August 26, 1998




Mr. David A. Roberson
Cavalier Homes, Inc.
Highway 41 North and Cavalier Road
Addison, AL 35540

                           Re:      Retention and Severance Agreement


Dear Mr. Roberson:

         Cavalier Homes, Inc., a Delaware corporation (the "Company"), considers
the establishment and maintenance of a sound and vital senior management team to
be essential to protecting  and enhancing the best  interests of the Company and
its  stockholders.   In  this  connection,   the  Company  recognizes  that  the
possibility  of a change  in  control  may  exist in the  future,  and that such
possibility,  and  the  uncertainty  and  questions  which  it may  raise  among
management,  may result in the departure or distraction of management  personnel
to the detriment of the Company and its stockholders.  Accordingly, the Board of
Directors of the Company (the "Board") has  determined  that  appropriate  steps
should  be  taken  to  reinforce  and  encourage  the  continued  attention  and
dedication of members of the Company's senior management, including yourself, to
their  assigned  duties  without  distraction  in the  face  of the  potentially
disturbing  circumstances arising from the possibility of a change in control of
the Company.  The Board has also  determined  that  appropriate  steps should be
taken to encourage senior management's participation, in the event of a proposed
change of  control,  in the  successful  completion  of the  change  of  control
transaction while  maintaining their focus on business  performance and strategy
execution.

         In order to induce  you to remain in the employ of the  Company  and in
consideration of your agreeing to remain in the employ of the Company subject to
the terms and conditions set forth below,  this letter  agreement sets forth the
benefits  which the  Company  agrees  will be  provided to you in the event your
employment  with the Company is terminated  subsequent to a change in control of
the  Company  (as  defined  in  Section 2 of this  letter  agreement)  under the
circumstances described below.

         1. Company's Right to Terminate.  You  acknowledge  that this Agreement
does not operate as an employment  contract nor establish any right of continued
employment  with the Company and that the Company may terminate your  employment
at any time,  subject  to  providing  the  benefits  hereinafter  specified,  if
applicable, in accordance with the terms hereof.




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Mr. David Roberson
August 26, 1998
Page 2                  


         2. Change in Control.  No benefits  shall be payable  hereunder  unless
there shall have been a change in control of the Company, as set forth below and
such change of control occurs prior to the termination of your  employment.  For
purposes  of this  Agreement,  a "change in control of the  Company"  means with
respect to the Company, if subsequent to the date of this Agreement:

                  (a) Any 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 or affiliate as of the date hereof
of the Company or any employee  benefit plan of the Company) (i) has acquired or
agreed to  acquire  beneficial  ownership  of 20% or more of the  voting  and/or
economic  interest in the capital stock of the Company,  or (ii) has obtained or
agreed to obtain the power (whether or not exercised) to elect a majority of the
board of directors of the Company; or

                  (b) A majority of the board of directors of the Company  shall
consist  at such time of  individuals  other  than (x)  members  of the board of
directors  on the date hereof and (y) other  members of such board of  directors
nominated,  recommended, elected, or approved to succeed or become a director 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 (such directors described in clauses
(x) and  (y)  above  being  hereinafter  sometimes  referred  to as  "Continuing
Directors"); or

                  (c) The approval by the  stockholders  of the Company of (i) a
merger or  consolidation  of the Company,  statutory  share  exchange,  or other
similar transaction with another  corporation,  partnership,  or other entity or
enterprise  in which  either the  Company  is not the  surviving  or  continuing
corporation  (other  than such a  transaction  that is solely for the purpose of
changing  the  domicile of the Company) or shares of common stock of the Company
are to be converted  into or exchanged  for cash,  securities  other than common
stock of the Company,  or other  property,  (ii) a sale or disposition of all or
substantially all of the assets of the Company,  or (iii) the dissolution of the
Company; or

                  (d) Any  transaction  or event  relating to the Company occurs
which is (or which  would be if the  Company  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.

