  Amendment,
Borrowers  shall  have  delivered  to  Lender:   (a)  a  Second  Revolving  Note
Modification  Agreement  in the form of  Exhibit A hereto,  duly  executed  (the
"Revolving  Note   Modification")  (b)  a  Second  Warehouse  Note  Modification
Agreement in the form of Exhibit B hereto,  duly executed (the  "Warehouse  Note
Modification")   (the  Revolving  Note   Modification  and  the  Warehouse  Note
Modification  are sometimes  hereinafter  referred to  collectively as the "Note
Modifications");  (c) a written opinion of legal counsel for Borrowers, dated as
of the date of this Amendment and addressed to Lender,  in the form of Exhibit C
hereto;  (d) such UCC-1  financing  statements  and amendments to existing UCC-1
financing   statements   as  Lender  may  request;   and  (e)  such   additional
documentation  (including,  but not limited to, a  certificate  of the corporate
secretary  or  assistant  secretary  of each  Borrower  in the form of Exhibit D
hereto,  certifying  as to  incumbency  and  signatures  of the officers of such
Borrower  signing  this  Amendment  and the Note  Modifications  and each  other
document delivered pursuant hereto,  together with a copy of resolutions of such
Borrower's  board of directors  and/or  shareholders  authorizing the execution,
delivery and  performance of this Amendment and the Note  Modifications  and the
Agreement  and the Notes as amended  thereby) as may be requested by Lender,  or
its counsel,  to satisfy Lender that this  Amendment and the Note  Modifications
have been duly  authorized,  executed and  delivered on behalf of each  Borrower
that is a party thereto,  constitute the valid and binding obligations  thereof,
and that the Notes as amended are entitled to the security of the  Agreement and
the Security Documents.

                  24.  Notwithstanding  the execution of this Amendment,  all of
the indebtedness evidenced by each of the Notes (as amended and increased by the
Note  Modifications)  shall remain in full force and effect,  and any Collateral
described  in  any  agreement  providing  security  for  any  Obligation  of the
Borrowers or any of them so defined to include the Notes, or any of them,  shall
remain subject to the liens, pledges,  security interests and assignments of any
such agreements as security for the indebtedness evidenced by each of the Notes,
the Obligations, and all other indebtedness described therein; nothing contained
in this Amendment or in the Note Modifications  shall be construed to constitute
a novation  of any of the  indebtedness  evidenced  by the Notes or to  release,
satisfy,  discharge or otherwise  affect or impair in any manner  whatsoever (a)
the  validity or  enforceability  of any of the  indebtedness  evidenced  by the
Notes; (b) the liens, pledges,  security interests,  assignments and conveyances
effected  by the  Agreement,  the  Security  Documents  and any other  agreement
securing any of the Notes, or the priority thereof; (c) the

                                                        30

<PAGE>



liability of any maker, endorser, surety, guarantor or other Person that may now
or hereafter be liable under or on account of any of the Notes or any  agreement
securing any or all of the Notes; or (d) any other security or instrument now or
hereafter  held  by  Lender  as  security  for  or as  evidence  of  any  of the
above-described  indebtedness.  Without in any way limiting the  foregoing,  (i)
each Borrower acknowledges and agrees that the indebtedness evidenced by each of
the Notes as amended and/or increased  pursuant to the Note Modifications is and
shall  remain  secured  by  the  Collateral  described  in the  Agreement,  each
Assumption  Agreement  and in the Security  Documents  and (ii)  Cavalier  Homes
specifically,  in its  capacity  as  guarantor  under  that  certain  Continuing
Guaranty Agreements dated February 17, 1994 and March 14, 1996 by Cavalier Homes
in favor of Lender (the "Guaranty Agreements"), acknowledges and agrees that the
"Liabilities"  (as defined in the Guaranty  Agreements)  of Cavalier  Acceptance
which are  unconditionally  guaranteed by Cavalier Homes include the $25,000,000
Loan.

                  25. Borrowers, jointly and severally, agree to pay directly or
reimburse  Lender,  on  demand,  for all of  Lender's  expenses,  including  the
reasonable  fees and  expenses  of its legal  counsel  and UCC  filing  fees and
expenses, incurred in connection with the preparation,  amendment,  modification
or  enforcement  of this  Amendment  or the  Agreement,  and the  collection  or
attempted collection of the Notes.

                  26.  Borrowers,  jointly and severally,  hereby  represent and
warrant  to  Lender  that  (a) the  officers  of each  Borrower  executing  this
Amendment and the Note Modifications have been duly authorized to do so and such
amendments and the Agreement and the Notes,  as amended  thereby,  are valid and
binding  upon  each  Borrower  which  is  a  party  thereto  in  every  respect,
enforceable in accordance  with their terms,  (b) each and every  representation
and warranty set forth in Article VI of the  Agreement is true and correct as of
the date  hereof  except as set forth on Exhibit E attached  hereto,  and (c) no
Event of  Default,  nor any event  that,  upon  notice or lapse of time or both,
would constitute an Event of Default, has occurred and is continuing.

                  27. Unless otherwise expressly modified or amended hereby, all
terms and conditions of the Agreement shall remain in full force and effect, and
the same, as amended hereby, are hereby ratified and confirmed in all respects.

                  28.  This  Amendment  shall  inure to and be binding  upon and
enforceable by Borrowers and Lender and their respective successors and assigns.

                  29.   This   Amendment   may  be   executed  in  one  or  more
counterparts,  each of which when  executed and  delivered  shall  constitute an
original.  All such counterparts shall together be deemed to be one and the same
instrument.



                                                        31

<PAGE>



                  IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment,  by and through their  respective duly authorized  officers as of the
day and year first above written.


                                         BORROWERS:

                                                   CAVALIER HOMES, INC.


                                         By:/s/ MICHAEL R. MURPHY         [L.S.]
                                         _______________________________________
                                         Its:      VP
                                         _______________________________________

                                                 CAVALIER MANUFACTURING, INC.



                                         By:/s/ MICHAEL R. MURPHY         [L.S.]
                                         _______________________________________
                                         Its:      VP
                                         _______________________________________

                                                  CAVALIER INDUSTRIES, INC.


                                         By:/s/ MICHAEL R. MURPHY         [L.S.]
                                         _______________________________________
                                         Its:      VP
                                         _______________________________________

                                                     BELMONT HOMES, INC.


                                         By:/s/ MICHAEL R. MURPHY         [L.S.]
                                         _______________________________________
                                         Its:      VP
                                         _______________________________________

                                                      DELTA HOMES, INC.


                                         By:/s/ MICHAEL R. MURPHY         [L.S.]
                                         _______________________________________
                                         Its:      VP
                                         _______________________________________


                                                        32

<PAGE>


                                                      SPIRIT HOMES, INC.


                                         By:/s/ MICHAEL R. MURPHY         [L.S.]
                                         _______________________________________
                                         Its:      VP
                                         _______________________________________

                                                     BELLCREST HOMES, INC.


                                         By:/s/ MICHAEL R. MURPHY         [L.S.]
                                         _______________________________________
                                         Its:      VP
                                         _______________________________________

                                                CAVALIER ACCEPTANCE CORPORATION


                                         By: /s/ JERRY F. WILSON, JR.     [L.S.]
                                         _______________________________________
                                         Its:      President
                                         _______________________________________

                                         LENDER:

                                                      FIRST COMMERCIAL BANK


                                         By: /s/ JIM WILLIAMS             [L.S.]
                                         _______________________________________
                                         Its       Vice President
                                         _______________________________________

                              ASSUMPTION AGREEMENT


                  THIS ASSUMPTION  AGREEMENT (this "Agreement") dated as of June
1, 1998 is made by and among First  Commercial  Bank,  an Alabama  state banking
corporation  (the  "Lender"),  Cavalier  Homes,  Inc.,  a  Delaware  corporation
("Cavalier  Homes"),  and the other entities who are presently  Borrowers  under
that certain  Revolving,  Warehouse and Term Loan Agreement dated as of February
17, 1994, as heretofore  amended  (Cavalier Homes and such other Borrowers being
herein referred to as the "Borrowers"),  and Belmont Homes,  Inc., a Mississippi
corporation ("Belmont"), Delta Homes, Inc., a Mississippi corporation ("Delta"),
Spirit Homes,  Inc., an Arkansas  corporation  ("Spirit")  and Bellcrest  Homes,
Inc.,  a  Georgia  corporation  ("Bellcrest")  (each an  "Assuming  Entity"  and
collectively, the "Assuming Entities").


