U. S. 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, 1997
         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 Number)


   Highway 41 N. and Cavalier Road,
            Addison, Alabama                                   35540
(Address of principal executive offices)                      Zip Code

       Registrant's telephone number, including area code: (205) 747-0044
           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                   New York 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. [ ]

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant,  computed by reference to the closing price of such stock on the New
York Stock Exchange as of March 23, 1998, was $202,128,797.

      Indicate the number of shares outstanding of each of the Registrant's
                 classes of common stock, as of March 23, 1998.
                                   19,944,670
                             Common, $0.10 par value
                       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 20, 1998.

<PAGE>

                              CAVALIER HOMES, INC.
                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1997

                                     PART I

ITEM 1.       BUSINESS

General

Cavalier Homes, Inc.,  incorporated in 1984, is a Delaware  corporation with its
executive  offices  located  at  Highway 41 North and  Cavalier  Road,  Addison,
Alabama 35540.  The Company also maintains  administrative  offices at 719 Scott
Avenue, Suite 600, Wichita Falls, Texas 76301. Unless otherwise indicated by the
context, references in this report to the "Company" or to "Cavalier" include the
Company,  its  subsidiaries,  divisions of its subsidiaries and their respective
predecessors, if any.

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

The Company designs and  manufactures a wide range of high quality  manufactured
homes and markets its homes  primarily in the  southeast,  southwest and midwest
regions of the United States,  with a focus on serving the low- to medium-priced
manufactured  housing market.  During 1997,  approximately  80% of the Company's
revenues were generated from sales in its core markets of Alabama,  Texas, North
Carolina,   South  Carolina,   Georgia,   Arkansas,   Louisiana,   Missouri  and
Mississippi.  At  December  31,  1997,  the  Company  operated  twenty-two  home
manufacturing  facilities.  Seven are located in Alabama,  four in  Mississippi,
three each in Texas and Georgia, two each in North Carolina and Arkansas and one
in Pennsylvania.

The Company's  homes are sold under 68 brand names. As of December 31, 1997, the
Company markets its homes through  approximately 800 independent dealers located
in 30 states,  with over 1,000 sales  centers.  In addition,  the Company has an
independent  Exclusive Dealer Program and currently has 132 participating dealer
locations  selling only the Company's  homes.  The Company's  homes are normally
fully furnished,  including  appliances,  and are comprised of one or more floor
sections.

Through its financial services segment,  the Company purchases qualifying retail
installment  sales contracts for  manufactured  homes sold through the Company's
independent  exclusive dealer network and sells various  commissioned  insurance
products to certain retail and wholesale  purchasers of its homes including both
personal and commercial lines of insurance.

Revenues,  operating profits  and other financial data of the Company's industry
segments  for the three year ended December 31, 1997 are set forth in Note II of
Notes to Consolidated Financial Statements in Part II.

Home Manufacturing Operations

At December 31,  1997,  the  Company,  through  five wholly owned  subsidiaries,
operated  twenty-two  manufacturing  facilities  engaged  in the  production  of
manufactured  homes.  At the  beginning  of 1997,  the Company  reorganized  its
operating  subsidiaries  and  merged  them into and  combined  them with two new
operating   subsidiaries,   Cavalier   Industries,   Inc.  ("CII"),  a  Delaware
corporation  (formerly Brigadier Homes of North Carolina,  Inc., Astro Mfg. Co.,
Inc.,   Mansion  Homes,   Inc.  and  Homestead   Homes,   Inc.),   and  Cavalier
Manufacturing,  Inc. ("CMI"), a Delaware corporation (formerly Cavalier Homes of
Alabama,  Inc.,  Buccaneer Homes of Alabama,  Inc.,  Riverchase  Homes, Inc. and
Cavalier  Town & Country  of Texas,  Inc.).  The former  operating  subsidiaries
continue their  operations as divisions of CII and CMI. The divisions of CII are
Brigadier  Homes of North Carolina (one  facility),  Astro Homes (one facility),
Mansion Homes (one facility) and Homestead Homes (one  facility).  The divisions
of CMI are Cavalier Homes of Alabama (three facilities),  Buccaneer Homes (three
facilities),  Riverchase  Homes (one  facility)  and Town & Country Homes (three
facilities).  At the end of 1997, in conjunction  with the Belmont  Merger,  the
Company acquired three subsidiaries  operating eight plants: Belmont Homes, Inc.
(four facilities), Spirit Homes, Inc. (two facilities) and Bellcrest Homes, Inc.
(two facilities).  The management of each of the Company's  manufacturing  units
typically  consists of a president or general manager,  a production  manager, a

                                       2
<PAGE>

general sales manager, a controller, a service manager, a purchasing manager and
a quality control  manager.  These  mid-level  management  personnel  manage the
Company's  manufacturing  facilities,  and typically participate in an incentive
compensation system based upon their respective operation's profitability.

The Company has experienced  significant growth in manufacturing capacity during
the  past  six  years,  expanding  from  four  manufactured  housing  production
facilities  in 1992 to twenty-two  facilities at the end of 1997.  The Company's
facilities  normally  operate  on  a  single-shift,  five-day  week  basis.  The
approximate  current annual  capacity of the respective  manufacturing  units is
shown below:
                                                                Approximate
                                              Number of       Annual Capacity
Manufacturing Unit                           Facilities        in Floors (1)

Belmont Homes, Inc.                               4                 10,000
Cavalier Homes of Alabama                         3                  6,000
Buccaneer Homes                                   3                  5,500
Town & Country Homes                              3                  5,000
Spirit Homes, Inc.                                2                  6,500
Bellcrest Homes, Inc.                             2                  3,500
Brigadier Homes of North Carolina                 1                  3,000
Homestead Homes                                   1                  2,500
Mansion Homes                                     1                  1,500
Riverchase Homes                                  1                  1,500
Astro Homes                                       1                  1,500
                                           -------------     -------------
                                                 22                 46,500
                                           =============     =============


(1)   Estimated capacity is based on one shift per day, five days per week,
      48 weeks per year.

Additionally,  the following table sets forth certain production information for
1997, 1996 and 1995:

<TABLE>
<CAPTION>
                                                 For the Year Ended December 31,
                        -----------------------------------------------------------------------------
                                 1997                       1996                        1995
                        ----------------------      ---------------------      ----------------------
Number of Homes Sold:

<S>                         <C>             <C>       <C>             <C>       <C>             <C>
   Single-Section Homes     13,576          58%       16,738          65%       13,627          69%
   Multi-Section Homes      10,026          42%        8,914          35%        6,040          31%
                        ----------   ----------     ---------   ---------     ---------     --------

      Total Homes           23,602         100%       25,652         100%       19,667         100%

Number of Floors Sold       33,646                    34,581                    25,717

</TABLE>

Construction of a home begins by welding steel frame members together. The frame
is then moved  through the plant,  stopping at a number of work  stations  where
various components and sub-assemblies are attached. Certain sub-assemblies, such
as plumbing, cabinets, ceilings and wall systems, are assembled at off-line work
stations.  The completed  home is usually sold fully  furnished and is ready for
connection to customer-supplied water, sewage and electrical systems.

The principal raw materials purchased by the Company are steel, lumber, plywood,
sheetrock, aluminum, galvanized pipe, insulating materials,  electrical supplies
and plastics.  The Company purchases axles,  wheels,  tires, kitchen appliances,
laminated wallboard, roof trusses, plumbing fixtures,  furniture,  carpet, vinyl
floor  covering,  windows  and  decorator  accessories.  Currently,  the Company
maintains  approximately  two to three weeks'  inventory of raw  materials.  The
Company is not  dependent on any single  source of supply and believes  that the
materials and parts necessary for the construction and assembly of its homes are
readily available from other sources.

The Company's component manufacturing subsidiaries provide laminated wallboards,
exterior doors,  cabinet doors and certain other supply products for some of its
manufacturing facilities.  Additionally,  certain of the Company's manufacturing
facilities  currently  purchase  roof trusses from a joint  venture in which the
Company owns an interest.  The Company  believes  prices obtained by the Company
for these  products from this joint venture are  competitive  with the Company's
other sources of supply.

Because the cost of transporting a manufactured home is significant,  there is a
limit to the distance  between a  manufacturing  facility and the dealers it can
service. 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.  One of the Company's
subsidiaries  employs  drivers  who own their own trucks to  deliver  its homes.

                                       3
<PAGE>

Dealers or other independent  installers are responsible for placing the home on
site, making utility  connections and providing and installing certain accessory
items and appurtenances, such as decks, 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 Act of 1974, as amended,  and administered by the
U.S. Department of Housing and Urban Development  ("HUD").  Single-section homes
are 14 to 16 feet wide,  vary in length from 40 to 80 feet and  contain  between
560 and 1,280 square feet. The multi-section models consist of two or more floor
sections that are joined at the home site, vary in length from 40 to 80 feet and
contain between 960 and 2,432 square feet.

The Company currently  produces over 600 different models of manufactured  homes
with a variety  of decors  that are  marketed  under 68 brand  names.  The homes
typically include a living room, dining area, kitchen,  one to four bedrooms and
one  or  more   bathrooms.   Each  home  contains  a  cooking  range  and  oven,
refrigerator,  water heater and central  heating.  Depending  on the  customer's
preferences, most homes are sold fully furnished. Customers may also choose many
available  options  including  fireplaces,  ceiling fans,  dishwashers,  garbage
disposals,  microwave ovens,  stereos,  bay windows,  composition shingle roofs,
vinyl siding and sliding glass patio doors.

During 1995,  the Company began  manufacturing  a series of homes intended to be
located in subdivisions  or residential  communities and marketed by real estate
developers.  These  "Developer"  homes  differ  from the  Company's  traditional
manufactured  homes as they  have  sheetrock  walls  that  have  been  taped and
textured and residential style  roof-lines.  These upscale homes can be set on a
permanent  foundation  and  may  include  garages,   porches,  decks  and  other
site-built amenities not found in traditional manufactured homes.

Modular homes are homes designed to meet building codes  administered  by states
and local  authorities,  as opposed to the national HUD guidelines.  Four of the
Company's  manufacturing  facilities  currently  manufacture a limited number of
modular homes meeting applicable regulatory standards.

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 or expenditures.

Independent Dealer Network, Sales and Marketing

 As of December 31, 1997,  the Company  markets its homes through  approximately
800 independent  dealers located in 30 states, with over 1,000 sales centers. In
addition,  the Company has an independent Exclusive Dealer Program and currently
has 132  participating  dealer  locations  selling  only  the  Company's  homes.
Approximately 80% of the Company's sales in 1997 were to dealers operating sales
centers in the Company's  core markets as follows:  Alabama - 13%,  Texas - 13%,
North  Carolina  - 10%,  South  Carolina  - 9%,  Georgia  - 8%,  Arkansas  - 8%,
Louisiana - 7%, Missouri - 6% and Mississippi - 6%.

