UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549

                                    FORM 10-K
 (Mark One)
[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR l5(d) OF
         THE SECURITIES EXCHANGE ACT OF 1934
         For the fiscal year ended December 31, 2004
         -------------------------------------------
         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 of                 (I.R.S. Employer
        incorporation or organization)                  Identification No.)

       32 Wilson Boulevard 100,
          Addison, Alabama                                        35540
      (Address of principal executive offices)                   Zip Code

           Registrant's telephone number, including area code: (256) 747-9800
              Securities registered pursuant to Section 12(b) of the Act:


                                                            Name of
                                                          each exchange
      Title of each class                               on which registered
      -------------------                               -------------------
      Common Stock, par value $.10                      American Stock Exchange

               Securities registered pursuant to Section 12(g) of the Act:
                                      None

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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).  Yes X  No__


The aggregate market value of the voting common equity held by non-affiliates
computed by reference to the closing price of such stock on the American Stock
Exchange as of June 26, 2004, was $84,577,225.

   The number of shares outstanding of each of the registrant's classes of
   common stock, as of March 30, 2005.
                     Common, $0.10 par value: 18,034,929
                     -------------------------

                    Documents Incorporated by Reference
           Part III of this report incorporates by reference certain
           portions of the Registrant's Proxy Statement for its Annual
           Meeting of Stockholders to be held May 24, 2005.


<PAGE>



                              CAVALIER HOMES, INC.
                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 2004

                                     PART I

ITEM 1.           BUSINESS (dollars in thousands)

General Development of Business
Cavalier Homes, Inc. (the "Company"), incorporated in 1984, is a Delaware
corporation with its executive offices located at 32 Wilson Boulevard 100,
Addison, Alabama 35540. Unless otherwise indicated by the context, references in
this report to the "Company" or to "Cavalier" include the Company, its
subsidiaries, divisions of these subsidiaries and their respective predecessors,
if any. Cavalier is engaged in the production, sale, financing and insuring of
manufactured homes.

Revenue, operating income (loss), identifiable assets and other financial data
of the Company's industry segments for the three years ended December 31, 2004
are contained in Note 11 of Notes to Consolidated Financial Statements in Part
II.

Home Manufacturing Operations
At December 31, 2004, the Company owned seven home manufacturing facilities
(including the Ft. Worth facility which was closed subsequent to year end
excluding idled facilities) engaged in the production of manufactured homes, one
plant that manufactures laminated wallboard and a cabinet manufacturing
operation. See "Item 2. Properties." The Company's operating home manufacturing
facilities normally function on a single-shift, five-day week basis with the
approximate annual capacity to produce 19,500 floors.

The management of each of the Company's home manufacturing units typically
consists of a president or general manager, a production manager, a controller,
a service manager, a purchasing manager and a quality control manager. These
mid-level management personnel manage the Company's home manufacturing
operations, and typically participate in an incentive compensation system based
upon their respective operation's profitability.

The following table sets forth certain sales information for 2004, 2003, and
2002:

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

                                                           For the Year Ended December 31,
                                ---------------------------------------------------------------------------------------
                                          2004                            2003                          2002
                                --------------------------      ------------------------      -------------------------
Number of homes sold:

   Single-section homes               1,949           31%              873          13%             2,235          19%
   Multi-section homes                4,387           69%            5,769          87%             9,734          81%
                                ------------  ------------      -----------  -----------      ------------  -----------

      Total homes                     6,336          100%            6,642         100%            11,969         100%
                                ============  ============      ===========  ===========      ============  ===========

Number of floors sold                10,772                         12,411                         21,703
                                ============                    ===========                   ============

</TABLE>

The Company designs and manufactures a wide range of homes with a focus on
serving the low- to medium-priced manufactured housing market in the South
Central and South Atlantic regions of the United States. Over the past four
years, the Company has implemented plans to standardize parts and specifications
to facilitate its ability to interchange production between home manufacturing
facilities to better manage both order backlog and delivery cost. Additionally,
basic product design and price point strategies are managed from an overall
Company perspective to maximize dealer and retail customer penetration and
minimize costs both from a manufacturing standpoint as well as for material
purchases.

Construction of a home begins by welding steel frame members together and
attaching axles, wheels and tires. The frame is then moved through the plant,
stopping at a number of workstations where various components and sub-assemblies
are attached. Certain sub-assemblies, such as floors, cabinets, ceilings and
wall systems, are assembled at off-line workstations. It takes approximately two
to four days to complete construction of a home. The completed home is sold
ready for connection to customer-supplied utilities.
<PAGE>

The principal raw materials purchased by the Company are steel, lumber, panels,
sheetrock, vinyl siding, roofing materials, insulating materials, electrical
supplies, appliances, roof trusses, plumbing fixtures, floor covering, and
windows. Currently, the Company maintains approximately two to four weeks'
inventory of raw materials. The Company is dependent on a single source of
supply for insulation, foam seal, and shingles. The inability of the Company to
obtain any materials used in the production of its homes, whether due to
materials shortages, destruction of manufacturing facilities or other events
affecting production of these component parts, may affect our ability to meet or
maintain production requirements.

The Company's component manufacturing subsidiaries provide most laminated
wallboards and cabinets for its home manufacturing facilities. Additionally,
certain of the Company's home manufacturing facilities currently purchase lumber
and roof trusses from joint ventures in which the Company owns an interest. The
Company believes prices obtained by the Company for these products from the
Company's joint ventures are competitive with the Company's other sources of
supply.

Because the cost of transporting a manufactured home is significant, there is a
practical limit to the distance between a manufacturing facility and its
dealers. The Company believes that the location of its manufacturing facilities
in multiple states allows it to serve more dealers in more markets. The Company
generally arranges, at the dealer's expense, for the transportation of finished
homes to dealers using independent trucking companies. Dealers are responsible
for placing the home on site, combining of multi-section homes, making utility
connections and providing and installing certain accessory items and
appurtenances, such as decks, air conditioning, carports and foundations.

Products
The Company's homes include both single-section and multi-section models, with
the substantial majority of such products being "HUD Code Homes" which are
manufactured homes that meet the specifications of the National Manufactured
Home Construction and Safety Standards Act of 1974, as amended, and administered
by the U.S. Department of Housing and Urban Development ("HUD"). Single-section
homes are 16 feet wide and 80 feet in length and contain approximately 1,200
square feet. The multi-section models consist of two or more floor sections that
are joined at the home site, vary in length from 48 to 80 feet and contain
approximately 1,200 to 2,300 square feet.

The Company currently offers around 590 different models of manufactured homes,
including modular homes, with a variety of decors that are marketed under
multiple brand names. The homes typically include a living room, dining area,
kitchen, two to four bedrooms and two bathrooms. Each home contains a cook
top/range and oven, refrigerator, microwave, dishwasher, water heater and
central heating. Customers also may choose from available options including gas
appliances, kitchen cabinets, and various decor packages, recessed frames for
use with permanent foundations and wind load and thermal options for use in
certain geographic areas.

The Company's product development and engineering personnel design homes in
consultation with operating management, sales representatives and dealers. They
also evaluate new materials and construction techniques and use computer-aided
and other design methods in a continuous program of product development, design
and enhancement. The Company's product development activities do not require
significant capital investments.

Independent Dealer Network, Sales and Marketing
At December 31, 2004, the Company had 131 participating dealer locations selling
the Company's homes under its Exclusive Dealer Program, which included four
Company-owned retail locations. In addition, the Company markets its homes
through approximately 240 active non-exclusive independent dealer locations.

Since 1991, the Company has sold homes through its independent exclusive dealer
network. The Company's independent exclusive dealers market and sell only homes
manufactured by the Company, while the Company's independent non-exclusive
dealers typically will choose to offer the products of other manufacturers in
addition to those of the Company. The Company's number of independent exclusive
dealers and percentage of total Company sales represented by them is summarized
in the following table:

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


         For the Year Ended December 31,                           2004      2003      2002
---------------------------------------------------              --------  --------  --------

Number of independent exclusive dealer locations (at year end)      127       129       220

Percentage of manufactured home sales                                60%       49%       55%
</TABLE>
<PAGE>

Through its finance subsidiary, CIS Financial Services, Inc. ("CIS"), the
Company purchases qualifying retail installment sales contracts primarily for
manufactured homes sold through the Company's dealer network.

Approximately 78.4% of the Company's sales in 2004 were to dealers operating
sales centers in the Company's core states as follows: North Carolina - 12.5%,
Louisiana - 10.2%, Alabama - 10.2 %, Texas - 7.7%, South Carolina - 6.9%,
Georgia - 8.6%, Arkansas - 5.2%, Missouri - 5.0%, Mississippi - 4.8%, Oklahoma -
3.7%, and Tennessee - 3.6%.

Generally, the Company has written agreements with its independent dealers,
which may be terminated at any time by either party, with or without cause,
after a short notice period. The Company does not have any control over the
operations of, or financial interests in, any of its independent dealers,
including any of its independent exclusive dealers. The Company is not dependent
on any single dealer, and in 2004, the Company's largest dealer location
accounted for approximately 1.9% of sales.

The Company believes that its independent dealer network enables the Company to
avoid the substantial investment in management, capital and overhead associated
with company-owned sales centers. To enable dealers to maximize retail market
penetration and enhance customer service, typically only one dealer within a
given market area distributes a particular product line of the Company. The
Company believes its strategy of selling its homes through independent dealers
helps to ensure that the Company's homes are competitive with those of other
manufacturers in terms of consumer acceptability, product design, quality and
price. Accordingly, a component of the Company's business strategy is to
continually strengthen its dealer relations. The Company believes its relations
with its independent dealers, including its independent exclusive dealers, are
good.

The Company's sales force is generally organized based on a geographic region
with a regional sales manager and sales representatives who are compensated
primarily on a commission basis. The sales representatives are charged with the
day-to-day servicing of the needs of the Company's independent dealers,
including its exclusive dealers. The Company markets its homes through product
promotions, participation in regional manufactured housing shows, advertisements
in local media and trade publications. As of December 31, 2004, the Company
maintained a sales force of 27 full-time salesmen and 5 full-time general sales
managers.

Retail Financing Activities
A significant factor affecting sales of manufactured homes is the availability
and terms of financing. CIS purchases qualifying retail installment sales
contracts for manufactured homes sold primarily through the Company's dealer
network.

CIS seeks to provide competitive financing terms to customers of the Company's
dealers. CIS currently offers various conventional loan programs which require a
down-payment ranging from 5% to 20% of the purchase price, in cash, trade-in
value of a previously-owned manufactured home and/or appraised value of equity
in any real property pledged as collateral. Repayment terms generally range from
180 to 360 months, depending upon the type of home and amount financed, the
amount of the down payment and the customer's creditworthiness. CIS's loans are
secured by a purchase money security interest in the manufactured home and, in
certain instances, a mortgage on real property pledged as additional collateral.
As of December 31, 2004, all of CIS's outstanding loans were secured. Loans
purchased by CIS normally provide a fixed rate of interest with equal monthly
payments and are non-recourse to the dealer. The interest rates applicable to
CIS's loan portfolio as of such date generally ranged from 7% to 15%, and the
approximate weighted average annual percentage interest rate was 10.99%.
Currently, CIS operates in most of the states in which the Company has
independent exclusive dealers.

For those retail customers who meet CIS's lending standards, CIS strives to
provide prompt credit approvals and funding of loans. CIS continually reviews
its policies and procedures to facilitate prompt decision-making on loan
applications. In the event an installment sale contract becomes 30 days
delinquent, CIS normally contacts the customer promptly in an effort to cure the
delinquency. Once a customer has failed to cure a default, CIS begins
repossession procedures. After repossession, CIS normally has the home delivered
to a dealer's sales center where CIS attempts to resell the home or contracts
with an independent party to resell the home. To a limited extent, CIS sells
repossessed homes at wholesale.

Beginning in 1998, the business focus of CIS changed from building, holding and
servicing a portfolio of loans to purchasing loans from retail customers of its
dealers that are subsequently sold to other financial institutions, with limited
recourse. CIS does not retain the servicing function and does not earn interest
<PAGE>

income on those sold loans. Although the level of CIS's future activities cannot
presently be determined, the Company expects to utilize internally generated
working capital and amounts generated from sales of loans under the retail
finance agreements discussed in the previous paragraph to fund the purchase of
retail installment sale contracts on homes sold by the Company's dealers and may
use borrowings to develop a portfolio of such installment sale contracts. The
Company believes that its relationships with its dealers will assist the
development of this business strategy.

The Company maintains a reserve for estimated credit losses on installment sale
contracts owned by CIS to provide for future losses based on the Company's
historical loss experience, current economic conditions and portfolio
performance. Amounts provided for credit losses were $75, $354 and $358 in 2004,
2003, and 2002, respectively. Additionally, as a result of defaults, early
payoffs and repossessions, net of recoveries, $152, $183 and $328 were charged
against the reserve in 2004, 2003, and 2002, respectively. The reserve for
credit losses at December 31, 2004 was $953 as compared to $1,030 at December
31, 2003 and $859 at December 31, 2002.

In 2004, 2003 and 2002, CIS repossessed 14 homes each year. The Company's
inventory of repossessed homes was 17 homes at December 31, 2004, as compared to
10 homes at both December 31, 2003 and 2002. The Company's net losses resulting
from repossessions on CIS purchased loans as a percentage of the average
principal amount of such loans outstanding for fiscal 2004, 2003 and 2002 was
1.53%, 1.71% and 3.66%, respectively. There can be no assurance that the
Company's future results with respect to delinquencies and repossessions will be
consistent with its past experience.

The loan portfolio contains loans identified as presenting uncertainty with
respect to collectibility (customers in bankruptcy). These loans totaled $502
(14 loans) and $334 (10 loans) at December 31, 2004 and 2003, respectively, and
are excluded from the following two tables.

At December 31, 2004 and December 31, 2003, delinquencies, except for loans
identified as presenting uncertainty with respect to collectibility, expressed
as a percentage of the total number of installment sale contracts which CIS
owned were as follows:

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

                     Total Number                               Delinquency Percentage
                                        ------------------------------------------------------------------------
December 31,         of Contracts          30 Days             60 Days            90 Days            Total
                   -----------------    ---------------    ----------------   ----------------  ----------------

       2004              221                     2.72%               0.91%              2.72%             6.35%

       2003              259                     0.39%               0.77%              1.16%             2.32%
</TABLE>

At December 31, 2004 and December 31, 2003, delinquencies, except for loans
identified as presenting uncertainty with respect to collectibility, expressed
as a percentage of the total outstanding principal balance of installment sale
contracts which CIS owned were as follows:

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

                     Total Value                                Delinquency Percentage
                                        ------------------------------------------------------------------------
December 31,         of Contracts          30 Days             60 Days            90 Days            Total
                   -----------------    ---------------    ----------------   ----------------  ----------------

       2004             $8,839                   3.02%               0.72%              3.39%             7.13%

       2003            $10,114                   0.73%               0.59%              1.28%             2.60%

</TABLE>

<PAGE>


Certain operating data relating to CIS are set forth in the following table:

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

                                                            December 31,
                                        ------------------------------------------------------
                                             2004                 2003               2002
                                        ---------------    ----------------   ----------------
Total loans receivable              $            8,839 $            10,114 $           10,977
Allowance for credit losses         $              953 $             1,030 $              859
Number of loans outstanding                        221                 259                293
Net loss ratio on average
   outstanding principal balance                 1.53%               1.71%              3.66%
Weighted average annual
   percentage rate                               11.0%               11.1%              11.5%

</TABLE>

Since its inception, CIS has been restricted in the amount of loans it could
purchase based on underwriting standards, as well as the availability of working
capital and funds borrowed under its credit line with its primary lender. From
time to time, the Company evaluates the potential to sell all or a portion of
its remaining installment loan portfolio, in addition to the periodic sale of
installment contracts purchased by CIS in the future. CIS is currently selling
loans to lenders under various retail finance contracts. The Company believes
the periodic sale of installment contracts under these retail finance agreements
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 CIS to increase its volume of loan purchases. There
can be no assurance, however, that additional sales will be made under these
agreements, or that CIS and the Company will be able to realize the expected
benefits from such agreements.

Retail Insurance Activities
Through its wholly owned insurance agency, the Company sells commissioned
insurance products primarily to retail purchasers of the Company's homes.

Wholesale Dealer Financing and Repurchase Obligations
In accordance with manufactured housing industry practice, the Company's dealers
finance a majority of their purchases of manufactured homes through wholesale
"floor plan" financing arrangements. Under a typical floor plan financing
arrangement, a financial institution provides the dealer with a loan for the
purchase price of the home and maintains a security interest in the home as
collateral. The financial institution which provides financing to the dealer
customarily requires the Company to enter into a separate repurchase agreement
with the financial institution under which the Company is obligated, upon
default by the dealer, to repurchase the financed homes at a declining price
based upon the Company's original invoice date and price. A portion of purchases
by dealers are pre-sold to retail customers and are paid through retail
financing commitments.

The risk of loss under repurchase agreements is lessened by the fact that (i)
sales of the Company's manufactured homes are spread over a relatively large
number of independent dealers, the largest of which accounted for approximately
1.9% of sales in 2004, (ii) the price the Company is obligated to pay under such
repurchase agreements declines based on predetermined amounts over the period of
the agreement (generally 18 to 24 months) and (iii) the Company historically has
been able to resell homes repurchased from lenders. As of December 31, 2004, the
maximum amount for which the Company is contingently liable under such
agreements was approximately $73,000. The Company has a reserve for repurchase
commitments of $2,052 as of December 3l, 2004, based on an evaluation of
dealers' financial condition. The provisions of FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation of FASB
Statements No. 5, 57, and 107 and a rescission of FASB Interpretation No. 34,
are applicable to the Company's repurchase commitments. However, based on the
Company's evaluation, the impact of adopting FIN 45 was not material to the
consolidated financial statements. The Company intends to adopt the provisions
of FIN 45 to new guarantees issued on or after January 1, 2005.

Quality Control, Warranties and Service
The Company believes the quality in materials and workmanship, continuous
refinement in design and production procedures as well as price and other market
factors, are important elements in the market acceptance of manufactured homes.
The Company maintains a quality control inspection program at various production
stages. The Company's manufacturing facilities and the plans and specifications
of its manufactured homes have been approved by a HUD-designated agency. An
<PAGE>

independent, HUD-approved third-party regularly inspects the Company's
manufactured homes for compliance during construction.

The Company provides the initial retail homebuyer with a one-year limited
warranty against manufacturing defects in the home's construction. Warranty
services after the sale are performed, at the expense of the Company, by Company
personnel, dealers or independent contractors. Additionally, direct warranties
often are provided by the manufacturers of specific components and appliances.

The Company generally employs a full-time service manager at each of its home
manufacturing units and at December 31, 2004, employed 116 full-time service
personnel to provide administrative and on-site service and to correct
production deficiencies that are attributable to the manufacturing process.
Warranty service constitutes a significant cost to the Company, and management
of the Company has placed emphasis on diagnosing potential problem areas to help
minimize costly field repairs. At December 31, 2004, the Company had established
a reserve for future warranty claims of $13,255 relating to homes sold, based
upon management's assessment of historical experience factors and current
industry trends.

Competition
The manufactured housing industry is highly competitive, characterized by low
barriers to entry and severe price competition. Competition is based primarily
on price, product features and quality, reputation for service quality, depth of
field inventory, delivery capabilities, warranty repair service, dealer
promotions, merchandising and terms of dealer (wholesale) and retail (consumer)
financing. The Company also competes with other manufacturers, some of which
maintain their own retail sales centers, for quality independent dealers. In
addition, the Company's manufactured homes compete with other forms of low-cost
housing, including site-built, prefabricated, modular homes, apartments,
townhouses and condominiums. The selection by retail buyers of a manufactured
home rather than an apartment or other alternative forms of housing is
significantly affected by their ability to obtain satisfactory financing. The
Company faces direct competition from numerous manufacturers, many of which
possess greater financial, manufacturing, distribution and marketing resources.

The Company's business strategy currently includes the continued operation of
financial services provided through CIS. The Company believes that operations of
CIS will have a positive impact on the Company's efforts to sell its products
and enhance its competitive ability within the industry. However, due to strong
competition in the retail finance segment of the industry from companies much
larger than CIS, there can be no assurance that CIS will be able to expand its
operations or that it will have a positive impact on the Company's ability to
compete.

Regulation
The Company's businesses are subject to a number of federal, state and local
laws, regulations and codes. Construction of manufactured housing is governed by
the National Manufactured Home Construction and Safety Standards Act of 1974, as
amended, and regulations issued thereunder by HUD, which have established
comprehensive national construction standards. The HUD regulations cover all
aspects of manufactured home construction, including structural integrity, fire
safety, wind loads, thermal protection and ventilation. Such regulations preempt
state and local regulations on such matters. The Company cannot presently
determine what, if any, legislation may be adopted by Congress or state or local
governing bodies, or the effect any such legislation may have on the Company or
the manufactured housing industry.

The Company's manufacturing facilities and the plans and specifications of its
manufactured homes have been approved by a HUD-designated agency. Furthermore,
an independent, HUD-approved third-party regularly checks the Company's
manufactured homes for compliance during construction. Failure to comply with
the HUD regulations could expose the Company to a wide variety of sanctions,
including closing the Company's manufacturing facilities. The Company believes
its manufactured homes meet or surpass all present HUD requirements.

HUD has promulgated regulations with respect to structural design, wind loads
and energy conservation. The Company's operations were not materially affected
by the regulations; however, HUD and other state and local governing bodies have
these and other regulatory matters under continuous review, and the Company
cannot predict what effect (if any) additional regulations promulgated by HUD or
other state or local regulatory bodies would have on the Company or the
manufactured housing industry.

Certain components of manufactured and modular homes are subject to regulation
by the U.S. Consumer Product Safety Commission ("CPSC"), which is empowered to
ban the use of component materials believed to be hazardous to health and to
<PAGE>

require the repair of defective components. The CPSC, the Environmental
Protection Agency and other governmental agencies are evaluating the effects of
formaldehyde. Regulations of the Federal Trade Commission also require
disclosure of a manufactured home's insulation specifications. Manufactured,
modular and site-built homes may be built with compressed board, wood paneling
and other products that contain formaldehyde resins. Since February 1985, HUD
has regulated the allowable concentration of formaldehyde in certain products
used in manufactured homes and required manufacturers to warn purchasers
concerning formaldehyde associated risks. The Company currently uses materials
in its manufactured homes that it believes meet HUD standards for formaldehyde
emissions and otherwise complies with HUD regulations in this regard.

The transportation of manufactured homes on highways is subject to regulation by
various federal, state and local authorities. Such regulation may prescribe size
and road use limitations and impose lower than normal speed limits and various
other requirements.

The Company's manufactured homes are subject to local zoning and housing
regulations. A number of states require manufactured home producers to post
bonds to ensure the satisfaction of consumer warranty claims. A number of states
have adopted procedures governing the installation of manufactured homes.
Utility connections are subject to state and local regulation.

The Company is subject to the Magnuson-Moss Warranty Federal Trade Commission
Improvement Act, which regulates the descriptions of warranties on products. The
description and substance of the Company's warranties are also subject to a
variety of state laws and regulations.

The Company's operations are subject to federal, state and local laws and
regulations relating to the generation, storage, handling, emission,
transportation and discharge of materials into the environment. The Company
currently does not believe it will be required under existing environmental laws
and enforcement policies to expend amounts which will have a material adverse
effect on its results of operations or financial condition. However, the
requirements of such laws and enforcement policies have generally become
stricter in recent years. Accordingly, the Company is unable to predict the
ultimate cost of compliance with environmental laws and enforcement policies.

A variety of federal laws affect the financing of manufactured homes, including
the financing activities conducted by CIS. The Consumer Credit Protection Act
(Truth-in-Lending) and Regulation Z promulgated thereunder require substantial
disclosures to be made in writing to a consumer with regard to various aspects
of the particular transaction, including the amount financed, the annual
percentage rate, the total finance charge, itemization of the amount financed
and other matters. The Equal Credit Opportunity Act and Regulation B promulgated
thereunder prohibit discrimination against any credit applicant based on certain
prohibited bases, and also require that certain specified notices be sent to
credit applicants whose applications are denied. The Fair Credit Act promulgated
thereunder regulates how customer credit reports are obtained and handled. The
Federal Trade Commission has adopted or proposed various trade regulation rules
to specify and prohibit certain unfair credit and collection practices and also
to preserve consumers' claims and defenses. The Government National Mortgage
Association ("GNMA") specifies certain credit underwriting requirements in order
for installment manufactured home sale contracts to be eligible for inclusion in
a GNMA program. HUD also has promulgated substantial disclosure and substantive
regulations and requirements in order for a manufactured home installment sale
contract to qualify for insurance under the Federal Housing Authority ("FHA")
program, and the failure to comply with such requirements and procedures can
result in loss of the FHA guaranty protection. In addition, the financing
activities of CIS also may become subject to the reporting and disclosure
requirements of the Home Mortgage Disclosure Act. In addition to the extensive
federal regulation of consumer credit matters, many states also have adopted
consumer credit protection requirements that may impose significant requirements
for consumer credit lenders. For example, many states require that a consumer
credit finance company such as CIS obtain certain regulatory licenses or permits
in order to engage in such business in that state, and many states also set
forth a number of substantive contractual limitations regarding provisions that
permissibly may be included in a consumer contract, as well as limitations upon
the permissible interest rates, fees and other charges that may be imposed upon
a consumer. Failure by the Company or CIS to comply with the requirements of
federal or state law pertaining to consumer credit could result in the
invalidity of the particular contract for the affected consumer, civil liability
to the affected customers, criminal liability and other adverse results. The
sale of insurance products by the Company is subject to various state insurance
laws and regulations, which govern allowable charges and other insurance
practices.
<PAGE>

Employees
As of December 31, 2004, the Company had 1,786 employees, of whom 1,429 were
engaged in home manufacturing and supply distribution, 40 in sales, 116 in
warranty and service, 158 in general administration, 2 in delivery, 25 in
finance and insurance services and 16 in the operation of retail locations. In
addition, at year end, the Company employed 71 individuals, covered by a
collective bargaining agreement, who were leased to another manufacturer
pursuant to an agreement entered into in 2003 for which the Company is fully
reimbursed related expenses. At year-end, other than the leased employees, none
of the Company's employees were covered by a collective bargaining agreement.
Management considers its relations with its employees to be good.

Risk Factors
If you are interested in making an investment in Cavalier, you should carefully
consider the following risk factors concerning Cavalier and its business, in
addition to the other information contained in this Report on Form 10-K:

Cyclical and Seasonal Nature of the Manufactured Housing Industry
The manufactured housing industry is highly cyclical and seasonal and has
experienced wide fluctuations in aggregate sales in the past, resulting in the
failure of many manufacturing concerns. Many of the same national and regional
economic and demographic factors that affect the broader housing industry also
affect the market for manufactured homes. Historically, most sectors of the home
building industry, including the manufactured housing industry, have been
affected by the following, among other things:

o        changes in general economic conditions;
o        inflation;
o        levels of consumer confidence;
o        employment and income levels;
o        housing supply and demand;
o        availability of alternative forms of housing;
o        availability of wholesale (dealer) financing;
o        availability of retail (consumer) financing;
o        the level and stability of interest rates; and
o        the availability of raw materials.

The Manufactured Housing Institute ("MHI") reported that from 1983 to 1991,
aggregate domestic shipments of manufactured homes declined 42%. According to
industry statistics, after a ten-year low in floor shipments in 1991, the
industry recovered significantly. Between 1992 and 1998, floor shipments
increased each year, as set forth in the table below, although the growth rate
gradually slowed and began to decline in 1999, and has declined significantly
since.