                                R E C I T A L S :


                  Lender and Cavalier  Homes,  Cavalier  Manufacturing,  Inc., a
Delaware  corporation,  Cavalier  Industries,  Inc., a Delaware  corporation and
Cavalier Acceptance Corporation, an Alabama corporation ("Cavalier Acceptance"),
as  Borrowers,  are parties to that certain  Revolving,  Warehouse and Term Loan
Agreement  dated as of  February  17,  1994,  as amended by that  certain  First
Amendment to Revolving,  Warehouse and Term Loan Agreement  dated March 14, 1996
(as the same has been  amended  to and  including  the date  hereof,  the  "Loan
Agreement").  Capitalized terms used in this Agreement, unless otherwise defined
herein, will have the meanings given to them in the Loan Agreement.

                  Under the terms of the Loan Agreement,  as heretofore amended,
Lender has agreed to lend to Borrowers  up to  $5,000,000  on a revolving  basis
(the  "Revolving  Loan  Commitment")  and  to  Cavalier  Acceptance,  one of the
Borrowers, up to $18,000,000 pursuant to a warehouse and term loan facility, but
solely on the terms and conditions specified in the Loan Agreement.

                  Each of the Assuming Entities desires to become obligated as a
Borrower,  jointly and severally,  with Cavalier Homes and the other  Borrowers,
with respect to the Loan Agreement, the Revolving Loan and the other Obligations
and to take all other action  necessary to become a Borrower and a Participating
Subsidiary (as such term is hereinafter  defined) under the Loan Agreement,  and
to cause all of  Assuming  Entity's  Accounts,  Inventory  and  other  specified
assets,  whether  now  owned  or  hereafter  acquired,  to be  included  in  the
Collateral, as defined in the Loan Agreement.

                  NOW, THEREFORE, in consideration of the foregoing recitals and
the mutual  agreements  herein set forth,  and to induce Lender to make Advances
under  the Loan  Agreement,  and in  further  consideration  of the  substantial
material  benefit to accrue to each of the Assuming  Entities from Advances made
and to be made by Lender under the Revolving  Loan,  the parties hereto agree as
follows:



<PAGE>



                  1. Each of the  Assuming  Entities  hereby  assumes and agrees
that it is and  shall be fully  liable,  jointly  and  severally  with the other
Borrowers, for the Obligations,  and all covenants,  agreements,  warranties and
representations  with  respect  to the  Revolving  Loan  set  forth  in the Loan
Agreement  and the Revolving  Note,  and hereby agrees that it is and shall be a
party to, and a Borrower under the terms of, the Loan  Agreement,  the Revolving
Note, and the other Loan  Documents,  with the same force and effect as would be
the case if Assuming Entity had been named as a Borrower in and had executed and
delivered the Loan  Agreement,  the Revolving Note, and the other Loan Documents
to Lender at Closing; provided,  however, that its liability with respect to the
Obligations  shall be  limited to an amount  equal to the  greater of (i) 95% of
Assuming Entity's Net Worth (as hereinafter  defined) from time to time; or (ii)
the amount that in a legal proceeding brought within the applicable  limitations
period  is  determined  by the  final,  non-appealable  order of a court  having
jurisdiction over the issue and the applicable parties to be the amount of value
given by Lender, or received by Assuming Entity, in exchange for the obligations
of Assuming Entity under this Agreement and the Loan Agreement.  As used in this
Section 1, "Net  Worth"  shall mean (x) the fair  value of the  property  of the
Assuming Entity from time to time (taking into  consideration the value, if any,
of rights  of  subrogation,  contribution  and  indemnity),  minus (y) the total
liabilities of Assuming Entity (including contingent liabilities  [discounted in
appropriate  instances],  but excluding liabilities of the Assuming Entity under
this Agreement and the Loan Agreement) from time to time.

                  2. As security for the prompt satisfaction of all Obligations,
each of the Assuming  Entities hereby  assigns,  transfers and conveys to Lender
all of such Assuming  Entity's  right,  title and interest in and to, and grants
Lender a lien on and a security  interest in, all amounts that may be owing from
time to time by Lender to Assuming  Entity in any capacity,  including,  without
limitation, any balance or share belonging to Assuming Entity, of any deposit or
other account with Lender, which lien and security interest shall be independent
of any right of set-off which Lender may have.

                  3. As  further  security  for the prompt  satisfaction  of all
Obligations,  in addition to any other or further  security  provided  under the
Loan Agreement or any of the Security  Documents,  each of the Assuming Entities
hereby assigns to Lender all of such Assuming Entity's right, title and interest
in and to, and grants  Lender a lien upon and  security  interest in, all of the
following,  wherever located, whether now owned or hereafter acquired,  together
with all  replacements  therefor and proceeds  (including,  without  limitation,
insurance  proceeds) thereof (all of which shall constitute  original Collateral
under this Agreement and the Loan Agreement):

                           a.       Accounts;

                           b.       Chattel Paper;

                           c.       Contracts;

                           d.       Contract Rights;

                           e.       Documents;



<PAGE>



                           f.       Eligible Contracts;

                           g.       General Intangibles;

                           h.       Instruments;

                           i.       Inventory;

                           j.       Rights  as  seller  of  Goods  and rights to
                                    returned,  repossessed or  reclaimed  Goods;
                                    and

                           k.       All  Records  pertaining  to  any   of   the
                                    Collateral.

                  4. The  foregoing  liens shall be first and prior liens except
for Permitted  Liens.  The  Collateral  and all of each Assuming  Entity's other
property  of any kind  held by Lender  shall  stand as one  general,  continuing
collateral  security for all Obligations and may be retained by Lender until all
Obligations  have been  satisfied in full and Lender's  commitment to lend under
the Loan Agreement has been terminated.

                  5. Each of the Assuming Entities  acknowledges that it has had
full and complete  access to the underlying  papers  relating to the Obligations
and all other papers executed by any person in connection with the  Obligations,
has  reviewed  them  and is fully  aware  of the  meaning  and  effect  of their
contents.  Each of the Assuming  Entities is fully informed of all circumstances
that  bear upon the  risks of  executing  this  Agreement  and which a  diligent
inquiry would reveal. Each of the Assuming Entities has adequate means to obtain
from the Borrowers on a continuing  basis  information  concerning the financial
condition  of any or all of the  Borrowers  and is not  depending  on  Lender to
provide such  information,  now or in the future.  Each of the Assuming Entities
agrees that Lender shall have no obligation to advise or notify it or to provide
it with any data or information. The execution and delivery of this Agreement is
not a  condition  precedent  (and  Lender  has not in any way  implied  that the
execution  of this  agreement  is a condition  precedent)  to  Lender's  making,
extending or modifying any loan or any other financial  accommodation  to or for
such Assuming Entity otherwise than under the Loan Agreement.

                  6. Each of the Assuming Entities hereby unconditionally agrees
to pay and perform all of the  Obligations,  whether now  existing or  hereafter
incurred or arising (subject to the proviso of Section 1 above).

                  7.  Each  of  the  Assuming   Entities   hereby   specifically
acknowledges and agrees, without limiting the generality of the other provisions
of this Agreement, to be bound by the terms and conditions specified in the Loan
Agreement, as the same may be amended, including, without limitation, agreements
whereby  such  Assuming  Entity  appoints   Cavalier  Homes  as  its  agent  and
attorney-in-fact to act on its behalf for all purposes of the Loan Agreement and
the other Loan Documents.

                  8.  Each of the  Assuming  Entities  hereby  agrees  that  the
obligations  and  liabilities  of  such  Assuming  Entity  with  respect  to the
Obligations are joint and several,


<PAGE>



continuing,  absolute  and  unconditional  (subject  to the proviso of Section 1
above).  Without  limiting the generality of the foregoing,  the obligations and
liabilities of each of the Assuming  Entities with respect to the Revolving Loan
and the Revolving Note or under the Security Documents executed by such Assuming
Entity  shall not be  released,  discharged,  impaired,  modified  or in any way
affected by (a) the invalidity or unenforceability of any Loan Document, (b) the
failure of the Lender to give Assuming  Entity a copy of any notice given to the
Borrowers or any of them, (c) any  modification,  amendment or supplement of any
obligation,  covenant  or  agreement  contained  in any Loan  Document,  (d) any
compromise,  settlement,  release or termination of any obligation,  covenant or
agreement  in any loan  document,  (e) any  waiver of  payment,  performance  or
observance  by or in favor of the  Borrowers  or any of them of any  obligation,
covenant or  agreement  under any Loan  Document,  (f) any  consent,  extension,
indulgence or other action or inaction,  or any exercise or  non-exercise of any
right, remedy or privilege with respect to any Loan Document,  (g) the extension
of time for payment or performance of any of the Obligations, (h) the release or
discharge of Lender's claims against any collateral now or at any time hereafter
securing  any of the  Obligations,  the  other  Borrowers,  or any of  them,  by
operation of law or  otherwise  or (i) any other matter that might  otherwise be
raised in  avoidance  of, or in  defense  against  an  action  to  enforce,  the
obligations  of each  such  Assuming  Entity  under  this  Agreement,  the  Loan
Agreement, the Revolving Note or any other Loan Document.