The  Company  has  written  agreements  with  most  of its  independent  dealers
requiring each dealer to maintain  qualified service staff to perform day-to-day
repair  work on the  Company's  homes sold by the dealer  and  requiring  prompt
payment by the dealer for homes  purchased.  These  agreements  generally 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 1997, the Company's  largest dealer accounted for  approximately
2.5% 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. *

Since 1991,  the Company has been  developing an  independent  exclusive  dealer
network. The Company's  independent exclusive dealers market and sell only homes

                                       4
<PAGE>

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  growth  in the  Company's  number  of
exclusive  dealers and percentage of total Company sales  represented by them is
summarized in the following table:

                                          For the Year Ended December 31,
                                       --------------------------------------
                                          1997         1996          1995
                                       -----------  ------------  -----------

  Number of Exclusive Dealers                 132         115            93

  Percentage of Manufactured Home Sales        30%         27%           26%


The industry has recently been  experiencing  a trend of increasing  competition
for quality independent  dealers,  and many manufacturers,  which had previously
not owned their own retail  sales  centers,  have begun  purchasing  independent
dealers  and/or  establishing  their own retail  outlets.  Although  the Company
intends to continue to focus on distribution through independent dealers, it may
broaden its programs in response to these  trends to allow for other  methods of
retail distribution or to purchase and/or establish its own retail sales centers
as a complement to its independent dealer network. *

Through its finance subsidiary  Cavalier  Acceptance  Corporation  ("CAC"),  the
Company purchases qualifying retail installment sales contracts for manufactured
homes sold  through  the  Company's  independent  exclusive  dealer  network and
provides its exclusive dealers with other services and support.

Each of the Company's  manufacturing divisions typically employs a general sales
manager and its own respective  sales  representatives  who are compensated on a
commission  basis. The plant-level  sales  representatives  are charged with the
day-to-day  servicing  of  the  needs  of  the  Company's  independent  dealers,
including  its  independent  exclusive  dealers.  The Company  markets its homes
through product promotions, participation in regional manufactured housing shows
and  advertisements  in local  media.  As of  December  31,  1997,  the  Company
maintained a sales force of 76 full-time salesmen and 11 full-time general sales
managers.

Retail Financing Activities

A significant  factor affecting sales of manufactured  homes is the availability
and terms of  financing.  CAC  purchases  qualifying  retail  installment  sales
contracts  for  manufactured  homes  sold  through  the  Company's   independent
exclusive  dealer  network.  In  addition,  the  Company's  goal  is  for  CAC's
activities  to provide the Company with a source of  consistent  earnings  which
may, to a certain extent, be insulated from fluctuating  manufactured home sales
volumes. *

CAC seeks to provide  highly  competitive  financing  terms to  customers of the
Company's   independent   exclusive   dealers.   CAC  currently  offers  various
conventional  loan programs which require a down-payment  ranging from 0% 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 84 to 240 months, depending
upon the type of home and amount  financed,  the amount of the down  payment and
the  customer's  creditworthiness.  CAC'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, 1997, all
of CAC's outstanding loans were secured. Loans purchased by CAC normally provide
a fixed rate of interest with equal monthly payments and are non-recourse to the
dealer.  All of CAC's loans  outstanding  at December  31, 1997  provided  for a
predetermined  fixed rate of interest.  The interest  rates  applicable to CAC's
loans as of such date generally ranged from 9.25% to 14.00%, and the approximate
weighted  average  annual  percentage  interest rate was 10.9%.  Currently,  CAC
operates in each of the 15 states in which the Company has independent exclusive
dealers.

For those retail customers who meet CAC's lending standards, CAC provides prompt
credit approvals and funding of loans. CAC has established a standardized credit
scoring system to facilitate such prompt  decision-making  on loan applications.
The most  important  criteria in the scoring  system are the income,  employment
stability and credit  worthiness of the borrower.  The system requires a minimum
score before CAC will consider funding the installment sale contract.

In the event an  installment  sale  contract  becomes  delinquent,  CAC normally
contacts the customer  within 10 to 25 days  thereafter in an effort to cure the
delinquency. CAC generally repossesses the home after payments have become 60 to
90 days delinquent.  After repossession,  CAC normally has the home delivered to
one of the  Company's  independent  dealer's  sales center where CAC attempts to
resell the home or contracts with an independent  party to remarket the home. To
a limited extent, CAC sells repossessed homes at wholesale.

                                       5
<PAGE>

The Company  maintains a reserve for estimated credit losses on installment sale
contracts  owned by CAC to provide  for  future  losses  based on the  Company's
historical  loss   experience,   current   economic   conditions  and  portfolio
performance.  * Amounts credited to the reserve were $1.3, $0.8 and $0.3 million
in 1997, 1996 and 1995, respectively.  Additionally, as a result of defaults and
repossessions  the reserve was charged $1.0, $0.3 and $0.1 million in 1997, 1996
and 1995,  respectively.  The reserve for credit losses at December 31, 1997 was
$1.3 million as compared to $0.9 million at December 31, 1996,  and $0.6 million
at December 31, 1995.

In  fiscal  1997,   1996  and  1995,  CAC  repossessed  92,  41  and  13  homes,
respectively.  The  Company's  inventory  of  repossessed  homes was 50 homes at
December 31, 1997,  as compared to 6 homes at December 31, 1996,  and 6 homes at
December 31, 1995. The Company's net losses resulting from  repossessions on CAC
purchased  loans as a percentage of the average  principal  amount of such loans
outstanding  for  fiscal  1997,  1996  and  1995  was  2.24%,  1.40%  and  .76%,
respectively.

At  December  31, 1997 and  December  31,  1996,  delinquencies  expressed  as a
percentage of the total number of  installment  sale  contracts  which CAC owned
were as follows:
<TABLE>

<CAPTION>
                                                              Delinquency Percentage
          Total Number                                          December 31,1997
                                    -------------------------------------------------------------------------
          of Contracts                  30 Days            60 Days             90 Days            Total
---------------------------------   ----------------    ---------------    ----------------  ----------------

<S>          <C>                            <C>                <C>                 <C>               <C>
             1,712                          1.46%              0.93%               0.12%             2.51%

                                                             Delinquency Percentage
          Total Number                                          December 31,1996
                                    -------------------------------------------------------------------------
          of Contracts                  30 Days            60 Days             90 Days            Total
---------------------------------   ----------------    ---------------    ----------------  ----------------

             1,292                          1.16%              0.08%               0.00%             1.24%

</TABLE>

At  December  31, 1997 and  December  31,  1996,  delinquencies  expressed  as a
percentage  of the total  outstanding  principal  balance  of  installment  sale
contracts which CAC owned were as follows:
<TABLE>

<CAPTION>
                                                              Delinquency Percentage
          Total Value                                           December 31,1997
                                    -------------------------------------------------------------------------
          of Contracts                  30 Days            60 Days             90 Days            Total
---------------------------------   ----------------    ---------------    ----------------  ----------------

<S>       <C>                               <C>                <C>                 <C>               <C>
          $ 49,146,000                      1.59%              0.95%               0.05%             2.59%

                                                             Delinquency Percentage
          Total Value                                           December 31,1996
                                    -------------------------------------------------------------------------
          of Contracts                  30 Days            60 Days             90 Days            Total
---------------------------------   ----------------    ---------------    ----------------  ----------------

          $ 36,425,000                      1.13%              0.09%               0.00%             1.22%
</TABLE>

There can be no  assurance  that the  Company's  future  results with respect to
delinquencies and  repossessions  will be consistent with its past experience as
reflected above.

Certain operating data relating to CAC are set forth in the following table:
<TABLE>
<CAPTION>

                                                                     December 31,
                                     ---------------------------------------------------
                                          1997                1996             1995
                                     ----------------  ---------------  ----------------
<S>                                  <C>               <C>              <C>
   Total loans receivable            $    49,146,000   $   36,425,000   $    19,209,000
   Allowance for credit losses       $     1,272,000   $      941,000   $       551,000
   Number of loans outstanding                 1,712            1,292               758
   Number of delinquencies                        43               16                 5
   Net loss ratio on average
      outstanding principal balance             2.24%            1.40%             0.76%
   Weighted average annual
      percentage rate                           10.9%            10.9%             11.3%
</TABLE>


CAC presently has 6 part-time and 30 full-time employees.

Although the level of CAC's future  activities  cannot  presently be determined,
the Company expects to utilize internally generated working capital,  borrowings
under  the  Company's  revolving,  warehouse  and term loan  agreement  with its
primary lender (described below under the heading  "Management's  Discussion and
Analysis of  Financial  Condition  and  Results of  Operations  - Liquidity  and
Capital  Resources") and amounts  generated from sales of loans under the Retail
Finance Agreement  discussed in the following  paragraph to fund the purchase of
retail  installment  sale  contracts on homes sold by the Company's  independent
exclusive dealers and to develop a portfolio of such installment sale contracts.
* The Company believes that its  relationships  with its exclusive  dealers will
assist the development of this portfolio. *

                                       6
<PAGE>

Since its  inception,  CAC has been  restricted in the amounts of loans it could
purchase based on  conservative  underwriting  standards,  the  availability  of
working  capital  and funds  borrowed  under its  credit  line with its  primary
lender.  In February 1998,  CAC entered into an agreement  (the "Retail  Finance
Agreement")  with  another lender providing for the periodic resale of a portion
of CAC's loans that meet established criteria. On March 13, 1998, CAC sold loans
to this lender  having an  outstanding  principal  amount of  approximately  $25
million for cash in the  approximate  amount of $26 million.  See  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Results of  Operations/Financial  Services."  The Company  believes the periodic
sale of installment contracts receivable under the Retail Finance Agreement will
reduce  requirements  for both  working  capital and  borrowings,  increase  the
Company's liquidity, reduce the Company's exposure to interest rate fluctuations
and enhance the ability of CAC to increase its volume of loan purchases. * There
can be no  assurance,  however,  that  additional  sales will be made under this
agreement,  or that CAC and the  Company  will be able to realize  the  expected
benefits from such agreement. *

Retail Insurance Activities

Through its wholly-owned insurance agency, Quality Certified Insurance Services,
Inc.  ("QCIS"),  the Company  sells  commissioned  insurance  products to retail
purchasers of the Company's  homes  including  physical damage and extended home
warranties.  QCIS also sells commercial lines of insurance  products,  including
general liability and property insurance, to the Company's independent exclusive
dealers and others. At December 31, 1997, QCIS had 13 full-time  employees and 2
part-time employees.

Wholesale Dealer Financing and Repurchase Obligations

In accordance with manufactured housing industry practice,  substantially all of
the Company's  dealers  finance 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 price plus, in specific cases, certain
administrative  expenses.  A portion of  purchases  by dealers  are  pre-sold to
retail customers and are paid through retail financing commitments.

The risk of loss under such repurchase  agreements is mitigated 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
2.5% of sales in 1997,  (ii) the  repurchase  obligation  expires on  individual
homes after a reasonable  period of time (generally 12 to 18 months from invoice
date) and also declines  during such period based on  predetermined  amounts and
(iii) the  Company is in many cases able to sell homes  repurchased  from credit
sources in the ordinary course of business without incurring significant losses.
As of  December  31,  1997,  the  Company's  contingent  liability  under  these
repurchase and other similar  recourse  agreements was an amount estimated to be
approximately  $158 million.  The Company has provided an allowance for possible
repurchase  losses of $1.2  million  as of  December  3l,  1997,  based on prior
experience  and  current  market  conditions.  Management  currently  expects no
material loss in excess of the allowance. *

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 rigorous  quality  control  inspection  program at all
production  stages.  The Company's  manufacturing  facilities  and the plans and
specifications of its manufactured  homes have been approved by a HUD-designated
inspection  agency. An independent,  HUD-approved  third-party  inspector checks
each of the Company's manufactured homes for compliance during construction.