Percentage Increase (Decrease) in Floor Shipments through 2004:
1992..................21%
1993..................22% 1997..................1% 2001..................(20.7)%
1994..................23% 1998..................8% 2002..................(11.1)%
1995..................12% 1999..............(4.3)% 2003..................(21.1)%
1996..................10% 2000.............(25.9)% 2004...................(3.1)%

During much of the 1990s, the manufactured housing industry experienced
increases in both the number of retail dealers and manufacturing capacity, which
we believe ultimately created slower retail turnover, higher dealer inventories
and increased price competition. These conditions continued to significantly
affect the industry in 2004, which was the sixth consecutive year of declining
HUD-Code shipments of new homes. In addition, a number of retail dealers have
failed and repossessions of manufactured homes have significantly increased.
Some manufactured housing wholesale and retail lenders also have discontinued
business in the industry, and some of the remaining lenders have raised their
interest rates and tightened their credit standards. We believe these conditions
reflect that the manufactured housing industry is in a down cycle, which has had
a material adverse effect on Cavalier's results of operations and financial
condition. Sales in the manufactured housing industry are also seasonal in
nature, with sales of homes traditionally being stronger in April through
October and weaker during the first and last part of the calendar year. While
seasonality did not significantly impact Cavalier's business from 1992 through
1996, when industry shipments were steadily increasing, the continued tightening
of competitive conditions seems to signal a return to the industry's traditional
seasonal patterns. Approximately 78.4% of the Company's sales in 2004 were to
dealers operating sales centers in the Company's core states. We cannot predict
<PAGE>

how long the tightening of competitive and industry conditions will last, or
what the extent of their impact will be on the future results of operations and
financial condition of Cavalier. Industry projections for wholesale shipments in
2005 are up slightly from 2004 levels.

Limitations on Ability to Pursue Business Strategy Cavalier's current business
strategies are to:
o control costs in light of currently prevailing industry conditions;
o attempt to generate an increase in sales in an increasingly competitive
  environment;
o return to consistent profitability;
o develop our exclusive and independent dealer network;
o pursue the financing, insurance and other activities of CIS and the financial
  services segment; and
o eliminate redundant products to streamline production in an effort to reduce
  costs.

Downturns in shipments in the manufactured housing industry and a decline in the
demand for Cavalier's homes have had a material adverse effect on us. Our
ability to execute our business strategy depends on a number of factors,
including the following:
o general economic and industry conditions;
o our ability to control costs if industry production capacity continues to
  decrease beyond current levels;
o competition from other companies in the same business as us;
o our ability to attract, retain or sell to additional independent dealers,
  especially exclusive dealers;
o the availability of semi-skilled workers in the areas in which our
  manufacturing facilities are located;
o the ability of CIS and the Company's insurance and component parts operations
  to be competitive;
o the availability of capital and financing;
o the ability of our independent dealers and retail locations to compete under
  current industry conditions;
o the availability and terms of wholesale and retail financing from lenders in
  the manufactured housing industry; and,
o market acceptance of product offerings.

There are other factors in addition to those listed above, many of which are
beyond our control. Cavalier cannot assure investors that our business strategy
will be successful. If our strategy is unsuccessful, this may have a material
adverse effect upon Cavalier's results of operations or financial condition.

Limitations on Availability of Consumer and Dealer Financing
Third-party lenders generally provide consumer financing for manufactured home
purchases. Our sales depend in large part on the availability and cost of
financing for manufactured home purchasers and dealers as well as our own retail
locations. The availability and cost of such financing is further dependent on
the number of financial institutions participating in the industry, the
departure of financial institutions from the industry, the financial
institutions' lending practices, and the strength of the credit markets
generally, governmental policies and other conditions, all of which are beyond
our control. Throughout the past six years the industry has been impacted
significantly by reduced financing available at both the wholesale and retail
levels, with several lenders exiting the marketplace or limiting their
participation in the industry, coupled with more restrictive credit standards
and increased home repossessions which re-enter home distribution channels and
limit wholesale shipments of new homes. The much-anticipated infusion of new and
competitive lending capacity, which the Company believes is essential to support
demand at higher levels, has not yet materialized. Until there is substantial
entry of finance resources to the manufactured housing market, the Company
believes a meaningful expansion for the industry will be delayed. Unfavorable
changes in the availability and terms of financing in the industry may have a
material adverse effect on Cavalier's results of operations or financial
condition.

Changes in Industry Retail Inventories
Changes in the level of retail inventories in the manufactured housing industry,
either up or down, can have a significant impact on the Company's operating
results. For example, due to the rapid expansion of the retail distribution
network in the manufactured housing industry that occurred in much of the
1990's, there was an imbalance between industry retail inventories and consumer
demand for manufactured homes. The deterioration in the availability of retail
financing, along with competition from repossessed homes, extended the inventory
adjustment period beyond what was originally expected. If these trends were to
continue, or if retail demand were to significantly weaken further, the
inventory overhang could result in even greater intense price competition,
further pressure on profit margins within the industry, and have a material
<PAGE>

adverse effect on Cavalier. The Company's inventory at all retail locations,
including Company-owned retail sales centers, remained consistent in 2004 from
2003. Cavalier believes that inventories of its homes are approaching levels
which are more consistent with retail demand, due in part to the Company's
emphasis on working with its dealers to reduce retail inventories, although we
cannot provide investors assurances to this effect. In spite of these efforts,
significant unfavorable developments or further deterioration within the
industry would undoubtedly have an adverse impact on Company operating results.

Dependence on Independent Dealers
Cavalier depends on independent dealers for substantially all retail sales of
our manufactured homes. Typically only one dealer within a given market area
distributes a particular product line of ours. Our relationships with our
dealers are cancelable on short notice by either party. The manufactured housing
industry recently has experienced a trend of increasing competition for quality
independent dealers. In addition, a number of dealers in the industry are
experiencing difficulty in the current market conditions, as a number of retail
dealers have failed and more dealers may fail before the current downturn ends.
While we believe that our relations with our independent dealers are generally
good, we cannot assure our investors that we will be able to maintain these
relations, that these dealers will continue to sell our homes, that these
dealers will be successful, or that we will be able to attract and retain
quality independent dealers.

Intense Competition
The production and sale of manufactured homes is a highly competitive industry,
characterized by low barriers to entry and severe price competition. Competition
is based primarily on the following factors:
o price;
o product features and quality;
o reputation for service quality;
o depth of field inventory;
o delivery capabilities;
o warranty repair service;
o dealer promotions;
o merchandising; and
o terms of wholesale (dealer) and retail (consumer)financing.

In addition, Cavalier competes with other manufacturers, some of which maintain
their own retail sales centers, for independent dealers. Manufactured homes also
compete with other forms of low-cost housing, including site-built,
prefabricated and modular homes, apartments, townhouses and condominiums. We
face direct competition from numerous manufacturers, many of which possess
greater financial, manufacturing, distribution and marketing resources. As a
result of these competitive conditions, Cavalier may not be able to sustain past
levels of sales or profitability.

Contingent Repurchase and Guaranty Obligations
Manufactured housing companies customarily enter into repurchase and other
recourse agreements with lending institutions, which have provided wholesale
floor plan financing to dealers. A majority of Cavalier's sales are made to
dealers located primarily in the South Central and South Atlantic regions of the
United States pursuant to repurchase agreements with lending institutions. These
agreements generally provide that we will repurchase our products from the
lending institutions at a declining price based upon the Company's original
invoice date and price in the event such product is repossessed upon a dealer's
default. The risk of loss under repurchase agreements is lessened by the fact
that (1) sales of our manufactured homes are spread over a relatively large
number of independent dealers; (2) the price that Cavalier is obligated to pay
under such repurchase agreements generally declines over the period of the
agreement and also declines during such period based on predetermined amounts;
and (3) Cavalier has been able to resell homes repurchased from lenders. While
we have established a reserve for possible repurchase losses, we cannot assure
investors that we will not incur material losses in excess of these reserves in
the future.

Uncertainties Regarding Retail Financing Activities
Cavalier purchases retail installment finance loans that have been originated by
our dealers. We maintain a reserve for estimated credit losses on installment
sale contracts owned by CIS to provide for future losses based on our historical
loss experience, current economic conditions and portfolio performance. It is
difficult to predict with any certainty the appropriate reserves to establish,
and we cannot assure investors that CIS will not experience losses that exceed
Cavalier's loss reserves and have a material adverse effect on Cavalier's
<PAGE>

results of operations and financial condition. Volatility or a significant
change in interest rates might also materially affect CIS's and Cavalier's
business, results of operations or financial condition.

Our strategy currently includes the continued operation of the financial
services segment of our business. We also may engage in other transactions, such
as selling portions of our installment loan portfolio, that are designed to
facilitate the ability of CIS to purchase and/or originate an increased volume
of loans and to reduce our exposure to interest rate fluctuations and
installment loan losses. Accordingly, we may incur additional debt, or other
forms of financing, in order to continue to fund such growth. CIS is currently
re-selling installment loan contracts to other financial institutions. Cavalier
believes the periodic sale of installment contracts under various retail finance
agreements will reduce requirements for both working capital and borrowings,
increase Cavalier's liquidity, reduce Cavalier's exposure to interest rate
fluctuations and enhance the ability of CIS to increase its volume of loan
purchases. However, we cannot assure investors that we will be able to make
additional sales. We also cannot offer any assurance that possible additional
financing, or the aforementioned transactions involving our installment loan
portfolio, will be available on terms acceptable to Cavalier. If not, we may be
forced to curtail our financial services business and to alter our other
strategies.

Potential Unavailability and Increases in Prices of Raw Materials
The availability and pricing of raw materials used in the production of homes
may significantly affect Cavalier's operating costs. Sudden increases in demand
for these construction materials, as has recently occurred, caused by natural
disasters or other market forces can greatly increase the costs of materials or
limit the availability of such materials. Increases in costs cannot always be
reflected immediately in prices, especially in competitive times, and,
consequently, may adversely impact Cavalier's profitability. Further, a
reduction in the availability of raw materials also may affect our ability to
meet or maintain production requirements.

Cavalier obtains a substantial amount of its supply of laminated wallboard from
a wholly-owned subsidiary, and obtains a majority of its supply of cabinetry
from another wholly-owned subsidiary. We depend upon these subsidiaries for a
significant portion of the materials used to construct portions of our
manufactured homes. The inability of either of these subsidiaries to provide
laminated wallboard or cabinetry to the Company, whether due to materials
shortages, destruction of manufacturing facilities or other events affecting
production of these component parts, may affect our ability to meet or maintain
production requirements.

Operations May Be Limited by the Availability of Manufactured Housing Sites
Any limitation on the growth of the number of sites for placement of
manufactured homes or on the operation of manufactured housing communities could
adversely affect the manufactured housing business. Manufactured housing
communities and individual home placements are subject to local zoning
ordinances and other local regulations relating to utility service and
construction of roadways. In the past, property owners often have resisted the
adoption of zoning ordinances permitting the location of manufactured homes in
residential areas, which Cavalier believes has adversely affected the growth of
the industry. We cannot assure investors that manufactured homes will receive
widespread acceptance or that localities will adopt zoning ordinances permitting
the location of manufactured home areas. The inability of the manufactured home
industry to gain such acceptance and zoning ordinances could have a material
adverse effect on our financial condition or results of operations.

Reliance on Executive Officers
Cavalier's success depends highly upon the personal efforts and abilities of its
current executive officers. Specifically, Cavalier relies on the efforts of its
Chairman of the Board, Barry B. Donnell (who retired as an executive officer as
of December, 31, 2004 but will continue to serve as Cavalier's Chairman of the
Board), its President and Chief Executive Officer, David A. Roberson, its Chief
Operating Officer, Gregory A. Brown, and its Vice President, Chief Financial
Officer and Secretary-Treasurer, Michael R. Murphy. The loss of the services of
one or more of these individuals could have a material adverse effect upon our
business. We do not have employment or non-competition agreements with any of
our executive officers. Our ability to continue to work through the industry's
current downturn will depend upon our ability to attract and retain experienced
management personnel.

Potential Adverse Effects of Regulation
Cavalier is subject to a variety of federal, state and local laws and
regulations affecting the production, sale, financing and insuring of
manufactured housing. We suggest you read the section above under the heading
"Regulation" for a description of many of these laws and regulations. Cavalier's
failure to comply with such laws and regulations could expose us to a wide
variety of sanctions, including closing one or more manufacturing facilities.
Governmental bodies have regulatory matters affecting our operations under
continuous review and we cannot predict what effect (if any) additional laws and
<PAGE>

regulations promulgated by HUD would have on us or the manufactured housing
industry. Failure to comply with laws or regulations applicable to or affecting
Cavalier, or the passage in the future of new and more stringent laws affecting
Cavalier, may adversely affect us.

Compliance with Environmental Laws
Federal, state and local laws and regulations relating to the generation,
storage, handling, emission, transportation and discharge of materials into the
environment govern Cavalier's operations. In addition, third parties and
governmental agencies in some cases have the power under such laws and
regulations to require remediation of environmental conditions and, in the case
of governmental agencies and entities, to impose fines and penalties. The
requirements of such laws and enforcement policies have generally become
stricter in recent years. Accordingly, we cannot assure investors that we will
not be required to incur response costs, remediation expenses, fines, penalties
or other similar damages, expenses or liabilities, or to incur operational
shut-downs, business interruptions or similar losses, associated with compliance
with environmental laws and enforcement policies that either individually or in
the aggregate would have a material adverse effect on our results of operations
or financial condition.

Warranty Claims
Cavalier is subject to warranty claims in the ordinary course of its business.
Although we maintain reserves for such claims, which to date have been adequate,
there can be no assurance that warranty expense levels will remain at current
levels or that such reserves will continue to be adequate. A large number of
warranty claims exceeding our current warranty expense levels could have a
material adverse effect on Cavalier's results of operations.

Litigation
We suggest that you read Item 3, Legal Proceedings, below, for description of
certain risk factors associated with litigation.

Volatility of Stock Price
The Company's common stock is currently traded on the American Stock Exchange.
The market price of the Company's common stock may be subject to significant
fluctuations in response to variations in the Company's operating results and
other factors affecting the Company specifically, the manufactured housing
industry generally, and the stock market generally.

Requirements of the Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act ("SOX") of 2002 has introduced many new requirements
applicable to the Company regarding corporate governance and financial
reporting. Among many other requirements is the requirement under Section 404 of
the Act that management issue a report on the Company's internal controls over
financial reporting and for the Company's independent registered public
accountant to attest to management's report. Section 404 currently is applicable
only to "accelerated filers," which determination is made at the end of the
second fiscal quarter of each year. Due to the increase in the Company's stock
price during 2004, the Company was designated an "accelerated filer" as of June
26, 2004. As a result of the Company's "accelerated filer" status, the Company
is required to comply with Section 404 beginning with the fiscal year ending
December 31, 2004. The Company devoted substantial time and incurred substantial
costs during 2004 in an attempt to comply timely with the requirements of
Section 404. The compliance efforts included attestation fees paid to the
independent registered public accounting firm and to a lesser extent consulting
fees to other parties to support management's assessment activities. The
Securities and Exchange Commission extended the compliance deadline for
accelerated filers meeting certain criteria, allowing an extra 45 days for such
filers to include management's report on internal controls and the independent
registered public accountant's attestation of such report in an amendment to the
previously-filed annual report for the 2004 fiscal year. The Company has taken
advantage of this extension, and hopes to file management's report on the
Company's internal controls and the attestation of the Company's independent
registered public accountants within the 45-day extension period. There can be
no assurance that the Company will be successful in complying with Section 404
during the required time period. Failure to do so could result in penalties and
additional expenditures to meet the requirements which could affect the ability
of our auditors to issue an unqualified report on the 404 audit report.


Available Information
You can find additional information regarding our executive officers and Board
of Directors in the Proxy Statement relating to our 2005 Annual Meeting of
Stockholders. In addition, we periodically file reports and other information
with the Securities and Exchange Commission ("SEC") under the Securities
Exchange Act of 1934. You can read and copy this information at the SEC's Public
Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549. You can obtain
<PAGE>

information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The public reports, proxy and information statements filed with
the SEC of electronic filers can be accessed via the SEC's Internet website
(http://www.sec.gov). Additionally, you may request copies of our documents by
calling our Investor Relations Department at (256) 747-9800; or visit our
website. Our Internet website is http://www.cavhomesinc.com. We make available,
free of charge, through the Investor Relations portion of our website, our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K, and amendments to such reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.

ITEM 2.  PROPERTIES (dollars in thousands)

The following table sets forth the location and approximate square footage for
each principal facility of the Company, separated by segment, as of December 31,
2004:

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

                                                                                            Approximate     Owned/    (a)
                 Location                         Use (Number of Facilities)              Square Footage    Leased
                 --------                         --------------------------              --------------    ------
       Home Manufacturing - operating
                 Addison, Alabama               Manufacturing facilities (2)                   364,000       Owned
                 Hamilton, Alabama              Manufacturing facility (1)                     200,000       Owned
                 Millen, Georgia                Manufacturing facilities (2)                   179,000       Owned
                 Nashville, North Carolina      Manufacturing facility (1)                     182,000       Owned
                 Ft. Worth, Texas               Manufacturing facility (1)                     104,000       Owned    (c)
       Home Manufacturing - idled                                                                                     (b)
                 Addison, Alabama               Manufacturing facilities (2)                   180,000       Owned
                 Adrian, Georgia                Manufacturing facility (1)                     107,000       Owned
                 Conway, Arkansas               Manufacturing facility (1)                     222,000       Owned
                 Cordele, Georgia               Manufacturing facility (1)                     179,000       Owned
                 Shippenville, Pennsylvania     Manufacturing facility (1)                     120,000       Owned
                 Winfield, Alabama              Manufacturing facility (1)                     134,000       Owned
       Component Manufacturers
                 Hamiliton, Alabama             Manufacturing facility (1)                      60,000       Owned
                 Haleyville, Alabama            Manufacturing facilities (2)                   169,000       Owned
       Financial Services
                 Hamilton, Alabama              Administrative Office                            9,000       Owned
       General Corporate
                 Addison, Alabama               Administrative Office                           10,000       Owned
                 Wichita Falls, Texas           Administrative Office                            1,000      Leased

</TABLE>

(a)  Certain of the facilities listed as owned are financed under industrial
     development bonds.
(b)  Certain of the idled facilities are leased to third parties under leasing
     arrangements, which, in some cases, include options to purchase.
(c)  The Ft. Worth, Texas facility was idled subsequent to the 2004 year end.

In general, the manufacturing facilities are in good condition and are operated
at capacities which range from approximately 40% to 65%, excluding idled
facilities.

ITEM 3.  LEGAL PROCEEDINGS

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
<PAGE>

imposition of large amounts of compensatory and punitive damages and trials by
jury. The outcome of many of the cases in which the Company is involved or may
in the future become involved cannot be predicted with any degree of
reliability, and the potential exists for unanticipated material adverse
judgments against the Company and its respective subsidiaries. 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.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to the shareholders during the last quarter of the
fiscal year.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
         AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company's common stock began trading on the American Stock Exchange under
the symbol "CAV" on March 5, 2004, having moved from the New York Stock
Exchange. The following table sets forth, for each of the periods indicated, the
reported high and low closing sale prices per share on the applicable exchange
for the Company's common stock
<TABLE>
<CAPTION>
<S>                                        <C>           <C>


                                          Closing Sales Price
                                        -----------------------
                                           High          Low
                                        -----------   ---------
Year ended December 31, 2004
     Fourth Quarter                        $ 5.99       $ 5.17
     Third Quarter                           5.85         3.88
     Second Quarter                          6.59         5.00
     First Quarter                           5.85         2.98

Year ended December 31, 2003
     Fourth Quarter                        $ 3.12       $ 2.64
     Third Quarter                           3.01         1.99
     Second Quarter                          2.13         1.20
     First Quarter                           1.85         1.13

</TABLE>

As of February 28, 2005, the Company had approximately 360 shareholders of
record and 2,800 beneficial holders of its common stock, based upon information
in securities position listings by registered clearing agencies upon request of
the Company's transfer agent.

The Company discontinued payments of dividends in the fourth quarter of 2000.
While the Company does not expect to recommence cash dividend payments in the
foreseeable future, the future payment of dividends on the Company's common
stock will be determined by the Board of Directors of the Company in light of
conditions then existing, including the earnings of the Company and its
subsidiaries, their funding requirements and financial conditions, certain loan
restrictions and applicable laws and governmental regulations. The Company's
present loan agreement contains restrictive covenants, which, among other
things, limit the aggregate dividend payments and purchases of treasury stock to
50% of the Company's consolidated net income for the two most recent fiscal
years.


<PAGE>


Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of December 31, 2004 regarding
compensation plans (including individual compensation arrangements) under which
common stock of the Company is authorized for issuance.

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

                                           EQUITY COMPENSATION PLAN INFORMATION
---------------------------------------------------------------------------------------------------------------------------
                           Number of securities to be       Weighted-average exercise         Number of securities remaining
                           issued upon exercise of          price of outstanding options,     available for future issuance
                          outstanding options, warrants      warrants and rights               under equity compensation
                                 and rights                                                     plans (excluding securities
                                                                                                reflected in column (a))
---------------------------------------------------------------------------------------------------------------------------
   Plan Category                     (a)                             (b)                                (c)
---------------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans
Approved by Stockholders           2,033,386                         8.52                            1,071,969
---------------------------------------------------------------------------------------------------------------------------
Equity Compensation Plans not
Approved by Stockholders              51,000                         3.40                                   -
---------------------------------------------------------------------------------------------------------------------------
Total                              2,084,386                         8.39                            1,071,969
---------------------------------------------------------------------------------------------------------------------------

</TABLE>

See Note 7 to the Consolidated Financial Statements for information regarding
the material features of the above plans. Each of the above plans provides that
the number of shares with respect to which options may be granted, and the
number of shares of Company common stock subject to an outstanding option, shall
be proportionately adjusted in the event of a subdivision or consolidation of
shares or the payment of a stock dividend on Company common stock, and the
purchase price per share of outstanding options shall be proportionately
revised.

Pursuant to a common stock repurchase program approved by the Company's Board of
Directors, a total of 3,168,800 shares have been purchased at a cost of $24,842.
The Company retired 2,151,500 of these shares at December 31, 1999, with the
remaining shares being recorded as treasury stock. At December 31, 2004, the
Company has authority under the program to acquire up to 831,200 additional
shares.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data regarding
the Company for the periods indicated. The statement of operations data, the
balance sheet data, and other data of the Company for each of the years in the
five year period ended December 31, 2004 have been derived from the consolidated
financial statements of the Company. The Company's audited financial statements
as of December 31, 2004 and 2003, and for each of the years in the three-year
period ended December 31, 2004, including the notes thereto and the related
report of Deloitte & Touche LLP, independent registered public accountants, are
included elsewhere in this report. The selected consolidated financial data
should be read in conjunction with the Consolidated Financial Statements
(including the Notes thereto) and the other financial information contained
elsewhere in this report, and with the Company's consolidated financial
statements and the notes thereto appearing in the Company's previously filed
Annual Reports on Form 10-K.
<PAGE>
<TABLE>
<CAPTION>
<S>                                                 <C>             <C>            <C>             <C>              <C>
                                                                          Year Ended December 31,
                                                ----------------------------------------------------------------------------
                                                   2004            2003            2002            2001            2000
                                                ------------   -------------   -------------   -------------   -------------
                                                                 (in thousands, except per share amounts)
Statement of Operations Data

Revenue:
     Home manufacturing net sales            $      223,779 $       237,215  $      375,385 $       347,535 $       306,239
     Financial services                               2,444           2,673           2,690           3,088           4,878
     Retail                                           7,938           7,948           7,908           6,968          16,842
     Other                                                -               -           1,274           6,280           5,153
                                                ------------   -------------   -------------   -------------   -------------
     Total revenue                                  234,161         247,836         387,257         363,871         333,112

Cost of sales                                       192,419         208,687         332,964         309,656         292,810
Selling, general and administrative                  38,340          43,171          62,649          66,690          85,430
Impairment and other related charges                    209             750           6,064           1,003           6,975
                                                ------------   -------------   -------------   -------------   -------------
Operating income (loss)                               3,193          (4,772)        (14,420)        (13,478)        (52,103)
Other income (expense) - net                           (857)           (685)           (756)           (655)           (251)
                                                ------------   -------------   -------------   -------------   -------------
Income (loss) before income taxes                     2,336          (5,457)        (15,176)        (14,133)        (52,354)

Income tax provision (benefit)                           75            (518)          5,716            (600)        (19,129)
Equity in earnings (losses) of equity-method
    investees                                           980             369             384            (485)           (243)
                                                ------------   -------------   -------------   -------------   -------------
Income (loss) before cumulative effect of
    change in accounting principle                    3,241          (4,570)        (20,508)        (14,018)        (33,468)

Cumulative effect of change in
     accounting principle                                 -               -         (14,162)              -               -
                                                ------------   -------------   -------------   -------------   -------------
Net income (loss)                            $        3,241 $        (4,570)$       (34,670)$       (14,018)$       (33,468)
                                                ============   =============   =============   =============   =============
Basic net income (loss) per share, before
     cumulative effect of change in accounting
     principle                               $          .18 $          (.26)$         (1.16)$          (.80)$         (1.88)

Cumulative effect of change in
     accounting principle, net of tax                     -               -            (.80)              -               -
                                                ------------   -------------   -------------   -------------   -------------
Basic net income (loss) per share            $          .18 $          (.26)$         (1.96)$          (.80)$         (1.88)
                                                ============   =============   =============   =============   =============
Diluted net income (loss) per share          $          .18 $          (.26)$         (1.96)$          (.80)$         (1.88)
                                                ============   =============   =============   =============   =============
Cash dividend per share                      $            - $             - $             - $             - $           .09
                                                ============   =============   =============   =============   =============
Weighted average number of shares
     outstanding                                     17,880          17,666          17,665          17,580          17,800
                                                ============   =============   =============   =============   =============
Weighted average number of shares
     outstanding, assuming dilution                  18,178          17,666          17,665          17,580          17,800
                                                ============   =============   =============   =============   =============
Other Data

Capital expenditures                         $          786 $           327 $         2,062 $         3,496 $         3,807
                                                ============   =============   =============   =============   =============
Balance Sheet Data

Working capital                              $       12,967 $         7,813 $        12,346 $        18,183 $        27,213
Total assets                                 $       98,230 $        98,533 $       130,071 $       174,116 $       187,595
Long-term debt                               $       11,400 $        13,089 $        22,643 $        23,999 $        24,054
Stockholders' equity                         $       45,167 $        40,987 $        45,536 $        80,192 $        94,318

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

</TABLE>
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS (dollars in thousands)

Overview
Cavalier Homes, Inc. and its subsidiaries produce, sell and finance manufactured
housing. The manufactured housing industry is cyclical and seasonal and is
influenced by many of the same economic and demographic factors that affect the
housing market as a whole. As a result of the growth in the industry during much
<PAGE>

of the 1990s, the number of retail dealerships, manufacturing capacity and
wholesale shipments expanded significantly, which ultimately created slower
retail turnover, higher retail inventory levels and increased price competition.
The industry also has been impacted by an increase in dealer failures, a severe
reduction in available consumer credit and wholesale (dealer) financing for
manufactured housing, more restrictive credit standards and increased home
repossessions which re-enter home distribution channels, each of which have
contributed to a reduction in wholesale industry shipments to a 42 year low.

Industry/Company Shipments and Market Share
The Manufactured Housing Institute ("MHI") reported that wholesale floor
shipments were down 3.1% in 2004, as compared to 2003. The cumulative decline
from 1999 through 2004 of 60% is detailed in the following table.