                  9. Each of the  Assuming  Entities  covenants  and agrees with
Lender as follows:

                           (a) Such  Assuming  Entity will not without  Lender's
         consent (i) sell, lease,  transfer or otherwise dispose of, in a single
         transaction  or a series  of  related  transactions,  the  whole of its
         business  or assets or such part  thereof  as in the  opinion of Lender
         constitutes a substantial portion thereof;  or (ii) liquidate,  wind up
         or dissolve,  or enter into any consolidation,  merger,  syndication or
         other   combination   or  engage  in  any   other   reorganization   or
         recapitalization;  provided,  however,  that Assuming  Entity may sell,
         lease,  transfer  or dispose of all or any  portion of its  business or
         assets to any other Consolidated Entity or Consolidated  Entities or to
         any Borrower or merge into or  consolidate  with any other  Borrower or
         one or more of the  Consolidated  Entities,  so long as the  entity  to
         which such business or assets are sold, leased, transferred or disposed
         of or which  survives or results from any such merger or  consolidation
         is a Borrower under the Loan Agreement.

                           (b) Such  Assuming  Entity  will not  incur,  create,
         assume or permit to exist any lien upon any of its properties or assets
         of any  character,  real,  personal  or  mixed,  whether  now  owned or
         hereafter acquired, other than liens that constitute Permitted Liens.

                           (c) Any  action  taken  or  attempted  to be taken by
         Assuming  Entity in violation of the provisions of clause (a) above and
         any lien incurred,  created, assumed or permitted to exist in violation
         of the  provisions  of clause (b) above  shall be null,  void and of no
         force or effect whatsoever.

                           (d) Such Assuming  Entity will execute such financing
         statements  (including  amendments thereto and continuation  statements
         thereof), in form satisfactory


<PAGE>



         to Lender as Lender may from time to time  specify;  pay, or  reimburse
         Lender for paying,  all costs and taxes of filing or recording the same
         in such public  offices as Lender may  designate;  deliver  such of the
         Collateral  which in the sole  judgment of Lender is best  perfected by
         possession,  to Lender or its designated agent or bailee; and take such
         other steps as Lender may from time to time direct, including,  without
         limitation,  the noting of Lender's lien on the  Collateral  and on any
         certificates  of  title  therefor,  all to  perfect  Lender's  security
         interest in the Collateral.

                           (e) Such Assuming Entity will deliver  immediately to
         Lender any Chattel Paper or  Instruments  arising out of the Collateral
         usually,  but not exclusively,  as proceeds.  Further,  Assuming Entity
         hereby  agrees  that  such  Chattel  Paper  or  Instruments  constitute
         original  Collateral  rather  than  proceeds;  but  if  proceeds,  then
         Lender's  security  interest  created by this  Agreement in the Chattel
         Paper or Instruments shall not be claimed merely as proceeds.

                           (f) Such Assuming  Entity will comply with all of the
         obligations,  requirements and restrictions in the covenants  contained
         in  Article  VII of the  Loan  Agreement,  to the  extent  they are now
         applicable, or may hereafter be amended to be applicable, to a Borrower
         that is a Participating Subsidiary.

                           (g) Such Assuming Entity shall,  promptly upon demand
         by Lender therefor upon the occurrence and during the continuance of an
         Event of Default,  execute and deliver to Lender from time to time such
         security agreements and other collateral  documents,  together with any
         related  financing  statements  and other  instruments,  as Lender  may
         request  granting  to  Lender  a lien  on any  or  all  real  property,
         Accounts, Chattel Paper, Contracts, Contract Rights, Documents, General
         Intangibles,  Instruments,  Inventory,  rights  as  seller of Goods and
         rights to returned,  repossessed  or reclaimed  Goods,  and all Records
         pertaining  to  any  of  the  Collateral  of  Assuming  Entity,  all as
         collateral security for the Obligations, it being understood and agreed
         that the rights of Lender  under this  clause (g) shall be in  addition
         to, and  cumulative  of, all other rights of the Lender under the terms
         of the  Loan  Agreement  to  require  collateral  as  security  for the
         Obligations.  Any lien granted under this  Agreement or under Article V
         of the Loan Agreement by Assuming  Entity shall secure the  Obligations
         only to the extent that Assuming  Entity is liable  therefor  under the
         terms of this Agreement and the Loan Agreement.

                           (h) Such Assuming Entity will not exercise any rights
         that it may acquire by way of  subrogation  under this Agreement or any
         Subrogation and Contribution Agreement or by any payment made hereunder
         or under any of the other Loan  Documents or  otherwise,  until all the
         Obligations  have  been  paid in full and the Loan  Agreement  has been
         terminated.  If any amount shall be paid to Assuming  Entity on account
         of any such subrogation  rights at any time when all of the Obligations
         shall  not have been  paid in full and the Loan  Agreement  terminated,
         such  amount  shall be held in trust for the  benefit of the Lender and
         shall be paid  forthwith  to the Lender to be credited and applied upon
         the Obligations,  whether matured or unmatured,  in accordance with the
         terms of the Loan Documents.



<PAGE>



                           (i) Such Assuming  Entity will not amend or waive any
         provision of the Subrogation and Contribution Agreement entered into by
         Assuming  Entities  and  Borrowers  nor  consent  to any  departure  by
         Borrowers  or  any  other  Participating  Subsidiary  or  Participating
         Partnership from such  Subrogation and  Contribution  Agreement or from
         any similar  Subrogation and Contribution  Agreements executed by other
         Participating  Subsidiaries  and  Participating  Partnerships,  without
         having  obtained the prior written consent of Lender to such amendment,
         waiver or consent.

                  10. Each of the Assuming  Entities  agrees that it is, and for
all  purposes  of the Loan  Agreement,  the  Revolving  Note and the other  Loan
Documents shall be, a Borrower and a Participating Subsidiary.

                  11. Assuming Entities,  Borrowers and Lender hereby agree that
Exhibits II.6.1(B), II.6.1(D), II.6.1(I), II.7.2(G), F, G, H, I, J, and K to the
Loan Agreement are hereby  supplemented by the respective  Supplements  attached
hereto which relate to the Assuming Entities.

                  12.  This   Agreement   shall  bind  each  Assuming   Entity's
successors and assigns and shall inure to the benefit of, and be enforceable by,
Lender  and its  successors  and  assigns.  This  Agreement  may only be waived,
modified or amended by a written  instrument  signed by the party  against which
the  enforcement  thereof is sought.  This  Agreement  shall in all  respects be
governed by, and construed in accordance with, the laws of the State of Alabama,
without regard to such state's rules regarding  conflicts of law. If any term of
this  Agreement  shall  be  invalid  or  unenforceable,  the  remainder  of this
Agreement shall remain in full force and effect.  This Agreement may be executed
in  counterparts,  each of which shall be deemed an  original,  but all of which
shall  constitute  one  agreement.  This  Agreement and the other Loan Documents
constitute  the entire  agreement  of the  parties  with  respect to the subject
matter  hereof and  supersede any  inconsistent  agreement  with respects to the
subject matter hereof and thereof.


             [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]




<PAGE>






________________________    ________________________    ________________________
Initial (Cavalier Homes,    Initial (Lender)            Initial (Belmont)
for itself and as agent
for the other Borrowers)                                ________________________
                                                        Initial (Delta)

                                                        ________________________
                                                        Initial (Spirit)

                                                        ________________________
                                                        Initial (Bellcrest)

                  13.      JURY WAIVER. EACH OF THE ASSUMING ENTITIES, BORROWERS
          AND LENDER HEREBY:

                                    (1)   IRREVOCABLY AND UNCONDITIONALLY WAIVES
         THE  RIGHT  TO  A  TRIAL  BY  JURY  IN  ANY  ACTION  OR  PROCEEDING  OR
         COUNTERCLAIM  OF  ANY  TYPE  AS  TO  ANY  MATTER  ARISING  DIRECTLY  OR
         INDIRECTLY  OUT  OF  OR  WITH  RESPECT  TO  THIS  AGREEMENT,  THE  LOAN
         AGREEMENT,  THE NOTES,  THE OTHER LOAN DOCUMENTS OR ANY OTHER  DOCUMENT
         EXECUTED IN CONNECTION HEREWITH OR THEREWITH; AND

                                    (2)   AGREES  THAT  ANY  OF  THEM MAY FILE A
         COPY  OF  THIS  AGREEMENT  WITH ANY COURT AS  WRITTEN  EVIDENCE  OF THE
         KNOWING,  VOLUNTARY  AND  BARGAINED-FOR  AGREEMENT  BETWEEN THE PARTIES
         IRREVOCABLY TO WAIVE TRIAL BY JURY, AND THAT ANY DISPUTE OR CONTROVERSY
         OF ANY KIND  WHATSOEVER  BETWEEN THEM SHALL INSTEAD BE TRIED IN A COURT
         OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY.