         3.  Termination  Following  Change  in  Control.  If any of the  events
described  in Section 2 hereof  constituting  a change in control of the Company
shall have occurred, you shall be entitled to the benefits provided in Section 4
hereof  upon  the  subsequent  voluntary  or  involuntary  termination  of  your
employment,  whether by you or by the Company, if such termination occurs within
the period  beginning on the date that the change of control is  completed  (the
"Change of Control Date") and ending on the second  anniversary of the Change of
Control Date (the "Trigger



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Mr. David Roberson
August 26, 1998
Page 3                  


Period")  unless such  termination  is (i) because of your death or  Retirement,
(ii) by the  Company  for Cause or (iii) by the  Company  or you for  Disability
(such  termination  within such period, as limited by clauses (i) through (iii),
being sometimes  referred to hereinafter as a "Payment  Trigger").  In the event
your employment is terminated  within the Trigger Period,  whether by you or the
Company,  following  the  occurrence of any of the events set forth at paragraph
(c)  below,  such  termination  of your  employment  shall  be  deemed  to be an
involuntary  termination of your employment by the Company and shall entitle you
to the benefits provided in Section 4 hereof.

                  (a)      Disability; Retirement.

                           (i)  "Disability"   shall  mean  a  disability  which
         entitles  you  to a  disability  benefit  under  a  disability  program
         sponsored  or  maintained  by the  Company;  provided,  that if no such
         program is applicable to you, then "Disability"  shall mean that, based
         on  medical  evidence  reasonably   satisfactory  to  the  Compensation
         Committee  of the Board,  you are  totally  and  permanently  unable to
         engage  in any  occupation  or  gainful  employment  for  which you are
         reasonably suited by background, training, education or experience.

                           (ii) Termination  by  the  Company  or  you  of  your
         employment  based on "Retirement"  shall mean termination in accordance
         with the  Company's  retirement  policy,  including  early  retirement,
         generally applicable to its salaried employees.

                  (b) Cause.  Termination by the Company of your  employment for
"Cause" shall mean termination based upon on any of the following:

                           (i)  dishonesty  or  fraud by  you in connection with
         your employment;

                           (ii)  appropriation  (or attempted  appropriation) by
         you  of a  material  business  opportunity  of the  Company,  including
         attempting to secure or securing any personal profit in connection with
         any transaction entered into on behalf of the Company;

                           (iii)   misappropriation   by   you   (or   attempted
         misappropriation) of any of the Company's funds or property;

                           (iv) your  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




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Mr. David Roberson
August 26, 1998
Page 4                  


                           (v) willful  misconduct by you in the  performance of
         your duties with the Company,  as determined by the good faith judgment
         of the Compensation Committee of the Board.

For purposes of this paragraph, no act, or failure to act, on your part shall be
considered  "willful"  unless  done,  or omitted to be done,  by you not in good
faith and without any reasonable  belief that your action or omission was in the
best interest of the Company.  Notwithstanding  the foregoing,  you shall not be
deemed to have been  terminated for Cause unless and until there shall have been
delivered to you a copy of a Notice of  Termination  (as defined below) from the
Chief  Executive  Officer of the Company or the  Compensation  Committee  of the
Board,  after reasonable notice to you and an opportunity for you, together with
your counsel, to be heard before the Compensation Committee of the Board (or, if
there be no such committee or such committee delivers the Notice of Termination,
the  Board  of  Directors),  finding  that in the  good  faith  opinion  of such
committee  (or the Board) you were  guilty of conduct set forth above in clauses
(i),  (ii),  (iii),  (iv) or (v) of the first  sentence  of this  paragraph  and
specifying the particulars thereof in detail.

                  (c) Constructive  Termination.  Your employment will be deemed
to have been  involuntarily  terminated by the Company upon the  termination  of
your employment,  whether by you or by the Company,  following the occurrence of
any of the following  without your prior  written  consent (any such event being
sometimes referred to hereinafter as your "Constructive Termination"):

                           (i) subsequent to a change in control of the Company,
         any reduction in your title, duties, responsibilities or authority with
         the  Company  immediately  prior to the  change in  control,  except in
         connection   with  the   termination  of  your  employment  for  Cause,
         Disability,  Retirement or as a result of your death or  voluntarily by
         you; or

                           (ii)  subsequent  to  a  change  in  control  of  the
         Company,  a  reduction  by the Company in your base salary as in effect
         immediately prior to the change in control; or

