SPLIT DOLLAR INSURANCE AGREEMENT


     THIS  AGREEMENT  effective  as  of  the 1st  day of  April,  1994,  between
Cavalier Homes, Inc., a corporation organized and existing under the laws of the
State of Delaware,  hereinafter referred to as the "Company";  and Barry Donnell
Irrevocable Insurance Trust, hereinafter referred to as the "Policy Owner".

     WHEREAS,  Barry Donnell,  hereinafter  referred to as the  "Director",  has
served on the Company's Board of Directors for several years; and

     WHEREAS,  the Director has performed  his duties ably and well,  and to the
satisfaction and benefit of the Company; and

     WHEREAS,  the Company  wishes to  participate  in obtaining  life insurance
protection on the Director's life; and

     WHEREAS,  the Company  wishes to  participate  in obtaining  life insurance
protection on the life of the Director and his wife (the "Insureds"); and

     NOW, THEREFORE, in consideration of the mutual promises and obligations set
forth hereinafter, the parties agree as follows:

                                  ARTICLE I

     Policy Owner is the owner of the  insurance  policy or policies on the life
of the Director listed by policy number in Exhibit "A", which is attached hereto
and made a part of this Agreement for all purposes  (hereinafter  referred to as
"Policy").

                                  ARTICLE II

     The Policy is the exclusive  property of the Policy Owner, who may exercise
all rights of  ownership  with  respect  thereto,  subject  only to the security
interest of the Company as expressed in this Agreement, notwithstanding anything
to the contrary in the policy, or endorsement and riders thereto.

                                  ARTICLE III

     A.  Until  the  termination  of  this  Agreement,   the  Company  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 Policy Owner.

     B. The Policy Owner shall be responsible  for the remittance of the imputed
value of the Policy,  otherwise known as the effective "PS 38" or "PS 58" costs.
Such amount shall be remitted by the Policy Owner to the Company  within  twelve
(12) months of the payment of each annual premium by the Company.
<PAGE>

                                  ARTICLE IV

     Upon the earlier of (i) the death of the  survivor of the  Insureds or (ii)
the cancellation of the policy, the Policy Owner  unconditionally  agrees to pay
to the Company an amount equal to (1) the aggregate  amount of premium  payments
paid by the Company on the Policy  minus (2) the  aggregate  amount of "PS 38/58
Costs"  incurred  with  respect to the split  dollar  arrangement  provided  for
herein. For purposes of this Agreement,  the term "PS 38/58 Costs" shall mean an
amount  equal to the annual cost of current  life  insurance  protection  on the
joint lives of the Insureds,  measured by the U.S. Life Table 38, while both are
alive and thereafter  measured by the lower of the PS 58 rate, set forth in Rev.
Rul. 55-747, 1955-2 C.B. 288, (or the corresponding  applicable provision of any
future Revenue  Ruling),  or the insurer's  current  published  premium rate for
annually renewable term insurance for standard risks.

     The  Company  shall not be entitled to any  payments  under this  Agreement
until the earlier of (i) the death of the  survivor of the  Insureds or (ii) the
cancellation of the Policy.

     The Company shall provide the policy owner an annual  accounting  detailing
the liability owed to the Company by the Policy Owner.

                                  ARTICLE V

     In  consideration  of the promises and  obligations  set forth herein,  the
Policy Owner agrees to grant the Company a security interest in said policy;

     Now  therefore,  for value  received,  the  Policy  owner  hereby  assigns,
transfers,  and sets over to the Company,  the following  specific rights in the
policy, subject to the following terms and conditions:

     (1) This  Assignment  is made,  and the policy is to be held, as collateral
security for all  liabilities  of the Policy  Owner to the  Company,  either now
existing or hereafter arising pursuant to the terms of this Agreement.

     (2) The  Policy is the  exclusive  property  of the Policy  Owner,  who may
exercise  all rights of  ownership  with  respect  thereto,  subject only to the
limited rights granted the Company pursuant to the terms of this Agreement.

     (3)  The  Company   shall,   upon  request,   forward  the  Policy  without
unreasonable  delay to the Policy Owner for  endorsement  of any  designation or
change of beneficiary or election of a payment plan for Policy proceeds.

     (4) The insuring  company is hereby  authorized  to recognize the Company's
claim to rights hereunder  without  investigating  the reason for such action by
the Company, or the validity or the amount of the liabilities hereunder.
<PAGE>

     (5) The insuring  company shall be fully protected in recognizing a request
made by the Policy Owner for surrender of the Policy  without the consent of the
Company,  and, upon such surrender,  the Policy shall be terminated and shall be
of no further force or effect.