         14. Each of the Assuming Entities and the other Borrowers,  jointly and
severally,  agree to pay directly or  reimburse  Lender,  on demand,  for all of
Lender's  expenses,  including  the  reasonable  fees and  expenses of its legal
counsel,  UCC filing fees and similar expenses,  incurred in connection with the
preparation,  amendment,  modification  or  enforcement of this Agreement or the
Loan Agreement, and the collection or attempted collection of the Notes.




<PAGE>



         IN WITNESS  WHEREOF,  this  Agreement  has been executed by the parties
hereto as of the day and year first written above.


                               ASSUMING ENTITIES:

                                                          BELMONT HOMES, INC.


                                          By:  /s/ MICHAEL R. MURPHY      [L.S.]
                                             ___________________________________
                                          Name:    Michael R. Murphy
                                               _________________________________
                                          Its:            VP
                                              __________________________________
                                          Address:  160 Industrial Park Drive
                                                    Belmont, Mississippi 38827
                                          Taxpayer Identification #: 64-0834574



                                                            DELTA HOMES, INC.


                                          By:  /s/ MICHAEL R. MURPHY      [L.S.]
                                             ___________________________________
                                          Name:    Michael R. Murphy
                                               _________________________________
                                          Its:            VP
                                              __________________________________
                                          Address: 1322 Industrial Park Drive
                                                   Clarksdale, Mississippi 38614
                                          Taxpayer Identification #: 64-0865110



                                                            SPIRIT HOMES, INC.


                                          By:  /s/ MICHAEL R. MURPHY      [L.S.]
                                             ___________________________________
                                          Name:    Michael R. Murphy
                                               _________________________________
                                          Its:            VP
                                              __________________________________
                                          Address:  550 Ammity Road
                                                    Conway, Arkansas 72033
                                          Taxpayer Identification #: 71-0625242

<PAGE>

                                                           BELLCREST HOMES, INC.


                                          By:  /s/ MICHAEL R. MURPHY      [L.S.]
                                             ___________________________________
                                          Name:    Michael R. Murphy
                                               _________________________________
                                          Its:            VP
                                              __________________________________
                                          Address:  206 Magnolia Street
                                                    Millen, Georgia 30442
                                          Taxpayer Identification #: 58-1708374



                                          BORROWERS:

                                                     CAVALIER HOMES, INC.
                                           for itself and as agent for the other
                                                          Borrowers


                                          By:  /s/ MICHAEL R. MURPHY      [L.S.]
                                             ___________________________________
                                          Name:    Michael R. Murphy
                                               _________________________________
                                          Its:            VP
                                              __________________________________



                                          LENDER:

                                                     FIRST COMMERCIAL BANK


                                          By:  /s/ JIM WILLIAMS           [L.S.]
                                             ___________________________________
                                          Its:          Vice President
                                              __________________________________

                              CAVALIER HOMES, INC.
                           DEFERRED COMPENSATION PLAN


         Cavalier Homes,  Inc., a Delaware  corporation,  hereby establishes the
Cavalier Homes, Inc. Deferred  Compensation Plan, effective as of April 1, 1998,
in order to assist Cavalier Homes,  Inc. and those of its affiliates which adopt
this  Plan in  attracting  and  retaining  key  employees  by  offering  them an
opportunity  to defer  compensation  and  participate in the success of Cavalier
Homes, Inc.


                                   ARTICLE I.
                                   DEFINITIONS

         Section  1.1  Definitions.  When  used in this  document  with  initial
capital  letters,  the  following  terms have the  meanings  indicated  unless a
different meaning is plainly required by the context:

                           (a)      "Board" shall mean the Board of Directors of
the Company.

                           (b)      "Change in Control" means, with respect to a
person,  (a)  any  other  person,  entity  or "group"  (within  the  meaning  of
Rules--13d-1  through 13d-6 of the  Securities Exchange  Act of 1934, as amended
(the  "Exchange  Act")) (other  than any  subsidiary  of the  person  undergoing
the  change  in  control  or  any  employee  benefit plan of such person or of a
subsidiary of such person)  (i)  has  acquired or  agreed to  acquire beneficial
ownership of 20% or more of the voting  and/or  economic interest in the capital
stock, membership,  partnership or other equity  interests  of such  person,  as
the case may be, or (ii) has obtained or agreed to obtain the power (whether  or
not exercised) to elect a majority of the  board of directors, general partners,
managers, trustees or other governing body of a  person,  (b) a  majority of the
board of  directors,  general  partners, managers,  trustees or other  governing
body  of  the  person shall consist at such time of  individuals  other than (x)
members of the board of  directors or other governing body of such person on the
date hereof and (y) other  members of such board of directors or other governing
body  nominated,  recommended,  elected,  or  approved  to  succeed  or become a
director  or  member of the governing body of such  person by a majority of such
members referred to in clause (x) or a nominating committee elected or appointed
by  such  members  referred  to  in  clause  (x) or  by  members  so  nominated,
recommended, elected, or approved; (c) the board of directors or other governing
body or, if applicable,  the shareholders or equity owners of the person,  shall
have  approved the sale of all or substantially  all the assets of such  person;
or (d) any  transaction  or event  relating  to the person  occurs  which is (or
which  would be if the person had a class of equity securities  registered under
Section 12 of the  Exchange  Act)  required  to  be described  pursuant  to  the
requirements of Item 6(e)  of  Schedule  14A of Regulation 14A promulgated under
the Exchange Act.

                           (c)      "Code"  means  the  Internal Revenue Code of
1986, as amended.

                           (d)      "Committee"   shall   mean   the   committee
provided for in Section 8.2 of the Plan.


                                                         1

<PAGE>



                           (e)      "Company"  means  Cavalier  Homes,  Inc.,  a
Delaware corporation, and its successors and assigns.

                           (f)      "Deferral"  shall  mean  the  portion  of  a
Participant's Qualifying Bonus that the Participant has elected to defer.

                           (g)      "Deferral Account"  shall  mean  the account
maintained for a Participant  pursuant to Section 3.3 (a) hereof  to reflect the
hypothetical value of the Participant's  Deferrals. 

                           (h)      "Deferral Election Form"  means such form or
forms  as may be  approved by the  Committee  from  time  to  time for use  by a
Participant to elect to defer compensation under the Plan.

                           (i)      "Disability"   means  the  disability  of  a
Participant which entitles the Participant  to  a  disability  benefit  under  a
disability  program  sponsored or maintained by the Participant's  Participating
Employer;  provided,  that if no such program is applicable to the  Participant,
then "Disability" with respect to  such Participant means that, based on medical
evidence  reasonably  satisfactory  to the Committee, the Participant is totally
and  permanently unable to engage in any  occupation or gainful  employment  for
which the Participant is reasonably suited by background, training, education or
experience.

                           (j)      "Distributable   Event"   means   an   event
identified as such in Section 5.1.

                           (k)      "ERISA" means the Employee Retirement Income
Security Act of 1974, as amended.

                           (l)      "Executive Officer" shall mean an "executive
officer" as that term is defined in Rule 3b-7 of the Securities  Exchange Act of
1934, as amended,  or an "officer" as  defined under  the rules of the  New York
Stock Exchange.

                           (m)      "Participant" means an individual identified
as such under Article III of the Plan.

                           (n)      "Participant's Share"  means  the product of
the percentage that would be used to  determine the  amount  of a  Participant's
Qualifying  Bonus for a calendar  quarter  and  the  amount  of the loss for the
calendar  quarter of the  Participating  Employer or division or  other economic
unit  thereof,  the  profits  of  which  would  have been used to determine such
Qualifying Bonus.

                           (o)      "Participating  Employer"  means  any person
participating in the Plan pursuant to Article XII of the Plan.