                           (iii)  subsequent  to a  change  in  control  of  the
         Company,  a failure by the Company to continue any bonus plans in which
         you are presently  entitled to  participate as the same may be modified
         from time to time prior to (but not in anticipation  of) such change in
         control,  or as the same  may be  modified  following  such  change  in
         control as may be  required  by or  desirable  for the  Company  due to
         changes to (x) the  Internal  Revenue  Code of 1986,  as  amended  (the
         "Code"),   (y)  applicable   accounting  rules  or  principles  or  (z)
         applicable  laws or regulations,  including,  without  limitation,  the
         Employee  Retirement Income and Security Act of 1974, as amended,  (the
         "Bonus Plans") or a failure by the Company to continue you



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Mr. David Roberson
August 26, 1998
Page 5                  


         as a  participant  in the Bonus Plans on at least the same basis as you
         are  participating in accordance with the Bonus Plans immediately prior
         to the change in control; or

                           (iv)  subsequent  to  a  change  in  control  of  the
         Company,  the  failure by the Company to continue in effect any benefit
         or compensation plan, life insurance plan,  health-and-accident plan or
         disability plan in which you are participating immediately prior to the
         change  in  control  of  the  Company  (or  plans  providing  you  with
         substantially  similar  benefits),  the  taking  of any  action  by the
         Company which would materially  adversely affect your  participation in
         or materially  reduce your benefits  under any of such plans or deprive
         you of any material fringe benefit enjoyed by you immediately  prior to
         the change in  control,  or the  failure by the  Company to provide you
         with the number of paid vacation days to which you are then entitled in
         accordance  with  the  Company's   normal  vacation  policy  in  effect
         immediately prior to the change in control; or

                           (v) subsequent to a change in control of the Company,
         the failure by the Company to obtain the assumption of or the agreement
         to perform this Agreement by any successor as contemplated in Section 7
         hereof; or

                           (vi)  subsequent  to  a  change  in  control  of  the
         Company, a change in the location of your employment greater than fifty
         (50) miles from your office location immediately prior to the change in
         control; or

                           (vii)  subsequent  to a  change  in  control  of  the
         Company,  any purported  termination  of your  employment  which is not
         effected   pursuant  to  a  Notice  of   Termination   satisfying   the
         requirements of paragraph (d) below (and, if applicable,  paragraph (b)
         above); or

                           (viii)  subsequent  to a  change  in  control  of the
         Company, (A) at the direction or with the concurrence of members of the
         Board or  management  of the Company who became such members  following
         the change in control, a material business  strategic plan,  direction,
         policy or  program of the  Company  is  altered  in a  material  manner
         (hereinafter  a "Policy  Change"),  and (B) you  disagree in good faith
         with such  Policy  Change and  believe  in good faith that such  Policy
         Change will have a material  adverse effect on the Company and so state
         in a written  notice  delivered to the Board within thirty (30) days of
         becoming  aware (or thirty (30) days after you,  exercising  reasonable
         diligence, should have become aware) of such Policy Change, and (C) the
         Policy  Change is not reversed  within  thirty (30) days of the date on
         which  your  written  notice  is  received  by the  Board,  and (D) you
         terminate  your  employment  with  the  Company  as a  result  of  such
         disagreement and belief.




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Mr. David Roberson
August 26, 1998
Page 6                  


                  (d) Notice of  Termination.  Any purported  termination by the
Company  pursuant to your Disability or Retirement,  as defined in paragraph (a)
above,  or for Cause,  as defined in paragraph (b) above,  or by you pursuant to
your  Disability or  Retirement,  as defined in paragraph (a) above or by you or
the  Company  based on an event  of  Constructive  Termination,  as  defined  in
paragraph (c) above,  shall be  communicated by written Notice of Termination to
the  other  party  hereto.  For  purposes  of  this  Agreement,   a  "Notice  of
Termination"  shall mean a notice which shall indicate the specific  termination
provision in this Agreement relied upon and shall set forth in reasonable detail
the facts and  circumstances  claimed to provide a basis for termination of your
employment under the provision so indicated.