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

                                                              Floor Shipments
            ---------------------------------------------------------------------------------------------------------------------
                                   Nationwide                                         Cavalier's Core 11 States
            ---------------------------------------------------------  ----------------------------------------------------------
                       Increase                 Increase                           Increase               Increase
                      (decrease)               (decrease)      Market              (decrease)             (decrease)       Market
  Year      Industry from prior year Cavalier from prior year  Share    Industry from prior year Cavalier from prior year   Share
----------  --------  -------------- -------- ---------------  ------  --------  --------------- --------  --------------  ------
     1999   582,498                   34,294                    5.9%    284,705                   30,070                    10.6%
     2000   431,787       -25.9%      18,590     -45.8%         4.3%    199,276     -30.0%        15,941     -47.0%          8.0%
     2001   342,321       -20.7%      21,324      14.7%         6.2%    149,162     -25.1%        17,884      12.2%         12.0%
     2002   304,370       -11.1%      21,703       1.8%         7.1%    124,127     -16.8%        18,039       0.9%         14.5%
     2003   240,180       -21.1%      12,411     -42.8%         5.2%     87,265     -29.7%        10,584     -41.3%         12.1%
     2004   232,824        -3.1%      10,772     -13.2%         4.6%     78,297     -10.3%         8,722     -17.6%         11.1%
</TABLE>

During this industry downturn, the Company's shipments fell in 1999 and 2000
disproportionately to the industry decline which the Company believes was due to
its strategy, early in the downturn, of working closely with its dealers to
assist them in reducing retail inventories, which also lessened the Company's
risk severity associated with dealer failures. The years 2001 and 2002 resulted
in significant market share gains for the Company due mainly to the Company's
aggressive marketing strategies, especially product offerings, which are core to
its plan for returning to profitability. In 2003 and 2004, the Company believes
its reduction in market share was due to several factors. External causes
include an intensely competitive marketplace and a lack of chattel (home only)
financing for all homes, especially single wide homes, in the industry, and
internally, the Company's momentum was negatively impacted by the consolidation
of its sales force and the closing of 7 home manufacturing facilities during
2003. For 2005, industry sources project a 5.1% increase in shipment levels with
a seasonally slow first quarter and gradual improvement for the 2nd and 3rd
quarters. The Company believes it is well-positioned to strengthen its
competitive position in the marketplace going forward with a value-packed
product line, including broader product offerings on price points as well as
enhanced features and a line of modular homes.

Industry Finance Environment
A major factor contributing to the manufactured housing industry growth in the
1990s was relaxed credit standards, which ultimately resulted in a change in the
financing approach in the industry due to underperforming manufactured housing
loans. Throughout the past six years, the industry has been impacted
significantly by reduced financing available at both the wholesale and retail
levels, with several lenders exiting the marketplace or limiting their
participation in the industry, coupled with more restrictive credit standards
and increased home repossessions which re-enter home distribution channels and
limit wholesale shipments of new homes. While the current industry trend is
toward more land/home (real estate) financing rather than chattel or home only
loans, additional chattel lending availability could result in renewed demand
for single wide products. While land/home financing generally offers more
favorable credit terms to the retail buyer of manufactured housing, the length
of time involved in closing land/home transactions is greater. The
much-anticipated infusion of new and competitive lending capacity, which the
Company believes is essential to support demand at higher levels has not yet
materialized. Until there is substantial entry of finance resources to the
manufactured housing market, the Company believes a meaningful expansion for the
industry will be delayed.

Raw Materials Costs and Gross Margin
Additionally, the Company's gross margin has been negatively impacted by (1)
price increases in substantially all raw materials (certain prices continue to
increase and show no signs of stabilization) and (2) overall commodity pressures
(i.e. global demand and capacity constraints and rising oil prices). The Company
is experiencing tightened supply from its traditional vendors of certain types
of raw materials required for the production of its homes. The Company is
working to obtain these and substitute products from other vendors, which are
likely to result in higher than normal costs. While the Company seeks to offset
rising costs through increasing its selling prices, sudden increases in costs,
coupled with dealers' retail sales commitments, can affect the timing and
<PAGE>

ability of the Company to pass on its cost increases. The Company is uncertain
at this time as to the impact the extent and duration of the increased prices
will have on the Company's future revenue and earnings.

Capacity and Overhead Costs
In response to the continued weakening of the manufactured housing industry
market conditions, the Company announced its decision to close six manufacturing
facilities in the fourth quarter of 2002, one in July 2003, and one in February
2005. These facilities were located in Conway, Arkansas (2), Graham, Texas,
Cordele, Georgia, Belmont, Mississippi, Haleyville, Alabama, Shippenville,
Pennsylvania, and Fort Worth, Texas and collectively employed approximately
1,250 people. The Company has shifted a substantial part of the production from
these plants (with the exception of the Pennsylvania plant) to one or more of
the Company's operating plants. The remaining plants will also handle dealer
sales and customer service for the Company's homes. On the retail side, the
Company closed one retail sales center in August 2003. In terms of operating
costs, the Company has made cost reductions in virtually all areas of
operations, including its exclusive dealer and marketing programs and its
administrative personnel and associated costs. Altogether, the Company has had a
net reduction in its production and administrative workforce of approximately
64% since December 31, 1998. The Company is continuing to evaluate its options
regarding capacity, cost and overhead issues, the need for further plant, retail
and other consolidations, reductions, idling and closings and methods designed
to address the Company's financial performance in light of developing market and
business conditions. The Company can give no assurance as to which one or more
of these options, if any, it may ultimately adopt, and, if adopted, whether and
to what extent these actions will have an effect on the financial condition and
results of operations of the Company.

Debt and Liquidity
During 2004, the Company reduced long-term debt by $3,431 from $16,536 to
$13,105.

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

                                            Industrial     Real Estate
                                            Development       Term
                                              Bonds           Loan          Totals
                                           ------------   ------------   -----------
Balance, beginning of year               $       7,641  $       8,895  $     16,536
Principal repayments:
  Scheduled                                     (1,393)          (341)       (1,734)
  From proceeds of property sales                    -         (1,697)       (1,697)
                                           ------------   ------------   -----------
Balance, end of year                     $       6,248  $       6,857  $     13,105
                                           ============   ============   ===========

</TABLE>

The Company improved its overall debt position by making scheduled principal
repayments as well as making additional principal repayments from proceeds from
sales of certain property. While significantly reducing debt, the Company's cash
position at December 31, 2004 remained good. 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, during which time the
Company collects the majority of its outstanding receivables, resulting in
higher year end cash balances than at other quarter ends.

Outlook
The Company's net income in 2004 was primarily due to its participation in
building single-section homes as part of the Federal Emergency Management
Agency's ("FEMA") disaster relief for victims of the 2004 hurricanes. Shipments
under the FEMA contract were completed as of December 31, 2004.  For 2005,
the Company expects the market will likely remain sluggish for some time, owing
in part to seasonality. The recent industry downturn has reduced excess dealer
inventory to the point that an increase in demand will likely translate more
directly into new orders. Meanwhile, the market for repossessed homes appears to
be firming in both price and quantity. However, the much-anticipated infusion of
new and competitive lending capacity, which the Company believes is essential to
support demand at higher levels, has not yet materialized. Until there is
substantial entry of finance resources to the manufactured housing market, the
Company believes a meaningful expansion for the industry will be delayed. The
Company expects to report a loss for the first quarter of 2005 due primarily to
the seasonality of the period, high raw materials prices as discussed above, and
employee termination costs that will be incurred (mostly in the first quarter)
in connection with the closing of the Texas facility of approximately $800 -
$900. Longer-term, however, the Company believes the steps taken to reduce its
costs and lower its breakeven point will position it to return to profitable
operations later in 2005 and strengthen its competitive position in the
marketplace going forward. However, the Company is uncertain at this time as to
the impact the extent and duration of the general economic conditions and
adverse industry conditions will have on the Company's future revenue and
<PAGE>

earnings. While the Company currently expects the results of operations for the
first quarter of 2005 to be a loss, changes in general economic conditions that
affect consumer purchases, availability of adequate financing sources, increases
in repossessions or dealer failures could affect the results of operations of
the Company.

Results of Operations
The following table summarizes certain financial and operating data including,
as applicable, the percentage of total revenue:


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

                                                                       For the Year Ended December 31,
                                                   -------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA                                2004                     2003                     2002
                                                   ----------------------   ----------------------   -----------------------
Revenue:
  Home manufacturing net sales                        $   223,779              $   237,215              $   375,385
  Financial services                                        2,444                    2,673                    2,690
  Retail                                                    7,938                    7,948                    7,908
  Other                                                         -                        -                    1,274
                                                        ----------               ----------               ----------

Total revenue                                             234,161      100.0%      247,836      100.0%      387,257       100.0%

Cost of sales                                             192,419       82.2%      208,687       84.2%      332,964        86.0%
                                                        ----------  ----------   ----------  ----------   ----------   ----------

     Gross profit                                          41,742       17.8%       39,149       15.8%       54,293        14.0%
                                                        ----------  ----------   ----------  ----------   ----------   ----------

Selling, general and administrative                        38,340       16.4%       43,171       17.4%       62,649        16.2%
Impairment and other related charges                          209        0.1%          750        0.3%        6,064         1.6%
                                                        ----------  ----------   ----------  ----------   ----------   ----------
Operating income (loss)                                     3,193        1.4%       (4,772)      -1.9%      (14,420)       -3.7%
                                                        ----------  ----------   ----------  ----------   ----------   ----------
Other income (expense):
   Interest expense                                        (1,075)      -0.5%       (1,065)      -0.4%       (1,495)       -0.4%
   Other, net                                                 218        0.1%          380        0.2%          739         0.2%
                                                        ----------               ----------               ----------   ----------
                                                             (857)                    (685)                    (756)
                                                        ----------               ----------               ----------
Income (loss) before income taxes                           2,336                   (5,457)                 (15,176)
Income taxes provision (benefit)                               75                     (518)                   5,716
Equity in earnings of equity-method investees                 980                      369                      384
                                                        ----------               ----------               ----------
Income (loss) before cumulative effect of  change in
accounting principle                                        3,241                   (4,570)                 (20,508)
Cumulative effect of  change in accounting principle            -                        -                  (14,162)
                                                        ----------               ----------               ----------
Net income (loss)                                     $     3,241        1.4%  $    (4,570)      -1.8%  $   (34,670)       -9.0%
                                                        ==========               ==========               ==========

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                     <C>      <C>            <C>        <C>           <C>          <C>

                                                                       For the Year Ended December 31,
                                                   -------------------------------------------------------------------------
OPERATING DATA                                              2004                     2003                     2002
                                                   ----------------------   ----------------------   -----------------------
Home manufacturing sales:
Floor shipments                                       10,772                   12,411                   21,703
Home shipments
  Single section                                       1,949       30.8%          873       13.1%        2,235        18.7%
  Multi section                                        4,387       69.2%        5,769       86.9%        9,734        81.3%
                                                   ----------  ----------   ----------  ----------   ----------   ----------

Total shipments                                        6,336      100.0%        6,642      100.0%       11,969       100.0%

Shipments to company owned retail locations             (175)      -2.8%         (140)      -2.1%         (187)       -1.6%
FEMA Shipments                                        (1,023)     -16.1%            -        0.0%            -         0.0%
                                                   ----------  ----------   ----------  ----------   ----------   ----------

Wholesale shipments to independent retailers           5,138       81.1%        6,502       97.9%       11,782        98.4%
                                                   ==========  ==========   ==========  ==========   ==========   ==========

Retail sales:
  Single section                                          49       25.7%           51       24.9%           73        33.5%
  Multi section                                          142       74.3%          154       75.1%          145        66.5%
                                                   ----------  ----------   ----------  ----------   ----------   ----------

Total sales                                              191      100.0%          205      100.0%          218       100.0%
                                                   ==========  ==========   ==========  ==========   ==========   ==========

Cavalier produced homes sold                             165       86.4%          179       87.3%          188        86.2%
                                                   ==========  ==========   ==========  ==========   ==========   ==========

Used homes sold                                           26       13.6%           26       12.7%           30        13.8%
                                                   ==========  ==========   ==========  ==========   ==========   ==========

Other operating data:

Installment loan purchases                       $    33,323              $    37,780              $    45,054

Capital expenditures                             $       786              $       327              $     2,062

Home manufacturing facilities (operating)**                7                        7                        8

Independent exclusive dealer locations                   127                      129                      220

Company-owned retail locations                             4                        3                        4

** includes Ft. Worth facility closed subsequent to year-end

</TABLE>


2004 Compared to 2003

Revenue
Total revenue for 2004 was $234,161, decreasing $13,675, or 5.5%, from 2003
revenue of $247,836.

Home manufacturing net sales accounted for virtually the entire decrease,
falling to $223,779. Home manufacturing net sales in 2003 were $237,215. Home
shipments decreased 4.6%, with floor shipments decreasing by 13.2%.
Single-section home shipments, as a percentage of total shipments, increased to
30.8% in 2004 from 13.1% in 2003, due primarily to the Company's participation
in building single-section homes as part of the FEMA disaster relief for victims
of the 2004 hurricanes, of which 1,023 homes were shipped in 2004. 53% of home
shipments in 2004 and 49% of home shipments in 2003 were to exclusive dealers.
Actual shipments of homes for 2004 were 6,336 versus 6,642 in 2003. Cavalier
attributes the decrease in sales and shipments primarily to continuing adverse
industry conditions which effects were partially offset by the FEMA units
shipped. Despite the Company's increase in sales prices to try and offset the
increase in raw materials prices, the average price of homes sold remained about
the same from $36,500 in 2003 to $36,400 in 2004, which was due to the higher
number of single-section homes sold as a result of the FEMA units shipped. The
single-section homes have a lower selling price than multi-section homes.

Inventory of the Company's product at all retail locations, including
Company-owned retail sales centers, decreased 0.5% to approximately $99,500 at
December 31, 2004 from $100,000 at year end 2003. At its peak in June 1999,
dealer inventory approximated $314,000.

Revenue from the financial services segment decreased slightly for 2004 at
$2,444 compared to $2,673 in 2003. For 2004, CIS Financial Services, Inc.
("CIS"), the Company's wholly-owned finance subsidiary, purchased contracts of
<PAGE>

$33,323 and sold installment contracts totaling $31,905. In 2003, CIS purchased
contracts of $37,780 and re-sold installment contracts totaling $35,953.
CIS does not retain the servicing function and does not earn the interest
income on these re-sold loans.

Revenue from the retail segment was $7,938 for 2004 compared to $7,948 for 2003.

Gross Profit
Gross profit was $41,742 or 17.8% of total revenue, for 2004, versus $39,149 or
15.8% of total revenue in 2003. The $2,593 increase in gross profit is primarily
the result of lower trailing costs associated with the plants closed during the
last quarter of 2002 and the third quarter of 2003 and sales price increases in
2004 over 2003. However, the Company's gross margin has been negatively impacted
by (1) price increases in substantially all raw materials (certain prices
continue to increase and show no signs of stabilization) and (2) overall
commodity pressures (i.e. global demand and capacity constraints and rising oil
prices). Despite the Company's increase in sales prices to try and offset the
increase in raw materials price, the average price of homes sold remained about
the same. This was due to the higher number of single-section homes sold as a
result of the FEMA units shipped. The single-section homes have a lower selling
price than multi-section homes.

Selling, General and Administrative
Selling, general and administrative expenses during 2004 were $38,340 or 16.4%
of total revenue, versus $43,171 or 17.4% of total revenue in 2003 a decrease of
$4,831, or 11.2%. The overall decrease includes a $478 decrease in advertising
and promotion cost, including cost to support the exclusive dealer program, a
decrease of $1,371 in employees benefits costs (primarily health insurance), a
decrease in service expenses of $2,730, which were partially offset by increases
in audit and accounting fees of $889 due to expenses associated with compliance
efforts under the SOX Act of 2002. The SOX compliance efforts included
attestation fees paid to the independent registered public accounting firm and
to a lesser extent consulting fees to other parties to support management's
assessment activities. Included in 2003 were recoveries of $475 from an
insurance subrogation matter and $251 from a dealer of a prior period loss.

Impairment and Other Related Charges
During 2004, the Company recorded impairment and other related charges of $209
($209 after tax or $0.01 per basic and diluted share) related to the closing of
a home manufacturing facility. The total charge consisted of writedowns for
property, plant and equipment. Charges for involuntary termination benefits will
be recorded as incurred, primarily during the first quarter of 2005. During
2003, impairment and other related charges totaling $750 ($750 after tax or
$0.04 per diluted share) relating to the closing of a home manufacturing
facility, the pending sale of another home manufacturing facility and the
closing of an underperforming retail location in August 2003. The charge
included writedowns of $551 for property, plant and equipment and $199 for
involuntary termination benefits which were recorded as incurred and paid.

Operating Income (Loss)
Operating income for 2004 was $3,193, compared to an operating loss of $4,772 in
2003. Segment operating results were as follows. (1) Home manufacturing
operating income, before intercompany eliminations, was $8,347 in 2004 as
compared to a loss of $1,124 in 2003. The increased home manufacturing operating
income is primarily due to improved gross profit, improved selling, general, and
administrative expenses, and the Company's participation in building
single-section homes as part of the FEMA disaster relief for victims of the 2004
hurricanes as discussed above. (2) Financial services operating income was $539
in 2004 as compared to income of $537 in 2003. (3) The retail segment's
operating loss increased from $41 in 2003 to $113 in 2004 primarily due to
startup costs associated with a new retail location opened in the fourth quarter
of 2004 and income from a 2003 release of the Company from a recourse liability
that did not recur in 2004. (4) General corporate operating expense, which is
not identifiable to a specific segment, increased from $4,439 in 2003 to $5,411
in 2004 primarily due to expenses associated with compliance efforts under the
SOX Act of 2002. The SOX compliance efforts included attestation fees paid to
the independent registered public accounting firm and to a lesser extent
consulting fees to other parties to support management's assessment activities.

Other Income (Expense)
Interest expense remained consistent primarily due to lower debt amounts
outstanding offset somewhat by a higher rate on amounts outstanding.

Other, net is comprised primarily of interest income (unrelated to financial
services). Other, net decreased $162 due to lower interest income rates earned
in 2004 on invested funds.

<PAGE>
Income (Loss) before Income Taxes
The Company's 2004 pre-tax income was $2,336, reflecting a 142.8% improvement
over the pre-tax loss of $5,457 in 2003, due to the factors discussed above.

Income Taxes
The Company recorded an income tax provision of $75 in 2004 for state income
taxes payable for subsidiaries in states for which the Company does not have a
net operating loss carry-forward. In 2003, the Company recognized an income tax
benefit of $518 primarily representing adjustments to prior years' tax
provisions that became appropriate given the results of the recent Internal
Revenue Service audit of the Company's federal income tax returns; however, the
Company did not record any tax benefit for net operating losses in 2003 because
management believed it was no longer appropriate to record income tax benefits
on current losses in excess of anticipated refunds and certain carryforward
items under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, Accounting for Income Taxes.

Equity in Earnings of Equity-Method Investees
The Company's equity in earnings of equity-method investees was $980 for 2004 as
compared to $369 for 2003. The overall increase was due primarily to the
improved operations at one of the Company's equity-method investees and to the
undistributed earnings from the investment in the last half of 2004 of another
equity-method investee.

Net Income (Loss)
The Company's net income for 2004 was $3,241 or $0.18 per diluted share, as
compared to a net loss of $4,570 or $0.26 per diluted share in 2003.

2003 Compared to 2002

Revenue
Total revenue for 2003 was $247,836, decreasing $139,421, or 36.0%, from 2002
revenue of $387,257.

Home manufacturing net sales accounted for virtually the entire decrease,
falling to $237,215. Home manufacturing net sales in 2002 were $375,385. Home
shipments decreased 44.5%, with floor shipments decreasing by 42.8%. Cavalier
attributes the decrease in sales and shipments to an intensely competitive
marketplace, a lack of chattel (home only) financing for all homes, especially
single wide homes in the industry, a loss of momentum in the consolidation of
its sales force and the closing of seven home manufacturing facilities.
Multi-section home shipments, as a percentage of total shipments, continued to
increase from 81.3% of shipments in 2002 to 86.9% of shipments in 2003 in
response to increasing consumer demand and more favorable terms and availability
of financing for multi-section homes as compared to single-section homes which
historically have been financed on a home-only (chattel) type of loan which in
recent years has not performed as well as mortgage loans. The average price of
homes sold increased $4,600 from $31,900 in 2002 to $36,500 in 2003. Actual
shipments of homes for 2003 were 6,642 versus 11,969 in 2002. Of these
shipments, 49% in 2003 and 55% in 2002 were to exclusive dealers.

Inventory of the Company's product at all retail locations, including
Company-owned retail sales centers, decreased 34% to approximately $100,000 at
December 31, 2003 from $151,000 at year end 2002. At its peak in June 1999,
dealer inventory approximated $314,000. This reduction in retail inventory is
due to (1) a decrease in the number of retail locations carrying the Company's
product from almost 1,100 at the end of 1999 to less than 600 at December 31,
2003 and (2) lower average levels of inventory carried on dealers' lots from 14
floors in 1999 to nine floors at December 31, 2003.

Revenue from the financial services segment decreased slightly for 2003 at
$2,673 compared to $2,690 in 2002. For 2003, CIS Financial Services, Inc.
("CIS") purchased contracts of $37,780 and re-sold installment contracts
totaling $35,953. In 2002, CIS purchased contracts of $45,054 and sold
installment contracts totaling $38,313. CIS does not retain the servicing
function and does not earn the interest income on these re-sold loans.
<PAGE>

Revenue from the retail segment was $7,948 for 2003 compared to $7,908 for 2002.
In August 2003, the Company closed one under-performing retail location,
bringing the number of company-owned stores to three at December 31, 2003.

Other revenue consists mainly of revenue from the Company's supply business,
which in 2002 primarily sold its products outside the Company. Revenues from
external customers decreased to $0 for 2003 compared to $1,274 during 2002 due
to the scaled back operations of the supply company which was subsequently sold
during the third quarter of 2002.

Gross Profit
Gross profit was $39,149 or 15.8% of total revenue, for 2003, versus $54,293 or
14.0% of total revenue in 2002. The $15,144 decrease in gross profit is
primarily the result of the reduction in sales. The improved gross profit
percentage is primarily due to an average sales price increase; however, the
Company's gross margin has been negatively impacted by (1) price increases in
substantially all raw materials (certain prices continue to increase and show no
signs of stabilization) and (2) overall commodity pressures (i.e. global demand
and capacity constraints and rising oil prices).

Selling, General and Administrative
Selling, general and administrative expenses during 2003 were $43,171 or 17.4%
of total revenue, versus $62,649 or 16.2% of total revenue in 2002 a decrease of
$19,478, or 31.1%. The overall decrease includes a $5,701 reduction in
advertising and promotion cost, including cost to support the exclusive dealer
program, a decrease of $3,206 in employees benefits costs (primarily health
insurance), including a benefit received in 2002 of $1,163 from the settlement
of a 1998 insurance claim related to the Company's employee benefit plans, a
$5,640 decrease in salaries, wages and incentive compensation, and a decrease in
inventory repurchase charges of $2,527. With the exception of the reduction in
inventory repurchase charges, the aforementioned reduction in selling, general
and administrative expenses were primarily due to the elimination of costs at
closed facilities, namely personnel related costs for approximately 1,100
terminated employees.

Impairment and Other Related Charges
During 2003, the Company recorded impairment and other related charges of $750
($750 after tax or $0.04 per diluted share) related to the closing of a home
manufacturing facility, the pending sale of another home manufacturing facility
and the closing of an underperforming retail location. The charge included
writedowns of $551 for property, plant and equipment and $199 for involuntary
termination benefits which were recorded as incurred and paid. Impairment and
other related charges totaling $6,064 ($5,253 after tax or $0.30 per diluted
share) were recorded in 2002 in connection with the closing of six home
manufacturing facilities. The charge included writedowns of $3,890 for property,
plant and equipment, $22 for lease obligations and $2,152 for involuntary
termination benefits for 989 employees.

Operating Income (Loss)
Operating loss for 2003 was $4,772, compared to an operating loss of $14,420 in
2002. Segment operating results were as follows. (1) Home manufacturing
operating loss, before intercompany eliminations, was $1,124 in 2003 as compared
to a loss of $8,061 in 2002. The reduction in operating loss is primarily due to
the decrease in impairment and other related charges noted above. (2) Financial
services operating income was $537 in 2003 as compared to a loss of $22 in 2002
due to an improved level of selling, general and administrative expenses related
to cost reduction efforts. (3) The retail segment's operating loss decreased
from $222 in 2002 to $41 in 2003 primarily due to higher gross margin and
decreased selling, general and administrative expenses. (4) The other segment
operating loss improved from $140 in 2002 to $0 in 2003 due mainly to the scaled
back operations of a supply company which was subsequently sold during the third
quarter of 2002. (5) General corporate operating expense, which is not
identifiable to a specific segment, improved from $5,930 in 2002 to $4,439 in
2003 primarily due to a reduction in salaries expense.

Other Income (Expense)
Interest expense decreased $430 primarily due to lower interest rates on amounts
outstanding under the Company's line of credit.

Other, net is comprised primarily of interest income (unrelated to financial
services). Other, net decreased $359 due primarily to lower interest income
rates earned in 2003 on invested funds.
<PAGE>
Income (Loss) before Income Taxes
The Company's 2003 pre-tax loss was $5,457, reflecting a 64.0% improvement over
the pre-tax loss of $15,176 in 2002, due primarily to improvements in impairment
and other related charges and selling, general and administrative expenses
offset by lower sales as discussed above.

Income Taxes
In 2003, the Company recognized an income tax benefit of $518 primarily
representing adjustments to prior years' tax provisions that became appropriate
given the results of the recent Internal Revenue Service audit of the Company's
federal income tax returns; however, the Company did not record any tax benefit
for net operating losses in 2003 because management believed it was no longer
appropriate to record income tax benefits on current losses in excess of
anticipated refunds and certain carryforward items under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes. The Company recorded an income tax provision of $5,716 in 2002.

Equity in Earnings of Equity-Method Investees
The Company's equity in earnings of equity-method investees was $369 in 2003
compared to $384 in 2002.

Net Income (Loss)
The Company's net loss for 2003 was $4,570 or $0.26 per diluted share, as
compared to a net loss of $34,670 or $1.96 per diluted share in 2002.

Liquidity and Capital Resources

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

                                                            Balances as of December 31,
                                                        -----------------------------------
(dollars in thousands)                                    2004        2003         2002
                                                        ----------  ----------   ----------

Cash, cash equivalents & certificates of deposit      $    31,674 $    32,393 $     34,939
Working capital                                       $    12,967 $     7,813 $     12,346
Current ratio                                            1.3 to 1    1.2 to 1     1.2 to 1
Long-term debt                                        $    11,400 $    13,089 $     22,643
Ratio of long-term debt to equity                        0.3 to 1    0.3 to 1     0.5 to 1
Installment loan portfolio                            $     8,839 $    10,114 $     10,977

</TABLE>

Operating activities provided net cash of $1,144 in 2004 and used net cash of
$3,011 in 2003. The change in operating activities is primarily due to the
Company's participation in building single-section homes as part of the FEMA
disaster relief for victims of the 2004 hurricanes.

The Company's capital expenditures were $786 for 2004, as compared to $327 for
2003. Capital expenditures during these periods included normal property, plant
and equipment additions and replacements. The Company received proceeds from the
sales of property, plant and equipment of $2,320 for 2004, as compared to $6,294
for 2003.

The decrease in long-term debt was due to scheduled principal payments of $1,734
and a $1,697 pay-down on the real estate term loan from a portion of the
proceeds from property sales.

On October 26, 2004, the Company amended its credit facility (the "Credit
Facility") with its primary lender, to extend the maturity date under the
revolving line of credit available under the Credit Facility to April 2007. A
director of the Company served as the president of the primary lender until
August 31, 2004. The Credit Facility is comprised of a revolving line of credit
which provides for borrowings (including letters of credit) up to $25,000 and a
real estate term loan (14 year) component of $10,000 which are cross-secured and
cross-defaulted. The amount available under the revolving line of credit, up to
$25,000, is equal to the lesser of an amount based on defined percentages of
accounts and notes receivable and inventories or certain levels of tangible net
worth plus all treasury stock purchases after December 31, 2003, as noted in the
following table.
<PAGE>
<TABLE>
<CAPTION>
<S>                                     <C>
                Tangible Net Worth              Credit Facility
                       ("TNW")                      Available
                ------------------------      -------------------------
                Above $50,000                 30% of TNW
                $50,000 - $38,000             $15,000
                $38,000 - $23,000             $15,000 to zero (dollar
                                              for dollar reduction)
</TABLE>
At December 31, 2004, $8,891 was available under the revolving line of credit,
after deducting letters of credit of $6,109. The Company did not have any
amounts outstanding under the revolving line of credit as of December 31, 2004
or 2003.