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

The Company  maintains a full-time  service manager at most of its manufacturing
facilities.  In addition,  the Company has 186  full-time  service  personnel to
provide  on-site   service  and  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

                                       7
<PAGE>

emphasis on diagnosing  potential  problem  areas to help minimize  costly field
repairs.  The Company  also has focused on  reducing  response  time to customer
service  requests.  At December 31, 1997, the Company had  established a reserve
for future warranty claims of $11.7 million  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 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 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  growth  strategy  currently  includes the continued  expansion of
financial  services provided through CAC. * The Company believes that operations
of CAC 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 CAC,  combined with the limited operating history of CAC, there
can be no assurance  that CAC 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 business is 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 the effect any
such legislation may have on the Company or the manufactured housing industry as
a whole.

The Company's  manufacturing  facilities and the plans and specifications of its
manufactured  homes have been approved by a  HUD-designated  inspection  agency.
Furthermore, an independent, HUD-approved third-party inspector 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 has these matters under continuous review and
the  Company  cannot  predict  what  effect  (if  any)  additional   regulations
promulgated by HUD would have on the Company or the  manufactured  industry as a
whole.

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
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 are all built with particle  board,  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 comply 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.

                                       8
<PAGE>

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 more
strict 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 CAC. 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  and also  set  forth  certain  substantive  limitations  on
permissible  contract terms.  The Equal Credit  Opportunity Act and Regulation B
promulgated   thereunder  prohibit  credit  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 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  CAC  may  also  become  subject  to  the  disclosure
requirements  of the Home Mortgage  Disclosure Act. In addition to the extensive
federal  regulation of consumer  credit  matters,  many states have also 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 CAC 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 CAC to comply  with the  requirements  of
federal  or  state  law  pertaining  to  consumer  credit  could  result  in the
unenforceability  of the particular  contract for the affected  consumer,  civil
liability  to the  affected  customers,  criminal  liability  and other  adverse
results.

Employees

As of December 31,  1997,  the Company had 5,051  employees,  of whom 4,396 were
engaged in home manufacturing,  97 in sales, 186 in warranty and service, 279 in
general  administration,  42 in delivery and 51 in retail  finance and insurance
services. At year end, only Astro Homes' employees engaged in manufacturing (100
employees)  were  covered  by  a  collective  bargaining  agreement.  Management
considers its relations with its employees to be good. *

Risk Factors

In addition to the other  information  contained herein,  persons  interested in
making an  investment  in the Company  should  carefully  consider the following
factors concerning the Company and its business:

     Uncertainties in Integrating Business Operations and Achieving Benefits of
     the Belmont Merger

On December 31, 1997, Crimson Acquisition Corp., a Mississippi corporation and a
wholly  owned  subsidiary  of the Company,  merged with and into Belmont  Homes,
Inc., a  Mississippi  corporation  and also a producer of  manufactured  housing
("Belmont"),  and Belmont became a wholly owned subsidiary of the Company. For a
more detailed description of Belmont and this transaction,  reference is made to

                                       9
<PAGE>

the Company's  Current  Reports on Form 8-K dated August 20, 1997,  December 11,
1997 and  January  15,  1998 (as  amended by Form 8-K/A dated March 16, 1998 and
Form 8-K/A dated March 17, 1998),  and the Company's  Registration  Statement on
Form S-4 filed with the Commission on December 2, 1997 (Reg. No. 333-41319). The
acquisition  of Belmont will  require the  consolidation  of  functions  and the
integration  of  departments,   systems  and  procedures,   which  will  present
significant management  challenges.  There can be no assurance that such actions
will be successfully  accomplished as rapidly as currently expected,  if at all.
Moreover, although the primary purpose of such actions will be to realize direct
cost savings and other operating efficiencies, synergies and benefits, there can
be  no  assurance  of  the  extent  to  which  or  whether  such  cost  savings,
efficiencies, synergies or benefits will be achieved.

     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.  The market for manufactured  homes is
affected by many of the same  national  and regional  economic  and  demographic
factors that affect the broader housing industry.  Historically, most sectors of
the home building industry,  including the manufactured  housing industry,  have
been affected by, among other things,  changes in general  economic  conditions,
inflation, levels of consumer confidence,  employment and income levels, housing
demand, availability of alternative forms of housing,  availability of financing
and the  level  and  stability  of  interest  rates.  The  Manufactured  Housing
Institute  ("MHI") reported that during the period from 1983 to 1991,  aggregate
domestic  shipments of  manufactured  homes declined 42.1% from 295,079 homes to
170,713  homes.  According  to  industry  statistics,  after a  ten-year  low in
shipments  of homes in  1991,  the  industry  recovered  significantly,  posting
increases in shipments of 24%, 21%, 20%, 12% and 7% for 1992,  1993,  1994, 1995
and 1996, respectively.  However, industry statistics reflect a decrease in home
shipments of approximately 2.8% for 1997 when compared to 1996. The manufactured
housing industry has, over the past several years, also experienced increases in
both the number of retail dealers and manufacturing capacity,  which the Company
believes  is  currently  resulting  in slower  retail  turnover,  higher  dealer
inventories, lower order backlogs and increased price competition.

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 was not a
significant  factor in the Company's  business during the period of 1992 through
1996 when industry  shipments  were steadily  increasing,  the recent decline in
shipments may signal a return to the industry's traditional seasonal patterns.

The  duration  and  extent of the  recent  decrease  in home  shipments  and the
tightening of  competitive  conditions,  and their  corresponding  impact on the
future results of operations and financial  condition of the combined companies,
is  uncertain  at this time.  Furthermore,  because of the cyclical and seasonal
nature  of  the  manufactured  housing  industry  and  the  recent  increase  in
competitive  conditions,  the Company can give no assurance that the industry is
not  entering  a  change  in its  cycle or  returning  to  traditional  seasonal
patterns,  either of which could have a material adverse effect on the Company's
results of operations or financial condition. *

     Limitations on Ability to Pursue Growth Strategy

The Company's  growth  strategies are to (i) expand the financing  activities of
its finance  subsidiary,  CAC,  (ii) develop its  independent  exclusive  dealer
network, (iii) expand its geographic presence and manufacturing  capacity,  (iv)
develop the  production and  distribution  of component  parts for  manufactured
housing and (v) pursue  additional  acquisitions.  Since  1991,  the Company has
expanded  manufacturing  capacity  to  meet  the  increase  in  demand  for  its
manufactured homes. Downturns in shipments in the manufactured housing industry,
or a decline in the demand or growth in demand for the  Company's  homes,  could
have a material adverse effect on the Company.  The Company's ability to execute
its strategy will depend on a number of factors,  including general economic and
industry conditions,  its ability to sell to additional independent dealers, the
availability  of  semi-skilled  workers  in the  areas  in which  the  Company's
manufacturing  facilities are located,  the ability of CAC to be competitive and
other factors, many of which are beyond the control of the Company. There can be
no assurance that the Company's growth strategy will be successful.  Further, if
the Company's  growth strategy is  unsuccessful,  there can be no assurance that
such lack of success will not have a material  adverse effect upon the Company's
results of operations or financial condition. *

     Uncertainties Regarding Retail Financing Activities

The Company  engages in the business of purchasing  retail  installment  finance
loans that have been originated by the Company's  independent exclusive dealers.
The Company  maintains a reserve for estimated credit losses on installment sale
contracts  owned by CAC to provide  for  future  losses  based on the  Company's
historical  loss   experience,   current   economic   conditions  and  portfolio
performance.   The  establishment  of  appropriate  reserves  is  an  inherently
uncertain  process,  and  there can be no  assurance  that the  ultimate  losses

                                       10
<PAGE>

realized by CAC will not exceed the Company's  loss reserves and have a material
adverse effect on the Company's results of operations and financial condition. *
There  also can be no  assurance  that  volatility  or a  significant  change in
interest  rates will not  materially  affect CAC's and the  Company's  business,
results of operations or financial condition. *

The  Company's  strategy  currently  includes  the  continued  expansion  of the
financial services segment of its business.  Accordingly,  the Company may incur
additional debt, or other forms of financing,  in order to continue to fund such
growth.  The Company may also engage in other  transactions,  such as selling or
securitizing  portions of its installment  loan portfolio,  that are designed to
facilitate the ability of CAC to purchase and/or  originate an increased  volume
of loans and to reduce the Company's  exposure to interest rate fluctuations and
installment  loan  losses.   The  Company  has  recently  entered  into  such  a
transaction  pursuant  to the Retail  Finance  Agreement  discussed  above under
"Retail  Financing  Activities"  and on March 13, 1998, sold  approximately  $25
million of its loans.  No  assurance  can be given  that  additional  sales will
indeed be made under this agreement,  however,  or that CAC and the Company will
be able to realize the expected benefits from such agreement. Further, there can
be no  assurance  that  possible  additional  financing,  or the  aforementioned
transactions  involving  the  Company's  installment  loan  portfolio,  will  be
available on terms acceptable to the Company. * If they are not, the Company may
be forced to curtail the  expansion of its  financial  services  business and to
alter its strategies. *

     Limitations on Availability of Consumer and Dealer Financing

Consumer  financing for  manufactured  home  purchases is generally  provided by
third-party  lenders.  The  availability  and cost of financing for manufactured
home purchasers and dealers is important to the Company's sales and is dependent
on financial institutions' lending practices, the strength of the credit markets
generally,  governmental policies and other conditions,  all of which are beyond
the  Company's  control.  In addition,  in most states,  manufactured  homes are
classified  legally and by taxing  authorities as personal  property rather than
real estate.  As a result,  financing for the purchase of manufactured  homes is
characterized  by shorter loan  maturities  and higher  interest  rates,  and in
certain  periods such  financing is more  difficult to obtain than  conventional
home mortgages. Unfavorable changes in these factors may have a material adverse
effect on the Company's results of operations or financial condition. *

     Potential Unavailability and Increases in Prices of Raw Materials

The Company's operating costs may be significantly  affected by the availability
and pricing of certain raw  materials,  particularly  lumber,  gypsum,  particle
board  and  insulation.  Sudden  increases  in  demand  for  these  construction
materials  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  and,
consequently,  may adversely impact  profitability.  Further, a reduction in the
availability  of raw  materials  also may affect a company's  ability to meet or
maintain production requirements.