                  (e) Date of Termination.  "Date of Termination" shall mean (A)
if your employment is terminated for  Disability,  thirty (30) days after Notice
of  Termination  is given  (provided  that you  shall not have  returned  to the
performance  of your  duties on a  full-time  basis  during such thirty (30) day
period), (B) if you employment is terminated due to your death, the date of your
death, (C) if your employment is terminated pursuant to paragraph (b) above, the
date  specified  in the  Notice  of  Termination,  (D)  if  your  employment  is
terminated for Retirement, the date specified in the Notice of Termination,  and
(E) if your  employment is terminated for any other reason,  the date on which a
Notice of Termination  is given;  provided that if within thirty (30) days after
any  Notice  of  Termination  is  given  the  party  receiving  such  Notice  of
Termination  notifies  the other  party  that a dispute  exists  concerning  the
termination,  the Date of Termination  shall be the date on which the dispute is
finally  determined,  either by mutual written agreement of the parties, or by a
final judgment,  order or decree of a court of competent  jurisdiction (the time
for appeal  therefrom  having  expired  and no appeal  having  been  perfected);
provided  further,  however,  that if such  disputed  termination  constitutes a
Payment  Trigger,  the Trigger  Period shall not run pending  resolution  of the
dispute  but  shall  recommence  upon  the  date  that the  dispute  is  finally
determined (as set forth in the preceding proviso).

         4. Certain Benefits Upon Termination. (a) If, after a change in control
of the  Company  shall  have  occurred,  as  defined  in  Section 2 above,  your
employment  with the  Company  shall be  terminated  (including  a  Constructive
Termination)  within  the  Trigger  Period by the  Company or you other than for
Cause,  Disability,  Retirement  or death,  and other  than by your  voluntarily
terminating your employment with the Company,  then you shall be entitled to the
benefits provided below:

                           (i)   the Company shall pay to you within thirty (30)
days following the Date of Termination in a lump sum cash payment your full base
salary through the Date of Termination  at the rate in effect at the time Notice
of Termination is  given plus (A) credit for any vacation earned but  not taken,
(B) the amount,  if any, of any bonus or long-term incentive compensation  for a
past fiscal  year  which has been earned  but not yet been paid to you,  (C) the
amount,  if any, of any bonus for the  current  year to be paid as a  percentage
of Company profit based on the Company's  results through the most recent fiscal
quarter as of the Date of Termination without



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Mr. David Roberson
August 26, 1998
Page 7                  


pro-ration,  (D) a pro-rated payment, based on the Company's results through the
most recent quarter as of the Date of Termination, with respect to the long-term
incentive  compensation payable under the Company's  performance based long-term
incentive program for the long-term  performance period that next ends following
the Date of  Termination,  and (E) a pro-rated  payment,  based on the Company's
results as of the Date of  Termination,  of any other  bonus due under any other
Bonus Plans;

                           (ii)  in lieu of any  further salary  payments to you
for  periods  subsequent  to the Date of  Termination, the  Company shall pay as
severance pay to you within thirty (30) days following the Date of Termination a
lump sum  cash amount equal  to 2.99  times  the sum of (A) the  amount  of your
annual  base  salary at the highest rate in effect during the twelve (12) months
immediately  preceding  the  Date of  Termination,  and (B) the  average  annual
bonus  received by you with respect to the three (3) years immediately preceding
the  Date of  Termination, or with  respect to the  period  beginning January 1,
1996 and ending December 31 of the calendar  year  immediately  preceding on the
Date of  Termination,  if such  period is less  than three  years at the Date of
Termination, and (C) (x) the most  recent amount earned by you (whether in stock
or  cash  or a  combination  thereof)  under  the  Company's  performance  based
long-term incentive program  established under the Company's Executive Incentive
Compensation Plan or, (y) if the Date of  Termination  giving rise to your right
to  benefits  hereunder  occurs  before   the  end  of  the  initial   Long-Term
Performance  Period  established  under the long-term incentive  program so that
benefits have not yet accrued under the long-term incentive program,  the target
amount  established for you  under  the program  for the  Long-Term  Performance
Period next ending; and

                           (iii) the  Company  shall  maintain in full force and
effect, for your continued benefit  until the  earlier of  (A)  three  (3) years
after the Date of  Termination or (B) you obtain substantially the same coverage
from a  new  employer,  all life insurance,  medical,  health and accident,  and
disability  plans,  programs  or  arrangements  in which you  were  entitled  to
participate  immediately prior to the  Date of  Termination,  provided that your
continued  participation  is possible  under the general terms and provisions of
such plans and programs.  In the event  that your participation in any such plan
or program is barred, the Company shall  use  reasonable  efforts to  arrange to
provide you with benefits substantially similar to those which you are  entitled
to  receive  under  such  plans and programs.