The applicable interest rates under the revolving line of credit are based on
certain levels of tangible net worth as noted in the following table.

                   Tangible Net Worth
                        ("TNW")                    Interest Rate
                ------------------------      -------------------------
                Above $77,000                 Prime less 0.50%
                $77,000 - $65,000             Prime
                $65,000 - $58,000             Prime plus 0.25%
                $58,000 - $38,000             Prime plus 1.00%
                Below $38,000                 Prime plus 2.00%

The real estate term loan agreement contained in the Credit Facility provides
for borrowings of $10,000, of which $6,857 was outstanding at December 31, 2004
and $8,895 was outstanding at December 31, 2003. Interest on the term note is
fixed for a period of five years from issuance at 6.5% and may be adjusted at 5
and 10 years. Amounts outstanding under the real estate term loan are
collateralized by certain plant facilities and equipment.

The Credit Facility, as amended, contains certain restrictive and financial
covenants which, among other things, limit the Company's ability, without the
lender's consent, 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, $1,000, (iii) incur additional indebtedness, including lease
obligations, which exceed in the aggregate $1,000, excluding floor plan notes
payable which cannot exceed $3,000 and (iv) make annual capital expenditures in
excess of $1,000. In addition, the Credit Facility contains certain financial
covenants requiring the Company to maintain on a consolidated basis certain
defined levels of debt to tangible net worth ratio (not to exceed 2.5 to 1) and
cash flow to debt service ratio of not less than 1.35 to 1 commencing with the
year ending December 31, 2005 and 1.5 to 1 for the years ending December 31,
2006 and thereafter, and to maintain a current ratio, as defined, of at least
1.0 to 1 and consolidated tangible net worth of at least $23,000. The Credit
Facility also requires CIS to comply with certain specified restrictions and
financial covenants. At December 31, 2004, the Company was in compliance with
its debt covenants.

Since its inception, CIS has been restricted in the amount of loans it could
purchase based on underwriting standards, as well as the availability of working
capital and funds borrowed under the Company's credit line with its primary
lender. From time to time, the Company evaluates the potential to sell all or a
portion of its remaining installment loan portfolio, in addition to the periodic
sale of installment contracts purchased by CIS in the future. CIS is currently
re-selling loans to other lenders under various retail finance contracts. The
Company believes the periodic sale of installment contracts under these retail
finance agreements 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 CIS to increase its volume
of loan purchases. There can be no assurance, however, that additional sales
will be made under these agreements, or that CIS and the Company will be able to
realize the expected benefits from such agreements.

The Company currently believes existing cash 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. However,
there can be no assurances to this effect. If it is not, or if the Company is
unable to remain in compliance with its covenants under its Credit Facility, the
Company would seek to maintain or enhance its liquidity position and capital
resources through modifications to or waivers under the Credit Facility,
<PAGE>
incurrence of additional short or long-term indebtedness or other forms of
financing, asset sales, restructuring of debt, and/or the sale of equity or debt
securities in public or private transactions, the availability and terms of
which will depend on various factors and market and other conditions, some of
which are beyond the control of the Company.

Projected cash to be provided by operations in the coming year is largely
dependent on sales volume. The Company's manufactured homes are sold mainly
through independent dealers who generally rely on third-party lenders to provide
floor plan financing for homes purchased. In addition, third-party lenders
generally provide consumer financing for manufactured home purchases. The
Company's sales depend in large part on the availability and cost of financing
for manufactured home purchasers and dealers as well as our own retail
locations. The availability and cost of such financing is further dependent on
the number of financial institutions participating in the industry, the
departure of financial institutions from the industry, the financial
institutions' lending practices, the strength of the credit markets generally,
governmental policies and other conditions, all of which are beyond our control.
Throughout the past five years the industry has been impacted significantly by
reduced financing available at both the wholesale and retail levels, with
several lenders exiting the marketplace or limiting their participation in the
industry, coupled with more restrictive credit standards and increased home
repossessions which re-enter home distribution channels and limit wholesale
shipments of new homes. Unfavorable changes in these factors and terms of
financing in the industry may have a material adverse effect on Cavalier's
results of operations or financial condition.

Off-Balance Sheet Arrangements
The Company's material off-balance sheet arrangements consist of repurchase
obligations, guarantees and letters of credit. Each of these arrangements is
discussed below under Contractual Obligations and Commitments.

Contractual Obligations and Commitments (dollars in thousands)
The following table summarizes contractual obligations of the Company at
December 31, 2004. For additional information related to these obligations, see
Note 5 to the Consolidated Financial Statements. This table excludes long-term
obligations for which there is no definite commitment period. The Company's debt
consists primarily of fixed rate debt. However, there is one bond that has a
variable interest rate. The Company estimated the interest payments due for this
bond using 2.5% which is a slight increase from the latest applicable interest
rate.

 <TABLE>
<CAPTION>
<S>                                                             <C>                <C>               <C>                 <C>
                                                                                Payments Due by Period
                                                -----------------------------------------------------------------------------------
                                                                    Less Than 1
                                                    Total               year         1 -3 years       4 - 5 years    After 5 years
                                                ----------------   --------------  -------------    -------------   --------------
Industrial development revenue bond issues            $  6,248         $ 1,337          $ 2,545         $ 1,865        $     501
Real estate term loan                                    6,857             368              812             925            4,752
Interest                                                 3,951             694            1,186             767            1,304

                                                ----------------   --------------  ---------------  --------------   --------------
Total contractual cash obligations                    $ 17,056         $  2,399         $ 4,543         $ 3,557        $   6,557
                                                ================   ==============  ===============  ==============   ==============
</TABLE>
The following table summarizes contingent commitments of the Company at December
31, 2004, including contingent repurchase obligations, guarantees of debt for
equity-method investees and letters of credit. For additional information
related to these contingent obligations, see Note 10 to the Consolidated
Financial Statements and Critical Accounting Estimates below. Contingent
insurance plans' retrospective premium adjustments are excluded from this table
as there is no definite expiration period (see Critical Accounting Estimates
below). Future minimum lease payments are excluded from this table because they
are not significant.

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

                                                               Amount of Commitment Expiration per Period
                                            ---------------------------------------------------------------------------------------
                                                                  Less than 1
                                                Total                  year          1 -3 years        4 - 5 years     After 5 years
                                            ------------------  ----------------   ---------------   --------------  ---------------
Repurchase obligations    (1)                   $ 73,000             $ 13,000          $ 60,000           $    -            $    -
Guarantees                (2)                      1,066                  205               326              304               231
Letters of credit         (3)                      6,109                6,109                 -                -                 -

                                            ------------------    --------------   ---------------   --------------   --------------
Total commitments                               $ 80,175             $ 19,314          $ 60,326           $  304            $  231
                                            ==================    ==============   ===============   ==============   ==============

</TABLE>

(1)        For a complete description of the contingent repurchase obligation,
           see Critical Accounting Estimates - Reserve for repurchase
           commitments. Although the commitments outstanding at December 31,
<PAGE>
           2004 have a finite life, these commitments are continually replaced
           as the Company continues to sell its manufactured homes to dealers
           under repurchase and other recourse agreements with lending
           institutions which have provided wholesale floor plan financing to
           dealers. The cost, net of recoveries, of these contingent repurchase
           obligations to the Company was $(291) (2004), $(181) (2003), and
           $2,347 (2002). The Company has a reserve for repurchase commitments
           of $2,052 (2004) and $3,070 (2003) based on prior experience and an
           evaluation of dealers' financial conditions.

(2)        The Company and certain of its equity partners have guaranteed
           certain debt for two companies in which the Company owns a one-third
           interest. The guarantees are limited to 40% of the outstanding debt.
           At December 31, 2004, $2,664 was outstanding under the guarantees, of
           which the Company had guaranteed $1,066. One of the companies has a
           lease purchase agreement with a third party to sell a facility
           financed by debt that the Company has guaranteed.

(3)        The Company has provided letters of credit to providers of certain of
           its surety bonds and insurance policies. While the current letters of
           credit have a finite life, they are subject to renewal at different
           amounts based on the requirements of the insurance carriers. The
           outstanding letters of credit reduce amounts available under the
           Company's Credit Facility. The Company has recorded insurance expense
           based on anticipated losses related to these policies.

Critical Accounting Estimates
Cavalier follows certain significant accounting policies when preparing our
consolidated financial statements as summarized in Note 1 to the Consolidated
Financial Statements. The preparation of our financial statements in conformity
with accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the amounts reported
in the financial statements and notes. We evaluate these estimates and
assumptions on an ongoing basis and use historical experience factors, current
economic conditions and various other assumptions that we believe are reasonable
under the circumstances. The results of these estimates form the basis for
making judgments about the carrying values of assets and liabilities as well as
identifying the accounting treatment with respect to commitments and
contingencies. Actual results could differ from these estimates under different
assumptions or conditions. The following is a list of the accounting policies
that we believe are most important to the portrayal of our financial condition
and results of operations that require our most difficult, complex or subjective
judgments as a result of the need to make estimates about the effect of matters
that are inherently uncertain.

Product Warranties
Cavalier provides the initial retail homebuyer a one-year limited warranty
covering defects in material or workmanship in home structure, plumbing and
electrical systems. We record a liability for estimated future warranty costs
relating to homes sold, based upon our assessment of historical experience
factors and current industry trends. Factors we use in the estimation of the
warranty liability include historical sales amounts and warranty costs related
to homes sold and any outstanding service work orders. We have a reserve for
estimated warranties of $13,255 (2004) and $13,475 (2003). Although we maintain
reserves for such claims, based on our assessments as described above, which to
date have been adequate, there can be no assurance that warranty expense levels
will remain at current levels or that such reserves will continue to be
adequate. A large number of warranty claims or per claim costs exceeding our
current warranty expense levels could have a material adverse effect on
Cavalier's results of operations.

Insurance
Cavalier's workers' compensation (prior to February 1, 1999, and after April 1,
2001), product liability and general liability insurance coverages were provided
under incurred loss, retrospectively rated premium plans. Under these plans, we
incur insurance expense based upon various rates applied to current payroll
costs and sales. Annually, such insurance expense is adjusted by the carrier for
loss experience factors subject to minimum and maximum premium calculations.
Refunds or additional premiums are estimated and recorded when sufficiently
reliable data is available. We were contingently liable at December 31, 2004 for
future retrospective premium adjustments up to a maximum of approximately
$21,600 in the event that additional losses are reported related to prior years.
We recorded an estimated liability of approximately $5,401 (2004) and $5,324
(2003) related to these contingent claims. Claims exceeding our current expense
levels could have a material adverse effect on Cavalier's results of operations.
<PAGE>
Reserve for repurchase commitments
Manufactured housing companies customarily enter into repurchase and other
recourse agreements with lending institutions, which have provided wholesale
floor plan financing to dealers. A majority of Cavalier's sales are made to
dealers located primarily in the South Central and South Atlantic regions of the
United States pursuant to repurchase agreements with lending institutions. These
agreements generally provide that we will repurchase our new products from the
lending institutions in the event such product is repossessed upon a dealer's
default. The risk of loss under repurchase agreements is lessened by (1) sales
of our manufactured homes are spread over a relatively large number of
independent dealers, the largest of which accounted for approximately 1.9% of
sales in 2004; (2) the price that Cavalier is obligated to pay under such
repurchase agreements declines based on predetermined amounts over the period of
the agreement (generally 18 to 24 months) and (3) Cavalier historically has been
able to resell homes repurchased from lenders. Cavalier reviews the aging of
retail dealers' inventory to estimate the amount of inventory subject to
repurchase obligation which is used to calculate the fair value of the floor
plan guarantees. Additionally, we review repurchase notifications received from
floor plan sources and review our dealer inventory for expected repurchase
notifications based on various communications from the lenders and the dealers
as well as for dealers who, we believe, are experiencing financial difficulty.
We apply a historical loss factor to the inventory estimated to be repurchased.
The maximum amount for which we are contingently liable under such agreements
approximated $73,000 at December 31, 2004. Changes in the level of retail
inventories in the manufactured housing industry, either up or down, can have a
significant impact on the Company's operating results. The deterioration in the
availability of retail financing, along with significant competition from
repossessed homes, has already extended the inventory adjustment period beyond
what was originally expected. If these trends were to continue, or if retail
demand were to significantly weaken further, the inventory overhang could result
in even greater intense price competition, cause further pressure on profit
margins within the industry, and have a material adverse effect on Cavalier. The
Company's inventory at all retail locations, including Company-owned retail
sales centers, declined 34% in 2003 from 2002 and remained consistent from 2003
to 2004. Cavalier believes that inventories of its homes are approaching levels
which are more consistent with retail demand, due in part to the Company's
emphasis on working with its dealers to reduce retail inventories, although we
cannot provide investors assurances to this effect. In spite of these efforts,
significant unfavorable developments or further deterioration within the
industry would undoubtedly have an adverse impact on Company operating results.
We have a reserve for repurchase commitments of $2,052 (2004) and $3,070 (2003).
The provisions of FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57, and 107
and a rescission of FASB Interpretation No. 34, are applicable to the Company's
repurchase commitments. However, based on the Company's evaluation, the impact
of adopting FIN 45 was not material to the consolidated financial statements.
The Company intends to adopt the provisions of FIN 45 to new guarantees issued
on or after January 1, 2005.

Impairment of Long-Lived Assets
Since the latter part of 1999, Cavalier and the manufactured housing industry
have experienced a downturn in business as discussed above. Due to deteriorating
market conditions, during this time, we have idled, closed or sold 17
manufactured housing facilities, a portion of our insurance and premium finance
business, a portion of our supply operations and 13 under-performing retail
locations. We periodically evaluate the carrying value of long-lived assets to
be held and used, including goodwill and other intangible assets, when events
and circumstances warrant such a review. The carrying value of long-lived assets
is considered impaired when the anticipated undiscounted cash flow from such
assets is less than its carrying value. In that event, a loss is recognized
based on the amount by which the carrying value exceeds the fair market value of
the long-lived assets. Fair market value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
Losses on long-lived assets to be disposed of are determined in a similar
manner, except that the fair market values are based primarily on independent
appraisals and preliminary or definitive contractual arrangements less costs to
dispose.

Goodwill
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. This statement is effective for financial statements issued
for years beginning after December 15, 2001. SFAS No. 142 specifies that
goodwill and certain intangible assets will no longer be amortized but instead
will be subject to periodic impairment testing. The Company adopted SFAS No. 142
effective January 1, 2002. Under the provisions of this statement, the Company
recorded a charge of $14,162, net of tax, or $0.80 per diluted share, as a
cumulative effect of a change in accounting principle, to eliminate all of its
goodwill due to impairment. The entire amount of the goodwill was associated
with the Company's home manufacturing unit.
<PAGE>
The Company and the manufactured housing industry have been impacted by
inventory oversupply at the retail level, an increase in dealer failures, a
reduction in available consumer credit and wholesale (dealer) financing for
manufactured housing, more restrictive credit standards and increased home
repossessions which re-enter home distribution channels. All of these factors
caused the Company to suffer significant losses from the last half of 1999
through the date of the initial valuation of goodwill under SFAS No. 142. The
fair value of the home manufacturing unit was determined by a third party
valuation specialist, using projections provided by Company management as well
as industry and other market data. The fair value of the home manufacturing unit
was lower than the carrying value, which required allocation of the fair value
to the assets and liabilities of the unit. In this allocation process, various
independent parties were used to appraise certain of the Company's manufacturing
fixed assets. Additionally, Company management estimated fair value of other
assets and liabilities based on assumptions believed to be appropriate to the
valuation process. As a result of this fair value allocation process, the
Company's goodwill was considered impaired and an adjustment was made during the
first quarter of 2002.

Deferred Tax Asset
The Company has a full valuation allowance against net deferred income tax
assets of $19,607 and $20,523 in accordance with the requirements of SFAS No.
109, Accounting for Income Taxes, for the years ended December 31, 2004 and
2003, respectively. Realization of the deferred tax assets (net of recorded
valuation allowances) is largely dependent upon future profitable operations and
future reversals of existing taxable temporary differences. Because the Company
has operated at a cumulative loss in its three most recent calendar years and
because it believes difficult competitive and economic conditions may continue
for the foreseeable future, the Company believes that under the standards of
SFAS No. 109 it is not appropriate to record income tax benefits in excess of
anticipated refunds of taxes previously paid. The valuation allowance may be
reversed to income in future periods to the extent that the related deferred
income tax assets are realized as a reduction of taxes otherwise payable on any
future earnings or the valuation allowances are otherwise no longer required.

Related Party Transactions
The Company purchased raw materials of approximately $17,680 and $14,580 from
MSR Forest Products, LLC, and Alliance Homes, Inc. during 2004 and 2003,
respectively. During 2002, the Company purchased raw materials of approximately
$17,231 from WoodPerfect, Ltd., and MSR Forest Products, LLC. The Company owns a
minority interest in WoodPerfect, Ltd. which in turn owns a minority interest in
MSR Forest Products, LLC. The Company also directly owns a minority interest in
MSR Forest Products and Alliance Homes, Inc.

The Company has a $25,000 revolving line of credit and $10,000 real estate
term-loan agreement (the "Credit Facility") with its primary bank, First
Commercial Bank, of which $6,536 was outstanding under the real estate term-loan
component of the Credit Facility at December 31, 2004. Mr. Thomas A. Broughton,
III, a director of the Company, served as the president of First Commercial Bank
through August 31, 2004. The Company made payments to its lender in the amount
of $694 (2004) $698 (2003), and $936 (2002) for interest, commitment, letter of
credit and various bond related fees. See footnote 5 to the Consolidated
Financial Statements for additional information regarding the Credit Facility.

The Company recorded net income (loss) of investees accounted for by the equity
method of $980, $369, and $384 for the years ended December 31, 2004, 2003, and
2002, respectively. Additionally, the Company and certain of its equity partners
have guaranteed certain debt for two companies in which the Company owns a
one-third interest. For additional information related to these guarantees, see
footnote (2) under Contractual Obligations and Commitments above.

The Company used the services of a law firm, Lowe, Mobley & Lowe, a partner of
which, Mr. John W Lowe, is also a director of the Company. The Company paid
legal fees to this firm of $346 (2004), $378 (2003), and $191 (2002). In
addition, the law firm received, from the proceeds of the settlement of a
Company insurance claim, an indirect legal fee payment of $562 in 2002.

Impact of Inflation
The Company generally has been able to increase its selling prices to offset
increased costs, including the costs of raw materials. Sudden increases in costs
as well as price competition, however, can affect the ability of the Company to
increase its selling prices. The Company believes that the relatively moderate
<PAGE>
rate of inflation over the past several years has not had a significant impact
on its sales or profitability, but can give no assurance that this trend will
continue in the future.

Recently Issued Accounting Standards
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN 46"). FIN 46
requires certain variable interest entities (also formerly referred to as
special purpose entities) to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. In December 2003, the FASB issued Interpretation No.
46R, Consolidation of Variable Interest Entities--an interpretation of ARB 51
(revised December 2003) ("FIN 46R"), which includes significant amendments to
previously issued FIN 46. Among other provisions, FIN 46R includes revised
transition dates for public entities. Adoption of FIN 46R is required for
financial statements issued after March 15, 2004. The adoption of this
interpretation did not have a material effect on the Company's consolidated
financial statements.

In November 2002, the FASB issued Interpretation ("FIN") No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57, and 107 and a rescission of FASB Interpretation No. 34. FIN 45 requires
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. FIN 45 also clarifies
that a guarantor is required to recognize, at inception of a guarantee, a
liability for the fair value of the obligation undertaken. FIN 45 provisions
were applied to the Company's reserve for repurchase commitments, however, the
impact was not material. The Company intends to adopt the FIN 45 provisions for
new guarantees beginning January 1, 2005.

In December 2004, the FASB issued SFAS No. 123R, Accounting for Stock-Based
Compensation, a revision of SFAS No. 123. SFAS No.123R supersedes APB Opinion
No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires the
cost of employee services received in exchange for an award of equity
instruments be recorded based on fair value on the grant date. The compensation
cost will be recognized over the vesting period. The fair value will be
remeasured annually at the reporting date. Adoption of SFAS 123R is required for
financial statements issued after June 15, 2005. The Company is currently
assessing the effects of the adoption of this statement on the Company's
consolidated financial statements.

In December 2004, the FASB issued Staff Position No. 109-1, Accounting for
Income Taxes, to the Tax Deduction on Qualified Production Activities Provided
by the American Jobs Creation Act of 2004 ("FSP FAS 109-1"). FSP FAS 109-1
states that the qualified production activities deduction should be accounted
for as a special deduction and the special deduction should be considered in
measuring deferred taxes when graduated tax rates are a significant factor and
assessing whether a valuation allowance is necessary. This deduction is not
available to the Company until it has utilized all of its net operating loss
carry forwards. The Company's deferred tax assets are currently fully reserved.

In November 2004, the FASB issued Statement No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4. SFAS No. 151 requires that abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage) be recognized as current period charges. SFAS 151 also requires that
the "allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities." Normal capacity is
defined as "the production expected to be achieved over a number of periods or
seasons under normal circumstances, taking into account the loss of capacity
resulting from planned maintenance". This statement becomes effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company is currently assessing the effects of the adoption of this statement on
the Company's consolidated financial statements.

In December 2004, the FASB issued Statement No. 153, Exchanges of Nonmonetary
Assets an amendment of APB Opinion No. 29. SFAS No. 153 requires that exchange
transactions that lack commercial substance be measured based on the recorded
amount less impairment and not on the fair values of the exchanged assets.
Exchange transactions that lack commercial substance are transactions that are
not expected to result in significant changes in the cash flows of the reporting
entity. This statement becomes effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company does not
expect the adoption of this statement to have a material effect on the Company's
consolidated financial statements.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in market prices
and interest rates. The Company is exposed to interest rate risk inherent in its
financial instruments, but is not currently subject to foreign currency or
commodity price risk. The Company manages its exposure to these market risks
through its regular operating and financing activities.

The Company purchases retail installment contracts from its dealers, at fixed
interest rates, in the ordinary course of business, and periodically resells a
majority of these loans to financial institutions under the terms of retail
finance agreements. The periodic resale of installment contracts reduces the
Company's exposure to interest rate fluctuations, as the majority of contracts
are held for a short period of time. The Company's portfolio consists of fixed
rate contracts with interest rates generally ranging from 7.0% to 15.0% and an
average original term of 270 months at December 31, 2004. The Company estimated
the fair value of its installment contracts receivable at $8,865 using
discounted cash flows and interest rates offered by CIS on similar contracts at
December 31, 2004.

The Company has one industrial development revenue bond issue and a revolving
line of credit (of which no amounts were outstanding at December 31, 2004) that
are exposed to interest rate changes. Since these borrowings are floating rate
debt, an increase in short-term interest rates would adversely affect interest
expense. Additionally, Cavalier has five industrial development revenue bond
issues at fixed interest rates. The Company estimated the fair value of its debt
instruments at $13,322 using rates at which the Company believes it could have
obtained similar borrowings at that time.
<TABLE>
<CAPTION>
<S>                                              <C>             <C>          <C>          <C>           <C>        <C>
                                                                           Assumed Annual Principal Cash Flows
                                             --------------------------------------------------------------------------------------
(dollars in thousands)                          2005     2006      2007     2008    2009    Thereafter      Total      Fair value
                                                ----     ----      ----     ----    ----    ----------      -----      ----------
Installment loan portfolio                   $ 2,086 a  $   83     $ 93   $ 103   $ 115        $6,359       $8,839       $8,366

(weighted average interest rate - 10.99%)
                                                                            Expected Principal Maturity Dates
                                             --------------------------------------------------------------------------------------
(dollars in thousands)                          2005     2006      2007     2008    2009    Thereafter      Total      Fair value
                                                ----     ----      ----     ----    ----    ----------      -----      ----------
Notes payable and long-term debt              $1,705    $1,638    $1,719   $1,357  $1,433      $5,253      $13,105      $13,001

(weighted average interest rate - 5.57%)

a  The Company has recorded an allowance for credit losses of $953, primarily
   based upon management's assessment of historical experience factors and
   current economic conditions.
</TABLE>

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

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

Our disclosure and analysis in this Annual Report on Form 10-K contain some
forward-looking statements. Forward looking statements give our current
expectations or forecasts of future events, including statements regarding
trends in the industry and the business, financing and other strategies of
Cavalier. You can identify these statements by the fact that they do not relate
strictly to historical or current facts. They generally use words such as
"estimates," "projects," "intends," "believes," "anticipates," "expects,"
"plans," and other words and terms of similar meaning in connection with any
discussion of future operating or financial performance. From time to time, we
also may provide oral or written forward-looking statements in other materials
we release to the public. These forward-looking statements include statements
involving known and unknown assumptions, risks, uncertainties and other factors
which may cause our actual results, performance or achievements to differ from
any future results, performance, or achievements expressed or implied by such
forward-looking statements or words. In particular, such assumptions, risks,
uncertainties and factors include those associated with the following:

o        the cyclical and seasonal nature of the manufactured housing industry
         and the economy generally;
o        the severe and continuing downturn in the manufactured housing
         industry;
o        limitations in Cavalier's ability to pursue its business strategy;
o        changes in demographic trends, consumer preferences and Cavalier's
         business strategy;
o        changes  and  volatility  in  interest  rates and the  availability
         of capital;
o        changes  in  the  availability of retail (consumer) financing;
<PAGE>
o        changes  in  the  availability  of wholesale (dealer) financing;
o        changes in level of industry retail inventories;
o        the   ability  to  attract  and  retain  quality  independent  dealers,
         executive officers and other key personnel;
o        competition;
o        contingent repurchase and guaranty obligations;
o        uncertainties regarding Cavalier's retail financing activities;
o        the potential unavailability and price increases for raw materials;
o        the potential unavailability of manufactured housing sites;
o        regulatory constraints;
o        the potential for additional warranty claims;
o        litigation;
o        the potential volatility in our stock price, and
o        the potential failure to comply with Sarbanes-Oxley Section 404 by
         required deadline.

Any or all of our forward-looking statements in this report, in the 2004 Annual
Report to Stockholders and in any other public statements we make may turn out
to be wrong. These statements may be affected by inaccurate assumptions we might
make or by known or unknown risks and uncertainties. Many factors listed above
will be important in determining future results. Consequently, no
forward-looking statement can be guaranteed. Actual future results may vary
materially.