     Contingent Repurchase and Guaranty Obligations

It is a customary  practice in the  manufactured  housing industry to enter into
repurchase and other recourse  agreements with lending  institutions  which have
provided  wholesale  floor plan financing to dealers.  Substantially  all of the
Company's  sales  are  made  to  dealers  located  primarily  in the  southeast,
southwest  and  midwest  regions of the United  States  pursuant  to  repurchase
agreements with lending  institutions.  These agreements  generally  provide for
repurchase  of the  Company's  products  from the lending  institutions  for the
balance due them in the event of repossession upon a dealer's default.  The risk
of loss under  repurchase  agreements is mitigated by the fact that (i) sales of
manufactured  homes are spread over a  relatively  large  number of  independent
dealers;  (ii) the price the Company 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 (iii) the Company has
been in many cases able to resell homes  repurchased  from credit sources in the
ordinary course of business  without  incurring  significant  losses.  While the
Company has established a reserve for possible  repurchase losses,  there can be
no assurance that the Company will not incur  material  losses in excess of such
reserves in the future. *

     Competitive Nature of the Industry

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 price,  product  features and  quality,  reputation  for
service and quality, depth of field inventory,  delivery capabilities,  warranty
repair service, dealer promotions,  merchandising and terms of dealer and retail
consumer financing.  In addition, the Company competes with other manufacturers,

                                       11
<PAGE>

some of which maintain their own retail sales centers,  for quality  independent
dealers.  In addition,  manufactured  homes compete with other forms of low-cost
housing,  including  site-built,  prefabricated  and modular homes,  apartments,
townhouses and condominiums.  The Company faces direct competition from numerous
manufacturers,   many  of  which  possess  greater   financial,   manufacturing,
distribution  and  marketing  resources.   As  a  result  of  these  competitive
conditions,  the Company  may not be able to sustain  past levels of sales or to
continue its sales growth or profitability. *

     Reliance on Executive Officers

The success of the  Company's  business is highly  dependent  upon the  personal
efforts  and  abilities  of the  current  executive  officers  of  the  Company.
Specifically,  the success of the Company is highly  dependent on the efforts of
its Chairman of the Board,  Barry B. Donnell,  its President and Chief Executive
Officer, David A. Roberson, 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 the Company's
business.  The Company does not have  employment or  non-competition  agreements
with any of its executive officers.  The Company's  continued growth,  including
the  expansion  of CAC's  business,  will depend upon its ability to attract and
retain additional experienced management personnel.

     Dependence on Independent Dealers

The Company depends on independent dealers for substantially all retail sales of
its  manufactured  homes.  Typically  only one dealer within a given market area
distributes   a  particular   product  line  of  the  Company.   The   Company's
relationships  with its dealers are  cancelable on short notice by either party.
The industry has recently been  experiencing  a trend of increasing  competition
for  quality  independent  dealers,  and many  manufacturers,  some of which had
previously  not owned  their own retail  sales  centers,  have begun  aggressive
programs  to  purchase  independent  dealers,  including  some of the  Company's
independent dealers,  and/or establishing their own retail sales centers.  While
the  Company  believes  that its  relations  with its  independent  dealers  are
generally  good,  there can be no  assurance  that the  Company  will be able to
maintain these relations, that these dealers will continue to sell the Company's
homes or that the Company will be able to attract and retain quality independent
dealers. *

     Potential Adverse Effects of Regulations

The  Company  is  subject  to a variety  of  federal,  state and local  laws and
regulations  affecting  the  production,  sale  and  financing  of  manufactured
housing. The National Manufactured Home Construction and Safety Standards Act of
1974, as amended, and regulations  promulgated by the U.S. Department of Housing
and  Urban  Development  ("HUD")  thereunder,   impose  comprehensive   national
construction  standards for manufactured homes and preempt conflicting state and
local  regulations.  Failure to comply with such  regulations  could  expose the
Company  to  a  wide  variety  of  sanctions,  including  closing  one  or  more
manufacturing  facilities.  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 has these matters
under  continuous  review  and it  cannot  be  predicted  what  effect  (if any)
additional  regulations  promulgated  by HUD would  have on the  Company  or the
manufactured  housing  industry as a whole. In addition,  certain  components of
manufactured homes are subject to regulation by the U.S. Consumer Product Safety
Commission.  The Company's  manufactured  homes are also 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  also  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.

A variety of federal laws affect the financing of manufactured homes,  including
the financing activities conducted by CAC. For a discussion of these regulations
and certain risks  associated with them, see discussion  above under the heading
"Regulation."

There can be no assurance that the Company will not be adversely  affected  by a
failure  to comply  with any laws or  regulations applicable to or affecting the
Company.  *

     Compliance with Environmental Laws

The  Company's  operations  are  subject  to  federal,  state and local laws and
regulations   relating  to  the   generation,   storage,   handling,   emission,

                                       12
<PAGE>

transportation  and discharge of materials  into the  environment.  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
more strict in recent years. Accordingly, the Company can give no assurance that
it 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 the
Company's results of operations or financial condition.

     Litigation

For description of certain risk factors  associated with litigation,  see "Legal
Proceedings", below.

     Volatility of Stock Price

The  Company's  Common  Stock is  traded on the NYSE.  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 and the stock market and the manufactured housing industry
generally.

________________________________________
*  See Safe Harbor Statement on page 49.


ITEM 2.           PROPERTIES

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,
1997.  Except as indicated in footnotes  to the table,  all the  facilities  are
owned by the Company.
<TABLE>
<CAPTION>
                                                                                                     Approximate
           Location                                 Use (Number of Facilities)                      Square Footage

<S>  <C>                                           <C>                                                  <C>
     Belmont Homes, Inc.
          Belmont Mississippi                      Manufacturing facilities (3)                         354,000
          Clarksdale, Mississippi                  Manufacturing facility (1)                            91,000
     Cavalier Homes of Alabama
          Addison, Alabama                         Manufacturing facilities (3)                         329,000 (1)
     Buccaneer Homes
          Hamiliton, Alabama                       Manufacturing facility (1)                           195,000
          Winfield, Alabama                        Manufacturing facilities (2)                         205,000 (5)
     Town & Country Homes
          Fort Worth, Texas                        Manufacturing facility (1)                           101,000 (2)
          Mineral Wells, Texas                     Manufacturing facility (1)                            81,000 (4)
          Graham, Texas                            Manufacturing facility (1)                           103,000 (6)

                                       13
<PAGE>

(continued)                                                                                          Approximate
                    Location                        Use (Number of Facilities)                      Square Footage
Manufacturing
     Spirit Homes, Inc.
          Conway, Arkansas                         Manufacturing facilities (2)                         220,000
          Bigelow, Arkansas                        Manufacturing facility (1)                            80,000
     Bellcrest Homes, Inc.
          Millen, Georgia                          Manufacturing facilities (2)                         164,000
     Brigadier Homes of North Carolina
          Nashville, North Carolina                Manufacturing facility (1)                           130,000
     Homestead Homes
          Cordele, Georgia                         Manufacturing facility (1)                           110,000
     Mansion Homes
          Robbins, North Carolina                  Manufacturing facility (1)                            99,000 (4)
     Riverchase Homes
          Haleyville, Alabama                      Manufacturing facility (1)                            78,000
     Astro Homes
          Shippenville, Pennsylvania               Manufacturing facility (1)                           134,000
     Quality Housing Supply, LLC
          Hamiliton, Alabama                       Manufacturing facility (1)                            50,000 (7)
          Winfield, Alabama                        Manufacturing facility (1)                            30,000 (2)
          Winfield, Alabama                        Distribution facility (1)                             48,000 (7)

Financial Services
          Hamilton, Alabama                        Administrative Office                                  7,000
          Haleyville, Alabama                      Administrative Office                                  1,000

General Corporate
          Addison, Alabama                         Administrative Office                                  8,000 (8)
          Wichita Falls, Texas                     Administrative Office                                  1,000 (3)

(1)  Lease expires on one facility in 1998 and one in 2001.
(2)  Lease expires in 1999.
(3)  Lease expires in 1998.
(4)  Lease expires in 2006.
(5)  Lease expires on one facility in 1999.
(6)  Lease expires in 2017.
(7)  Lease expires in 2000.
(8)  Lease expires in 2001.
</TABLE>

In general, the manufacturing  facilities are in good condition and are operated
at  capacities  which range from  approximately  57% to 95%,  excluding the idle
facility in Bigelow, Arkansas.

________________________________________
*  See Safe Harbor Statement on page 49.


ITEM 3.           LEGAL PROCEEDINGS

The Company and its subsidiaries  are 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 its  subsidiaries  and  companies  engaged  in
businesses  similar to it allege,  among other  things,  breach of contract  and
warranty,  product  liability,  personal  injury and  fraudulent,  deceptive  or
collusive  practices in connection with their  businesses.  These kinds of suits
are typical of suits that have been filed in recent  years,  and they  sometimes
seek  certification  as  class  actions,  the  imposition  of large  amounts  of
compensatory  and  punitive  damages and trials by jury.  Courts have  certified
several of these  types of cases as class  actions  recently,  and many of these
types of cases have resulted in large damage awards,  especially  large punitive
damage awards. 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  addition,   a  suit  has  been  filed  by  three  former  shareholders  (the
"Plaintiffs") of Belmont Homes,  Inc., an Alabama  corporation  which originally
owned the initial Belmont manufacturing  facility ("BHIA"), in the Circuit Court
of Madison County,  Alabama (Case Number CV 97-2297) against BHIA, Belmont (as a
successor in interest of BHIA), certain other corporate entities  (collectively,
the "Other  Corporations"),  the Estate of Jerold Kennedy (the former  President
and Chief Executive  Officer of Belmont),  J. M. Page, and certain other unnamed
and unidentified individual officers,  employees,  agents and directors of BHIA,
Belmont  and the  Other  Corporations,  alleging  breach  of  fiduciary  duties,
misrepresentation,  deceit,  suppression  and civil  conspiracy.  The Plaintiffs
state  that they  owned a  majority  of the stock in BHIA and sold such stock in
February of 1989. In addition to certain other allegations, the Plaintiffs claim
that  Mr.  Kennedy,   along  with  others  who  allegedly  conspired  with  him,
misrepresented  and omitted certain facts to them regarding his attempts to hire
a production manager,  that Belmont later hired the production manager, and that
the  Plaintiffs  would not have sold their stock in BHIA in the absence of these
alleged  misrepresentations  and omissions.  In their complaint,  the Plaintiffs
request an  unspecified  amount of  compensatory  and  punitive  damages  and/or
equitable  relief,  including a  constructive  trust.  The Company is aware that
these same plaintiffs have also filed a separate claim against the Estate of Mr.
Kennedy in the probate court of Franklin  County,  Alabama (Case Number 97-051),
alleging essentially the same facts and seeking substantial compensatory damages
and  punitive  damages  and a  constructive  trust over the stock in the various
Belmont  entities owned by Mr. Kennedy's  estate.  The Company believes that the
Plaintiffs'  claims against  Belmont are without merit and intends to vigorously
contest  such  claims.  The  outcome  of this  litigation  and its effect on the
Company cannot presently be determined,  however, and the possibility exists for
an adverse  resolution  of the  litigation  which could have a material  adverse
effect on the results of operations  and  financial  condition of the Company in
the quarter and year in which any such adverse resolution occurs. *

________________________________________
*  See Safe Harbor Statement on page 49.


                                       14
<PAGE>

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

On December 31, 1997, the Company held a Special Meeting of Stockholders to vote
on a proposal for the share  issuance of Cavalier  common stock  pursuant to the
Agreement and Plan of Merger,  dated as of August 14, 1997,  as amended,  by and
among Cavalier Homes, Inc., Belmont Homes, Inc. and Crimson Acquisition Corp., a
wholly-owned subsidiary of Cavalier. The results of the vote were as follows:

            Votes                                           Number
            Votes For                                    7,233,696
            Votes Against                                  153,490
            Votes Withheld / Abstentions                    51,076
            Nonvotes                                             0

                                     PART II

ITEM 5.           MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCK
                  HOLDER MATTERS

The  Company's  common stock is traded on the New York Stock  Exchange  ("NYSE")
under the symbol "CAV".  The following table sets forth, for each of the periods
indicated,  the reported  high and low closing sale prices per share on the NYSE
for the  Company's  common stock and the cash  dividends  paid per share in such
periods. The amounts have been adjusted for all stock splits through November of
1996. All adjusted prices of the Company's common stock have been rounded to the
nearest one-eighth of one dollar.