                  (b) If,  after a change in control of the  Company  shall have
occurred,  as defined in Section 2 above, you shall  voluntarily  terminate your
employment with the Company within the Trigger Period other than for Disability,
Retirement or death or in connection with an event of Constructive  Termination,
then you shall be entitled to the benefits set forth below:

                           (i)   the Company shall pay to you within thirty (30)
days following the Date of Termination in a lump sum cash payment your full base
salary through the Date of Termination  at the rate in effect at the time Notice
of Termination is given plus  (A) credit for any  vacation earned but not taken,
(B) the amount,  if any, of any bonus or long-term incentive



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Mr. David Roberson
August 26, 1998
Page 8                  


compensation  for a past fiscal year which has been earned but not yet been paid
to you, (C) the amount,  if any, of any bonus for the current year to be paid as
a percentage of Company profit based on the Company's  results  through the most
recent fiscal quarter as of the Date of Termination  without  pro-ration,  (D) a
pro-rated  payment,  based on the  Company's  results  through  the most  recent
quarter as of the Date of Termination,  with respect to the long-term  incentive
compensation  payable under the Company's  performance based long-term incentive
program for the long-term  performance  period that next ends following the Date
of Termination,  and (E) a pro-rated payment,  based on the Company's results as
of the Date of Termination, of any other bonus due under any other Bonus Plans;

                           (ii)   in lieu of any further salary payments to  you
for  periods  subsequent  to  the Date  of Termination, the Company shall pay as
severance pay to you within  thirty (30) days  following the Date of Termination
a  lump  sum  cash  amount  equal  to  the  sum  of  (A)  the   amount  of  your
annual  base  salary at the highest rate in effect during the twelve (12) months
immediately preceding the Date of Termination, and (B) the average annual  bonus
received by you with  respect to the three (3)  years immediately  preceding the
Date of Termination, or  with respect to the  period  beginning  January 1, 1996
and ending December 31 of the calendar  year  immediately  preceding on the Date
of  Termination,  if  such  period  is  less  than  three  years  at the Date of
Termination, and (C) (x) the most  recent amount earned by you (whether in stock
or  cash  or a  combination  thereof)  under  the  Company's  performance  based
long-term  incentive program established under the Company's Executive Incentive
Compensation Plan or, (y) if the Date of  Termination  giving rise to your right
to benefits hereunder occurs before the end of the initial Long-Term Performance
Period established under the long-term incentive  program so that  benefits have
not yet accrued  under  the  long-term  incentive  program,  the  target  amount
established for you under the program for  the Long-Term Performance Period next
ending; and 
                           (iii)  the Company  shall  maintain in full force and
effect, for  your  continued   benefit  until  the  earlier  of  (A)  the  first
anniversary  of the  Date  of Termination  or (B)  you  obtain substantially the
same  coverage  from a new employer,  all life  insurance,  medical,  health and
accident,  and  disability plans,  programs  or  arrangements  in which you were
entitled to participate immediately prior to the Date of  Termination,  provided
that  your  continued participation  is possible  under  the  general  terms and
provisions of such plans and programs.  In the event that your  participation in
any such plan or program is barred,  the Company  shall use  reasonable  efforts
to arrange to provide you with benefits substantially similar to those which you
are entitled to receive under such plans and programs.

                  (c) You shall not be required  to  mitigate  the amount of any
payment provided for in this Section 4 by seeking other employment or otherwise,
nor shall the amount of any payment provided for in this Section 4 be reduced by
any  compensation  earned by you as the result of employment by another employer
after the Date of Termination,  or otherwise.  In the event that you voluntarily
terminate  your   employment   with  the  Company  and  are  paid  the  benefits
contemplated by paragraph (b) of this Section 4 and, at any time within five (5)
years following the receipt of such



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Mr. David Roberson
August 26, 1998
Page 9                  


payment,  you are  reemployed  by the  Company  or any  subsidiary  thereof in a
position  where  your  duties  or  responsibilities  with  the  Company  or such
subsidiary  are  commensurate  with  those of your  position  with  the  Company
immediately prior to the original termination of your employment which gave rise
to the  Company's  payment of benefits  under this Section 4, you shall,  on the
date of such  reemployment,  be obligated to repay to the Company,  in cash,  an
amount equal to the benefit paid to you under  paragraph  (b) of this Section 4,
plus any  amounts  paid to you under  Section 5 hereof  in  connection  with the
payments to you pursuant to paragraph (b) of this Section 4 (and not  previously
repaid by you pursuant to the terms of Section 5).