We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our future filings with the Securities and Exchange Commission or in any of
our press releases. Also note that, under the heading "Risk Factors," we have
provided a discussion of factors that we think could cause our actual results to
differ materially from expected and historical results. Other factors besides
those listed could also adversely affect Cavalier. This discussion is provided
as permitted by the Private Securities Litigation Reform Act of 1995.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Selected Quarterly Financial Data (Unaudited)

The table below sets forth certain unaudited quarterly financial data for the
two years ended December 31, 2004 and 2003. The Company believes that the
following quarterly financial data includes all adjustments necessary for a fair
presentation, in accordance with accounting principles generally accepted in the
United States of America. The following quarterly financial data should be read
in conjunction with the other financial information contained elsewhere in this
report. The operating results for any interim period are not necessarily
indicative of results for a complete year or for any future period.
<PAGE>
<TABLE>
<CAPTION>
<S>                                          <C>                <C>              <C>              <C>              <C>

        Quarterly Statistics
        Comparison of Operating Results (Unaudited)
        (Dollars in thousands except per share amounts)

                                            Fourth           Third             Second            First
                                            Quarter         Quarter            Quarter         Quartrter           Total
                                        --------------    --------------   --------------   --------------    -------------
2004
Revenue:
        Home manufacturing                   $ 73,426          $ 56,945         $ 51,226         $ 42,182         $ 223,779
        Financial services                        576               647              679              542             2,444
        Retail                                  2,035             2,411            1,962            1,530             7,938

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

        Total revenue                          76,037            60,003           53,867           44,254           234,161
                                        --------------    --------------   --------------   --------------    --------------

Gross profit                                   14,923            10,508            8,719            7,592            41,742
Net income (loss)                               4,654  b          1,068  b          (599) b        (1,882)            3,241
Basic net income (loss) per share    a           0.26  b           0.06  b         (0.03) b         (0.11)             0.18
Diluted net income (loss) per share  a           0.25  b           0.06  b         (0.03) b         (0.11)             0.18

2003
Revenue:
        Home manufacturing                   $ 53,178          $ 60,788         $ 66,034         $ 57,215         $ 237,215
        Financial services                        665               652              728              628             2,673
        Retail                                  2,198             2,423            1,959            1,368             7,948

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

        Total revenue                          56,041            63,863           68,721           59,211           247,836
                                        --------------    --------------   --------------   --------------    --------------

Gross profit                                   11,499             9,911           10,904            6,835            39,149
Net income (loss)                               1,078  b            943  b          (409) b        (6,182)           (4,570)
Basic net income (loss) per share    a           0.06  b           0.05  b         (0.02) b         (0.35)            (0.26)
Diluted net income (loss) per share  a           0.06  b           0.05  b         (0.02) b         (0.35)            (0.26)

   a    The sum of quarterly amounts may not equal the annual amounts due to rounding.

   b    2004 Includes impairment and other related charges of $209 ($209 after tax or $0.01 per share basic and diluted) in
        connection with the closing of one home manufacturing facility.
        2003 Includes impairment and other related charges of $750 ($750 after tax or $0.04 per share basic and diluted) recorded
        in connection with closing one home manufacturing facility, the pending sale of another home manufacturing facility closed
        in December 2002 and closing one retail location $574 (fourth quarter), $122 (third quarter), $54 (second quarter)).

        Certain amounts from the prior periods have been reclassified to conform to the 2004 presentation.
</TABLE>








<PAGE>


                      CAVALIER HOMES, INC. AND SUBSIDIARIES
                   FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

             Index to Consolidated Financial Statements and Schedule

Report of Independent Registered Public Accounting Firm                      36

Consolidated Balance Sheets                                                  37

Consolidated Statements of Operations                                        38

Consolidated Statements of Stockholders' Equity                              39

Consolidated Statements of Cash Flows                                        40

Notes to Consolidated Financial Statements                                   41


Schedule -

         II - Valuation and Qualifying Accounts                              59



Schedules I, III, IV and V have been omitted because they are not required.


<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of
Cavalier Homes, Inc.:

We have audited the accompanying consolidated balance sheets of Cavalier Homes,
Inc. and subsidiaries (the "Company") as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2004. Our
audits also included the financial statement schedule listed in the Index at
Item 8. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Cavalier Homes, Inc. and
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill to
conform to Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, and adopted Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
effective January 1, 2003.


/s/ Deloitte & Touche LLP


Birmingham, Alabama
March 28, 2005

<PAGE>
<TABLE>
<CAPTION>
<S>                                                                             <C>            <C>

                                 CAVALIER HOMES, INC. AND SUBSIDIARIES
                                      CONSOLIDATED BALANCE SHEETS
                                      DECEMBER 31, 2004 AND 2003
                            (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
-------------------------------------------------------------------------------------------------------

 ASSETS                                                                        2004            2003
                                                                            -----------     -----------
 CURRENT ASSETS:
      Cash and cash equivalents                                           $     31,674    $     32,393
      Accounts receivable, less allowance for losses of
          $85 (2004) and $102 (2003)                                             4,279           1,939
      Notes and installment contracts receivable - current, including
          held for resale $2,011 (2004) and $2,157 (2003)                        2,086           2,238
      Inventories                                                               14,909          10,964
      Deferred income taxes                                                        415             693
      Other                                                                        852           2,879
                                                                            -----------     -----------
             Total current assets                                               54,215          51,106
                                                                            -----------     -----------
 PROPERTY, PLANT AND EQUIPMENT:
      Land                                                                       5,279           5,382
      Buildings and improvements                                                36,976          37,702
      Machinery and equipment                                                   31,252          31,213
                                                                            -----------     -----------
                                                                                73,507          74,297
      Less accumulated depreciation and amortization                            39,762          37,105
                                                                            -----------     -----------
            Total plant, property and equipment, net                            33,745          37,192
                                                                            -----------     -----------
 INSTALLMENT CONTRACTS RECEIVABLE, less
     allowance for credit losses of $953 (2004) and $1,030 (2003)                5,801           6,846
                                                                            -----------     -----------
 GOODWILL, less accumulated amortization of $6,968 (2001)                            -               -
                                                                            -----------     -----------
 DEFERRED INCOME TAXES                                                               -               -
                                                                            -----------     -----------

 OTHER ASSETS                                                                    4,469           3,389
                                                                            -----------     -----------
 TOTAL                                                                    $     98,230    $     98,533
                                                                            ===========     ===========

 LIABILITIES AND STOCKHOLDERS' EQUITY

 CURRENT LIABILITIES:
      Current portion of long-term debt                                   $      1,705    $      3,447
      Note payable under retail floor plan agreement                             1,071               -
      Accounts payable                                                           4,295           3,844
      Amounts payable under dealer incentive programs                            4,252           5,828
      Accrued compensation and related withholdings                              3,754           2,664
      Accrued insurance                                                          6,609           6,385
      Estimated warranties                                                      13,255          13,475
      Reserve for repurchase commitments                                         2,052           3,070
      Other                                                                      4,255           4,580
                                                                            -----------     -----------
           Total current liabilities                                            41,248          43,293
                                                                            -----------     -----------
 DEFERRED INCOME TAXES                                                             415             693
                                                                            -----------     -----------
 LONG-TERM DEBT                                                                 11,400          13,089
                                                                            -----------     -----------
 OTHER LONG-TERM LIABILITIES                                                         -             471
                                                                            -----------     -----------
 COMMITMENTS AND CONTINGENCIES (NOTE 10)

 STOCKHOLDERS' EQUITY:
      Series A Junior Participating Preferred Stock, $0.01 par value;
        200,000 shares authorized, none issued                                       -               -
      Preferred Stock, $0.01 par value; 300,000 shares authorized,
        none issued                                                                  -               -
     Common stock, $0.10 par value; 50,000,000 shares authorized,
        18,992,574 (2004) and 18,692,944 (2003) shares issued                    1,899           1,869
      Additional paid-in capital                                                56,861          55,952
      Accumulated deficit                                                       (9,492)        (12,733)
      Treasury stock, at cost; 1,017,300 (2004 and 2003) shares                 (4,101)         (4,101)
                                                                            -----------     -----------
          Total stockholders' equity                                            45,167          40,987
                                                                            -----------     -----------
 TOTAL                                                                    $     98,230    $     98,533
                                                                            ===========     ===========

 See notes to consolidated financial statements.

</TABLE>
<PAGE>

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

                                           CAVALIER HOMES, INC. AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF OPERATIONS
                                   FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
                                       (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
---------------------------------------------------------------------------------------------------------

                                                                  2004            2003           2002
                                                              ------------   -------------  -------------
 REVENUE                                                    $     234,161  $      247,836  $     387,257
                                                              ------------   -------------  -------------
 COST OF SALES                                                    192,419         208,687        332,964

 SELLING, GENERAL AND ADMINISTRATIVE                               38,340          43,171         62,649

 IMPAIRMENT AND OTHER RELATED
    CHARGES                                                           209             750          6,064
                                                              ------------   -------------  -------------
                                                                  230,968         252,608        401,677
                                                              ------------   -------------  -------------
 OPERATING INCOME (LOSS)                                            3,193          (4,772)       (14,420)
                                                              ------------   -------------  -------------

 OTHER INCOME (EXPENSE):
     Interest expense                                              (1,075)         (1,065)        (1,495)
     Other, net                                                       218             380            739
                                                              ------------   -------------  -------------
                                                                     (857)           (685)          (756)
                                                              ------------   -------------  -------------
 INCOME (LOSS) BEFORE INCOME TAXES                                  2,336          (5,457)       (15,176)

 INCOME TAX PROVISION (BENEFIT)                                        75            (518)         5,716

 EQUITY IN EARNINGS OF EQUITY-METHOD
     INVESTEES                                                        980             369            384
                                                              ------------   -------------  -------------
 INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
     CHANGE IN ACCOUNTING PRINCIPLE                                 3,241          (4,570)       (20,508)

 CUMULATIVE EFFECT OF CHANGE IN
    ACCOUNTING PRINCIPLE, NET OF TAX
    BENEFIT OF $1,306                                                   -               -        (14,162)
                                                              ------------   -------------  -------------
 NET INCOME (LOSS)                                          $       3,241  $       (4,570) $     (34,670)
                                                              ============   =============  =============

 BASIC AND DILUTED INCOME (LOSS) PER SHARE:
   INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
       CHANGE IN ACCOUNTING PRINCIPLE                       $        0.18  $        (0.26) $       (1.16)

   CUMULATIVE EFFECT OF CHANGE IN
       ACCOUNTING PRINCIPLE                                             -               -          (0.80)
                                                              ------------   -------------  -------------
 NET INCOME (LOSS)                                          $        0.18  $        (0.26) $       (1.96)
                                                              ============   =============  =============
 WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC                   17,879,939      17,666,192     17,664,901
                                                              ============   =============  =============
 WEIGHTED AVERAGE SHARES OUTSTANDING -
    DILUTED                                                    18,178,394      17,666,192     17,664,901
                                                              ============   =============  =============

 See notes to consolidated financial statements.
</TABLE>
<PAGE>


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

                                                  CAVALIER HOMES, INC. AND SUBSIDIARIES
                                            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                         FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
                                             (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
------------------------------------------------------------------------------------------------------------------------------------


                                                                                          Retained
                                                       Common          Additional         Earnings       Treasury
                                                        Stock           Paid -in        (Accumulated       Stock           Total
                                                                         Capital           Deficit)
                                                   ---------------   --------------   -------------    -------------    ------------

 BALANCE, JANUARY 1, 2002                        $          1,868          55,918          26,507          (4,101)          80,192
   Stock options exercised                                      -               8               -               -                8
   Income tax benefit attributable to
      exercise of stock options                                 -               6               -               -                6
   Net loss                                                     -               -         (34,670)              -          (34,670)
                                                   ---------------   -------------   -------------     -------------    ------------

 BALANCE, DECEMBER 31, 2002                                 1,868          55,932          (8,163)         (4,101)          45,536
   Stock options exercised                                      1              13               -               -               14
   Income tax benefit attributable to
      exercise of stock options                                 -               7               -               -                7
   Net loss                                                     -               -          (4,570)              -           (4,570)
                                                   ---------------   -------------   -------------     -------------    ------------

 BALANCE, DECEMBER 31, 2003                                 1,869          55,952         (12,733)         (4,101)          40,987
   Stock options exercised                                     30             909               -               -              939
   Net income                                                   -               -           3,241               -            3,241
                                                   ---------------   -------------   ---------------   -------------    ------------

 BALANCE, DECEMBER 31, 2004                      $          1,899  $       56,861  $       (9,492)   $     (4,101)  $       45,167
                                                   ===============   =============   ===============   =============    ============

 See notes to consolidated financial statements.

</TABLE>
<PAGE>

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

                                                  CAVALIER HOMES, INC. AND SUBSIDIARIES
                                                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                                           FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
                                                              (IN THOUSANDS)


                                                                                     2004              2003             2002
                                                                                 ------------     -------------     ------------

 OPERATING ACTIVITIES:
   Net income (loss)                                                           $       3,241    $       (4,570)   $     (34,670)
   Adjustments to reconcile net income (loss) to net cash
   provided by (used in) operating activities:
        Cumulative effect of change in accounting principle, net of tax                                                  14,162
        Depreciation and amortization                                                  3,317             4,588            6,286
        Provision for  (recovery of) credit and accounts receivable losses              (235)              173            2,749
        Loss (gain) on sale of property, plant and equipment                             (10)              (51)             162
        Impairment and other related charges                                             209               750            6,064
        Deferred income taxes                                                              -                 -           15,862
        Other, net                                                                      (980)             (461)          (1,751)
        Changes in assets and liabilities:
             Accounts receivable                                                      (2,321)            1,414            3,895
             Inventories                                                              (3,945)            7,323            2,385
             Income taxes                                                                (53)            5,356           (4,838)
             Accounts payable                                                            451            (3,216)            (999)
             Other assets and liabilities                                             (1,711)          (13,202)          (9,443)
                                                                                 ------------     -------------     ------------

        Cash provided by (used in) operations                                         (2,037)           (1,896)            (136)

             Installment contracts purchased for resale                              (32,864)          (37,156)         (44,068)
             Sale of installment contracts                                            31,905            35,953           38,313
             Principal collected on installment contracts purchased for resale         2,066             2,197              225
                                                                                 ------------     -------------     ------------
        Net cash provided by (used in) operating activities                             (930)             (902)          (5,666)
                                                                                 ------------     -------------     ------------

 INVESTING ACTIVITIES:
   Proceeds from disposition of property, plant and equipment                          2,320             6,294            1,059
   Capital expenditures                                                                 (786)             (327)          (2,062)
   Notes and installment contracts purchased for investment                             (496)             (627)          (1,175)
   Principal collected on notes and installment contracts purchased for investment       474               629             1,106
   Other investing activities                                                            120              (173)           2,013
                                                                                 ------------     -------------     ------------
       Net cash provided by (used in) investing activities                             1,632             5,796              941
                                                                                 ------------     -------------     ------------

 FINANCING ACTIVITIES:
   Net borrowings (payments) on notes payable                                          1,071                 -           (2,297)
   Payments on long-term debt                                                         (3,431)          (17,454)          (1,303)
   Proceeds from long-term borrowings                                                      -            10,000                -
   Proceeds from exercise of stock options                                               939                14                8
                                                                                 ------------     -------------     ------------
        Net cash used in financing activities                                         (1,421)           (7,440)          (3,592)
                                                                                 ------------     -------------     ------------
 NET DECREASE IN CASH AND CASH EQUIVALENTS                                              (719)           (2,546)          (8,317)
 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                         32,393            34,939           43,256
                                                                                 ------------     -------------     ------------
 CASH AND CASH EQUIVALENTS, END OF YEAR                                        $      31,674    $       32,393    $      34,939
                                                                                 ============     =============     ============
See Notes to consolidated financial statements.
</TABLE>
<PAGE>


CAVALIER HOMES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
-------------------------------------------------------------------------------


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Principles of Consolidation - The consolidated financial statements
      include the accounts of Cavalier Homes, Inc. and its wholly-owned and
      majority-owned subsidiaries (collectively, the "Company"). The Company's
      minority ownership interests in various joint ventures are accounted for
      using the equity method and are included in other assets in the
      accompanying consolidated balance sheets (see note 12). Intercompany
      transactions have been eliminated in consolidation. See Note 11 for
      information related to the Company's business segments.

      Nature of Operations - The Company designs and produces manufactured homes
      which are sold to a network of dealers located primarily in the South
      Central and South Atlantic regions of the United States. In addition,
      through its financial services segment, the Company offers retail
      installment sale financing and related insurance products primarily for
      manufactured homes sold through the Company's dealer network. The
      Company's retail segment operates retail sales locations which offer the
      Company's homes, financing, and insurance products to retail customers.

      Accounting Estimates - The Company's consolidated financial statements are
      prepared in conformity with accounting principles generally accepted in
      the United States of America which require management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and disclosure of contingent assets and liabilities at the date of the
      consolidated financial statements and the reported amounts of revenues and
      expenses during the reporting period. Actual results could differ from
      those estimates.

      Fair Value of Financial Instruments - The carrying value of the Company's
      cash equivalents, accounts receivable, accounts payable and accrued
      expenses approximates fair value because of the short-term nature of these
      instruments. Additional information concerning the fair value of other
      financial instruments is disclosed in Notes 3 and 5.

      Cash Equivalents - The Company considers all highly liquid investments
      with original maturities of three months or less to be cash equivalents.

      Inventories - Inventories are stated at the lower of cost (first-in,
      first-out method) or market. Work-in-process and finished goods
      inventories include an allocation for labor and overhead costs.

      Property, Plant and Equipment - Property, plant and equipment is stated at
      cost and depreciated over the estimated useful lives of the related assets
      primarily using the straight-line method. Maintenance and repairs are
      expensed as incurred.

      Goodwill - In June 2001, the Financial Accounting Standards Board ("FASB")
      issued Statement of Financial Accounting Standards ("SFAS") No. 142,
      Goodwill and Other Intangible Assets. Under this pronouncement, goodwill
      and intangible assets with indefinite lives will no longer be amortized
      but reviewed at least annually for impairment. The Company adopted SFAS
      No. 142 effective January 1, 2002. Under the provisions of this statement,
      in the first quarter of 2002, the Company recorded a charge of $14,162,
      net of tax, or $0.80 per diluted share, as a cumulative effect of a change
      in accounting principle, to eliminate all of its goodwill due to
      impairment. The entire amount of goodwill was associated with the
      Company's home manufacturing unit.

      The Company and the manufactured housing industry have been impacted by
      inventory oversupply at the retail level, an increase in dealer failures,
      a reduction in available consumer credit and wholesale (dealer) financing
<PAGE>

      for manufactured housing, more restrictive credit standards and increased
      home repossessions which re-enter home distribution channels. All of these
      factors caused the Company to suffer significant losses from the last half
      of 1999 and through the date of the initial impairment analysis of
      goodwill under SFAS No. 142. The fair value of the home manufacturing unit
      was determined with the assistance of a third-party valuation specialist,
      using projections provided by Company management as well as industry and
      other market data. The fair value of the home manufacturing unit was lower
      than the carrying value, which required allocation of the fair value to
      the assets and liabilities of the unit. In this allocation process,
      various independent parties were used to appraise certain of the Company's
      manufacturing fixed assets. Additionally, Company management estimated
      fair value of other assets and liabilities based on assumptions believed
      to be appropriate to the valuation process. As a result of this fair value
      allocation process, the Company's goodwill was considered impaired and an
      adjustment was recorded as described above.

      Impairment of Long-Lived Assets - In accordance with SFAS No. 144,
      Accounting for the Impairment or Disposal of Long-Lived Assets, the
      Company evaluates the carrying value of long-lived assets to be held and
      used when events and circumstances warrant such a review. The carrying
      value of long-lived assets is considered impaired when the anticipated
      undiscounted cash flow from such assets is less than its carrying value.
      In that event, a loss is recognized based on the amount by which the
      carrying value exceeds the fair market value of the long-lived assets.
      Fair market value is determined primarily using the anticipated cash flows
      discounted at a rate commensurate with the risk involved. Losses on
      long-lived assets to be disposed of are determined in a similar manner,
      except that the fair market values are primarily based on independent
      appraisals and preliminary or definitive contractual arrangements less
      costs to dispose.

      Revenue Recognition - Revenue for manufactured homes sold to independent
      dealers generally is recorded when all of the following conditions have
      been met; (a) an order for the home has been received from the dealer, (b)
      an agreement with respect to payment terms (usually in the form of a
      written or verbal approval for payment has been received from the dealer's
      flooring institution), and (c) the home has been shipped and risk of loss
      has passed to the dealer. All sales are final and without recourse except
      for the contingency described in Note 10. For Company-owned retail
      locations, revenue is recorded when the home has been delivered and
      accepted by the retail customer, risk of ownership has been transferred
      and funds have been received. Interest income on installment contracts
      receivable is recognized using the interest method.

      Product Warranties - The Company provides the retail home buyer a one-year
      limited warranty covering defects in material or workmanship in home
      structure, plumbing and electrical systems. The Company has provided a
      liability of $13,255 (2004) and $13,475 (2003) for estimated future
      warranty costs relating to homes sold, based upon management's assessment
      of historical experience factors and current industry trends. Activity in
      the liability for product warranty was as follows:

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

                                                                 2004                       2003                       2002
                                                          -------------------       --------------------       --------------------
Balance, beginning of year                                $        13,475           $        15,000            $        11,700
Warranty expense, net                                              14,423                    21,194                     27,765
Payments                                                          (14,643)                  (22,719)                   (24,465)
                                                          -------------------       --------------------       --------------------
Balance, end of year                                      $        13,255           $        13,475            $        15,000
                                                          ===================       ====================       ====================

</TABLE>

      Allowance for Credit Losses on Installment Contracts - The Company has
      provided an allowance for estimated future credit losses resulting from
      retail financing activities of CIS Financial Services, Inc. ("CIS"), a
      wholly- owned subsidiary, primarily based upon management's assessment of
      historical experience and current economic conditions.

      Insurance - The Company's workers' compensation (prior to February 1,
      1999, and after April 1, 2001), product liability and general liability
      insurance coverages were provided under incurred loss, retrospectively
      rated premium plans. Under these plans, the Company incurs insurance
      expense based upon various rates applied to current payroll costs and
<PAGE>

      sales. Annually, such insurance expense is adjusted by the carrier for
      loss experience factors subject to minimum and maximum premium
      calculations. Refunds or additional premiums are estimated and recorded
      when sufficiently reliable data is available. The Company's workers'
      compensation insurance coverage from February 1999 through March 2001 was
      provided under a fully insured, large deductible policy, and during 2001,
      the Company's product liability and general liability insurance coverages
      were converted to a fully insured, large deductible policy.

      Net Income (Loss) Per Share - The Company reports two separate net income
      (loss) per share numbers, basic and diluted. Both are computed by dividing
      net income (loss) by the weighted average shares outstanding (basic) or
      weighted average shares outstanding assuming dilution (diluted) as
      detailed below (in thousands of shares):

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

                                                                              2004                  2003                  2002
                                                                        ----------------     ----------------    -----------------
Weighted shares outstanding                                                      17,880              17,666               17,665
Dilutive effect of stock options and warrants                                       298                   -                    -
                                                                        ----------------     ----------------    -----------------

Weighted average shares outstanding, assuming dilution                           18,178              17,666               17,665
                                                                        ================     ================    =================
</TABLE>

      Options and warrants that were potentially dilutive to basic net income
      per share were not included in the computation of diluted net income per
      share because to do so would have been anti-dilutive. Options and warrants
      in 2003 and 2002 are excluded due to their antidilutive effect as a result
      of the Company's net losses. The maximum anti-dilutive options and
      warrants (in thousands of shares) were $1,371, $2,686, and $3,291, for
      2004, 2003, and 2002, respectively.

      Stock Based Compensation Plans - In December 2002, the FASB issued SFAS
      No. 148, Accounting for Stock-Based Compensation - Transition and
      Disclosure, an amendment of FASB Statement No. 123. SFAS No. 148 amends
      SFAS No. 123, Accounting for Stock-Based Compensation, to provide
      alternative methods of transition for a voluntary change to the fair value
      method of accounting for stock-based employee compensation. In addition,
      SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
      prominent disclosures in both annual and interim financial statements.
      These disclosure modifications are included in the notes to these
      consolidated financial statements. The Company applies Accounting
      Principles Board Opinion ("APB") 25, Accounting for Stock Issued to
      Employees, and related interpretations in accounting for its employee and
      director plans. Accordingly, no compensation expense has been recognized
      for these plans except where the exercise price was less than fair value
      on the date of grant. The Company has granted no such options. Had
      compensation cost been determined based on the fair value at the grant
      date for awards under these plans consistent with the methodology
      prescribed under SFAS No. 123, the Company's net income (loss) and net
      income (loss) per share would approximate the pro forma amounts below. See
      Note 7 for the assumptions used in the following table:

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


                                                                       2004                     2003                    2002
                                                               -------------------      -------------------     ------------------

Net income (loss), as reported                                  $         3,241          $        (4,570)       $        (34,670)
Less:  Total stock-based employee compensation
  expense determined under fair value based method
  for all awards, net of related tax effects                                 42                       71        $            867
                                                               -------------------      -------------------     -------------------
  Pro forma                                                     $        $3,199          $        (4,641)                (35,537)
                                                               ===================      ===================     ===================

Basic and diluted income (loss) per share:
  As reported                                                   $          0.18          $         (0.26)$       $         (1.96)
  Pro forma                                                     $          0.18          $         (0.26)$       $         (2.01)

</TABLE>
<PAGE>

      Recently Issued Accounting Pronouncements - In January 2003, the FASB
      issued Interpretation No. 46, Consolidation of Variable Interest Entities,
      an Interpretation of ARB No. 51 ("FIN 46"). FIN 46 requires certain
      variable interest entities (also formerly referred to as special purpose
      entities) to be consolidated by the primary beneficiary of the entity if
      the equity investors in the entity do not have the characteristics of a
      controlling financial interest or do not have sufficient equity at risk
      for the entity to finance its activities without additional subordinated
      financial support from other parties. In December 2003, the FASB issued
      Interpretation No. 46R, Consolidation of Variable Interest Entities--an
      interpretation of ARB 51 (revised December 2003) ("FIN 46R"), which
      includes significant amendments to previously issued FIN 46. Among other
      provisions, FIN 46R includes revised transition dates for public entities.
      Adoption of FIN 46R is required for financial statements issued after
      March 15, 2004. The adoption of this interpretation did not have a
      material effect on the Company's consolidated financial statements.

      In November 2002, the FASB issued Interpretation ("FIN") No. 45,
      Guarantor's Accounting and Disclosure Requirements for Guarantees,
      Including Indirect Guarantees of Indebtedness to Others, an interpretation
      of FASB Statements No. 5, 57, and 107 and a rescission of FASB
      Interpretation No. 34. FIN 45 requires disclosures to be made by a
      guarantor in its interim and annual financial statements about its
      obligations under guarantees issued. FIN 45 also clarifies that a
      guarantor is required to recognize, at inception of a guarantee, a
      liability for the fair value of the obligation undertaken. FIN 45
      provisions were applied to the Company's reserve for repurchase
      commitments, however, the impact was not material. The Company intends to
      adopt the FIN 45 provisions for new guarantees beginning January 1, 2005.

      In December 2004, the FASB issued SFAS No. 123R, Accounting for
      Stock-Based Compensation, a revision of SFAS No. 123. SFAS No.123R
      supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
      SFAS No. 123R requires the cost of employee services received in exchange
      for an award of equity instruments be recorded based on fair value on the
      grant date. The compensation cost will be recognized over the vesting
      period. The fair value will be remeasured annually at the reporting date.
      Adoption of SFAS 123R is required for financial statements issued after
      June 15, 2005. The Company is currently assessing the effects of the
      adoption of this statement on the Company's consolidated financial
      statements.

      In December 2004, the FASB issued Staff Position No. 109-1, Accounting for
      Income Taxes, to the Tax Deduction on Qualified Production Activities
      Provided by the American Jobs Creation Act of 2004 ("FSP FAS 109-1"). FSP
      FAS 109-1 states that the qualified production activities deduction should
      be accounted for as a special deduction and the special deduction should
      be considered in measuring deferred taxes when graduated tax rates are a
      significant factor and assessing whether a valuation allowance is
      necessary. This deduction is not available to the Company until it has
      utilized all of its net operating loss carry forwards. The Company's
      deferred tax assets are currently fully reserved.

      In November 2004, the FASB issued Statement No. 151, Inventory Costs, an
      amendment of ARB No. 43, Chapter 4. SFAS No. 151 requires that abnormal
      amounts of idle facility expense, freight, handling costs, and wasted
      material (spoilage) be recognized as current period charges. SFAS 151 also
      requires that the "allocation of fixed production overheads to the costs
      of conversion be based on the normal capacity of the production
      facilities." Normal capacity is defined as "the production expected to be
      achieved over a number of periods or seasons under normal circumstances,
      taking into account the loss of capacity resulting from planned
      maintenance". This statement becomes effective for inventory costs
      incurred during fiscal years beginning after June 15, 2005. The Company is
      currently assessing the effects of the adoption of this statement on the
      Company's consolidated financial statements.