                                       Closing Sales Price
                                 ----------------------------
                                      High           Low          Dividends
                                 ------------   -------------   -------------
   Year ended December 31, 1997
        Fourth Quarter               10  7/8          9  1/4        $ 0.018
        Third Quarter                11  1/2          9  1/2          0.019
        Second Quarter               11  7/8          9  3/8          0.019
        First Quarter                12  1/4          9  3/4          0.018

   Year ended December 31, 1996
        Fourth Quarter               17  3/8         10  1/2        $ 0.018
        Third Quarter                19  1/8         12  7/8          0.015
        Second Quarter               18  3/4         12  1/8          0.014
        First Quarter                12  3/8          9  3/8          0.014


As of March 23, 1998, the Company had  approximately  360 shareholders of record
and 8,400  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 intends to continue to pay regular quarterly  dividends.  * However,
the payment of dividends on the  Company's  common  stock is  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  aggregate net
income for the two most recent fiscal years.

________________________________________
*  See Safe Harbor Statement on page 49.



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 income data, the balance
sheet  data,  and other data of the  Company  for each of the five  years  ended
December 31, 1997, have been derived from the consolidated  financial statements
of the Company.  The Company's audited  financial  statements as of December 31,
1997 and 1996, and for each of the years in the three-year period ended December
31,  1997,  including  the notes  thereto and the  related  report of Deloitte &
Touche LLP,  independent  auditors,  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.

                                       15
<PAGE>

<TABLE>

<CAPTION>
                                                             Year Ended December 31,
                                    ---------------------------------------------------------------------------
                                        1997           1996            1995           1994            1993
                                    -------------  --------------  -------------  --------------  -------------
                                                     (in thousands, except per share amounts)
Statement of Income Data

<S>                                 <C>            <C>             <C>            <C>             <C>
Revenues:
     Net sales                      $    555,842   $     573,838   $    420,790   $     312,268   $    225,700
     Financial services                    5,346           3,333          1,764             703            230
                                    -------------  --------------  -------------  --------------  -------------

     Total revenues                      561,188         577,171        422,554         312,971        225,930

Cost of sales                            466,749         482,302        354,811         265,943        193,411
Selling, general and administrative       69,999          54,022         39,035          28,109         20,847
Non-recurring merger and related
  costs                                    7,359
                                    -------------  --------------  -------------  --------------  -------------

Operating profit                          17,081          40,847         28,708          18,919         11,672
Life insurance proceeds                    1,500           1,750
Other income (expense) - net                (242)          1,589             90            (612)          (813)
                                    -------------  --------------  -------------  --------------  -------------

Income before taxes                 $     18,339   $      44,186   $     28,798   $      18,307   $     10,859
                                    =============  ==============  =============  ==============  =============

Net income                          $     10,247   $      27,479   $     17,630   $      11,458   $      6,642
                                    =============  ==============  =============  ==============  =============

Basic net income per share 1        $        .52   $        1.42   $       1.06   $         .83   $        .55
                                    =============  ==============  =============  ==============  =============

Diluted net income per share 1      $        .51   $        1.39   $       1.03   $         .82   $        .54
                                    =============  ==============  =============  ==============  =============

Cash dividend per share 1           $       .073   $        .061   $       .036   $        .021   $       .018
                                    =============  ==============  =============  ==============  =============
Weighted average number of shares
     outstanding 1                        19,835          19,363         16,630          13,824         12,084
                                    =============  ==============  =============  ==============  =============
Weighted average number of shares
     outstanding, assuming                20,028          19,799         17,057          14,036         12,292
     dilution 1                     =============  ==============  =============  ==============  =============

Other Data

Capital expenditures                $     10,186   $      16,106   $     13,482   $       7,665   $      4,747
                                    =============  ==============  =============  ==============  =============

                                                                   December 31,
                                    ---------------------------------------------------------------------------
                                        1997           1996            1995           1994            1993
                                    -------------  --------------  -------------  --------------  -------------
Balance Sheet Data

Working capital                     $     28,484   $      24,746   $     22,157   $      18,095   $      6,217
Total assets                        $    211,554   $     196,387   $    132,694   $      86,859   $     48,222
Long-term debt                      $     15,808   $       6,227   $     11,233   $      13,057   $     10,878
Stockholders' equity                $    133,551   $     122,652   $     75,119   $      41,767   $     15,560

1 All per share data has been adjusted for all stock splits.
</TABLE>

ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS

General

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

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

The Company's business is cyclical and seasonal and is influenced by many of the
same economic and demographic factors that affect the housing market as a whole.
According  to the  Manufactured  Housing  Institute  ("MHI"),  the  manufactured
housing  industry  posted  gains in  shipments  from  1992  through  1996,  with
approximate  total annual  shipments  of 211,000  (1992)  increasing  to 363,000
(1996), and with the greatest gains occurring in the southeastern United States.

                                       16
<PAGE>

The Company  conducts a substantial  portion of its business in the southeastern
United States and attributes  past years' strong  shipment growth to a reduction
of alternative housing,  increased  availability of retail financing,  increased
consumer  confidence and continuing  strength in the national economy.  However,
the  manufactured  housing  industry  has,  over the past  several  years,  also
experienced  increases  in both the number of retail  dealers and  manufacturing
capacity,  which the Company  believes is currently  resulting in slower  retail
turnover,  higher dealer  inventories,  lower order backlogs and increased price
competition.  According to MHI, industry  statistics  reflect a decrease in home
shipments  of 2.8% in 1997 as compared to 1996,  with  approximate  shipments of
353,000 (1997) compared to 363,000 (1996),  and with large declines occurring in
Alabama,  Mississippi  and  South  Carolina,  all  substantial  markets  for the
Company.  It is  possible  that  these  developments  may  signal  a  return  to
seasonality in the Company's manufacturing business, which was not a significant
factor  during the period  from 1992  through  1996,  with sales of homes  being
stronger in April  through  October and weaker during the first and last part of
the calendar year. * It is also possible that these developments could mean that
the industry is entering a downturn in its cycle.  * The Company is uncertain at
this time as to the extent and  duration  of these  developments  and as to what
effect these factors will have on the Company's future sales and earnings. *

Over the last several years,  the Company has increased its production  capacity
to  take  advantage  of the  growth  being  experienced  in the  industry  until
recently,  increasing the number of operating manufacturing facilities from four
at the  end  of  1992  to  twenty-two  at  December  31,  1997.  The  fourteenth
manufacturing  facility  was acquired in June 1997,  when the Company  purchased
substantially  all of the assets and assumed  certain  existing  liabilities  of
Pacer Homes,  Inc., a manufacturer in Texas.  Eight operating home manufacturing
facilities (two in Georgia,  four in Mississippi and two in Arkansas) were added
with the Belmont Merger.

Results of Operations

The following tables  summarize,  for the periods and dates  indicated,  certain
financial,  operating  and balance  sheet data  including,  as  applicable,  the
percentage of net sales or total revenue:

<TABLE>
<CAPTION>
STATEMENT OF INCOME SUMMARY                                            For the Year Ended December 31,
                                        -------------------------------------------------------------------------------------------
(Dollars in Thousands)                             1997                             1996                           1995
                                        ----------------------------    -----------------------------   ---------------------------
<S>                                     <C>           <C>              <C>            <C>               <C>           <C>
Net Sales                                $  555,842        100.0%      $    573,838         100.0%      $   420,790         100.0%
Cost of Sales                               466,749         84.0%           482,302          84.0%          354,811          84.3%
                                        ------------  ------------     -------------  -------------     ------------  ------------

     Gross Profit on Sales               $   89,093         16.0%      $     91,536          16.0%      $    65,979          15.7%
                                        ============                   =============                    ============

Net Sales                                $  555,842                    $    573,838                     $   420,790
Financial Services                            5,346                           3,333                           1,764
                                        ------------                   -------------                    ------------

     Total Revenue                       $  561,188        100.0%      $    577,171         100.0%      $   422,554         100.0%
                                        ============                   =============                    ============
Selling, General and Administrative      $   69,999         12.5%      $     54,022           9.4%      $    39,035           9.2%
Non-recurring Merger and Related Costs   $    7,359          1.3%
Operating Profit                         $   17,081          3.0%      $     40,847           7.1%      $    28,708           6.8%
Other Income (Expense)                   $    1,258          0.2%      $      3,339           0.6%      $        90           0.0%
Net Income                               $   10,247          1.8%      $     27,479           4.8%      $    17,630           4.2%

OPERATING DATA SUMMARY                          For the Year Ended December 31,
                                        ---------------------------------------------
(Dollars in Thousands)                       1997           1996              1995
                                        -------------   --------------   ------------

Installment Loan Purchases              $    18,013    $    19,932       $   10,721
Capital Expenditures                    $    10,186    $    16,106       $   13,482
Home Shipments                               23,602         25,652           19,667
Floor Shipments                              33,646         34,581           25,717
Independent Exclusive Dealers                   132            115               93
Home Manufacturing Facilities                    22             24               16

BALANCE SHEET SUMMARY                             Balances as of December 31,
                                        ---------------------------------------------
(Dollars in Thousands)                       1997           1996              1995
                                        -------------   -------------    ------------

Cash and Cash Equivalents               $    37,276     $    29,751     $    23,060
Working Capital                         $    28,484     $    24,746     $    22,157
Current Ratio                              1.5 to 1        1.4 to 1        1.5 to 1
Long-Term Debt                          $    15,808     $     6,227     $    11,233
Ratio of Long-Term Debt to Equity            1 to 8         1 to 20          1 to 7
Installment Loan Portfolio              $    49,146     $    36,425     $    19,209
</TABLE>



Net  Sales.  Net  sales for 1997 as  compared  to 1996  decreased  by 3%, or $18
million,  with home shipments  declining by 8%. However,  sales of multi-section
homes increased during the year, resulting in only a 3% decline in the number of
floors  sold.  The  Company  believes  the  decline  in net  sales is  primarily

                                       17
<PAGE>

attributable to increased  competition in the industry related to an increase in
manufacturing  capacity,  higher dealer  inventories and slower retail inventory
turnover.  Net sales for 1997 included  approximately $51 million from Bellcrest
Homes, Inc. ("Bellcrest"), which was acquired by Belmont in October 1996.

Net sales for 1996  increased $153 million,  or 36%, as compared to 1995,  while
shipments  of homes  rose 30% and  shipments  of floors  increased  by 34%.  The
Company  believes  that the  increase  in net  sales  for the  period  primarily
resulted from continuing  improvement in industry conditions,  combined with the
increase  in  manufacturing  facilities  and  a  shift  in  product  mix  toward
multi-section homes. Net sales for 1996 included  approximately $65 million from
Spirit Homes, Inc., which was acquired by Belmont in October 1995.