         5.       Tax Gross-Up.

                  (a) If you become entitled to any payments or benefits whether
pursuant  to the terms of this  Agreement  or any  other  plan,  arrangement  or
agreement  with the  Company,  any person  whose  actions  result in a change in
control or any  person  affiliated  with the  Company  or such  persons  (in the
aggregate, "Payments" or singularly, "Payment") which are subject to taxes under
Section  4999 (or any  successor  provision  thereto)  of the Code (the  "Excise
Tax"), the Company shall pay to you an additional  amount  ("Gross-Up  Payment")
such that the net amount  retained by you, after deduction of (A) any Excise Tax
on Payments, (B) any federal, state and local income tax and Excise Tax upon the
payment provided for by this Section, and (C) any interest and penalties imposed
because the Excise Tax is not paid during the period  beginning with the earlier
of the date (i) the IRS issues a notice  stating  that an Excise Tax is due with
respect to a Payment,  (ii) you deliver to the Company an opinion of tax counsel
selected by you and  reasonably  acceptable to the Company that all or a portion
of the  Payment is subject to the  Excise Tax and  setting  forth the  estimated
amount of the Excise Tax on the Payment,  and (iii) the Company  delivers to you
an opinion of tax counsel  selected by the Company and reasonably  acceptable to
you that all or a portion  of the  payment  is  subject  to the  Excise  Tax and
setting forth the estimated amount of the Excise Tax on the Payment (the "Excise
Tax  Imposition  Date") and ending ten (10) days after the Excise Tax Imposition
Date,  shall be equal  to the full  amount  of the  Payments.  For  purposes  of
determining  the  amount  of the  Gross-Up  Payment,  you shall be deemed to pay
federal income taxes at the highest  marginal rate of federal income taxation in
the  calendar  year in which the  Gross-Up  Payment  is to be made and state and
local  income taxes at the highest  marginal  rates of taxation in the state and
locality of your  residence on the date the Gross-Up  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 taxes.

                  (b) The Gross-Up Payment for any Payment made shall be paid to
you  within  ten (10) days after the  Excise  Tax  Imposition  Date,  unless the
Company undertakes to indemnify you as provided in Section 5 (c).

                  (c) In lieu of paying the  Gross-Up  Payment for any  Payment,
the  Company  may elect to  undertake,  at its sole  expense,  the  defense  and
settlement of any assessment by the IRS of the Excise Tax on any Payment. In the
alternative, the Company may elect to pay the Gross-Up



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Mr. David Roberson
August 26, 1998
Page 10                  


Payment and seek to recover the Excise Tax by pursuing a claim for a refund.  If
the Company so elects to undertake the defense or  settlement of any  assessment
by the IRS of the Excise Tax on any  Payment or the  recovery  of the Excise Tax
through a claim for refund,  the Company shall  protect,  defend,  indemnify and
hold you forever  harmless  from and against the Excise Tax on such  Payment and
payments  pursuant to this Section 5(c) and any federal,  state and local income
tax  (determined  pursuant to the last  sentence of Section  5(a)) upon payments
pursuant to this  Section  5(c) and any and all  liabilities,  demands,  claims,
actions,  causes of action,  assessments,  losses,  costs,  damages or expenses,
including  attorneys' and accountants' fees in connection with any thereof,  and
any interest and penalties  sustained by you as a result of or arising out of or
by virtue of the Company's undertaking.  You shall cooperate with the Company as
reasonably  requested by the Company in the conduct of such defense,  settlement
or refund claim.