      In December 2004, the FASB issued Statement No. 153, Exchanges of
      Nonmonetary Assets an amendment of APB Opinion No. 29. SFAS No. 153
      requires that exchange transactions that lack commercial substance be
      measured based on the recorded amount less impairment and not on the fair
      values of the exchanged assets. Exchange transactions that lack commercial
      substance are transactions that are not expected to result in significant
      changes in the cash flows of the reporting entity. This statement becomes
      effective for nonmonetary asset exchanges occurring in fiscal periods
      beginning after June 15, 2005. The Company does not expect the adoption of
      this statement to have a material effect on the Company's consolidated
      financial statements.
<PAGE>

      Reclassifications - Certain amounts from the prior periods have been
      reclassified to conform to the 2004 presentation.

2.    IMPAIRMENT AND OTHER RELATED CHARGES

      For any exit or disposal activities initiated after December 31, 2002, the
      Company has adopted SFAS No. 146, Accounting for Costs Associated with
      Exit or Disposal Activities which requires that the liability for costs
      associated with an exit or disposal activity be recognized when the
      liability is incurred rather than at the time a company commits to an exit
      plan. SFAS No. 146 also establishes that the liability initially should be
      measured and recorded at fair value. During 2002, the Company adopted SFAS
      No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
      which provides that a long-lived asset or asset group that is to be sold
      shall be classified as "held for sale" if certain criteria are met,
      including the expectation supported by evidence that the sale will be
      completed within one year. The Company has idle assets of $10,262 (2004)
      and $13,901 (2003) recorded at lower of carrying value or fair value which
      are comprised primarily of closed home manufacturing facilities which the
      Company is attempting to sell. With the exception of a home manufacturing
      facility sold in January 2004 (as described below), management does not
      have evidence at the balance sheet date that it is probable that the sale
      of these assets will occur within one year, and thus, in accordance with
      the requirements of SFAS No. 144, such assets are classified as "held and
      used" and depreciation has continued on these assets. The following
      paragraphs describe impairment and other related charges recorded in the
      current and prior years on the most significant of these closed
      facilities.

      During 2004, the Company recorded impairment and other related charges of
      $209 ($209 after tax or $0.01 per basic and diluted share) related to the
      closing of a home manufacturing facility. The total charge consisted of
      writedowns for property, plant and equipment. Charges for involuntary
      termination benefits will be recorded as incurred, primarily during the
      first quarter of 2005.

      During 2003, the Company recorded impairment and other related charges of
      $750 ($750 after tax or $0.04 per diluted share) in connection with the
      closing of a home manufacturing facility in August 2003, the pending sale
      of another home manufacturing facility closed in December 2002 and the
      closing of an underperforming retail location in August 2003. The charge
      included writedowns of $551 for property, plant and equipment and $199 for
      involuntary termination benefits which were recorded as incurred and paid.
      In January 2004, the pending sale was consummated resulting in net cash
      proceeds of $2,073, of which $1,555 was used to pay down on the real
      estate term loan in accordance with provisions of the credit facility.
      Accordingly, this repayment was reflected in current portion of long-term
      debt as of December 31, 2003 and the related property was included in
      other current assets in the accompanying consolidated balance sheet. No
      additional gain or loss was recorded at the time of the sale.

      During 2002, the Company recorded impairment and other related charges of
      $6,064 ($5,253 after tax or $0.30 per diluted share) in connection with
      the closing of six home manufacturing facilities. The charge included
      writedowns of $3,890 for property, plant and equipment, $22 for lease
      obligations and $2,152 for involuntary termination benefits for 989
      employees. Payments of $8 (2004), $1,484 (2003), and $682 (2002) were made
      against the reserve for lease obligations and involuntary termination
      benefits.

      Payments of $0 (2004), $128 (2003), and $837 (prior to 2002) were made
      against the reserve for lease and other obligations established prior to
      2002. At December 31, 2004 and 2003, reserves for lease and other
      obligations were $0 and $8, respectively.

3.    INSTALLMENT CONTRACTS RECEIVABLE

      CIS finances retail sales through the purchase of installment contracts
      primarily from retail customers of a portion of the Company's dealer
      network, at fixed interest rates, in the ordinary course of business, and
      resells a majority of the loans to financial institutions under the terms
      of retail finance agreements. CIS enters into agreements to sell, with
      limited recourse, contracts in its portfolio that meet specified credit
<PAGE>

      criteria. Under these agreements, CIS sold $31,905, $35,953, and $38,313
      of contracts receivable and realized gains of $940, $1,115, and $1,391 for
      the years ended December 31, 2004, 2003, and 2002, respectively. Standard
      loan programs require minimum down payments, ranging from 5% to 20% of the
      purchase price of the home, on all installment contracts based on the
      creditworthiness of the borrower. CIS's portfolio consists of fixed rate
      contracts with interest rates generally ranging from 7.0% to 15.0% and
      from 8.0% to 15.0% at December 31, 2004 and 2003, respectively. The
      average original term of the portfolio was approximately 270 and 267
      months at December 31, 2004 and 2003, respectively. For loans held in its
      portfolio, CIS requires the borrower to maintain adequate insurance on the
      home throughout the life of the contract. Contracts are secured by the
      home which is subject to repossession by CIS upon default by the borrower.
      At December 31, 2004, scheduled principal payments of installment
      contracts receivable (including expected sales of contracts receivable in
      2005) are as follows:

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


          Year Ending
          December 31,
------------------------------------
            2005                                         $        2,086
            2006                                                     83
            2007                                                     93
            2008                                                    103
            2009                                                    115
         Thereafter                                               6,359
                                                           -------------

                              Total                      $        8,839
                                                           =============

</TABLE>

      The Company maintains a reserve for loans based on historical experience,
      the estimated value of any underlying collateral, and specifically
      identified factors presenting uncertainty with respect to collectibility.
      Activity in the allowance for credit losses on installment contracts was
      as follows:

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

                                                              2004                    2003                    2002
                                                        ------------------     -------------------    ----------------------

Balance, beginning of year                            $             1,030    $                859   $                   829
Provision for credit losses                                            75                     354                       358
Charge offs, net                                                     (152)                   (183)                     (328)
                                                        ------------------     -------------------    ----------------------
Balance, end of year                                  $               953    $              1,030   $                   859
                                                        ==================     ===================    ======================
</TABLE>

      At December 31, 2004 and 2003, the estimated fair value of installment
      contracts receivable, excluding loans identified as presenting uncertainty
      with respect to collectibilty, was $8,366 and $9,997 respectively. These
      fair values were estimated using discounted cash flows and interest rates
      offered by CIS on similar contracts at such times.
<PAGE>
4.    INVENTORIES

      Inventories consisted of the following:

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

                                             2004                 2003
                                       -----------------    -----------------

Raw materials                       $            11,326  $             7,791
Work-in-process                                   1,159                1,083
Finished goods                                    2,424                2,090
                                       -----------------    -----------------
Total inventory                     $            14,909  $            10,964
                                       =================    =================
</TABLE>

        During 2004, 2003, and 2002, the Company purchased raw materials of
        approximately $17,680, $14,580, and $17,231 respectively, from joint
        ventures in which the Company owns a minority interest.

5.    CREDIT ARRANGEMENTS

      On October 26, 2004, the Company amended its credit facility (the "Credit
      Facility") with its primary lender to extend the maturity date under the
      revolving line of credit available under the Credit Facility to April
      2007. A director of the Company served as president of the primary lender
      until August 31, 2004. The Credit Facility is comprised of a revolving
      line of credit which provides for borrowings (including letters of credit)
      up to $25,000 and a real estate term loan (14 year) component of $10,000
      which are cross-secured and cross-defaulted. The amount available under
      the revolving line of credit, up to $25,000, is equal to the lesser of an
      amount based on defined percentages of accounts and notes receivable and
      inventories or certain levels of tangible net worth plus all treasury
      stock purchases after December 31, 2003, as noted in the following table.

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

                  Tangible Net Worth              Credit Facility
                       ("TNW")                      Available
                ------------------------      -------------------------

                Above $50,000                 30% of TNW
                $50,000 - $38,000             $15,000
                $38,000 - $23,000             $15,000 to zero (dollar
                                              for dollar reduction)

</TABLE>

      At December 31, 2004, $8,891 under the revolving line of credit was
      available after deducting letters of credit of $6,109. The Company did not
      have any amounts outstanding under the revolving lines of credit as of
      December 31, 2003 and 2004.The applicable interest rates under the
      revolving line of credit are based on certain levels of tangible net worth
      as noted in the following table.

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

                 Tangible Net Worth
                        ("TNW")                    Interest Rate
                ------------------------      -------------------------

                Above $77,000                 Prime less 0.50%
                $77,000 - $65,000             Prime
                $65,000 - $58,000             Prime plus 0.25%
                $58,000 - $38,000             Prime plus 1.00%
                Below $38,000                 Prime plus 2.00%
</TABLE>

      The bank's prime rate at December 31, 2004 and 2003 was 5.25% and 4.00%
      respectively. The Company made payments to its lender in the amount of
      $694 (2004), $698 (2003) and $936 (2002) for interest, commitment fees,
      letter of credit and various bond related fees.
<PAGE>

      The real estate term loan agreement contained in the Credit Facility
      provides for borrowings of $10,000, of which $6,857 and $8,895 was
      outstanding at December 31, 2004 and December 31, 2003 respectively.
      Interest on the term note is fixed for a period of five years from
      issuance at 6.5% and may be adjusted at 5 and 10 years. Amounts
      outstanding under the real estate term loan are collateralized by certain
      plant facilities and equipment.

      The Credit Facility, as amended, contains certain restrictive and
      financial covenants which, among other things, limit the Company's
      ability, without the lender's consent, 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, $1,000, (iii) incur
      additional indebtedness, including lease obligations, which exceed in the
      aggregate $1,000, excluding floor plan notes payable which cannot exceed
      $3,000 and (iv) make annual capital expenditures in excess of $1,000. In
      addition, the Credit Facility contains certain financial covenants
      requiring the Company to maintain on a consolidated basis certain defined
      levels of debt to tangible net worth ratio (not to exceed 2.5 to 1) and
      cash flow to debt service ratio of not less than 1.35 to 1 commencing with
      the year ending December 31, 2005 and 1.5 to 1 for the years ending
      December 31, 2006 and thereafter, and to maintain a current ratio, as
      defined, of at least 1.0 to 1 and consolidated tangible net worth of at
      least $23,000. The Credit Facility also requires CIS to comply with
      certain specified restrictions and financial covenants. At December 31,
      2004, the Company was in compliance with its debt covenants.

      The Company has $1,071 and $0 of notes payable under retail floor plan
      agreements at December 31, 2004 and 2003, respectively. The notes are
      collateralized by certain Company-owned retail stores' inventories and
      bear interest at rates ranging from prime to prime plus 2.5% based on the
      age of the home.

      The Company has amounts outstanding under six Industrial Development
      Revenue Bond issues ("Bonds") which totaled $6,248 and $7,641 at December
      31, 2004 and 2003, respectively. Four of the bond issues bear interest at
      variable rates ranging from 4.45% to 5.40% and mature at various dates
      through April 2009. One of the bond issues is payable in equal quarterly
      principal payments with interest payable at 6.75% and matures in 2005. One
      of the bond issues is payable in annual installments through 2013 with
      interest payable monthly at a variable rate currently at 2.39% as
      determined by a remarketing agent. The real estate term loan and the bonds
      are collateralized by substantially all of the Company's plant facilities
      and equipment. Restricted bond funds of $148 and $0 are reflected as a
      non-current asset in the consolidated balance sheets as December 31, 2004
      and 2003, respectively.

      At December 31, 2004, principal repayment requirements on long-term debt
      are as follows:

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

        Year Ending
        December 31,
   -----------------------
            2005                                         $        1,705
            2006                                                  1,638
            2007                                                  1,719
            2008                                                  1,357
            2009                                                  1,433
         Thereafter                                               5,253
                                                           -------------

                    Total                                        13,105
        Less current portion                                      1,705
                                                           -------------

                    Long-term debt                       $       11,400
                                                           =============
</TABLE>
<PAGE>


      At December 31, 2004 and 2003, the estimated fair value of outstanding
      borrowings was $13,001 and $16,958. These estimates were determined using
      rates at which the Company believes it could have obtained similar
      borrowings at such times.

      Cash paid for interest during the years ended December 31, 2004, 2003, and
      2002 was $1,114, $1,165, and $1,576 respectively.

6.    STOCKHOLDERS' EQUITY

      The Company has adopted a Stockholder Rights Plan with the terms and
      conditions of the plan set forth in a Rights Agreement dated October 23,
      1996 between the Company and its Rights Agent. Pursuant to the plan, the
      Board of Directors of the Company declared a dividend of one Right (as
      defined in the Rights Agreement) for each share of the Company's
      outstanding common stock to stockholders of record on November 6, 1996.
      One right is also associated with each share of the Company's outstanding
      common stock issued after November 6, 1996, until the Rights become
      exercisable, are redeemed or expire. The Rights, when exercisable, entitle
      the holder to purchase a unit equal to 0.80 one-hundredth share of Series
      A Junior Participating Preferred Stock, par value $0.01, at a purchase
      price of $80 per unit. Upon certain events relating to the acquisition of,
      or right to acquire, beneficial ownership of 20% or more of the Company's
      outstanding common stock by a third party, or a change in control of the
      Company, the Rights entitle the holder to acquire, after the Rights are no
      longer redeemable by the Company, shares of common stock of the Company
      (or, in certain cases, securities of an acquiring person) for each Right
      held at a significant discount. The Rights will expire on November 6,
      2006, unless redeemed earlier by the Company at $0.01 per Right under
      certain circumstances.

      Pursuant to a common stock repurchase program approved by the Company's
      Board of Directors, a total of 3,168,800 shares have been purchased at a
      cost of $24,842. The Company retired 2,151,500 of these shares at December
      31, 1999, with the remaining shares being recorded as treasury stock. At
      December 31, 2004, the Company has authority under the program to acquire
      up to 831,200 additional shares.

7.    INCENTIVE PLANS

      o    The Company has a Key Employee Stock Incentive Plan (the "1996
           Plan"), which provides for the granting of both incentive and
           non-qualified stock options. Additionally, the 1996 Plan provides for
           stock appreciation rights and awards of both restricted stock and
           performance shares. Options are granted at prices and terms
           determined by the compensation committee of the Board of Directors.
           Options granted under the 1996 Plan are generally exercisable six
           months after the grant date and expire ten years from the date of
           grant. As of December 31, 2004, shares authorized for grant under
           this plan totaled 2,882,018 of which 975,251 shares were available to
           be granted.

      o    The Company also has a Non-employee  Director Plan under which
           625,000 shares of the Company's  common stock were reserved for
           grant to  non-employee  directors  at fair market value on the date
           of such grant.  Options are granted upon the  director's initial
           election and automatically on an annual basis thereafter,  up to a
           maximum of 125,000 shares.  Options granted under the plan are
           generally  exercisable  six months  after the grant  date and expire
           ten years from the date of grant.  As of December 31, 2004, 96,718
           shares were  available to be granted.  Additionally, in January 2002,
           the Board of Directors of the Company granted to certain non-employee
           directors,  who had received the maximum shares available under the
           Non-employee Director Plan, options to purchase 51,000 shares of the
           Company's  common  stock on  substantially  the same terms and
           conditions as options granted under the Non-employee Director Plan.

      The Company has a Dividend Reinvestment Plan, which provides for 500,000
      shares to be purchased by participants in the Plan by reinvesting the cash
      dividends on all, or part, of their shares. The price of the shares
      purchased through the Plan is the higher of 95% of the average daily high
      and low sale prices of the Company's common stock on the four trading days
<PAGE>

      including and preceding the Investment Date (as defined in the Plan) or
      95% of the average high and low sales prices on the Investment Date.

      The fair value of options granted was estimated at the date of grant using
      the Black-Scholes option pricing model with the following weighted average
      assumptions:

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

                                                                        2004                 2003                 2002
                                                                  -----------------    -----------------    -----------------

Dividend yield                                                               0.00%                0.00%                0.00%
Expected volatility                                                         62.51%               62.79%               59.46%
Risk free interest rate                                                      3.52%                2.55%                4.56%
Expected lives                                                           5.0 years            5.0 years            6.6 years

</TABLE>

      The pro forma disclosure, as required by SFAS No. 123 and SFAS No. 148, is
      presented in tabular format in Note 1. The effects of applying SFAS No.
      123 in this pro forma disclosure may not be indicative of future amounts,
      and additional awards in future years are anticipated.

      With respect to options exercised, the income tax benefits resulting from
      compensation expense allowable under federal income tax regulations in
      excess of the expense (benefit) reflected in the Company's financial
      statements have been credited to additional paid-in capital.
<PAGE>

      Information regarding all of the Company's stock option plans is
      summarized below:

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

                                                                                                                    Weighted
                                                                                            Weighted                Average
                                                                    Shares                  Average                Fair Value
                                                                                             Price               at Grant Date
                                                              --------------------    ---------------------   ---------------------
 OUTSTANDING AT JANUARY 1, 2002                                         2,788,089                   $ 8.49
   Granted at fair value                                                  665,354                     3.22                  $ 1.89
   Exercised                                                               (5,293)                    1.48
   Cancelled                                                             (563,889)                    5.90
                                                              --------------------
 OUTSTANDING, DECEMBER 31, 2002                                         2,884,261                   $ 7.79
   Granted at fair value                                                   75,000                     1.72                  $ 0.94
   Exercised                                                              (10,000)                    1.39
   Cancelled                                                             (474,674)                    6.71
                                                              --------------------
 OUTSTANDING, DECEMBER 31, 2003                                         2,474,587                   $ 7.84
   Granted at fair value                                                   25,000                     2.99                  $ 1.67
   Exercised                                                             (299,630)                    3.14
   Cancelled                                                             (115,571)                    8.97
                                                              --------------------

 OUTSTANDING, DECEMBER 31, 2004                                         2,084,386                   $ 8.39
                                                              ====================    =====================

 Options exercisable at December 31, 2004                               2,084,386                   $ 8.39
                                                              ====================    =====================
 Options exercisable at December 31, 2003                               2,474,587                   $ 7.84
                                                              ====================    =====================
 Options exercisable at December 31, 2002                               2,884,261                   $ 7.79
                                                              ====================    =====================

</TABLE>
<PAGE>

      The following table summarizes information concerning stock options
outstanding at December 31, 2004:

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

                                      Options Outstanding                         Options Exercisable
                    -----------------------------------------------------    ------------------------------

                                             Weighted
                                              Average         Weighted                          Weighted
                                             Remaining         Average                          Average
     Range of               Number          Contractual       Exercise          Number          Exercise
  Exercise Prices        Outstanding           Life             Price         Exercisable        Price
--------------------    ---------------    --------------    ------------    --------------   -------------

   $1.69 -  $4.64              751,137              6.36   $        3.37           751,137  $         3.37
   $4.64 -  $9.88              164,275              3.49            9.64           164,275            9.64
   $9.88 - $12.35              917,774              2.42           10.45           917,774           10.45
  $12.35 - $16.60              251,200              1.46           15.10           251,200           15.10
                        ---------------                                      --------------

   $1.69 - $16.60            2,084,386              3.81   $        8.39         2,084,386  $         8.39
                        ===============                      ============    ==============   =============

</TABLE>

8.    INCOME TAXES

      Provision (benefit) for income taxes consists of:

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

                                                                              2004               2003               2002
                                                                      -----------------   -----------------   ----------------
Current
   Federal                                                            $             -     $          (672)           (10,166)
   State                                                                           75                 154                 20
                                                                      -----------------   -----------------   ----------------
                                                                                   75                (518)           (10,146)

Deferred
   Federal                                                            $             -     $             -     $       11,618
   State                                                                            -                   -              4,244
                                                                      -----------------   -----------------   ----------------
                                                                                    -                   -             15,862

Income taxes (benefit)                                                             75                (518)             5,716
Income tax benefit - change in accounting principle                                 -                   -             (1,306)
                                                                      -----------------   -----------------   ----------------

Total                                                                 $            75     $          (518) $           4,410
                                                                      =================   =================   ================

</TABLE>

      Effective March 9, 2002, the Jobs Creation and Workers' Assistance Act was
      passed which enabled the Company to carryback net operating losses five
      years instead of two years as under the previous law. Due to the change in
      law, the Company received refunds of $6,425 in 2003 and $4,634 in 2002.
      Both refunds were reflected in the current income tax provision and
      benefit related to the change in accounting principle for the year ended
      December 31, 2002. The Company received an additional refund of $309 in
      2003.


      Total income tax provision (benefit) for 2004, 2003, and 2002, is
      different from the amount that would be computed by applying the expected
      federal income tax rate of 35% to income (loss) before income taxes. The
      reasons for this difference are as follows:
<PAGE>

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

                                                                                  2004                2003                2002
                                                                             ----------------   -----------------   ----------------

Income tax provision (benefit) at expected federal income tax rate           $        1,160     $      (1,781)      $      (9,199)
State income tax provision (benefit), net of federal tax effect                        (148)              712               3,455
Change in valuation allowance                                                          (916)            1,968              11,672
Non-deductible operating expenses                                                       124                24                 212
Tax effect of exercise of non-qualified stock options                                  (251)
Goodwill                                                                                  -                 -               4,210
Adjustments to prior years' tax provisions following IRS audit                          106            (1,345)                  -
Additional refunds attributable to law change                                             -               (96)             (4,634)
                                                                             ----------------   -----------------   ----------------

Total                                                                        $           75     $           (518)   $       5,716
                                                                             ================   =================   ================
</TABLE>

      The Company has a valuation allowance against net deferred income tax
      assets of $19,607 and $20,523 in accordance with the requirements of SFAS
      No. 109, Accounting for Income Taxes for the years ended December 31, 2004
      and 2003, respectively. Realization of the deferred tax assets (net of
      recorded valuation allowances) is largely dependent upon future profitable
      operations and future reversals of existing taxable temporary differences.
      Because the Company has operated at a cumulative loss in its three most
      recent calendar years and because it believes difficult competitive and
      economic conditions may continue for the foreseeable future, the Company
      believes that under the standards of FAS No. 109 it is not appropriate to
      record income tax benefits in excess of anticipated refunds of taxes
      previously paid. The valuation allowance may be reversed to income in
      future periods to the extent that the related deferred income tax assets
      are realized as a reduction of taxes otherwise payable on any future
      earnings or the valuation allowances are otherwise no longer required. In
      2004, the Company utilized state net operating loss carry forwards of
      $1,546 to reduce taxes otherwise payable.

      Deferred tax assets and liabilities are based on the expected future tax
      consequences of temporary differences between the book and tax bases of
      assets and liabilities. The approximate tax effects of temporary
      differences at December 31, 2004 and 2003 were as follows:

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

                                                                              2004              2003
                                                                                Assets (Liabilities)
                                                                        ----------------------------------

Current differences
     Warranty expense                                                 $          5,052  $           5,100
     Inventory capitalization                                                      751                596
     Allowance for losses on receivables                                           412                470
     Accrued expenses                                                            3,131              3,435
     Repurchase commitments                                                        811              1,192
     Deferred gain                                                                   -                  -
                                                                        ---------------   ----------------
                                                                                10,157             10,793
     Less valuation allowance                                                    9,742             10,100
                                                                        ---------------   ----------------

Total                                                                 $            415  $             693
                                                                        ===============   ================
</TABLE>
<TABLE>
<CAPTION>
<S>                                                                           <C>               <C>

                                                                             2004              2003
                                                                               Assets (Liabilities)
                                                                        ----------------------------------

Non-current differences
     Depreciation and basis differential of acquired assets           $            931  $             912
     Net operating loss and other carryforwards                                  6,945              7,241
     Goodwill                                                                      292                327
     Other assets                                                                1,289              1,257
     Other liabilities                                                              (7)                (7)
                                                                        ---------------   ----------------
                                                                                 9,450              9,730
     Less valuation allowance                                                    9,865             10,423
                                                                        ---------------   ----------------

Total                                                                 $           (415) $            (693)
                                                                        ===============   ================
</TABLE>
<PAGE>

      At December 31, 2004, the Company had federal and state net operating loss
      carryforwards of $7,463 and $71,252 respectively. The net operating loss
      carryforwards will expire as follows:

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

                                                                         Federal         State
        2010                                                      $         848  $           -
        2018                                                                  -            403
        2019                                                                  -            557
        2020                                                                  -         30,925
        2021                                                                  -          8,890
        2022                                                                  -         15,194
        2023                                                              6,580         11,615
        2024                                                                 35          3,668
</TABLE>

      In 2003, the Company recognized an income tax benefit of $579 representing
      adjustments to prior years' tax provisions that became appropriate given
      the results of the recent Internal Revenue Service audit of the Company's
      federal income tax returns.

      The Company has recorded a liability for tax contingencies where it is
      likely that certain tax return positions will be challenged and the
      Company's position may not prevail. The liability for tax contingencies is
      calculated using historical financial information, multiplied by the
      effective tax rate and includes an applicable interest accrual applied
      where appropriate. The liability for tax contingencies is adjusted when
      circumstances warrant, including the progression of tax authority audits,
      emerging case law and legislation. Open tax years for which the Company is
      subject to audit varies by tax jurisdiction. The Company estimates the
      maximum liability for tax contingencies to be $817 and has recorded a
      liability for tax contingencies of $300 (2004) and $301 (2003). In the
      opinion of management, the recorded liability for tax contingencies is
      adequate to address known tax contingencies and is included in other
      current liabilities in the consolidated balance sheet.

      Net cash paid (received) for income taxes for the years ended December 31,
      2004, 2003, and 2002 were $128, $(6,645), and $(4,820), respectively.

9.    EMPLOYEE BENEFIT PLANS

      The Company has self-funded group medical plans which are administered by
      third party administrators. The medical plans have reinsurance coverage
      limiting liability for any individual employee loss to a maximum of $100,
      with an aggregate limit of losses in any one year based on the number of
      covered employees. Incurred claims identified under the Company's incident
      reporting system and incurred but not reported claims are funded or
      accrued based on estimates that incorporate the Company's past experience,
      as well as other considerations such as the nature of each claim or
      incident, relevant trend factors and advice from consulting actuaries. The
      Company has established self-insurance trust funds for payment of claims
      and makes deposits to the trust funds in amounts determined by consulting
      actuaries. The cost of these plans to the Company was $1,809, $2,901, and
      $4,771, for years ended December 31, 2004, 2003, and 2002, respectively.

      The Company sponsors an employee 401(k) retirement plan covering all
      employees who meet participation requirements. Employee contributions are
      limited to a percentage of compensation as defined in the plan. The amount
      of the Company's matching contribution is discretionary as determined by
      the Board of Directors. Company contributions amounted to $413, $422, and
      $546, for the years ended December 31, 2004, 2003, and 2002, respectively.
<PAGE>


10.   COMMITMENTS AND CONTINGENCIES

      Operating Leases:
      The Company is obligated under various operating lease agreements with
      varying monthly payments and expiration dates through March 2006. Total
      rent expense under operating leases was $205, $278, and $481, for the
      years ended December 31, 2004, 2003, and 2002, respectively.