Actual  shipments of homes during the three years ended December 31, 1997,  1996
and 1995 were 23,602,  25,652 and 19,667,  respectively.  During the  three-year
period ended  December 31, 1997, the average price of homes sold rose to $23,600
in 1997 from  $22,400  (1996) and $21,400  (1995).  The  increase in the average
selling  price was primarily  due to price  increases  instituted by the Company
during all three years  associated  with rising  prices in raw  materials and an
increase in the shipment of multi-section  homes.  During the three-year period,
the percentage of  multi-section  homes sold was 42%, 35% and 31% of total homes
sold in 1997, 1996 and 1995, respectively.

Gross Profit on Sales.  Gross  profit on sales is derived by  deducting  cost of
sales from net sales.  Gross profit on sales for the three years ended  December
31, 1997, 1996 and 1995 was $89.1, $91.5 and $66.0 million, respectively.  Gross
profit for 1997 was  negatively  impacted by a  reduction  in net sales and $0.8
million  charged to warranty  expense in connection  with  conforming  Belmont's
contractual warranty arrangements to Cavalier's. The increase in gross profit on
sales from 1995 to 1996 was primarily attributable to increased sales volume due
to  industry  growth  and  the  Company's   increased  number  of  manufacturing
facilities.  Gross profit as a percentage  of net sales has remained  relatively
stable at 16.0%, 16.0% and 15.7% for the years ended December 31, 1997, 1996 and
1995, respectively

Financial Services Revenue. Financial services revenue is derived primarily from
interest on installment  sale contracts held by CAC and the sale of commissioned
insurance  products by the  Company's  wholly owned  insurance  agency,  Quality
Certified Insurance Services, Inc. ("QCIS").  Financial services revenue for the
years ended December 31, 1997,  1996 and 1995 was  approximately  $5.3, $3.3 and
$1.8 million,  respectively.  The increase in financial services revenue was due
to the  continued  growth in the  Company's  loan  portfolio to $49, $36 and $19
million at the end of 1997, 1996 and 1995, respectively.

Selling,  General  and  Administrative.   Selling,  general  and  administrative
expenses during the three years ended December 31, 1997, 1996 and 1995 were $70,
$54 and $39  million,  respectively,  and as a percentage  of total  revenue was
12.5%,  9.4% and 9.2% for the years  ended  December  31,  1997,  1996 and 1995,
respectively. During 1997, selling, general and administrative expense increased
$16  million as compared to 1996 due  primarily  to the costs  related to new or
expanded  manufacturing  facilities of $9.1 million,  a $1.9 million increase in
selling and administrative salaries and commissions,  a $1.1 million increase in
CAC's  administrative  costs  consistent with its growth and expenses related to
the Company's expanded marketing programs of $0.9 million, partially offset by a
reduction in executive incentive compensation of $1.5 million. Additionally, the
Company charged to selling,  general and administrative  expense $0.3 million in
connection with conforming Belmont's contractual repurchase  arrangements to its
own. Selling, general and administrative expense increased $15 million from 1995
to 1996  due in part  to the  costs  related  to new or  expanded  manufacturing
facilities  of $10.5 million and a $1 million  increase in CAC's  administrative
costs consistent with its growth.

Non-recurring  Merger and Related Costs.  In connection with the Belmont Merger,
the Company  recorded  charges of $7.4 million in the quarter ended December 31,
1997.  These  charges  were  non-recurring  and  included  $2.5 million from the
earn-out provision contained in the Stock Purchase Agreement between Belmont and
the shareholders of Bellcrest,  $0.9 million for severance costs associated with
the  consolidation  of  certain  administrative   functions,  $3.1  million  for
printing,  investment banking, legal, accounting and other fees and $0.9 million
for other costs  associated  with combining and realigning the operations of the
two companies.

Operating  Profit.  Operating  profit is  derived  by  deducting  cost of sales,
selling, general and administrative expense and non-recurring merger and related
costs from total revenue.  Operating profit declined from 1996 to 1997 primarily
due to the reduction in net sales,  the increase in costs associated with new or
expanded  manufacturing  facilities of $9.1 million and the non-recurring merger
and related costs associated with the Belmont Merger of $7.4 million,  offset by
a $2.2 million increase in operating profit of the financial  services business.
The  increase  in  operating  profit  from 1995 to 1996 is  consistent  with the
increase in net sales during the period.

                                       18
<PAGE>

Other Income (Expense):

Interest  Expense.  Manufacturing  interest  expense for 1997  increased by $0.3
million as compared to 1996 due  primarily to  additional  borrowings to support
the purchase of Bellcrest,  which debt was paid in full in September  1997,  and
interest on two new industrial  development bond issues.  Manufacturing interest
expense for 1996  declined by $0.5 million as compared to 1995 due  primarily to
the  effect of debt  reduction  from the use of  proceeds  of  Belmont's  public
offering of stock in January 1996. The increase in financial  services  interest
expense for 1997 of $0.3  million as compared to 1996  reflects  the  additional
borrowings  incurred to support  the level of  purchases  of retail  installment
sales contracts by CAC.

Life Insurance  Proceeds.  The Company  experienced  non-recurring gains on life
insurance  proceeds  during  1996 of $1.75  million  as a result of the death of
Cavalier's  President and Chief Executive  Officer,  Jerry F. Wilson, and during
1997 of $1.5 million as a result of the death of Belmont's  President  and Chief
Executive Officer, Jerold Kennedy.

Other,  Net. Other, net, during the years ended December 31, 1997, 1996 and 1995
was  $1.3,  $2.4  and $1.4  million,  respectively.  Other,  net,  is  primarily
comprised of interest income (unrelated to financial services),  gains or losses
on sales of assets,  equity earnings in investments  accounted for on the equity
basis of accounting and applicable allocation of minority interest.  The decline
of $1.2 million in 1997 as compared to 1996 was  primarily due to a $0.3 million
loss on property  disposals recorded in 1997 in connection with the closing of a
leased facility and a $0.4 million decline in equity  earnings.  The increase in
other, net, of $1.0 million in 1996 as compared to 1995 was mainly due to a $0.5
million increase in gain on sales of investments.

Net Income. Net income declined from 1996 to 1997 primarily due to the reduction
in net sales,  the  increase  in certain  selling,  general  and  administrative
expenses and the  non-recurring  charges  associated  with the Belmont Merger of
$1.1  million  recorded in  connection  with  conforming  Belmont's  contractual
warranty  and  repurchase   arrangements  to  Cavalier's  and  $7.4  million  of
non-recurring  merger and related  costs (a total of $6.5 million net of taxes).
The increase in net income from 1995 to 1996 is consistent  with the increase in
net sales during the period.

Financial  Services.  The Company purchases  qualifying retail installment sales
contracts  for  manufactured  homes  sold  through  the  Company's   independent
exclusive  dealer  network and sells  various  commissioned  insurance  products
through  CAC  and  QCIS,  respectively.   The  following  table  summarizes  the
operations of CAC and QCIS:

<TABLE>

                                                           For the Year Ended December 31,
<CAPTION>
                                                   ---------------------------------------------
<S>                                                   <C>             <C>              <C>
(Dollars in Thousands)                                1997            1996             1995
                                                   ---------------------------------------------

Installment Loan Portfolio                       $      49,146 $        36,425   $       19,209
Installment Loan Purchases                       $      18,013 $        19,932   $       10,721
Financial Services Revenues - CAC                $       4,849 $         2,991   $        1,682
Financial Services Revenues - QCIS               $         497 $           342   $           82
Principal Collections                            $       5,293 $         2,716   $        1,337
Number of Loans Outstanding                              1,712           1,292              758
Weighted Average Interest Rate                            10.9%           10.9%            11.3%
</TABLE>


During the three years ended  December 31, 1997,  1996 and 1995,  CAC  purchased
contracts totaling $18.0, $19.9 and $10.7 million,  respectively,  and collected
principal  amounts  under  such  installment  contracts  of $5.3,  $2.7 and $1.3
million,  respectively. At the end of 1997, 1996 and 1995, CAC held $49.1, $36.4
and $19.2 million of installment  contracts  receivable,  respectively,  and had
established  allowances  for  credit  losses  of $1.3,  $0.9  and $0.6  million,
respectively.

Since its  inception,  CAC has been  restricted in the amounts of loans it could
purchase based on restricted underwriting standards, the availability of working
capital and funds  borrowed  under its credit line with its primary  lender.  In
February 1998, CAC entered into an agreement (the "Retail  Finance  Agreement"),
with another  lender  providing  for the  periodic  resale of a portion of CAC's
loans that meet established  criteria. On March 13, 1998, CAC sold loans to this
lender having an outstanding  principal amount of approximately  $25 million for
cash in the approximate amount of $26 million,  of which $14 million was used to
retire debt. The effect of this transaction on net income would be to reduce the
amount of financial  services revenue for interest income on this portion of the
portfolio,  offset by reduced  interest  expense on retired debt and earnings on
the remaining  proceeds.  The Company  believes the periodic sale of installment
contracts receivable under the Retail Finance Agreement will reduce requirements
for both  working  capital and  borrowings,  increase the  Company's  liquidity,
reduce the  Company's  exposure to interest  rate  fluctuations  and enhance the
ability  of CAC to  increase  its  volume of loan  purchases.  * There can be no
assurance,  however, that additional sales will be made under this agreement, or
that CAC and the Company will be able to realize the expected benefits from such
agreement. *

                                       19
<PAGE>

Liquidity and Capital Resources

As of December  31,  1997,  1996 and 1995,  the  Company had working  capital of
$28.5, $24.7 and $22.2 million,  respectively. The 1997 working capital increase
of $3.8 million was due primarily to net  long-term  borrowings of $2.8 million,
$2.1  million  proceeds  from  the  sale  of  common  stock,   installment  loan
collections  of $5.3 million and net cash  provided by operating  activities  of
$23.2 million for the year, reduced by $10.2 million in capital expenditures and
$18.0  million in  installment  loan  purchases.  Working  capital  during  1996
increased  $2.5  million  due  primarily  to  net  cash  provided  by  operating
activities of $33.7 million, $2.7 million in installment loan collections, $12.0
million of  proceeds  from the sale of common  stock and $4.5  million  from the
exercise of stock  options,  reduced by capital  expenditures  of $16.1 million,
installment  loan purchases of $19.9 million,  net long-term debt  repayments of
$3.0  million  and  $8.5  million  for  the  purchase  of   Bellcrest.   Capital
expenditures  included  normal  property,  plant  and  equipment  additions  and
replacements.  In addition to the Bellcrest  purchase,  the Company  opened four
additional  facilities  in 1996,  one each located in Mineral  Wells,  Texas and
Hamilton,  Alabama,  and two in  Conway,  Arkansas.  During  1997,  the  Company
acquired a facility in Graham, Texas.

The ratio of current  assets to current  liabilities  for the three  years ended
December  31,  1997,  1996,  and  1995  was  1.5 to 1,  1.4  to 1 and  1.5 to 1,
respectively.