     (6) Upon the full  payment of the  liabilities  advanced  pursuant  to this
Agreement,  the  Company  shall  release and  reassign  to the Policy  Owner all
specific rights in the Policy included in this Agreement.

                                  ARTICLE VI

     A. The Company shall be prohibited from taking any action that might limit,
restrict,  reduce, eliminate or otherwise affect proceeds (as defined in Article
IX), to the  beneficiary  of the Policy,  and is  specifically  prohibited  from
surrendering  the Policy for  cancellation  and from assigning its rights in the
Policy to anyone other than the Policy Owner.

     B. The  Company's  security  interest in the Policy shall also apply to any
proceeds  payable to the Policy  Owner  should the Policy  Owner  surrender  the
Policy  pursuant  to  Article  VIII  of this  Agreement  or as a  result  of the
termination of this Agreement as provided for in Article X hereof.

                                  ARTICLE VII

     A. The Policy  owner  retains  all  rights in the  Policy not  specifically
assigned to the Company including, but not limited, to the following rights:

     (1) The right to surrender the Policy and receive the cash surrender value.

     (2) The right to change the beneficiary of the Policy.

     (3) The right to select dividend options.

     (4) The right to select  optional  methods of settlement with regard to the
         Part B death benefit provided for in Article IX.

     (5) The right to assign the rights of the Policy Owner in the Policy.

     (6) All other rights contained in the Policy.

     B. The Policy  Owner shall  exercise no policy  right,  including,  but not
limited to,  borrowing  against the cash surrender  value of the Policy,  if the
exercise of such right  would (1) reduce the cash value of the Policy  below the
amount  necessary to satisfy the Policy Owner's  obligation to the Company under
Article IV or (2) otherwise impair the Company's rights under this Agreement.
<PAGE>

                                  ARTICLE VIII

     In the event of surrender of the Policy, the Policy Owner shall receive the
cash surrender  value as defined in the Policy.  and shall pay to the Company an
amount  equal to the  aggregate  amounts paid by the Company for the premiums on
the policy less the aggregate PS 38/58 Costs.  The sole and  exclusive  right to
surrender the policy is vested in the Policy Owner.

                                  ARTICLE IX

     In the event  death  benefits  under the Policy  become  payable  while the
Policy and this  Agreement  are in force,  the  proceeds of the Policy  shall be
divided into two parts and paid by the insurance company as follows:

Part A - - An amount  shall  be  paid  to  the  Company  which  shall  equal the
           amount due the company undex Article IV above.

Part B - - The  balance  of  the  proceeds  shall  be paid to the beneficiary or
           beneficiaries  designated to receive such balance in  accordance with
           the terms of the Policy.

                                  ARTICLE X

     A. This  Agreement.  shall be terminated  upon the occurrence of any of the
following events:

     (1) Surrender of the Policy by the Policy Owner pursuant to Article VIII of
         this Agreement;

     (2)  Termination  of the  Director's  employment  with the  Company for any
          reason  whatsoever other   than  the  Director's   death,  disability,
          retirement or  termination  after a "change  in  control"  as  defined
          in the Change in   Control   Agreement adopted  by the Company, and as
          amended;

     (3) Mutual agreement of the Policy Owner and the Company;

     (4) The payment of death benefits under the Policy; and

     (5) After December l, 2009, the Company may terminate  this  Agreement,  at
         any time, by giving ten (10) days written notice to the Policy Owner.

     B. Upon termination of this Agreement. the Company shall not be required to
make further premium payments on the Policy.

     C. The  obligation  of the Policy  Owner to pay any amounts due the Company
under this  Agreement  (including,  without  limitation,  those  obligations  in
Articles IV, VIII and IX) shall survive the termination of this Agreement.
<PAGE>

                                  ARTICLE XI

     This Agreement  shall be binding upon and shall inure to the benefit of the
parties hereto, their heirs, legal representatives, successors, and assigns.

                                  ARTICLE XII

     This Agreement embodies all agreements made with respect to the Policy, and
no change,  alteration,  or modification  may be made,  except in writing by all
parties hereto.

     IN WITNESS WHEREOF,  the parties hereto have set their hands on the day and
year first above written.


                                    By: /s/ DAVID A. ROBERSON
                                       -----------------------------------------
                                       Its Secretary/Treasurer
                                       (Cavalier Homes, Inc.)


                                       /s/ JUDY L. DARNELL
                                      ------------------------------------------
                                      Trustee - Barry Donnell
                                      Irrevocable Insurance Trust - Policy Owner

<PAGE>
                                  EXHIBIT "A"

                   LIFE INSURANCE POLICIES ON EMPLOYEE'S LIFE


Insurer                             Policy #                         Face Amt
--------                            --------                         --------
New England Life                    8806071                       $1,000,000.00