      Future minimum rents payable under operating leases that have initial or
      remaining noncancelable lease terms in excess of one year at December 31,
      2004 are as follows:

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

                    Year Ending
                    December 31,
              ------------------------

                        2005                           $        99
                        2006                                    90
                        2007                                    80
                        2008                                    23
                        2009                                     -
                     Thereafter                                  -
                                                          -----------
                                       Total           $        292
                                                          ===========
</TABLE>

        Contingent Liabilities and Other:
        a. The Company is  contingently  liable under terms of repurchase
           agreements  with financial  institutions  providing  inventory
           financing  for  retailers  of its  products.  These  arrangements,
           which are  customary  in the  industry,  provide for the repurchase
           of products sold to retailers in the event of default by the
           retailer.  The risk of loss under these  agreements is spread over
           numerous  retailers.  The price the Company is obligated to pay
           generally  declines  over the period of the agreement (generally
           18 - 24 months) and the risk of loss is further reduced by the sale
           value of repurchased  homes. The maximum  amount for which the
           Company is  contingently  liable under such  agreements  approximated
           $73,000 at December 31, 2004.  The Company has a reserve for
           repurchase  commitments  of $2,052 (2004) and $3,070 (2003) based on
           prior  experience and an evaluation of dealers' financial conditions.
           Activity in the reserve for repurchase commitments was as follows:

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

                                                                             2004                2003                 2002
                                                                         ----------------   ----------------   -----------------
        Balance, beginning of period                                   $         3,070              4,000              3,200
        Provision for losses (recoveries) on inventory repurchases                (291)              (181)             2,347
        Recoveries (payments), net                                                (727)              (749)            (1,547)
                                                                         ----------------   ----------------   -----------------
        Balance, end of period                                         $         2,052              3,070              4,000
                                                                         ================   ================   =================

</TABLE>

        b. Under the insurance plans described in Note 1, the Company was
           contingently liable at December 31, 2004 for future retrospective
           premium adjustments up to a maximum of approximately $21,600 in the
           event that additional losses are reported related to prior years.

        c. 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
<PAGE>

           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.  Anticipated
           legal fees  associated  with these lawsuits are accrued at the time
           such cases are identified.  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, for which no accrual is made because the losses
           are not assumed to be probable  or  reasonably  estimable.  The
           Company  used the  services of a law firm in which a partner is also
           a director of the Company.  The Company paid legal fees to this firm
           of $346 (2004),  $378 (2003), and $191 (2002).  In addition, the law
           firm received,  from the proceeds of the settlement of a Company
           insurance claim, an indirect legal fee payment of $562 in 2002.

        d. The Company and certain of its equity partners have guaranteed
           certain debt for two companies in which the Company owns a one-third
           interest. The guarantees are limited to 40% of the outstanding debt.
           At December 31, 2004, $2,664 of debt was outstanding under the
           guarantees, of which the Company had guaranteed $1,066.

        e. The Company has provided letters of credit totaling $6,109 as of
           December 31, 2004 to providers of certain of its surety bonds and
           insurance policies. While the current letters of credit have a finite
           life, they are subject to renewal at different amounts based on the
           requirements of the insurance carriers. The Company has recorded
           insurance expense based on anticipated losses related to these
           policies.

11.   SEGMENT INFORMATION

      The Company's reportable segments are organized around products and
      services. Through its Home manufacturing segment, the Company's five
      divisions (seven home manufacturing plants), which are aggregated for
      reporting purposes, design and manufacture homes which are sold in the
      United States to a network of dealers which includes Company-owned retail
      locations. Through its Financial services segment, the Company primarily
      offers retail installment sale financing and related insurance products
      for manufactured homes sold through the Company's dealer network. The
      Company's Retail segment is comprised of company-owned retail lots that
      derive their revenues from home sales to individuals. Included in the
      "other" category are supply companies who primarily sell their products
      outside of the Company. The accounting policies of the segments are the
      same as those described in the summary of significant accounting policies
      except that intercompany profits, transactions and balances have not been
      eliminated. The Company's determination of segment operating profit does
      not reflect other income (expenses) or income tax provision (benefit).
<PAGE>

<TABLE>
<CAPTION>
<S>                                                              <C>                   <C>                  <C>
                                                                2004                  2003                 2002
                                                         -------------------   -------------------   ------------------
Gross revenue:
  Home manufacturing                                   $            230,418  $            242,338  $           381,545
  Financial services                                                  2,444                 2,673                2,690
  Retail                                                              7,938                 7,948                7,908
  Other                                                                   -                     -                1,274
                                                         -------------------   -------------------   ------------------
      Gross revenue                                    $            240,800  $            252,959  $           393,417
                                                         ===================   ===================   ==================

Intersegment revenue:
  Home manufacturing                                   $              6,639  $              5,123  $             6,160
  Financial services                                                      -                     -                    -
  Retail                                                                  -                     -                    -
  Other                                                                   -                     -                    -
                                                         -------------------   -------------------   ------------------
      Intersegment revenue                             $              6,639  $              5,123  $             6,160
                                                         ===================   ===================   ==================

Revenue from external customers:
  Home manufacturing                                   $            223,779  $            237,215  $           375,385
  Financial services                                                  2,444                 2,673                2,690
  Retail                                                              7,938                 7,948                7,908
  Other                                                                   -                     -                1,274
                                                         -------------------   -------------------   ------------------
      Total revenue                                    $            234,161  $            247,836  $           387,257
                                                         ===================   ===================   ==================

Operating income (loss):
  Home manufacturing                                   $              8,347  $             (1,124) $            (8,061)
  Financial services                                                    539                   537                  (22)
  Retail                                                               (113)                  (41)                (222)
  Other                                                                   -                     -                 (140)
  Elimination                                                          (108)                  295                  (45)
                                                         -------------------   -------------------   ------------------
  Segment operating income (loss)                                     8,665                  (333)              (8,490)

  General corporate                                                  (5,472)               (4,439)              (5,930)
                                                         -------------------   -------------------   ------------------
      Operating income (loss)                          $              3,193  $             (4,772) $           (14,420)
                                                         ===================   ===================   ==================

Depreciation and amortization:
  Home manufacturing                                   $              2,590  $              3,651  $             5,178
  Financial services                                                     29                    39                   63
  Retail                                                                 17                    59                   41
  Other                                                                   -                     -                    2
                                                         -------------------   -------------------   ------------------

  Segment depreciation and amortization                               2,636                 3,749                5,284
  General corporate                                                     681                   839                1,002
                                                         -------------------   -------------------   ------------------
      Total depreciation and amortization              $              3,317  $              4,588  $             6,286
                                                         ===================   ===================   ==================

Capital expenditures:
  Home manufacturing                                   $                599  $                289  $             1,866
  Financial services                                                     30                     8                  107
  Retail                                                                 40                     -                    -
  Other                                                                   -                     -                    2
                                                         -------------------   -------------------   ------------------

  Segment capital expenditures                                          669                   297                1,975
  General corporate                                                     117                    30                   87
                                                         -------------------   -------------------   ------------------
      Total capital expenditures                       $                786  $                327  $             2,062
                                                         ===================   ===================   ==================

Identifiable assets:
  Home manufacturing                                   $             60,297  $             62,311  $            80,633
  Financial services                                                 13,755                13,364               12,497
  Retail                                                              3,296                 2,987                6,458
  Other                                                                   -                     -                   21
                                                         -------------------   -------------------   ------------------

  Segment assets                                                     77,348                78,662               99,609
  General corporate                                                  20,882                19,871               30,462
                                                         -------------------   -------------------   ------------------
      Total assets                                     $             98,230  $             98,533  $           130,071
                                                         ===================   ===================   ==================
</TABLE>
<PAGE>

      The Financial services segment's operating profit includes net interest
      income of $1,010, $1,136, and $981, and gains from the sale of installment
      contracts of $940, $1,115, and $1,391, for the years ended December 31,
      2004, 2003, and 2002, respectively.

      Identifiable assets for the General corporate category include $3,449,
      $2,595, and $2,359, of investment in equity-method investees at December
      31, 2004, 2003, and 2002, respectively.

12.   EQUITY- METHOD INVESTEES

      The Company's minority ownership interests in its six joint ventures (of
      which the Company owns various interest percentages) are accounted for
      using the equity method and are included in other assets in the
      accompanying consolidated balance sheets in the amount of $3,449 (2004)
      and $2,595 (2003). The Company recorded equity in earnings of
      equity-method investees of $980, $369, and $384, for the years ended
      December 31, 2004, 2003, and 2002, respectively. Dividends received from
      investees accounted for by the equity method were $209, $228, and $229,
      for the years ended December 31, 2004, 2003, and 2002, respectively. The
      Company's only significant minority ownership interest is in WoodPerfect,
      Ltd., of which the Company owns 35.42% interest. Summarized
      information related to the combined group of equity investees is as
      follows:

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

                                                      2004                     2003
                                               -------------------     ----------------------
Balance Sheet:
Current assets                                 $           18,304      $               7,975
Non-current assets                             $            9,988      $               9,645
Current liabilities                            $            8,834      $               2,272
Non-current liabilities                        $            3,964      $               4,152

Income Statement:
Net sales                                      $           92,656      $              53,811
Gross profit                                   $           10,482      $               5,618
Income from continuing operations              $            3,773      $               1,506
Net income                                     $            3,581      $               1,451

</TABLE>
<PAGE>

                                    CAVALIER HOMES INC. AND SUBSIDIARIES
                              SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                           For the Years Ended December 31, 2004, 2003 and 2002
                                          (Dollars in Thousands)

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

                                                                    Additions
                                                 Balance at        Charged to                            Balance at
                                                Beginning of        Costs and                              End of
                                                    Year            Expenses         Deductions             Year
                                               ---------------   ----------------  ----------------    ---------------
Allowance for losses on Accounts
   Receivable:
       Year Ended December 31, 2004        $              102                (17)                - $               85
                                               ===============   ================  ================    ===============
       Year Ended December 31, 2003        $              145                  -               (43)$              102
                                               ===============   ================  ================    ===============
       Year Ended December 31, 2002        $              625                 44              (524)$              145
                                               ===============   ================  ================    ===============
Allowance for credit losses:
       Year Ended December 31, 2004        $            1,030                 75              (152)$              953
                                               ===============   ================  ================    ===============
       Year Ended December 31, 2003        $              859                354              (183)$            1,030
                                               ===============   ================  ================    ===============
       Year Ended December 31, 2002        $              829                358              (328)$              859
                                               ===============   ================  ================    ===============
Warranty reserve:
       Year Ended December 31, 2004        $           13,475             14,423           (14,643)$           13,255
                                               ===============   ================  ================    ===============
       Year Ended December 31, 2003        $           15,000             21,194           (22,719)$           13,475
                                               ===============   ================  ================    ===============
       Year Ended December 31, 2002        $           11,700             27,765           (24,465)$           15,000
                                               ===============   ================  ================    ===============
Reserve for repurchase commitments:
       Year Ended December 31, 2004        $            3,070               (291)             (727)$            2,052
                                               ===============   ================  ================    ===============
       Year Ended December 31, 2003        $            4,000               (181)             (749)$            3,070
                                               ===============   ================  ================    ===============
       Year Ended December 31, 2002        $            3,200              2,347            (1,547)$            4,000
                                               ===============   ================  ================    ===============
</TABLE>

ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE

None.

ITEM 9A.          CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
The Company's President/Chief Executive Officer and its Chief Financial Officer
have reviewed the Company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the end of the period covered
by this report, and have determined such disclosure controls and procedures to
be effective in alerting them to material information relating to the Company
that may be required to be included in the Company's periodic filings. The
Company's disclosure controls and procedures also are designed with the
<PAGE>

objective of ensuring that such information is accumulated and communicated to
Company management as appropriate to allow timely decisions regarding required
disclosure.

Changes in Internal Control Over Financial Reporting
During the fourth quarter of 2004, the Company identified a material weakness in
its internal controls over financial reporting with respect to classification of
transactions involving installment contracts purchased for resale from those
purchased for investment. The Company determined that the material weakness
negatively impacted the preparation of the Company's Consolidated Statements of
Cash Flows, and restated the Consolidated Statements of Cash Flows for the years
ended December 31, 2003, 2002 and 2001 and for the 2004 and 2003 interim
periods. As a result of the restatement, the Company took steps to improve the
control processes surrounding the preparation and review of the Consolidated
Statements of Cash Flows that management believes materially affects, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting. The Company believes that the remediation of the material
weakness, and the accompanying changes in the Company's internal control over
financial reporting, was complete as of December 31, 2004.

Management's Annual Report on Internal Control Over Financial Reporting
The Act imposed many requirements regarding corporate governance and financial
reporting. One requirement under Section 404 of the Act, beginning with this
Annual Report on Form 10-K, is for management to report on the Company's
internal controls over financial reporting and for our independent registered
public accountants to attest to this report. In late November 2004, the
Securities and Exchange Commission issued an exemptive order providing a 45 day
extension for the filing of these reports and attestations by eligible
companies. We elected to utilize this 45 day extension, therefore, this Annual
Report on Form 10-K does not include these reports. These reports will be
included in an amended Form 10-K which we expect to file not later than May 2,
2005. During 2004, the Company spent considerable time and resources analyzing,
documenting and testing our system of internal controls. Currently, we are not
aware of any material weaknesses in our internal controls over financial
reporting and related disclosures based on our evaluations to date, other than
the material weakness previously disclosed on the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on December 9, 2004..
As noted above, the Company believes that the previously identified material
weakness has been remediated as of December 31, 2004.  There can be no assurance
that the Company will be successful in complying with Section 404 during the
required time period.  Failure to do so could result in penalties and additional
expenditures to meet the requirements which could affect the ability of our
auditors to issue an unqualified report on the 404 audit report.


ITEM 9B. OTHER INFORMATION

None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

For a description of the directors and executive officers of the Company, see
"Election of Directors," "Executive Officers and Principal Stockholders," and
"Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 24, 2005,
which are incorporated herein by reference.

For disclosure regarding the Company's Code of Ethics, see "Corporate
Governance" of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 24, 2005, which is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION

For a description of the Company's executive compensation, see "Election of
Directors," "Executive Officers and Principal Stockholders," "Executive
Compensation" (other than the "Report of the Compensation Committee on Executive
Compensation" and the "Performance Graph"), "Compensation Committee Interlocks
and Insider Participation," and "Certain Relationships and Related Transactions"
of the Company's Proxy Statement for the Annual Meeting of Stockholders to be
held on May 24, 2005, which are incorporated herein by reference.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

For a description of the security ownership of management and certain beneficial
owners, see "Executive Officers and Principal Stockholders" of the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 24,
2005, which is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

For a description of certain relationships and related transactions of the
Company, see "Compensation Committee Interlocks and Insider Participation," and
"Certain Relationships and Related Transactions" of the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 24, 2005,
which are incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES

For a description of principal accountants fees and services, see "Fee
Disclosure" of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 24, 2005, which is incorporated herein by
reference.

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

                                     PART IV

ITEM 15.          EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)      1. The financial statements contained in this report and the page on
         which they may be found are as follows:

         Financial Statement Description                                                     Form 10-K Page No.
         -------------------------------                                                     ------------------

         Report of Independent Registered Public Accounting Firm                                      36
         Consolidated Balance Sheets as of December 31, 2004 and 2003                                 37
         Consolidated Statements of Operations for the years ended December 31, 2004,                 38
                           2003 and 2002
         Consolidated Statements of Stockholders' Equity for the years ended                          39
                           December 31, 2004, 2003 and 2002
         Consolidated Statements of Cash Flows for the years ended December 31,                       40
                           2004, 2003 and 2002
         Notes to Consolidated Financial Statements                                                   41

         2.   The financial statement schedule required to be filed with this
         report and the page on which it may be found is as follows:
          No.         Schedule Description                                                      Form 10-K Page
          ---         --------------------                                                      --------------
          II          Valuation and Qualifying Accounts                                               59

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

(3) Articles of Incorporation and By-laws.

         * (a) The Composite 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, 1998.
<PAGE>
         * (b) The Certificate of Designation of Series A Junior Participating
         Preferred 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.

         * (c) The Amended and Restated By-laws of the Company, filed as Exhibit
         3(b) to the Company's registration of securities on Form 8A/A filed on
         March 3, 2004.

(4)      Instruments Defining the Rights of Security Holders, Including
         Indentures.

         * (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 ChaseMellon
         Shareholder Services, LLC, filed as Exhibit 4 to the Company's Current
         Report on Form 8-K dated October 30, 1996.

(10) Material contracts

         * (a) Rights Agreement between Cavalier Homes, Inc. and ChaseMellon
         Shareholder Services, LLC, filed as Exhibit 4 to the Company's Current
         Report on Form 8-K dated October 30, 1996.

         * (b) Lease Agreement dated April 1, 1999, between Development
         Authority of Johnson County, Georgia and Bellcrest Homes, Inc.
         regarding the lease of the manufacturing facility located in Adrian,
         Georgia, filed as Exhibit 10(b) to the Company's Annual Report on Form
         10-K for the year ended December 31, 1999.

         * (c) Industrial Sublease dated October 2, 2000, by and among Cavalier
         Industries, Inc., as successor by merger to Bellcrest Homes, Inc.,
         Alliance Homes, Inc., All-Span Homes, LLC and G. Hiller Spann,
         regarding the sublease of the manufacturing facility located in Adrian,
         Georgia, filed as Exhibit 10(c) to the Company's Annual Report on Form
         10-K for the year ended December 31, 2000.

         * (d) Lease Agreement dated March 1, 1997, between the City of Winfield
         and Buccaneer Homes, a division of Cavalier Manufacturing, Inc., filed
         as Exhibit 10(aa) to the Company's Annual Report on Form 10-K for the
         year ended December 31, 1996.

         * (e) Lease Agreement between the Industrial Development Board of the
         Town of Addison and Jerry F. Wilson, Robert Lowell Burdick and John W
         Lowe, dated as of June 1, 1984, filed as Exhibit 10(j) to the Company's
         Registration Statement on Form S-1, Registration No. 33-3525, dated
         February 21, 1986.

         * (f) Assignment and Assumption Agreement by and among the Estate of
         Jerry F. Wilson, Robert Lowell Burdick, John W Lowe, Cavalier
         Manufacturing, Inc. and Cavalier Real Estate Co., Inc., dated January
         13, 1999, regarding the lease of the manufacturing facility located in
         Addison, Alabama, filed as Exhibit 10(g) to the Company's Annual Report
         on Form 10-K for the year ended December 31, 1999.

         * (g) Lease Agreement between the Industrial Development Board of the
         Town of Addison and the Winston County Industrial Development
         Association, dated as of February 1, 1994, regarding the lease of the
         manufacturing facility located in Addison, Alabama, filed as Exhibit
         10(h) to the Company's Annual Report on Form 10-K for the year ended
         December 31, 1999.

         * (h) Assignment and Assumption Agreement by and among Winston County
         Industrial Development Association, Cavalier Manufacturing, Inc. and
         Cavalier Real Estate Co., Inc. dated January 13, 1999, regarding the
<PAGE>
         lease of the manufacturing facility located in Addison Alabama, filed
         as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the
         quarter ended March 31, 2000.

         * (i) Lease Agreement between The Industrial Development Board of the
         Town of Addison and Cavalier Homes of Alabama, a division of Cavalier
         Manufacturing, Inc., dated November 1, 1997, filed as Exhibit 10(yy) to
         the Company's Annual Report on Form 10-K for the year ended December
         31, 1997.

         * (j) Lease Agreement dated April 1, 1999, between Crisp County-Cordele
         Industrial Development Authority and Cavalier Industries, Inc.
         regarding the lease of the manufacturing facility located in Cordele,
         Georgia, filed as Exhibit 10(j) to the Company's Annual Report on Form
         10-K for the year ended December 31, 1999.

         * (k) Lease Agreement dated March 1, 2001, between the Industrial
         Development Board of the City of Hamilton and Quality Housing Supply,
         LLC regarding the lease of the component manufacturing facility located
         in Hamilton, Alabama, filed as Exhibit 10(a) to the Company's Quarterly
         Report on Form 10-Q for the quarter ended March 31, 2001.

         * (l) Lease Agreement dated March 1, 1995, between the Industrial
         Development Board of the City of Haleyville, Alabama and Wheel House
         Properties, Inc., as assigned to and assumed by Star Industries, Inc.
         on January 11, 1996, and as further assigned to and assumed by Cavalier
         Manufacturing, Inc. in December 1996, filed as Exhibit 10(bb) to the
         Company's Annual Report on Form 10-K for the year ended December 31,
         1996.

         * (m) Amended and Restated Revolving and Term Loan Agreement, dated as
         of March 31, 2000, by and among the Company, First Commercial Bank and
         certain subsidiaries of the Company, filed as Exhibit 10(b) to the
         Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
         2000.

         * (n) First Amendment to Amended and Restated Revolving and Term Loan
         Agreement, dated as of September 29, 2000, between the Company and
         First Commercial Bank, filed as Exhibit 10(a) to the Company's
         Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.

         * (o) Second Amendment to Amended and Restated Revolving and Term Loan
         Agreement, dated as of May 4, 2001, between the Company and First
         Commercial Bank, filed as Exhibit 10(c) to the Company's Quarterly
         Report on Form 10-Q for the quarter ended March 31, 2001.

         * (p) Second Modification to Amended and Restated Revolving Note, dated
         as of June 21, 2002, between the Company and First Commercial Bank,
         filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q
         for the quarter ended June 29, 2002.

         * (q) Third Amendment to Amended and Restated Revolving and Term Loan
         Agreement, dated as of June 21, 2002, between the Company and First
         Commercial Bank, filed as Exhibit 10(b) to the Company's Quarterly
         Report on Form 10-Q for the quarter ended June 29, 2002.

         * (r) Third Modification to Amended and Restated Revolving Note, dated
         as of October 25, 2002, between the Company and First Commercial Bank,
         filed as Exhibit 10(c) to the Company's Quarterly Report on Form 10-Q
         for the quarter ended September 28, 2002.

         * (s) Fourth Amendment to Amended and Restated Revolving and Term Loan
         Agreement, dated as of October 25, 2002, between the Company and First
         Commercial Bank, filed as Exhibit 10(d) to the Company's Quarterly
         Report on Form 10-Q for the quarter ended September 28, 2002.

         * (t) Fourth Modification to Amended and Restated Revolving Note, dated
         as of August 6, 2003, between the Company and First Commercial Bank,
         filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q
         for the quarter ended June 28, 2003.
<PAGE>
         * (u) Fifth Amendment to Amended and Restated Revolving and Term Loan
         Agreement, dated as of August 6, 2003, between the Company and First
         Commercial Bank, filed as Exhibit 10(b) to the Company's Quarterly
         Report on Form 10-Q for the quarter ended June 28, 2003.

         * (v) Real Estate Note, dated as of August 6, 2003, between the Company
         and First Commercial Bank, filed as Exhibit 10(c) to the Company's
         Quarterly Report on Form 10-Q for the quarter ended June 28, 2003.

         * (w) Guaranty Agreement, dated as of August 6, 2003, between the
         Company and First Commercial Bank, filed as Exhibit 10(d) to the
         Company's Quarterly Report on Form 10-Q for the quarter ended June 28,
         2003.

         * (x) Amended and Restated Real Estate Note, dated as of September 26,
         2003, between the Company and First Commercial Bank, filed as Exhibit
         10(a) to the Company's Quarterly Report on Form 10-Q for the quarter
         ended September 27, 2003.

         * (y) Guaranty Agreement between First Commercial Bank and Cavalier
         Homes, Inc. dated July 15, 1997, relating to guaranty of payments by
         Lamraft, LP filed as Exhibit 10(a) to the Company's Quarterly Report on
         Form 10-Q for the quarter ended September 26, 1997.

         * (z) Amendment to the Limited Credit Guaranty Agreement between First
         Commercial Bank and Cavalier Homes, Inc., executed as of March 24,
         1999, relating to guaranty of payments by Lamraft, LP filed as Exhibit
         10(b) to the Company's Quarterly Report on Form 10-Q for the quarter
         ended April 2, 1999.

         * (aa) Guaranty Agreement between First Commercial Bank and Cavalier
         Homes, Inc., dated as of September 1, 1999, relating to guaranty of
         payments by Lamraft, LP, filed as Exhibit 10(a) to the Company's
         Quarterly Report on Form 10-Q for the quarter ended October 1, 1999.

         * (bb) Guaranty Agreement between First Commercial Bank and Cavalier
         Homes, Inc. dated July 15, 1997, relating to guaranty of payments by
         Woodperfect of Texas, LP filed as Exhibit 10(c) to the Company's
         Quarterly Report on Form 10-Q for the quarter ended September 26, 1997.

         * (cc) Amendment to the Limited Credit Guaranty Agreement between First
         Commercial Bank and Cavalier Homes, Inc. executed March 24, 1999,
         relating to guaranty of payments by Woodperfect of Texas, LP filed as
         Exhibit 10(d) to the Company's Quarterly Report on Form 10-Q for the
         quarter ended April 2, 1999.

         * (dd) Continuing Guaranty Agreement between First Commercial Bank and
         Cavalier Homes, Inc., dated March 31, 2000, relating to guaranty of
         payments of Cavalier Acceptance Corporation, filed as Exhibit 10(c) to
         the Company's Quarterly Report on Form 10-Q for the quarter ended March
         31, 2000.

         * (ee) Release of Guarantor and Amendment to Guaranty Agreements among
         First Commercial Bank, Patriot Homes, Inc., Cavalier Homes, Inc.,
         Southern Energy Homes, Inc. and Lee Roy Jordan, dated as of December
         31, 1999, filed as Exhibit 10(hh) to the Company's Annual Report on
         Form 10-K for the year ended December 31, 1999.

         * ** (ff) Cavalier Homes, Inc. 1988 Nonqualified Stock Option Plan, as
         amended, filed as Exhibit 10(a) to the Company's Annual Report on Form
         10-K for the year ended December 31, 1993.

         * ** (gg) Cavalier Homes, Inc. 1993 Amended and Restated Nonqualified
         Stock Option Plan, filed as Exhibit 10(z) to the Company's Annual
         Report on Form 10-K for the year ended December 31, 1998.

         * ** (hh) Cavalier Homes, Inc. Executive Incentive Compensation Plan,
         filed as an Appendix to the Company's definitive Proxy Statement for
         the Annual Meeting of Stockholders held May 15, 1996.
<PAGE>
         * ** (ii) Amendment to Cavalier Homes, Inc. Executive Incentive
         Compensation Plan, filed as Exhibit 10(ii) to the Company's Quarterly
         Report on Form 10-Q for the quarter ended March 28, 1997.

         * ** (jj) Cavalier Homes, Inc. Employee Stock Purchase Plan, filed as
         an Appendix to the Company's definitive Proxy Statement for the Annual
         Meeting of Stockholders held May 15, 1996.

         * ** (kk) Cavalier Homes, Inc. Key Employee Stock Incentive Plan, filed
         as an Appendix to the Company's definitive Proxy Statement for the
         Annual Meeting of Stockholders held May 15, 1996.

         * ** (ll) Amendment to Cavalier Homes, Inc. Key Employee Stock
         Incentive Plan, filed as Exhibit 10(i) to the Company's Quarterly
         Report on Form 10-Q for the quarter ended March 28, 1997.

         * ** (mm) Amendment to Cavalier Homes, Inc. Key Employee Stock
         Incentive Plan, effective December 30, 1997, filed as Exhibit 10(j) to
         the Company's Annual Report on Form 10-K for the year ended December
         31, 1997.

         * ** (nn) Amendment to Cavalier Homes, Inc. Key Employee Stock
         Incentive Plan, effective January 23, 1998, filed as Exhibit 10(k) to
         the Company's Annual Report on Form 10-K for the year ended December
         31, 1997.

         * ** (oo) Amendment to Cavalier Homes, Inc. Key Employee Stock
         Incentive Plan, effective October 20, 1998, filed as Exhibit 10(l) to
         the Company's Annual Report on Form 10-K for the year ended December
         31, 1998.

         * ** (pp) Cavalier Homes, Inc. Amended and Restated Nonemployee
         Directors Stock Option Plan, filed as an Appendix to the Company's
         definitive Proxy Statement for the Annual Meeting of Stockholders held
         May 15, 1996.

         * ** (qq) Amendment to Cavalier Homes, Inc. Amended and Restated
         Nonemployee Directors Plan filed as Exhibit 10(i) to the Company's
         Annual Report on Form 10-K for the year ended December 31, 1996.

         * ** (rr) Amendment to Cavalier Homes, Inc. Amended and Restated
         Nonemployee Directors Plan, filed as Exhibit 10(n) to the Company's
         Annual Report on Form 10-K for the year ended December 31, 1997.

         * (ss) Cavalier Homes, Inc. Amended and Restated Dividend Reinvestment
         Plan, filed as Appendix A to the Prospectus appearing in the Company's
         Post-Effective Amendment No. 1 to Form S-3, Registration No. 333-48111,
         filed on September 29, 1998.

         * ** (tt) Belmont Homes, Inc. 1994 Incentive Stock Plan, filed as an
         Exhibit to the Belmont Homes, Inc. Registration Statement on Form S-1,
         Registration No. 33-87868.