The Company  entered into a credit  agreement (the "Credit  Facility")  with its
primary  lender in  February  1994 and later  amended  it in March of 1996.  The
facility presently consists of a $23 million revolving,  warehouse and term-loan
agreement.  The  Credit  Facility  contains  a  revolving  line of credit  which
provides for  borrowings  (including  letters of credit) of up to 80% and 50% of
the  Company's  eligible  (as  defined)  accounts  receivable  and  inventories,
respectively,  up to a maximum of $5  million.  Interest  is  payable  under the
revolving  line of credit at the bank's prime rate.  The warehouse and term-loan
agreements  contained in the Credit Facility provide for borrowings of up to 80%
of the Company's  eligible (as defined)  installment  sales  contracts,  up to a
maximum of $18 million. Interest on the term notes is fixed for a period of five
years from  issuance at a rate based on the weekly  average  yield on  five-year
treasury  securities  averaged  over the  preceding  13 weeks,  plus 2%,  with a
floating rate for the remaining two years  (subject to certain  limits) equal to
the bank's prime rate plus .75%. The warehouse  component of the Credit Facility
provides for borrowings of up to $2 million with interest  payable at the bank's
prime rate plus 1%. Under the Credit Facility,  $12.7 million was outstanding at
December 31, 1997,  and $3.9 million was  outstanding  at December 31, 1996. The
Credit Facility contains certain restrictive  covenants which limit, among other
things,  the Company's  ability to (i) make  dividend  payments and purchases of
treasury  stock in an aggregate  amount which  exceeds 50% of  consolidated  net
income for the two most  recent  years,  (ii)  mortgage or pledge  assets  which
exceed, in the aggregate, $1 million without written notice to the lender, (iii)
incur additional indebtedness,  including lease obligations, which exceed in the
aggregate  $2.5  million  and (iv)  make  capital  expenditures  in excess of $6
million.  In addition,  the Credit Facility contains certain financial covenants
requiring the Company to maintain on a consolidated basis certain defined levels
of net working  capital (at least $3.5 million),  tangible net worth (which must
increase at least $2 million per year,  subject to a carryover  for increases in
excess of $2 million in the prior  year),  debt to equity ratio (not to exceed 2
to 1) and cash flow to debt  service  ratio (not less than 1.5 to 1). The Credit
Facility also  requires CAC to comply with certain  specified  restrictions  and
financial covenants.

The Company has  received a  commitment  from its primary  lender for a two-year
renewal amendment to the Credit Facility, which currently expires in April 1998,
providing  for  borrowings  of up to $35  million.  The renewal  provides  for a
revolving  line of credit  with a maximum of $10 million  (an  increase  from $5
million) and a warehouse  line of $25 million (an increase from $18 million) and
includes a fixed rate term-loan feature. The Company currently does not expect a
material  change to the  restrictive  and  financial  covenants  included in the
Credit Facility. *

The Company's  growth  strategy  currently  includes the continued  expansion of
financial  services,  component supply  operations,  and its independent  dealer
network and the pursuit of additional acquisitions. The Company may also utilize
funds in the acquisition or establishment of retail sales centers.  Accordingly,
it is likely  that the Company  will incur  additional  debt,  or other forms of
financing, in order to continue to fund the pursuit of such growth strategies. *
The Company  currently  believes  existing cash and investment  balances  (which
include  proceeds from the sale of a portion of its  installment  loan portfolio
described  above) and funds available under the Credit  Facility,  together with
cash provided by operations,  will be adequate to fund the Company's  operations
and plans for the next twelve months. * In order to provide additional funds for
continued  pursuit of the Company's  growth  strategies and for operations,  the
Company  may  incur,  from time to time,  additional  short and  long-term  bank
indebtedness  and may issue, in public or private  transactions,  its equity and
debt securities, the availability and terms of which will depend upon market and
other  conditions.  * The Company may continue to engage in other  transactions,
such  as  selling  or  securitizing  all or  portions  of its  installment  loan
portfolio,  that are  designed  to  facilitate  the  ability  of the  Company to

                                       20
<PAGE>

originate an increased  volume of loans and to reduce the Company's  exposure to
interest  rate  fluctuations.  * The Company has  recently  entered  into such a
transaction  pursuant  to the Retail  Finance  Agreement  described  above under
"Results of Operations--Financial Services." There can be no assurance that such
possible  additional  financing,  or the aforementioned  potential  transactions
involving the Company's  installment loan portfolio,  will be available on terms
acceptable  to the Company.  It is possible that a future lack of financing or a
prolonged downturn in industry conditions could cause the Company to curtail the
expansion of financial services or otherwise alter its growth strategies. *

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  can affect the ability of the Company to increase
its selling prices.  The Company  believes that the relatively  moderate 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. *

Impact of Accounting Statements

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

Year 2000 Compliance

The   inability   of   computers,   software  and  other   equipment   utilizing
microprocessors  to recognize  and properly  process data fields  containing a 2
digit year is commonly  referred to as the Year 2000  Compliance  issue.  As the
year 2000 approaches,  such systems may be unable to accurately  process certain
date-based information.

The  Company has  identified  all  significant  applications  that will  require
modification to ensure Year 2000 Compliance. Internal and external resources are
being used to make the required modifications and test Year 2000 Compliance. The
Company plans on completing the testing process of all significant  applications
by December 31, 1998.  In addition, the Company has initiated communcations with
others with whom it does  significant  business  to  determine  their  Year 2000
Compliance  readiness  and  the extent to which the Company is vulnerable to any
third party Year 2000 issues.

The total cost to the Company of these Year 2000  Compliance  activities  is not
expected to exceed $0.3 million in any given year. * These costs and the date on
which the  Company  plans to  complete  the Year 2000  modification  and testing
processes are based on management's best estimates, which were derived utilizing
numerous  assumptions of future events  including the continued  availability of
certain  resources and other  factors.  However,  there can be no guarantee that
these  estimates  will be achieved  and actual  results  could differ from those
plans.

________________________________________
*  See Safe Harbor Statement on page 49.


ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Selected Quarterly Financial Data (Unaudited)

The table contained on the following page sets forth certain unaudited quarterly
financial  data for the two years ended  December 31, 1997 and 1996. The Company
believes that the following  quarterly  financial data includes all  adjustments
necessary  for a  fair  presentation,  in  accordance  with  generally  accepted
accounting principles.  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.

                                       21
<PAGE>

<TABLE>

<CAPTION>
                                      Fourth Quarter   Third Quarter      Second Quarter     First Quarter          Total
                                    -----------------  --------------    -----------------  ------------------  -------------
                                                            (in thousands, except per share amounts)
<S>                                 <C>                <C>               <C>               <C>                <C>
1997
Revenues:
        Net sales                        $ 131,865         $ 138,276          $ 159,629          $ 126,072          $ 555,842
        Financial services                   1,526             1,382              1,296             1,142              5,346

                                    ---------------    --------------    ---------------   ---------------    ---------------
        Total revenues                     133,391           139,658            160,925           127,214            561,188

Gross profit                                22,985            23,598             26,662            21,194             94,439
Net income                                  (4,165) b          3,639              6,880 a           3,893             10,247 a,b
Basic net income per share                    (.21) b            .18                .35 a             .20                .52 a,b
Diluted net income per share                  (.21) b            .18                .34 a             .19                .51 a,b


1996
Revenues:
        Net sales                        $ 152,436         $ 145,264          $ 151,065         $ 125,073          $ 573,838
        Financial services                   1,074               867                772               620              3,333

                                    ---------------    --------------    ---------------   ---------------    ---------------
        Total revenues                     153,510           146,131            151,837           125,693            577,171

Gross profit                                25,098            24,341             24,980            20,450             94,869
Net income                                   7,938  c          6,964              7,064             5,513             27,479  c
Basic net income per share       d             .40  c            .35                .37               .30               1.42  c
Diluted net income per share     d             .40  c            .35                .36               .29               1.39  c



        The sum of quarterly amounts may not equal the annual amounts due to rounding.
   a    Includes a non-recurring gain of $1,500 or $.08 per share Basic, and $.07 Diluted from life insurance proceeds.
   b    Includes non-recurring charges of $8,447, comprised of $1,088 recorded in connection with conforming Belmont's
        contractual warranty and repurchase arrangements to Cavalier's and $7,359 of non-recurring merger and related
        costs ($6,526 net of taxes, or $.33 per share Basic and Diluted.)
   c    Includes a non-recurring gain of $1,750 or $.09 per share Basic and Diluted from life insurance proceeds.
   d    Adjusted for all applicable stock splits.

</TABLE>


Prior  amounts have been  restated due to the December 31, 1997 Belmont  Merger,
which was accounted for as a pooling of interests.  Previously  reported amounts
for the  individual  companys' net sales,  total  revenues and gross profit have
been  adjusted for the effect of former  equity  investments  in  unconsolidated
joint ventures which are now consolidated  subsidiaries and for reclassification
of certain Belmont amounts to conform to Cavalier's presentation.

                                       22
<PAGE>

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

             Index to Consolidated Financial Statements and Schedule

                                                                    Page Numbers

Independent Auditor's Report                                             24


Consolidated Balance Sheets                                              25


Consolidated Statements of Income                                        27


Consolidated Statements of Stockholders' Equity                          28


Consolidated Statements of Cash Flows                                    29


Notes to Consolidated Financial Statements                               30


Schedule -

         II - Valuation and Qualifying Accounts                          43




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


                                       23
<PAGE>


INDEPENDENT AUDITORS' REPORT


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

We have audited the  consolidated  balance  sheets of Cavalier  Homes,  Inc. and
subsidiaries  as of  December  31, 1997 and 1996,  and the related  consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years  in  the  period  ended  December 31, 1997.   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 these
financial  statements and financial statement schedule based on our audits.  The
consolidated financial statements give  retroactive  effect to the merger of the
Company and Belmont Homes,  Inc.,  which has been accounted for as a  pooling of
interests as  described in Note 1 to the consolidated  financial statements.  We
did not audit  the  consolidated  balance  sheet  of  Belmont Homes,  Inc. as of
December  31,  1996, or  the  related   consolidated   statements   of   income,
stockholders'  equity,  and  cash  flows of Belmont  Homes,  Inc.  for the years
ended  December 31,  1996 and 1995,  which  statements  reflect  total assets of
$79,355,000  as of December 31, 1996,  and  total  revenues of $227,817,000  and
$148,304,000 for the years ended December 31, 1996 and 1995, respectively. Those
statements were audited by other auditors whose report has been furnished to us,
and our  opinion,  insofar as  it relates to  the amounts  included  for Belmont
Homes,  Inc.  for 1996 and  1995,  is based  solely on  the report of such other
auditors.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  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  and the  report of the other  auditors  provide a
reasonable basis for our opinion.

In our opinion,  based on our audits and the report of the other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material   respects,   the  financial  position  of  Cavalier  Homes,  Inc.  and
subsidiaries at December 31, 1997 and 1996, and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 1997 in conformity with generally accepted  accounting principles.  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.