                           (p)      "Plan"  means  the  Cavalier   Homes,   Inc.
Deferred Compensation Plan, as set forth herein and as the same may be from time
to time amended.

                           (q)      "Qualifying  Bonus"  means a quarterly bonus
payable by a  Participating Employer which  first becomes  payable in a calendar
year subsequent  to  the calendar year of the applicable  deferral  election for

                                                         2

<PAGE>



services to be performed during a  calendar year subsequent to the calendar year
in which the election is made.

The foregoing  notwithstanding,  with respect to an election made within 96 days
of the effective  date of the Plan or within 30 days after a  Participant  first
becomes a Participant,  "Qualifying Bonus" means a quarterly bonus payment which
first  becomes  payable  subsequent to the date of the  applicable  election for
services to be performed subsequent to the date of such election.

                           (r)      "Trust"    means   the  trust  described  in
Section 9.4.  The Trust shall constitute an unfunded  arrangement  and shall not
affect  the  status of the Plan as an  unfunded  plan.  Participants  and  their
beneficiaries shall  have  no beneficial ownership interest in any assets of any
such Trust.

                           (s)      "Trustee"   means  one or more corporations,
entities or persons selected by the Company to serve as a Trustee for the Trust.



                                   ARTICLE II.
                          ELIGIBILITY AND PARTICIPATION

         Section  2.1  Eligibility.  The  Committee  shall  from  time  to  time
designate such Executive Officers or members of the Board who are also employees
of a Participating  Employer as it deems  appropriate as eligible to participate
in the Plan and shall inform each such Executive  Officer or member of the Board
in writing of such designation and the date on which the employee shall become a
Participant in the Plan.

         Section 2.2 Participation. An individual eligible to participate in the
Plan shall become a Participant upon filing a completed  Deferral  Election Form
with  the  Committee  and  acceptance  of such  form by the  Committee.  Once an
individual  becomes a Participant  in the Plan,  the  individual  shall remain a
Participant  until the benefits which may be payable to the individual under the
Plan have been distributed to or on behalf of the individual.

         Section  2.3  Suspension  of  Eligibility.  The  Committee  may  in its
discretion   determine  that  a  Participant  will  no  longer  be  eligible  to
participate  in the Plan,  and in such  event,  the  Participant's  Section  3.1
compensation  deferral  election  will  immediately  terminate and no additional
amounts  shall be credited to his or her Accounts  under Section  3.3(a),  until
such time,  if any,  as the  individual  is again  determined  to be eligible to
participate  in the Plan by the  Committee and makes a new Section 3.1 election.
However,  the Deferred Account of such Participant shall continue to be adjusted
by the other provisions of Section 3.3 until fully distributed.


                                                         3

<PAGE>



                                  ARTICLE III.
                         DEFERRAL ELECTIONS AND ACCOUNTS

         Section 3.1       Deferral Elections.

                           (a)      A Participant  may elect to defer receipt of
all or every portion  of each  Qualifying  Bonus,  and the amount of  Qualifying
Bonus so deferred  shall be a Deferral.

                           (b)      Upon election to defer compensation pursuant
to  the  Plan,  a  Participant  will  have  no  further  right  to such deferred
compensation other than as provided under the Plan.

         Section 3.2 Form and Effectiveness of Deferral  Election.  Elections to
defer  compensation  under  the Plan  shall  be made in  writing  on a  Deferral
Election Form. A Participant  who has elected to defer all or part of Qualifying
Bonuses may  terminate  such  election  with respect to  Qualifying  Bonuses for
services  rendered  in  calendar  quarters  commencing  after the  Participant's
execution and delivery to the Committee of a notice of  termination in such form
as the Committee may prescribe or approve.  A Participant  who has so elected to
terminate  Deferrals may not again commence  Deferrals  until the first calendar
quarter of the first calendar year following  such  termination.  An election to
defer  may  be  revised  or  terminated  with  respect  to  Qualifying   Bonuses
attributable to services performed in subsequent calendar years by the making of
a new deferral election on a Deferral Election Form.  Notwithstanding  the other
provisions of this Plan, a Participant's  Deferral Election Form and the various
elections and selections made thereon shall not become  effective until accepted
by the Committee.

         Section 3.3       Participant Accounts and Adjustments Thereto.

                  (a) Deferral  Account shall be maintained for each Participant
who elects Deferrals.  As of the date each Qualifying Bonus is paid (or would be
paid but for the Participant's  election to have the entire amount deferred as a
Deferral),  the Participant's Deferral Account shall be credited with the amount
of the Deferral  referable to such Qualifying  Bonus. A  Participant's  Deferral
Account shall also be adjusted at least monthly and as of the date preceding the
date  any  payment  is to  be  made  to  the  Participant  of a  benefit,  or an
installment  thereof,  hereunder  to reflect  any  deemed  gain or loss from the
deemed  investment of amounts  credited to the  Participant's  Deferral  Account
pursuant to Section 4.2 hereof;  provided that a Participant's  Deferral Account
shall be credited or debited for only sixty-two percent (62%) of any such deemed
gain or loss which,  if  recognized  by the Company,  would affect the Company's
taxable income or loss.

                  (b) As of the close of each  calendar  year,  if a Participant
had a  Participant's  Share with  respect to any  calendar  quarter  during such
calendar year, a Participant's  Deferral  Account shall be reduced by the lesser
of the amount of Excess  Deferrals  credited to such Excess Deferral Account for
the calendar  year or that portion of the  Participant's  Share for any calendar
quarter of such calendar year that was not taken into account in determining the
amount of the Participant's Qualifying Bonus for any subsequent calendar quarter
in such calendar year.

                  (c) It is contemplated that Qualifying Bonuses will be paid on
or about the 20th day of the month  following  the end of the  calendar  quarter
except for Qualifying Bonuses for the fourth

                                                         4

<PAGE>



calendar quarter,  which Qualifying  Bonuses are expected to be paid on or about
the 30th day of the month following the end of such quarter.


                                   ARTICLE IV.
                         DEEMED INVESTMENT OF DEFERRALS

         Section 4.1 Investment Options. The Committee shall establish a list of
investment options, which shall be mutual funds, investment options under a type
of variable insurance products,  or comparable  investments and may from time to
time add investment options to, or delete existing investment options from, such
list.

         Section 4.2 Deemed Investment. A Participant may elect in such form and
manner as the  Committee  may from time to time  prescribe  or  approve  to have
amounts  credited to his or her Deferral Account treated as if such amounts were
invested in one or more of the investment options  established by the Committee.
In the event a Participant  fails to make such an election,  the amount credited
to  such  Participant's  Deferral  Account  shall  be  deemed  invested  in such
investment  option as the  Committee  shall from time to time  designate  as the
default  investment  option.  Amounts deemed  invested in an investment  fund or
investment  funds  pursuant to the election of a Participant or as a result of a
failure to make an election  shall be valued as if so invested,  reflecting  all
earnings,  losses, and other distributions or charges and changes in value which
would have been incurred through such investment. Appropriate adjustments to the
Excess  Deferral  Accounts  of the  Participants  shall be made as  provided  in
Section 3.3(a) and 3.3(b) hereof.


                                   ARTICLE V.
                                 DISTRIBUTIONS.

         Section  5.1  Distributable  Events.  Subject to Section  5.5 below,  a
Participant's  Distributable  Event shall be the first to occur of the following
events, provided, that events (b) - (f) shall be Distributable Events only if so
elected by the Participant in the Deferral Election Form:

                  (a)  the   Participant's   70th  birthday   (i.e.,   the  70th
anniversary of the Participant's  birth) or such earlier birthday,  not prior to
the Participant's 65th birthday,  as the Participant may specify in the Deferral
Election Form;

                  (b)      the   Participant's   Disability   (as   defined   in
Section 1.1);

                  (c)      the Participant's death;

                  (d) the first  date on which the  Participant  is no longer an
employee of the Company or any affiliate of the Company;

                  (e)      such other event as the Participant  may  specify  in
the Deferral Election Form (subject to approval of the Committee);


                                                         5

<PAGE>



                  (f)      the  date  of  a  Change  in  Control  of the Company
occurring after May 20, 2000, or

                  (g)      termination  for  Cause  subject to and in accordance
with Section 5.5.

         A  Participant's  Distributable  Event  elections  must  be made on the
Participant's initial Deferral Election Form and are irrevocable.


         Section 5.2       Distribution of Benefits.