         * ** (uu) Belmont Homes, Inc. 1994 Non-Qualified Stock Option Plan for
         Non-Employee Directors, filed as an Exhibit to the Belmont Homes, Inc.
         Registration Statement on Form S-1, Registration No. 33-87868.

         * ** (vv) Form of Stock Option Agreement between the Company and Thomas
         A. Broughton, III, dated January 29, 2002, filed as Exhibit 4(e) to the
         Company's Registration Statement on Form S-8, Registration No.
         333-90652.

         * ** (ww) Form of Stock Option Agreement between the Company and Lee
         Roy Jordan, dated January 29, 2002, filed as Exhibit 4(f) to the
         Company's Registration Statement on Form S-8, Registration No.
         333-90652.
<PAGE>
         * ** (xx) Form of Stock Option Agreement between the Company and John W
         Lowe, dated January 29, 2002, filed as Exhibit 4(g) to the Company's
         Registration Statement on Form S-8, Registration No. 333-90652.

         * (yy) Form of Indemnification Agreement between Belmont Homes, Inc.
         and the Directors and Executive Officers of Belmont Homes, Inc., filed
         as Exhibit 10.2 to Belmont Homes, Inc. Current Report on Form 8-K filed
         on September 8, 1997.

         * (zz) Form of Indemnification Agreement by and between Cavalier
         Homes, Inc. and each member of its Board of Directors, filed as Exhibit
         10(a) to the Company's Quarterly Report on Form 10-Q for the quarter
         ended September 25, 1998.

         * (aaa) Inventory Security Agreement and Power of Attorney, dated as of
         July 13, 2004, between the Company and 21st Mortgage Company, filed as
         Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the
         quarter ended September 25, 2004

         * (bbb) Supply Agreement, dated as of August 30, 2004, between the
         Company and Alliance Homes, Inc. and North American Catastrophe
         Services, Inc, filed as Exhibit 10(b) to the Company's Quarterly
         Report on Form 10-Q for the quarter ended September 25, 2004.

         * (ccc) Sixth Amendment to Amended and Restated Revolving and Term Loan
         Agreement, dated as of October 26, 2004, between the Company and First
         Commercial Bank, filed as Exhibit 10(c) to the Company's Quarterly
         Report on Form 10-Q for the quarter ended September 25, 2004.


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

(21) Subsidiaries of the Registrant.

(23) Consents of Deloitte & Touche LLP.

(31) Rule 13a-15(e) or 15d-15(e) Certifications
           (a) Certification of principal executive officer pursuant to Exchange
               Act Rule 13a-15(e) or 15d-15(e).
           (b) Certification of principal financial officer pursuant to Exchange
               Act Rule 13a-15(e) or 15d-15(e).

(32) Section 1350 Certifications
           (a)  Certification of CEO pursuant to 18 U.S.C. Section 1350, as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.
           (b)  Certification of CFO pursuant to 18 U.S.C. Section 1350, as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.

 -----------------------------------------
* Incorporated by reference herein.
** Management contract or compensatory plan or arrangement.


(c) Financial statements of subsidiaries not consolidated and fifty percent or
    less owned persons
              (a) Financial statements of WoodPerfect, Ltd.

<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Partners of
WoodPerfect, Ltd.

We have audited the accompanying balance sheets of WoodPerfect, Ltd. (the
"Partnership") (a limited partnership) as of December 31, 2004 and 2003, and the
related statements of income, partnership capital, and cash flows for each of
the three years in the period ended December 31, 2004. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the
Partnership's internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of WoodPerfect, Ltd. as of December 31, 2004
and 2003, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.




Birmingham, Alabama
March 21, 2005



<PAGE>



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

WOODPERFECT, LTD.
(A Limited Partnership)

BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
-----------------------------------------------------------------------------------------------------------------------

ASSETS                                                                                         2004             2003

CURRENT ASSETS:
  Cash                                                                                       $ 1,085           $ 7,127
  Accounts receivable, less allowance for doubtful accounts
    of $65,000 (2004) and $37,000 (2003)                                                   1,809,523           867,238
  Inventories                                                                              6,201,999         3,137,392
  Prepaid expenses and other assets                                                           67,129            58,537
                                                                                           ----------        ---------

           Total current assets                                                            8,079,736         4,070,294

INVESTMENT                                                                                   951,484           883,473

PROPERTY, PLANT, AND EQUIPMENT--Net                                                        2,301,925         2,170,610
                                                                                           ----------        ---------

TOTAL                                                                                   $ 11,333,145       $ 7,124,377
                                                                                        =============      ===========


LIABILITIES AND PARTNERSHIP CAPITAL

CURRENT LIABILITIES:
  Line of credit                                                                         $ 3,057,484         $ 702,000
  Note payable to Partner                                                                     50,000            50,000
  Capital lease obligations                                                                   43,290                 -
  Accounts payable                                                                           445,252           216,564
  Accrued expenses                                                                           405,375           365,051
                                                                                         -----------         ---------

           Total current liabilities                                                       4,001,401         1,333,615

LONG-TERM CAPITAL LEASE OBLIGATION                                                           149,216                 -

PARTNERSHIP CAPITAL                                                                        7,182,528         5,790,762
                                                                                         -----------         ---------

TOTAL                                                                                   $ 11,333,145       $ 7,124,377
                                                                                        =============      ===========


See notes to financial statements.
</TABLE>


<PAGE>


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

WOODPERFECT, LTD.
(A Limited Partnership)

STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
----------------------------------------------------------------------------------------------------------------------


                                                                        2004              2003              2002

NET SALES                                                           $ 47,001,162      $ 32,119,883      $ 35,899,642
                                                                    ------------      ------------      ------------
COST OF SALES:
  Materials                                                           41,041,280        28,020,730        31,046,193
  Labor                                                                  528,069           453,018           525,120
  Overhead                                                             2,225,722         1,780,357         2,164,957
                                                                    ------------      ------------      ------------
           Total cost of sales                                        43,795,071        30,254,105        33,736,270
                                                                    ------------      ------------      ------------
SELLING, GENERAL, AND
 ADMINISTRATIVE EXPENSES                                               1,302,502         1,086,380         1,133,619
                                                                    ------------      ------------      ------------
OPERATING INCOME                                                       1,903,589           779,398         1,029,753
                                                                    ------------      ------------      ------------
OTHER INCOME (EXPENSE):
  Management fees                                                       (206,662)         (126,970)         (144,535)
  Interest expense                                                       (79,291)          (57,435)         (101,399)
  Equity in net income of investee                                       176,471           203,458           248,977
  Gain on sale of equipment                                                   -              5,000                 -
                                                                    ------------      ------------      -------------
           Total other (expense) income-net                             (109,482)           24,053             3,043
                                                                    ------------      ------------      -------------
NET INCOME                                                           $ 1,794,107         $ 803,451       $ 1,032,796
                                                                    ============      ============      =============

See notes to financial statements.
</TABLE>

<PAGE>

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

WOODPERFECT, LTD.
(A Limited Partnership)

STATEMENTS OF PARTNERSHIP CAPITAL
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
----------------------------------------------------------------------------------------------------------------------


                                                                                                             Total
                                                                              General       Limited       Partnership
                                                                              Partner       Partners        Capital

BALANCE-January 1, 2002                                                      $ 77,235    $ 4,797,648      $ 4,874,883

  Net income                                                                   14,976      1,017,820        1,032,796

  Cash distributions                                                           (6,376)      (433,329)        (439,705)
                                                                             ---------   ------------     ------------
BALANCE-December 31, 2002                                                      85,835      5,382,139        5,467,974

  Net income                                                                   11,650        791,801          803,451
                                                                                                   -
  Cash distributions                                                           (6,970)      (473,693)        (480,663)
                                                                             ---------   ------------     ------------
BALANCE-December 31, 2003                                                      90,515      5,700,247        5,790,762

  Net income                                                                   37,412      1,756,695        1,794,107
                                                                                                   -
  Cash distributions                                                           (5,991)      (396,350)        (402,341)
                                                                            ----------   ------------     ------------
BALANCE-December 31, 2004                                                   $ 121,936    $ 7,060,592      $ 7,182,528
                                                                            ==========   ============     ============

See notes to financial statements.
</TABLE>


<PAGE>

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

WOODPERFECT, LTD.
(A Limited Partnership)

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
-----------------------------------------------------------------------------------------------------------------------

                                                                             2004              2003             2002

OPERATING ACTIVITIES:
  Net income                                                             $ 1,794,107        $ 803,451        1,032,796
                                                                         -----------       ----------        ----------
  Adjustments to reconcile net income to net cash
    (used in) provided by operating activities:
    Gain of sale of equipment                                                      -           (5,000)               -
    Provision for doubtful accounts                                           65,000           37,000           18,000
    Depreciation and amortization                                            244,308          200,155          223,845
    Equity in net income of investee                                        (176,471)        (203,458)        (248,977)
    Changes in operating assets and liabilities:
      Accounts receivable                                                 (1,007,285)        (360,891)         481,263
      Inventories                                                         (3,064,607)       1,003,498         (797,269)
      Prepaid expenses and other assets                                       (8,593)         (42,124)          56,821
      Accounts payable                                                       228,688          137,634         (183,543)
      Accrued expenses                                                        40,324           64,129           (4,342)
                                                                         ------------      -----------       ----------
           Net cash (used in) provided by operating activities            (1,884,529)       1,634,394          578,594
                                                                         ------------      -----------       ----------
INVESTING ACTIVITIES:
  Capital expenditures                                                      (167,280)          (2,499)               -
  Proceeds from sale of equipment                                                  -            5,000                -
  Distributions from investee                                                108,460          127,576          105,313
                                                                         ------------      -----------       ----------
           Net cash (used in) provided by investing activities               (58,820)         130,077          105,313
                                                                         ------------      -----------       ----------
FINANCING ACTIVITIES:
  Net borrowings (payments) on line of credit                              2,355,484       (1,070,000)         343,000
  Payments of notes payable                                                        -         (208,598)        (586,856)
  Payments of capital lease obligations                                      (15,836)               -                -
  Distributions to partners                                                 (402,341)        (480,663)        (439,705)
                                                                         ------------      -----------       ----------
           Net cash provided by (used in) financing activities             1,937,307       (1,759,261)        (683,561)
                                                                         ------------      -----------       ----------
NET (DECREASE) INCREASE IN CASH                                               (6,042)           5,211              346

CASH-Beginning of year                                                         7,127            1,916            1,570
                                                                         ------------      -----------       ----------
CASH-End of year                                                             $ 1,085          $ 7,127          $ 1,916
                                                                         ============      ===========       ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION-Cash paid during the year for interest                        $ 75,454         $ 59,120        $ 101,088
                                                                         ===========       ===========       ==========
NONCASH INVESTING AND FINANCING
  ACTIVITIES-Acquisition of property, plant, and
  equipment utilizing capital leases                                       $ 288,929
                                                                         ===========

See notes to financial statements.
</TABLE>

<PAGE>

WOODPERFECT, LTD.
(A Limited Partnership)


NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
--------------------------------------------------------------------------------


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Description of Business--WoodPerfect, Ltd. (the "Partnership"), which
      operates in Guin, Alabama, was formed on May 21, 1992 for the primary
      purpose of manufacturing, distributing, and selling roof trusses, lumber,
      plywood, and other wood products. The Partnership sells mainly to mobile
      home manufacturers located throughout the Southeast. In 2004 and 2003,
      approximately 13.7% and 17.7%, respectively, of the Partnership's sales
      were to companies who held partnership interests in WoodPerfect, Ltd.

      Use of Estimates--The preparation of financial statements in conformity
      with accounting principles generally accepted in the United States of
      America requires management to make estimates and assumptions that affect
      the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements
      and the reported amounts of revenues and expenses during the reporting
      periods. Actual results could differ from those estimates.

      Fair Value of Financial Instruments--The carrying value of the
      Partnership's accounts receivable, accounts payable and accrued expenses
      approximates fair value due to the short-term maturity of these
      instruments. Additional information regarding the fair value of other
      financial instruments is disclosed in Note 5.

      Accounts Receivable--The Partnership records accounts receivable net of
      allowances for uncollectibility. Management estimates these allowances
      based on customer relationships, the aging and turns of accounts
      receivable and the creditworthiness, concentrations, and payment history
      of our customers.

      Inventories--Inventories are stated at the lower of cost (first-in,
      first-out method) or market.

      Property, Plant, and Equipment--Buildings, machinery, and equipment are
      stated at cost and depreciated over the estimated useful lives of the
      related assets (generally 40 years for buildings and five to ten years for
      equipment and machinery) using the straight-line method. Assets recorded
      under capital leases and leasehold improvements are depreciated over the
      shorter of their useful lives or the term of the related lease.

      Impairment of Long-Lived Assets--The Partnership periodically evaluates
      the carrying value of long-lived assets to be held and used when events
      and circumstances warrant such a review. The carrying value of a
      long-lived asset is considered impaired when the anticipated undiscounted
      cash flow from the asset is less than its carrying value. In such an
      event, a loss is recognized based on the amount by which the carrying
      value exceeds the fair market value of the long-lived asset. No impairment
      loss was recognized in 2004, 2003, and 2002.

      Income Taxes--The Partnership is organized as a limited partnership
      pursuant to the Alabama Uniform Limited Partnership Act of 1983, with
      WoodPerfect, Inc. as the general partner. The financial statements include
      only those assets and liabilities which relate to the business of the
      Partnership and do not include any activities of the partners outside of
      the Partnership.
<PAGE>

      All income and losses applicable to the Partnership are passed through to
      the partners for federal and state income tax purposes. Income and losses,
      as well as cash distributions, are allocated to the partners in proportion
      to their respective units. Subject to maintaining adequate capital as
      defined in the partnership agreement, cash distributions are generally
      made annually in the minimum amount of 40% of the Partnership's taxable
      income.

      Revenue Recognition--Revenue from sales is recognized upon delivery to the
      customer when there is persuasive evidence of an arrangement, the product
      price is fixed and determinable, and collection of the resulting revenue
      is probable. The Partnership has no post-delivery obligations. Our revenue
      recognition policies are consistent with the guidance in Staff Accounting
      Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, as
      amended by SAB 101A, 101B, and SAB 104.

      Recently Issued Accounting Pronouncements--In November 2004, the FASB
      issued SFAS No. 151, Inventory Costs as amendment of ARB No. 43, Chapter
      4. SFAS No. 151 clarifies that abnormal amounts of idle facility expense,
      freight, handling costs and wasted materials (or spoilage) should be
      recognized as current-period charges and requires the allocation of fixed
      production overheads to inventory based on the normal capacity of the
      production. Management is currently evaluating the impact, if any, of its
      adoption of SFAS No. 151 on the Partnership's financial position and
      results of operations.

2.    INVENTORIES

      Inventories at December 31, 2004 and 2003 consist of the following:

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

                                                                      2004            2003

Raw materials                                                     $ 5,322,158     $ 2,760,779
Finished goods                                                        879,841         376,613
                                                                  -----------     -----------
Total                                                             $ 6,201,999     $ 3,137,392
                                                                  ===========     ===========
</TABLE>

3.    INVESTMENT

      The Partnership purchased a 24% interest in MSR Forest Products, LLC
      ("MSR") in August 1998 for $432,000 in cash. Total assets of MSR were
      $5,791,290 and $5,471,072 and total liabilities were $1,918,166 and
      $1,922,774 at December 31, 2004 and 2003, respectively. For the years
      ended December 31, 2004, 2003, and 2002, MSR had revenues of $27,570,685,
      $21,517,991, and $23,439,667, respectively, and net income of $735,295,
      $847,744, and $1,037,406, respectively. The investment is accounted for
      under the equity method.


<PAGE>



4.    PROPERTY, PLANT, and EQUIPMENT

      Property, plant, and equipment at December 31, 2004 and 2003 consist of
      the following:

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

                                                                                            2004            2003

        Land                                                                             $ 312,040       $ 312,040
        Land improvements                                                                  256,974         256,974
        Buildings                                                                        1,640,525       1,640,525
        Machinery and equipment                                                          1,580,440       1,561,949
        Office furniture and fixtures                                                      158,361         136,706
        Automobiles and trucks                                                             377,902          42,425
                                                                                       -----------     ------------
                                                                                         4,326,242       3,950,619
        Less accumulated depreciation                                                    2,024,317       1,780,009
                                                                                       -----------     ------------
        Total                                                                          $ 2,301,925     $ 2,170,610
                                                                                       ===========     ============
</TABLE>

      Assets under capital leases included in property, plant and equipment at
      December 31, 2004 are as follows:

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

        Automobiles and trucks                                                                           $ 288,929
        Less accumulated depreciation                                                                      (51,727)
                                                                                                         ----------
        Property, plant and equipment-net                                                                $ 237,202
                                                                                                         ==========
</TABLE>

      Depreciation and amortization expenses totaled $244,308, $200,155, and
      $223,845, for the years ended December 31, 2004, 2003, and 2002,
      respectively.

5.    LINE OF CREDIT

      Line of credit borrowings with a bank at December 31, 2004 and 2003
      consist of borrowings under a $5,000,000 line of credit, with interest
      payable at the prime rate minus 1% (4.25% and 3.00% at December 31, 2004
      and 2003, respectively). Borrowings under the line-of-credit are due
      August 31, 2005. The credit agreement contains certain covenants, which
      require minimum working capital and net worth levels. The Partnership was
      in compliance with all covenants at December 31, 2004 and 2003. The
      borrowings are collateralized by the Partnership's inventory and accounts
      receivable. The fair value of such borrowings is approximated by the
      carrying value given the variable nature of the associated interest rate.

6.    LEASE COMMITMENTS

      The Partnership leases automobiles and trucks under capitalized leases and
      office equipment under yearly operating leases. Rent expense attributable
      to the operating leases during each of the last three fiscal years was
      approximately $22,166 (2004), $20,706 (2003), and $20,706 (2002).
<PAGE>

      At December 31, 2004, future minimum lease payments under capitalized
      leases are as follows:

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

                                                                                                        Capital
        Fiscal Years:                                                                                           Leases

        2005                                                                                            $ 53,598
        2006                                                                                              45,868
        2007                                                                                              35,046
        2008                                                                                              35,046
        2009                                                                                              35,046
        Years subsequent to 2009                                                                          16,061
                                                                                                       ----------
        Total minimum lease payments                                                                     220,665
        Less: Imputed interest                                                                            28,159
                                                                                                       ----------
        Present value of minimum capitalized lease payments                                              192,506
        Current portion                                                                                   43,290
                                                                                                       ----------
        Long-term capitalized lease obligations                                                        $ 149,216
                                                                                                       ==========
</TABLE>

7.    RELATED PARTY TRANSACTIONS

      In 2004, 2003 and 2002, the Partnership expensed management fees to its
      general partner, WoodPerfect, Inc., of $65,000 plus 6.5% of Partnership
      income (as defined), for a total of $206,662 (2004), $126,970, (2003)and
      $144,535 (2002). Accrued expenses at December 31, 2004 and 2003 included
      $211,123 and $195,204, respectively, related to such fees.

      The Partnership had sales to customers affiliated through common ownership
      of approximately $6,454,127 (2004), $6,113,870 (2003), and $7,286,371
      (2002) of which $219,663, $52,608, and $63,350 were included in accounts
      receivable at December 31, 2004, 2003, and 2002, respectively.

      There is a note payable to a Partner of $50,000 for which interest is
      payable monthly at 6.5%. The note is collateralized by substantially all
      of the Partnership's assets and is due on demand. Interest expense for
      this note totaled $3,250 for each of the three years in the period ended
      December 31, 2004. Accrued interest was $3,250 as of December 31, 2004 and
      2003.

8.    EMPLOYEE BENEFIT PLAN

      During the year ended December 31, 2002, the Partnership established an
      employee savings plan (the "Plan") under Section 401(k) of the Internal
      Revenue Code for the benefit of eligible employees. The Partnership makes
      matching contributions to the Plan at the discretion of the partners up to
      4% of employee contributions. Partnership expense related to the Plan was
      $25,965, $65,462, and $51,829 for the years ended December 31, 2004, 2003,
      and 2002, respectively.

                                      ******
<PAGE>
SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) 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

                                                  By: /s/ DAVID A. ROBERSON
                                                      ---------------------
                                                  Its President

                                                  Date: March 31, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacity and on the dates indicated.

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

Signature                         Title                                              Date

/s/ DAVID A. ROBERSON             Director and Principal Executive               March 31, 2005
----------------------------       Officer


/s/ MICHAEL R. MURPHY             Chief Financial Officer and Principal
 ---------------------------       Accounting Officer                            March 31, 2005


/s/ BARRY DONNELL                 Chairman of the Board and Director             March 31, 2005
----------------------------


/s/ THOMAS A. BROUGHTON, III      Director                                       March 31, 2005
----------------------------


/s/ JOHN W LOWE                   Director                                       March 31, 2005
 ---------------------------


/s/ LEE ROY JORDAN                Director                                       March 31, 2005
----------------------------


/s/ J. DON WILLIAMS               Director                                       March 31, 2005
----------------------------


/s/ A. DOUGLAS JUMPER, SR.        Director                                       March 31, 2005
----------------------------


/s/ NORMAN W. GAYLE, III          Director                                       March 31, 2005
----------------------------


/s/ BOBBY TESNEY                  Director                                       March 31, 2005
----------------------------
</TABLE>
<PAGE>

                                      INDEX

Exhibit
Number
-------

(11)            Statement re: Computation of Per Share Earnings

(21)            Subsidiaries of the Registrant

(23)            Consents of Deloitte & Touche LLP

(31) Exhibits
           (a) Certification of principal executive officer pursuant to Exchange
               Act Rule 13a-15(e) or 15d-15(e).
           (b) Certification of principal
               financial officer pursuant to Exchange Act Rule 13a-15(e) or
               15d-15(e).

(32) Exhibits
           (a) Certification of CEO pursuant to 18 U.S.C. Section 1350, as
               adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
               2002.
           (b) Certification of CFO pursuant to 18 U.S.C. Section 1350, as
               adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
               2002.

<PAGE>

                                                Exhibit 11
                                 Statement re: Computation of Per Share Earnings

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

                                       CAVALIER HOMES, INC. AND SUBSIDIARIES
                                 COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
                                  (dollars in thousands except per share amounts)

                                                                        For the Year Ended December 31,
                                                         --------------------------------------------------------------
                                                               2004                  2003                  2002
                                                         ------------------    ------------------    ------------------

 BASIC & DILUTED
      Net income (loss)                                $             3,241  $             (4,570) $            (34,670)
                                                         ==================    ==================    ==================
 SHARES:

   Weighted average common shares
      outstanding (basic)                                       17,879,939            17,666,192            17,664,901

   Dilutive effect of stock options
     and warrants                                                  298,455                     -                     -
                                                         ------------------    ------------------    ------------------
   Weighted average common shares
     outstanding, assuming dilution (diluted)                   18,178,394            17,666,192            17,664,901
                                                         ==================    ==================    ==================



 Basic net income (loss) per share                     $              0.18  $              (0.26) $              (1.96)
                                                         ==================    ==================    ==================

 Diluted net income (loss) per share                   $              0.18  $              (0.26) $              (1.96)
                                                         ==================    ==================    ==================

</TABLE>
<PAGE>


                                   Exhibit 21
                         Subsidiaries of the Registrant


         BRC Components, Inc., an Alabama corporation
         Cavalier/AAA, a Delaware limited liability company
         CIS Financial Services, Inc., an Alabama corporation
         Cavalier Home Builders, LLC, a Delaware limited liability company
         Cavalier Properties, Inc., a Delaware corporation
         Cavalier Real Estate Co., Inc., a Delaware corporation
         Quality Housing Supply, LLC, a Delaware limited liability company
         Ridge Pointe Manufacturing, LLC, an Alabama limited liability company
         The Home Place, LLC, an Alabama limited liability company
         The Home Place of Nashville, Inc., a Delaware corporation


<PAGE>

                                   Exhibit 23
                        Consent of Deloitte & Touche LLP


CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos.
33-20859, 33-86232, 333-06371, 333-19833, 333-90652 on Form S-8 and Registration
Statement Nos. 333-18213 (as amended) and 333-48111 (as amended) on Form S-3 of
our report dated March 28, 2005 relating to the financial statements and
financial statement schedule of Cavalier Homes, Inc. and subsidiaries (which
report expresses an unqualified opinion and includes an explanatory paragraph
related to the adoption of Statement of Financial Accounting Standards No. 142
and 146), appearing in the Annual Report on Form 10-K of Cavalier Homes, Inc.
for the year ended December 31, 2004.

/s/ Deloitte & Touche LLP

Birmingham, Alabama
March 31, 2005



<PAGE>



                                   Exhibit 23
                        Consent of Deloitte & Touche LLP


CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos.
33-20859, 33-86232,  333-06371, 333-19833,  333-90652 on Form S-8 and
Registration Statement Nos. 333-18213 (as amended) and 333-48111 (as amended)
on Form S-3 of Cavalier Homes, Inc. of our report dated March 21, 2005 relating
to the financial statements of WoodPerfect Ltd. (a limited partnership)
appearing in the Annual Report on Form 10-K of Cavalier Homes, Inc. for the
year ended December 31, 2004.

/s/ Deloitte & Touche LLP

Birmingham, Alabama
March 31, 2005


<PAGE>


                                  EXHIBIT 31(a)

                                 CERTIFICATIONS

         I, David A. Roberson, certify that:

         1. I have reviewed this annual report on Form 10-K of Cavalier Homes,
Inc.;

         2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operation and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e), for the registrant and have:

                  a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;

                  b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and

                  c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth quarter in the case of an
annual report) that has materially affected or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial reporting
to the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function);

                  a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information and

                  b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal control over financial reporting.

Date: March 31, 2005

/s/ David A. Roberson
---------------------

David A. Roberson
Chief Executive Officer


<PAGE>



                                  EXHIBIT 31(b)

                                 CERTIFICATIONS

I, Michael R. Murphy, certify that:

         1. I have reviewed this annual report on Form 10-K of Cavalier Homes,
Inc.;

         2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;

         3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operation and cash flows of the
registrant as of, and for, the periods presented in this annual report;

         4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e), for the registrant and have:

                  a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;

                  b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and

                  c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth quarter in the case of an
annual report) that has materially affected or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;

         5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial reporting
to the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function);

                  a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information and

                  b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal control over financial reporting.

Date: March 31, 2005

/s/ Michael R. Murphy
---------------------

Michael R. Murphy
Chief Financial Officer


<PAGE>




                                  EXHIBIT 32(a)

                CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
                    AS ADOPTED PURSUANT TO SECTION 906 OF THE
                           SARBANES-OXLEY ACT OF 2002

In connection with Cavalier Homes, Inc. ("Company") Annual Report on Form 10-K
for the period ended December 31, 2004 ("Report"), the undersigned certifies
that:

1.       The Report fully complies with the requirements of Section 13(a) or
         15(d) of the Securities Exchange Act of 1934; and

2.       The information contained in the Report fairly presents, in all
         material respects, the financial condition and results of operations of
         the Company.


Date:    March 31, 2005               By:      /s/ David A. Roberson
                                         --------------------------------------
                                                   David A. Roberson
                                                   Chief Executive Officer


<PAGE>



                                  EXHIBIT 32(b)

                CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
                    AS ADOPTED PURSUANT TO SECTION 906 OF THE
                           SARBANES-OXLEY ACT OF 2002


In connection with Cavalier Homes, Inc. ("Company") Annual Report on Form 10-K
for the period ended December 31, 2004 ("Report"), the undersigned certifies
that:


1.       The Report fully complies with the requirements of Section 13(a) or
         15(d) of the Securities Exchange Act of 1934; and

2.       The information contained in the Report fairly presents, in all
         material respects, the financial condition and results of operations of
         the Company.


Date:    March 31, 2005                By:      /s/ Michael R. Murphy
                                          -------------------------------------
                                                    Michael R. Murphy
                                                    Chief Financial Officer