                  (d) If the Excise Tax is determined to be less than the amount
taken into account in determining the Gross-Up  Payment paid pursuant to Section
5(a),  you shall repay to the  Company  within ten (10) days after the time that
the amount of such reduction in Excise Tax is finally  determined the portion of
the Gross-Up Payment  attributable to such reduction plus interest on the amount
of such repayment at the rate provided in Section  1274(b)(2)(B) of the Code for
debt instruments with a maturity after issuance equal to the period beginning on
the date the  Gross-Up  Payment  was made and  ending  on the date of  repayment
required by this  sentence,  or in the case of a refund,  plus  interest paid on
such  refund.  If the Excise Tax is  determined  to exceed the amount taken into
account in determining  the Gross-Up  Payment paid pursuant to Section 5(a) (the
"Excise Tax Deficit"),  the Company within ten (10) days after the time that the
amount of the Excise Tax Deficit is finally  determined shall make an additional
payment to you in an amount  equal to (i) the Excise Tax  Deficit,  plus (ii) an
amount equal to any interest  and  penalties  payable to the IRS with respect to
the Excise Tax Deficit,  plus (iii) any federal,  state and local income tax and
Excise Tax  (determined  pursuant  to the last  sentence  of Section  5(a)) upon
payments made pursuant to this sentence.

         6. Term of Agreement. This Agreement shall become effective on the date
hereof  and,  subject  to the first  sentence  of the second  paragraph  of this
Section 6, shall continue in effect until the earliest of the following:

                  (i) a Date of Termination  in accordance  with Section 3(e) or
         other  termination  of your  employment  with the  Company  shall  have
         occurred prior to a change in control of the Company; or

                  (ii) if a Payment  Trigger shall have occurred during the term
         of  this  Agreement,   the  performance  by  the  Company  of  all  its
         obligations, and the satisfaction by the Company of all its obligations
         and liabilities, under this Agreement;




<PAGE>


Mr. David Roberson
August 26, 1998
Page 11                  


                  (iii) the date that is the fifth (5th) anniversary of the date
         of this Agreement;  provided,  however,  that if a change in control of
         the Company occurs prior to such fifth (5th) anniversary, the Company's
         obligation  to you under this  Agreement  due to such change in control
         shall not lapse upon the fifth (5th)  anniversary,  but shall  continue
         through  the final day of the  Trigger  Period  that  begins  with such
         change in control if such final day of the Trigger Period is later than
         such fifth (5th) anniversary.

                  Any change in control of the  Company  during the term of this
Agreement that for any reason ceases to constitute a change in control or is not
followed by a Payment  Trigger shall not effect a  termination  or lapse of this
Agreement,  and, in such event,  this  Agreement  shall continue to apply to the
event of any subsequent  change in control of the Company occurring prior to the
end of the term of this  Agreement.  Any  transfer of your  employment  from the
Company  to a  subsidiary,  from  a  subsidiary  to the  Company,  or  from  one
subsidiary to another  subsidiary  shall not  constitute a  termination  of your
employment for purposes of this Agreement.

         7.       Successors; Binding Agreement.

                  (a) The Company will require any successor  (whether direct or
indirect,   by  purchase,   merger,   consolidation  or  otherwise)  to  all  or
substantially all of the business and/or assets of the Company,  by agreement in
form and substance satisfactory to you, to expressly assume and agree to perform
this  Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place.  Failure of the
Company  to  obtain  such  agreement  prior  to the  effectiveness  of any  such
succession shall be a breach of this Agreement and shall, if such failure occurs
subsequent  to a  change  in  control  of the  Company,  constitute  an event of
Constructive  Termination  and entitle you to  compensation  from the Company in
accordance with Section 4 hereof,  except that for purposes of implementing  the
foregoing,  the date on which any such  succession  becomes  effective  shall be
deemed the Date of Termination. As used in this Agreement,  "Company" shall mean
the Company as  hereinbefore  defined and any  successor to its business  and/or
assets as aforesaid  which  executes and delivers the agreement  provided for in
this Section 7 or which otherwise  becomes bound by all the terms and provisions
of this Agreement by operation of law.

                  (b)  This  Agreement  shall  inure  to the  benefit  of and be
enforceable   by   your   personal   or   legal   representatives,    executors,
administrators,  successors, heirs, distributees,  devisees and legatees. If you
should die while any amount  would still be payable to you  hereunder if you had
continued to live, all such amounts,  unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to your devisee,  legatee or
other designee or, if there be no such designee, to your estate.