                  (a)  Distribution   Commencement   Date.   Distribution  of  a
Participant's Plan benefit shall be made or commenced as promptly as practicable
after the Participant's  Distributable Event but not more than fifteen (15) days
after  such   Distributable   Event.   Notwithstanding   the  foregoing,   if  a
Participant's  Distributable  Event occurs  pursuant to Section  5.1(d) or would
otherwise occur after the date described in Section 5.1(d) above,  the Committee
may, in its sole discretion, accelerate the date payment of such benefit is made
or commenced to any date after the date described in Section 5.1(d) above.

                  (b) Amount of  Benefit.  A  Participant  shall be  entitled to
receive as his or her  benefit  hereunder,  a payment of the value of his or her
Excess Deferral Account.

                  (c)  Payment  Options.  In the  event  a  Participant  becomes
eligible to receive a payment of benefits under the Plan,  the benefits  payable
to  the  Participant  or,  in  the  event  of the  Participant's  death,  to the
Participant's  designated  beneficiary,  shall be paid in accordance with one of
the payment  options  available  under the Plan as elected by the Participant on
the  Participant's  initial Deferral  Election Form. The payment options include
installment  payments over a period certain, a lump sum payment,  and such other
payment  method as may be  specified  by the  Participant  and  accepted  by the
Committee. The Committee may, in its sole discretion,  reduce the payment period
over which  payments  would have been made  pursuant to an  installment  payment
option  elected  by a  Participant  (including  consolidation  into a lump sum);
provided,  that in the event of a Change in Control,  no  reduction of a payment
period may be made prior to the fifth  anniversary  of such  Change in  Control.
Absent a payment option election,  the Committee shall direct the payment of any
benefits payable under the Plan to or on behalf of the Participant in a lump sum
payment to the Participant,  or in the event of the Participant's  death, to the
Participant's designated beneficiary under the Plan.

         Section  5.3  Distributions  as  a  Result  of  a  Tax   Determination.
Notwithstanding  any provision in this Plan to the contrary,  if, at any time, a
court or the Internal Revenue Service  determines that any amounts credited to a
Participant's  Deferral  Account  under the Plan or Trust are  includable in the
gross income of the  Participant  and subject to tax, the Committee  may, in its
sole  discretion,  permit  a lump sum  distribution  of an  amount  equal to the
amounts determined to be includable in the Participant's gross income.

         Section 5.4 Parachute Payments.  In the event that any payments made to
a  Participant  under the Plan alone,  or  together  with  payments  made to the
Participant under any other contract, plan, or program, result in subjecting the
Participant to the excise tax imposed by Section 4999 of

                                                         6

<PAGE>



the  Code,  then  the  Participant's   Participating   Employer  shall  pay  the
Participant  an  additional  amount  such that the net  amount  retained  by the
Participant  after deduction of any excise tax on such payments and any federal,
state, and local income tax and excise tax on the additional  payments  provided
for by this  paragraph  shall be equal to the benefits  otherwise  payable under
this Plan.  For purposes of determining  the additional  payment to be made, the
Participant  shall be deemed to pay federal income taxes at the highest marginal
rate of federal  income  taxation in the calendar  year in which the  additional
payment is to be made and state and local income  taxes at the highest  marginal
rates of taxation in the state and  locality of the  Participant's  residence in
the  calendar  year the  additional  payment is to be made,  net of the  maximum
reduction in federal income taxes which could be obtained from deduction of such
state and local income taxes.  In the event that the excise tax is  subsequently
determined  to be less than the amount taken into account  hereunder at the time
of payment, the Participant shall repay to his or her Participating Employer, at
the time that the amount of such reduction in excise tax is finally  determined,
the portion of the  additional  payment  attributable  to such  reduction,  plus
interest on such amount at the rates  provided in Section  1274(b)(2)(B)  of the
Code.  In the event that the excise tax is determined to exceed the amount taken
into account  hereunder at the time of the payment  (including  by reason of any
payment the existence or amount of which cannot be determined at the time of the
additional  payment),  the  Participant's  Participating  Employer shall make an
additional  payment in respect of such excess  (plus any  interest  payable with
respect  to such  excess)  at the time the  amount  of such  excess  is  finally
determined.

         Section 5.5 Distribution  Upon Termination for Cause. In the event that
a Participant is terminated for Cause (as defined below),  the Committee may, in
its  discretion,  treat such  termination  or any date  subsequent  thereto as a
Distributable  Event.  For  purposes of this Plan,  termination  for Cause means
termination based on any of the following:

                         (i)    dishonesty  or  fraud  in connection with his or
her employment;

                         (ii)   failure  to adhere (in any  material respect) to
any policy of a Participating  Employer to which the Participant  is subject and
that is known or reasonably should be known to the Participant;

                         (iii)  appropriation (or attempted  appropriation) of a
material  business  opportunity  of  the  Company  or  any  subsidiary  thereof,
including  attempting to secure or securing  any  personal profit in  connection
with any  transaction  entered  into  on  behalf  of  any  of  the Participating
Employers;

                         (iv)   misappropriation (or attempted misappropriation)
of any of a Participating Employer's funds or property;

                         (v)    conviction  of,  or  indictment   for   (or  its
procedural equivalent) or entering of a guilty  plea or plea of no contest  with
respect to,  a felony or any other  criminal offense  involving moral  turpitude
(other than traffic offenses); or

                         (vi)  insubordination  or  willful  misconduct  in  the
performance of, or gross  neglect of, the  Participant's duties  with his or her
Participating  Employer,  as  determined  by  the  good  faith  judgment  of the
Committee.


                                                         7

<PAGE>



                                   ARTICLE VI.
                               NONTRANSFERABILITY

         Section 6.1  Anti-Alienation  of  Benefits.  Any  amounts  which may be
credited to a Participant's  Deferral Accounts under the Plan, and any rights or
privileges  pertaining  thereto,  may  not  be  anticipated,   alienated,  sold,
transferred,  assigned, pledged, encumbered, or subjected to any charge or legal
process;  and no  interest  or right to receive a benefit  may be taken,  either
voluntarily or  involuntarily,  for the  satisfaction  of the debts of, or other
obligations  or claims  against,  such  person or entity,  including  claims for
alimony, support, separate maintenance and claims in bankruptcy proceedings.

         Section 6.2 Incompetent Participants. If any person who may be eligible
to receive a payment under the Plan has been legally declared  incompetent and a
conservator or other person  legally  charged with the care of such person or of
his or her estate has been  appointed,  any payment  under the Plan to which the
person is eligible to receive shall be paid to such  conservator or other person
legally  charged  with the care of the  person  or his or her  estate.  Any such
payment  shall be a  payment  for the  account  of such  person  and a  complete
discharge of any liability of the Participating Employers and the Plan therefor.

         Section 6.3  Designated  Beneficiary.  In the event of a  Participant's
death  prior to the  payment  of all or a portion of any  benefits  which may be
payable with respect to the Participant under the Plan,  payment of any benefits
payable  on  behalf  of the  Participant  under  the Plan  shall be made to such
beneficiary as the Participant may designate in such manner as the Committee may
prescribe or approve. If no such beneficiary has been designated,  payment shall
be made to the Participant's estate.


                                  ARTICLE VII.
                                   WITHHOLDING

         Section 7.1  Withholding.  The amounts payable pursuant to the Plan may
be reduced by the amount of any federal, state or local taxes required by law to
be withheld with respect to such payments unless other arrangements satisfactory
to the Company are made for discharging any and all withholding obligations with
respect to the payment of benefits under the Plan.


                                  ARTICLE VIII.
                           ADMINISTRATION OF THE PLAN

         Section 8.1  Administrator.  The administrator of the Plan shall be the
Committee,  which may delegate  authority with respect to the  administration of
the Plan to one or more of its members, or to any other person or persons, as it
deems necessary or appropriate for the administration and operation of the Plan.

         Section 8.2  Committee.  (a)   The Committee  shall consist of not less
than one nor more than  five members who shall be appointed by and  serve at the
pleasure of the Board.  The Board shall  have the right to remove any  member of
the Committee at any time.  A member of the Committee

                                                         8

<PAGE>



may resign at any time by written  resignation to the Board. Should a vacancy on
the  Committee  occur,  a successor  shall be  appointed  by the Board,  but the
Committee may act notwithstanding the existence of a vacancy so long as there is
at least one member of the Committee.

                  (b) The Committee shall act  unanimously  unless the Committee
consists of at least three members,  in which event it shall act by or through a
majority  of its  members.  Any  decision  or  determination  to be  made by the
Committee may be made by the vote taken at a duly called meeting or by unanimous
written  consent  without a meeting.  The Board  shall  appoint a  Chairman  and
Secretary of the  Committee  if it consists of more than one member,  but if the
Committee  consists of a single  member,  such member shall act as both Chairman
and  Secretary.  All  acts and  determinations  of the  Committee  shall be duly
recorded by the  Secretary  thereof,  or under his or her  supervision,  and all
records,   together   with  such  other   documents  as  may  be  necessary  for
administration of the Plan, shall be preserved in the custody of such Secretary.
The member or members of the Committee shall serve as such without  compensation
but shall be reimbursed for all expenses reasonably incurred.

         Section  8.3  Authority  of  Committee.  The  Committee  shall have the
authority,  duty and power to interpret and construe the  provisions of the Plan
as it deems appropriate,  to adopt,  establish and revise rules,  procedures and
regulations  relating to the Plan, to determine the conditions  subject to which
any benefits may be payable, to resolve all questions  concerning the status and
rights of Participants and others under the Plan, including, but not limited to,
eligibility for benefits, and to make any other determinations which it believes
necessary or advisable for the  administration  of the Plan. The Committee shall
have the duty and  responsibility of maintaining  records,  making the requisite
calculations   and   disbursing   payments   hereunder.    The   determinations,
interpretations,  regulations  and  calculations of the Committee shall be final
and binding on all persons and parties concerned.  The Chairman of the Committee
shall be the agent of the Plan for the  service of legal  process in  accordance
with Section 502 of ERISA.

         Section 8.4  Operation  of Plan and Claims  Procedures.  The  Committee
shall be responsible for the general  operation and  administration  of the Plan
and for carrying out the  provisions  thereof.  The Company shall be responsible
for the expenses incurred in the administration of the Plan. The Committee shall
also be responsible  for  determining  eligibility  for payments and the amounts
payable  pursuant  to  the  Plan.  The  Committee  shall  be  entitled  to  rely
conclusively  upon all tables,  valuations,  certificates,  opinions and reports
furnished  by any  actuary,  accountant,  controller,  counsel  or other  person
employed or engaged by the  Committee  or the Company  with respect to the Plan.
The  procedures  for filing  claims for  payments  under the Plan are  described
below.

                  (a) It is not necessary for a Participant  to file a claim for
benefits to commence  receiving his or her benefit.  However,  a Participant who
believes he or she is  entitled  to a payment  under the Plan may submit a claim
for payments in writing to the Committee.  Any claim for payments under the Plan
must be made by the  Participant or his or her  beneficiary in writing and state
the  claimant's  name and the nature of benefits  payable under the Plan. If for
any reason a claim for payments under the Plan is denied by the  Committee,  the
Committee shall deliver to the claimant a written  explanation setting forth the
specific reasons for the denial, specific references to the pertinent provisions
of the Plan on which the  denial  is  based,  a  description  of any  additional
material or  information  necessary for the claimant to perfect the claim and an
explanation of why such material or information is necessary, and information on
the  procedures  to be  followed by the claimant in obtaining a review of his or

                                                         9

<PAGE>



her claim, all written in a manner calculated to be understood  by the claimant.
For this purpose:

                           (i)   The  claimant's  claim  shall  be  deemed to be
filed when presented in writing to the Committee.

                           (ii)  The Committee's explanation shall be in writing
delivered to the claimant within 90 days of the date the claim is filed.

                  (b) The  claimant  shall  have 60  days  following  his or her
receipt of the denial of the claim to file with the Committee a written  request
for review of the  denial.  For such  review,  the  claimant  or the  claimant's
representative  may review  pertinent  documents and submit  written  issues and
comments.

                  (c) The Committee shall decide the issue on review and furnish
the claimant with a copy within 60 days of receipt of the claimant's request for
review of the claimant's  claim.  The decision on review shall be in writing and
shall include specific reasons for the decision,  written in a manner calculated
to be  understood  by the  claimant,  as  well  as  specific  references  to the
pertinent  provisions  in the Plan on which the decision is based.  If a copy of
the decision is not so furnished to the claimant  within such 60 days, the claim
shall be deemed  denied on  review.  In no event may a claimant  commence  legal
action  for  benefits  the  claimant  believes  are due the  claimant  until the
claimant has exhausted all of the remedies and procedures  afforded the claimant
by this Section 8.4.

         Section 8.5  Participant's  Address.  Each  Participant  shall keep the
Committee  informed of his or her current address and the current address of his
or her  beneficiary.  The  Committee  shall not be  obligated  to search for any
person.  If the  location of a  Participant  is not made known to the  Committee
within  three (3) years  after the date on which  payment  of the  Participant's
benefits may be made,  payment may be made as though the Participant had died at
the end of the three-year  period. If, within one (1) additional year after such
three-year period has elapsed, or, within three (3) years after the actual death
of a Participant,  the Committee is unable to locate any designated  beneficiary
of the Participant,  then the Committee shall have no further  obligation to pay
any  benefit  hereunder  to or on  behalf  of  such  Participant  or  designated
beneficiary and such benefits shall be irrevocably forfeited.

         Section 8.6  Indemnification.  The Company shall, and does hereby agree
to, indemnify and hold harmless the Committee and each member thereof,  from all
liability,  joint or  several,  for their  acts,  omissions,  and conduct in the
administration  of the Plan  except  for  those  acts,  omissions,  and  conduct
resulting  from their own willful  misconduct  or lack of good faith;  provided,
however,  that if any party  would  otherwise  be  entitled  to  indemnification
hereunder with respect to any liability and such party is insured against losses
resulting from such liability by any insurance contract or contracts, such party
shall be  entitled  to  indemnification  hereunder  only to the extent  that the
amount of such liability exceeds the amount thereof payable under such insurance
contract or contracts.


                                                        10

<PAGE>



                                   ARTICLE IX.
                            MISCELLANEOUS PROVISIONS

         Section 9.1 No Employment Rights. Neither the Plan nor any action taken
hereunder  shall be construed as giving any Participant any right to be retained
in the service or employ of the Company.

         Section 9.2 Participants Should Consult Advisors.  Neither the Company,
the other Participating  Employers,  nor their respective  directors,  officers,
employees or agents  makes any  representation  or warranty  with respect to the
state,  federal or other tax, financial,  estate planning,  or the securities or
other legal  implications  of  participation  in the Plan.  Participants  should
consult with their own tax,  financial and legal  advisors with respect to their
participation in the Plan.

         Section  9.3  Unfunded  and  Unsecured.  The Plan shall at all times be
considered  entirely  unfunded both for tax purposes and for purposes of Title I
of ERISA, and no provision shall at any time be made with respect to segregating
assets of any Participating  Employer for payment of any amounts hereunder.  The
Plan is intended as an unfunded  deferred  compensation  plan  maintained  for a
select group of  "management or highly  compensated  employees," as that term is
used in Sections 201(2),  301(a)(3),  and 401(a)(1) of ERISA. Any funds invested
under the Trust shall  continue  for all purposes to be available to the general
creditors of the Company in the event of a bankruptcy  (involvement in a pending
proceeding under the Federal  Bankruptcy  Code) or insolvency  (inability to pay
debts as they  mature) of the Company.  The Company  shall  promptly  notify the
Trustee and the applicable  Participants of such bankruptcy or insolvency of the
Company.  No  Participant  or any other person  shall have any  interests in any
particular  assets  of any  Participating  Employer  by  reason  of the right to
receive a benefit under the Plan and to the extent the  Participant or any other
person acquires a right to receive  benefits under the Plan, such right shall be
no greater than the right of any general unsecured creditor of any Participating
Employer. The Plan constitutes a mere promise by the Participating  Employers to
make payments to the Participants in the future.  Nothing  contained in the Plan
shall constitute a guaranty by any Participating Employer or any other person or
entity that any funds in any trust, or, except as otherwise  provided in Section
12.2,  the assets of any  Participating  Employer  will be sufficient to pay any
benefit hereunder. Furthermore, no Participant shall have any right to a benefit
under the Plan except in accordance with the terms of the Plan.

         Section 9.4 The Trust. In order to provide assets from which to fulfill
its obligations to the Participants and their  beneficiaries under the Plan, the
Company  may  establish a Trust by a trust  agreement  with a third  party,  the
Trustee,  to which the Company may, in its discretion,  contribute cash or other
property to provide for the benefit  payments  under the Plan.  The Trustee will
have the duty to invest the Trust assets and funds in accordance  with the terms
of the Trust.  The Company shall be entitled at any time, and from time to time,
in its sole discretion, to substitute assets of at least equal fair market value
for any assets held in the Trust.  All rights  associated with the assets of the
Trust will be exercised by the Trustee or the person  designated by the Trustee,
and  will in no event  be  exercisable  by or rest  with  Participants  or their
beneficiaries.  The Trust shall  provide that in the event of the  insolvency of
the  Company,  the Trustee  shall hold the assets for the benefit of the general
creditors of the Company.  The Trust shall be based on the model trust contained
in  Internal  Revenue  Service  Revenue  Procedure  92-64 with such  changes and
modifications as may be approved by the Board.