<PAGE>


Mr. David Roberson
August 26, 1998
Page 12                  


         8. Notice.  For the purposes of this  Agreement,  notices and all other
communications  provided for in this Agreement  shall be in writing and shall be
deemed to have been duly given when delivered  personally or mailed by certified
or registered mail, return receipt requested,  postage prepaid, addressed to the
respective  addresses  set forth on the first page of this  Agreement,  provided
that all  notices to the  Company  shall be  directed  to the  attention  of the
Chairman  of the  Board  of the  Company  with a copy  to the  Secretary  of the
Company,  or to such other  address as either  party may have  furnished  to the
other in writing in accordance herewith, except that notice of change of address
shall be effective only upon receipt.

         9.  Miscellaneous.  No  provisions  of this  Agreement may be modified,
waived or discharged unless such waiver,  modification or discharge is agreed to
in writing  signed by you and such officer as may be  authorized by the Board of
Directors  of the  Company.  No waiver by either party hereto at any time of any
breach by the other  party  hereto of, or  compliance  with,  any  condition  or
provision of this  Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreements or  representations,  oral or otherwise,
express or implied,  with respect to the subject matter hereof have been made by
either  party which are not  expressly  set forth in this  Agreement;  provided,
however, that this Agreement shall not supersede or in any way limit the rights,
duties or  obligations  you may have under any other written  agreement with the
Company.  The validity,  interpretation,  construction  and  performance of this
Agreement  shall be governed by the laws of the State of Alabama  without regard
to principles regarding conflicts of laws.

         10.      Counterparts.  This Agreement may be  executed in  one or more
counterparts, each  of which shall be deemed to be  an original but all of which
together will constitute one and the same instrument.

         11.  Enforcement;  Expenses.  The provisions of this Agreement shall be
regarded as  divisible,  and if any of said  provisions  or any part thereof are
declared  invalid or  unenforceable  by a court of competent  jurisdiction,  the
validity and  enforceability of the remainder of such provisions or parts hereof
and the applicability  thereof shall not be affected thereby.  The Company shall
pay all fees,  costs and expenses  (including,  without  limitation,  reasonable
attorneys'  fees and the costs of  investigating  any potential  claim) (herein,
collectively,  "Costs")  incurred by you in connection  with any dispute arising
under or relating to this Agreement or any action(s) or proceeding(s) to enforce
your  rights  under  this  Agreement,  should  you  prevail  in such  action  or
proceeding,  and, in addition to paying your Costs, the Company shall pay to you
(i)  interest on such Costs and on the  aggregate  amount of the benefits due to
you under Section 4 above (said benefits being referred to in this Section 11 as
the "Termination Benefits") from your Date of Termination to the date such Costs
and  Termination  Benefits  are paid to you at an annual rate equal to the prime
lending rate charged by First  Commercial  Bank,  or the successor  thereto,  in
effect on the Date of Termination,  and (ii) liquidated and agreed  compensatory
damages  in an amount  equal to  twenty-five  percent  (25%) of the  Termination
Benefits.



<PAGE>


Mr. David Roberson
August 26, 1998
Page 13                  

         12. Jurisdiction;  Service of Process. Any action or proceeding seeking
to  enforce  any  provision  of,  or based on any  right  arising  out of,  this
Agreement  may be brought  against  either party only in the courts of the state
and county in which you are  employed  by the  Company  and each of the  parties
consents to the  jurisdiction of such courts (and of the  appropriate  appellate
courts) in any such action or proceeding  and waives any objection to venue laid
therein.  Process  in any  action or  proceeding  referred  to in the  preceding
sentence may be served on either party anywhere in the world.

         If this letter correctly sets forth our agreement on the subject matter
hereof,  kindly sign and return to the Company the enclosed  copy of this letter
which will then constitute our agreement on this subject.

                                                   CAVALIER HOMES, INC.


                                                   /s/ MICHAEL R. MURPHY
                                                   -----------------------------
                                                   Its Vice President


AGREED TO THIS 26TH DAY OF AUGUST, 1998.


/s/ DAVID A. ROBERSON
-------------------------------
David A. Roberson