                                                        11

<PAGE>



         Section 9.5  Plan Provisions.   Except  when otherwise required  by the
context, any singular term shall include the plural.

         Section 9.6  Severability;  Compliance  with Law. If a provision of the
Plan shall be held to be illegal or invalid,  the illegality or invalidity shall
not affect the remaining  parts of the Plan, and the Plan shall be construed and
enforced  as if the  illegal or invalid  provision  had not been  included.  The
obligations  of the Company under the Plan shall be subject to  compliance  with
any and all applicable federal, state, and local laws, rules, and regulations.

         Section 9.7 Applicable  Law. To the extent not preempted by the laws of
the  United  States,  the laws of the State of  Alabama,  without  regarding  to
provisions governing conflicts of laws, shall apply with respect to the Plan.


                                   ARTICLE X.
                                   AMENDMENTS

         Section 10.1 Amendment of the Plan.  The Company  reserves the power to
alter,  amend or wholly revise the Plan at any time and from time to time by the
action of the Board,  and the  interest  of each  Participant  is subject to the
powers so reserved;  provided,  however,  that no amendment made subsequent to a
Change  in  Control  shall be  effective  to the  extent  that it  would  have a
materially  adverse  impact  on a  Participant's  reasonably  expected  economic
benefit  attributable to compensation  deferred by the Participant  prior to the
Change in Control.  An amendment  shall be  authorized by the Board and shall be
stated in an instrument in writing signed in the name of the Company by a person
or persons  authorized by the Board.  After the instrument has been so executed,
the Plan shall be deemed to have been  amended in the manner  therein set forth,
and all parties  interested  herein shall be bound thereby.  No amendment to the
Plan may alter,  impair,  or reduce the vested benefits credited to any Accounts
prior to the effective date of such amendment without the written consent of any
affected Participant.


                                   ARTICLE XI.
                                  TERM OF PLAN

         Section  11.1 Term of the Plan.  The Company may at any time  terminate
the Plan by action of the Board, with such termination being effective as of the
date  that all  benefits  payable  to  Participants  have  been  distributed  to
Participants  in accordance  with and subject to the  provisions of Article V of
the Plan.  Effective  as of the date of such Board action (or such later date as
may be specified therein),  all Section 3.1 compensation deferral elections will
terminate  and no further  amounts  shall be  credited  to any  Accounts  of any
Participant  under Section 3.3 (a) after such date.  However,  the Participants'
Accounts  shall  continue to be adjusted by the other  provisions of Section 3.3
until all benefits are distributed to the  Participants or to the  Participants'
beneficiaries.



                                                        12

<PAGE>



                                  ARTICLE XII.
                             PARTICIPATING EMPLOYERS

         Section 12.1 Eligibility. The Participating Employers that have adopted
the Plan effective as of April 1, 1998 are the Company and Belmont  Homes,  Inc.
Any  other  business  entity,  more  than  50% of which  is  owned  directly  or
indirectly  by the Company,  may, with the consent of the  Committee,  adopt the
Plan by executing  and  delivering  to the Company a written  instrument in such
form and containing such provisions as the Committee may prescribe or approve.

         Section 12.2  Participation  Reimbursements.  Each of the Participating
Employers agrees to make payments of the benefits provided under the Plan to its
respective employee Participants.  The Company hereby guarantees the performance
by each of the other Participating Employers of its respective obligations under
the  Plan.   Neither  the  respective   benefit   payment   obligations  of  the
Participating Employers nor the Company's guarantee of performance is secured in
any way. Such  obligations  and  guarantee  constitute no more than unfunded and
unsecured  promises of payment and  performance.  Each  Participating  Employer,
other than the Company,  shall  reimburse the Company for its allocable share of
costs and expenses  paid by the Company in  connection  with the  operation  and
administration of the Plan and shall reimburse the Company for any benefits paid
by the Company under the Plan to  Participants  to the extent  allocable to such
Participating  Employer and its  Participants.  Payments made to Participants by
the Trust shall  constitute  payments  by the  Company and the Company  shall be
reimbursed for such payments by the appropriate Participating Employers.

         Section 12.3 Recordkeeping and Reporting.  Each Participating  Employer
shall  furnish to the  Committee  the  information  with  respect to each of its
Participants  as may be  necessary to enable the  Committee to maintain  records
sufficient  to determine  the  benefits  (and the  compensation  sources of such
benefits) which may become payable to or with respect to such  Participants  and
to give those  Participants any reports which may be required under the terms of
the Plan or by law.

         Section 12.4 Termination of  Participation.  A Participating  Employer,
other than the Company,  may withdraw from participation in the Plan at any time
by providing the Company with 30 days advance  written notice of such withdrawal
from  participation  and the  effective  date of such  Participating  Employer's
withdrawal,  which  30-day  notice  period  may be  waived  by the  Company.  In
addition, the Company may terminate a Participating  Employer's participation in
the Plan by providing such  Participating  Employer with 30 days advance written
notice, which 30-day notice period may be waived by the Participating  Employer.
A Participating  Employer which  terminates its  participation in the Plan shall
remain obligated under the Plan with respect to deferrals (and matches referable
thereto)  made  prior  to  such  termination  by  its  Participants,   including
subsequent investment performance adjustments, unless otherwise expressly agreed
by the Company with the Company fully assuming such obligations.


                                                        13

<PAGE>



         IN WITNESS WHEREOF,  the Company and Belmont Homes, Inc. as of the date
hereof have caused this Plan to be executed by their  respective duly authorized
officers.


                                                CAVALIER HOMES, INC.



                                     By:      /s/ MICHAEL R. MURPHY
                                        ________________________________________
                                     Its:       Vice President
                                         _______________________________________



                                                 BELMONT HOMES, INC.



                                     By:      /s/ MICHAEL R. MURPHY
                                        ________________________________________
                                     Its:       Vice President
                                         _______________________________________





                                                        14
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<TABLE> <S> <C>

<ARTICLE>                               5

<MULTIPLIER>                                                                1000
       
This schedule contains summary financial information extracted from the Cavalier
Homes, Inc. Consolidated Condensed Balance Sheets as of June  26, 1998,  and the
Consolidated Condensed  Statements of  Income and  Cash Flows  for the  Thirteen
Weeks ended June 26, 1998 and June 27, 1997,  in  each   case unaudited,  and is
qualified in its  entirety by reference to such financial statements.
<S>                                                                         <C>            <C>
<PERIOD-TYPE>                                                               6-mos          6-mos
<FISCAL-YEAR-END>                                                           Dec-31-1998    Dec-31-1997
<PERIOD-END>                                                                Jun-26-1998    Jun-27-1997
<CASH>                                                                            45456          26616
<SECURITIES>                                                                          0              0
<RECEIVABLES>                                                                     35254          31788
<ALLOWANCES>                                                                       1185            854
<INVENTORY>                                                                       34820          32870
<CURRENT-ASSETS>                                                                 126849         100769
<PP&E>                                                                            75934          66423
<DEPRECIATION>                                                                    21331          14826
<TOTAL-ASSETS>                                                                   227303         217073
<CURRENT-LIABILITIES>                                                             79984          69369
<BONDS>                                                                               0              0
                                                                 0              0
                                                                           0              0
<COMMON>                                                                           2008           1982
<OTHER-SE>                                                                       139903         131744
<TOTAL-LIABILITY-AND-EQUITY>                                                     227303         217073
<SALES>                                                                          289739         285701
<TOTAL-REVENUES>                                                                 293192         288139
<CGS>                                                                            238908         239068
<TOTAL-COSTS>                                                                         0              0
<OTHER-EXPENSES>                                                                      0              0
<LOSS-PROVISION>                                                                   (469)           234
<INTEREST-EXPENSE>                                                                  554            746
<INCOME-PRETAX>                                                                   13638          16869
<INCOME-TAX>                                                                       5527           6096
<INCOME-CONTINUING>                                                                8111          10773
<DISCONTINUED>                                                                        0              0
<EXTRAORDINARY>                                                                       0              0
<CHANGES>                                                                             0              0
<NET-INCOME>                                                                       8111          10773
<EPS-PRIMARY>                                                                      0.41           0.54
<EPS-DILUTED>                                                                      0.40           0.54
        

</TABLE>


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