/s/ Deloitte & Touche LLP
-------------------------

Birmingham, Alabama
February 17,  1998 (March 13, 1998 as to the  amendment  to the Credit  Facility
  described in Note 5)


                                       24
<PAGE>



CAVALIER HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------

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

                                                                                                   1997              1996
ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                                                   $    37,276       $    29,751
  Certificates of deposit, maturing within one year                                                 4,000             8,243
  Marketable securities available for sale                                                                            1,097
  Accounts receivable, less allowance for losses of
    $1,175 (1997) and $837 (1996) (Notes 5 and 10)                                                  8,449            11,361
  Notes and installment contracts receivable - current
    (Notes 4 and 5)                                                                                 1,561             1,086
  Inventories (Note 5)                                                                             29,697            28,172
  Deferred income taxes (Note 8)                                                                    7,240             6,482
  Other current assets                                                                              1,292             3,390
                                                                                               -----------       ----------
           Total current assets                                                                    89,515            89,582
                                                                                               -----------       ----------

PROPERTY, PLANT AND EQUIPMENT (Note 5):
  Land                                                                                              2,159             1,921
  Buildings and improvements                                                                       37,011            30,726
  Machinery and equipment                                                                          32,213            29,255
                                                                                               -----------       ----------
                                                                                                   71,383            61,902
  Less accumulated depreciation and amortization                                                   17,949            12,048
                                                                                               -----------       ----------
           Total property, plant and equipment, net                                                53,434            49,854
                                                                                               -----------       ----------

INSTALLMENT CONTRACTS RECEIVABLE, less
  allowance for credit losses of $1,272 (1997) and
  $941 (1996) (Notes 4 and 5)                                                                      46,614            34,504
                                                                                               -----------       ----------

GOODWILL, less accumulated amortization
   of $3,102 (1997) and $1,947 (1996) (Note 3)                                                     19,551            20,706
                                                                                               -----------       ----------


OTHER ASSETS                                                                                        2,440             1,741
                                                                                               -----------       ----------

TOTAL                                                                                          $  211,554        $  196,387
                                                                                               ===========       ==========

See notes to consolidated financial statements.

</TABLE>

                                       25
<PAGE>




CAVALIER HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------

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

                                                                                                     1997               1996
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Current portion of long-term debt (Note 5)                                                     $   3,271          $  10,046
  Accounts payable                                                                                   9,575             12,063
  Amounts payable under dealer incentive programs                                                   14,614             13,853
  Accrued compensation and related withholdings                                                      4,294              6,037
  Estimated warranties                                                                              11,700             10,566
  Accrued merger and related costs (Note 1)                                                          5,178
  Other accrued expenses                                                                            12,399             12,271
                                                                                                  ---------          --------
           Total current liabilities                                                                61,031             64,836
                                                                                                  ---------          --------

DEFERRED INCOME TAXES (Note 8)                                                                         297              1,942
                                                                                                  ---------          --------

LONG-TERM DEBT (Note 5)                                                                             15,808              6,227
                                                                                                  ---------          --------

OTHER LONG-TERM LIABILITIES                                                                            867                730
                                                                                                  ---------          --------

STOCKHOLDERS' EQUITY (Notes 5, 6 and 7):
  Series A Junior Participating  Preferred Stock, $.01 par value; 200,000 shares
    authorized, none issued
  Preferred stock, $.01 par value; 300,000 shares authorized,
    none issued
  Common stock, $.10 par value; authorized 50,000,000 shares,
    issued 19,941,357 (1997) and 19,742,328 (1996) shares                                            1,994              1,974
  Additional paid-in capital                                                                        57,228             55,126
  Retained earnings                                                                                 74,329             65,552
                                                                                                 ----------         ---------

           Total stockholders' equity                                                              133,551            122,652
                                                                                                 ----------         ---------

TOTAL                                                                                            $ 211,554          $ 196,387
                                                                                                 ==========         =========


See notes to consolidated financial statements.

</TABLE>

                                       26
<PAGE>


CAVALIER HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------

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

                                                                            1997                 1996                1995

REVENUES:
  Net sales                                                         $        555,842     $        573,838    $        420,790
  Financial services                                                           5,346                3,333               1,764
                                                                    ----------------     ----------------    ----------------
                                                                             561,188              577,171             422,554
                                                                    ----------------     ----------------    ----------------

COST OF SALES (Note 10)                                                      466,749              482,302             354,811

SELLING, GENERAL AND ADMINISTRATIVE (Notes 7 and 9):
  Manufacturing                                                               66,825               51,946              37,909
  Financial services                                                           3,174                2,076               1,126

NON-RECURRING MERGER AND RELATED COSTS (Note 1)                                7,359
                                                                    ----------------     ----------------    ----------------

                                                                             544,107              536,324             393,846
                                                                    ----------------     ----------------    ----------------

OPERATING PROFIT                                                              17,081               40,847              28,708
                                                                    ----------------     ----------------    ----------------

OTHER INCOME (EXPENSE):
  Interest expense:
    Manufacturing                                                               (699)                (353)               (832)
    Financial services                                                          (812)                (492)               (501)
  Life insurance proceeds                                                      1,500                1,750
  Other, net                                                                   1,269                2,434               1,423
                                                                    ----------------     ----------------    ----------------
                                                                               1,258               3,339                  90
                                                                    ----------------     ----------------    ----------------

INCOME BEFORE INCOME TAXES                                                    18,339               44,186              28,798

INCOME TAXES (Note 8)                                                          8,092               16,707              11,168
                                                                    ----------------     ----------------    ----------------

NET INCOME                                                          $         10,247     $         27,479     $        17,630
                                                                    ================     ================    ================

BASIC NET INCOME PER SHARE (Notes 2 and 6)                          $           0.52     $           1.42    $           1.06
                                                                    ================     ================    ================

DILUTED NET INCOME PER
  SHARE (Notes 2 and 6)                                             $           0.51     $           1.39    $           1.03
                                                                    ================     ================    ================

WEIGHTED AVERAGE SHARES
  OUTSTANDING (Notes 2 and 6)                                             19,834,942           19,362,944          16,629,523
                                                                    ================     ================    ================

WEIGHTED AVERAGE SHARES OUTSTANDING,
   ASSUMING DILUTION (Notes 2 and 6)                                      20,028,181           19,799,492          17,056,945
                                                                    ================     ================    ================


See notes to consolidated financial statements.

</TABLE>

                                       27
<PAGE>


CAVALIER HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------

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

                                                                                                      Treasury
                                                                         Additional                  Stock - At
                                                             Common       Paid-in       Retained       Average
                                                              Stock       Capital       Earnings        Cost          Total

BALANCE, JANUARY 1, 1995                                 $    1,663    $   17,719      $  22,435     $    (50)     $  41,767
  Sale of common stock to public                                157        15,126                                     15,283
  Treasury stock reissued and common stock issued
    in connection with a purchase option                          1           413                          50            464
  Stock options exercised (Note 7)                                9           689                                        698
  Income tax benefits attributable to exercise
    of stock options (Note 7)                                                 281                                        281
  Other                                                                      (215)                                      (215)
  Cash dividends paid ($.04 per share)                                                      (637)                       (637)
  Dividends on preferred stock                                                              (152)                       (152)
  Net income                                                                              17,630                      17,630
                                                         ----------    ----------      ----------      ----------  ----------

BALANCE, DECEMBER 31, 1995                                    1,830        34,013         39,276      $     -         75,119
  Sale of common stock to public                                 64        11,661                     ===========     11,725
  Stock options exercised (Note 7)                               73         4,419                                      4,492
  Income tax benefits attributable to exercise of
    stock options (Note 7)                                                  3,692                                      3,692
  Sale of common stock under Employee Stock
    Purchase Plan (Note 7)                                        2           238                                        240
  Common stock issued in connection with
    acquisitions                                                  5           887                                        892
  Accrued compensation                                                        216                                        216
  Cash dividends paid ($.06 per share)                                                    (1,203)                     (1,203)
  Net income                                                                              27,479                      27,479
                                                         ----------    ----------     ----------                    ---------

BALANCE, DECEMBER 31, 1996                                    1,974        55,126         65,552                     122,652
  Stock options exercised (Note 7)                                              7                                          7
  Sale of common stock under Employee Stock
    Purchase Plan (Note 7)                                        5           425                                        430
  Sale of common stock under Dividend
    Reinvestment Plan (Note 7)                                   17         1,653                                      1,670
  Accrued compensation                                                        172                                        172
  Cash dividends paid ($.07 per share)                                                    (1,470)                     (1,470)
  Retirement of common stock                                     (2)         (155)                                      (157)
  Net income                                                                              10,247                      10,247
                                                         ----------    ----------     ----------                   ---------

BALANCE, DECEMBER 31, 1997                               $    1,994    $   57,228     $   74,329                   $ 133,551
                                                         ==========    ==========     ==========                   =========


See notes to consolidated financial statements.

</TABLE>

                                       28
<PAGE>


CAVALIER HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------

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

                                                                                                1997           1996           1995
OPERATING ACTIVITIES:
  Net income                                                                                $  10,247     $   27,479     $   17,630
  Adjustments to reconcile net income to net cash provided by
    operating activities:
    Depreciation and amortization                                                               7,492          5,760          3,757
    Provision for credit losses and repurchase commitments                                        669            389            301
    (Gain) loss on sale of property, plant and equipment                                          340           (144)            23
    Equity in net income of unconsolidated affiliates                                             (98)          (289)          (237)
    Minority interest in net income (loss) of consolidated subsidiaries                           137            (20)
    Compensation related to issuance of stock options                                             172            216
    Changes in assets and  liabilities  provided  (used) cash, net of
      effects of acquisitions:
      Accounts receivable                                                                       2,574           (672)        (1,437)
      Inventories                                                                                (488)        (8,021)        (1,366)
      Accounts payable                                                                         (3,310)          (146)         1,669
      Amounts payable under dealer incentive programs                                             761          4,508          2,174
      Accrued compensation and related withholdings                                            (1,743)         1,188            929
      Estimated warranties                                                                      1,134          1,744          1,897
      Other assets and liabilities                                                              5,361          1,695          1,944
                                                                                           ----------     ----------     ----------
           Net cash provided by operating activities                                           23,248         33,687         27,284
                                                                                           ----------     ----------     ----------

INVESTING ACTIVITIES:
  Net cash paid in connection with acquisitions                                                  (871)        (8,515)        (2,592)
  Proceeds from sale of property, plant and equipment                                             122            228             63
  Capital expenditures                                                                        (10,186)       (16,106)       (13,482)
  Purchases of certificates of deposit                                                         (8,000)       (16,114)        (8,717)
  Maturities of certificates of deposit                                                        12,243         14,588          2,000
  Purchases of marketable securities                                                                                         (1,004)
  Proceeds from sale or maturity of marketable securities                                       1,097          2,479          3,210
  Purchases and originations of notes and installment contracts                               (19,562)       (19,932)       (10,721)
  Principal collected on notes and installment contracts                                        6,015          2,716          1,337
  Cash restricted for construction                                                                               521          1,548
  Other                                                                                           133             95             38
                                                                                           ----------     ----------     ----------
           Net cash used in investing activities                                              (19,009)       (40,040)       (28,320)
                                                                                           ----------     ----------     ----------

FINANCING ACTIVITIES:
  Proceeds from long-term borrowings                                                           25,263          9,650          2,000
  Payments on long-term debt                                                                  (22,456)       (12,610)       (13,562)
  Net proceeds from sales of common stock                                                       2,099         11,965         15,283
  Proceeds from exercise of stock options                                                           7          4,492            698
  Cash dividends paid                                                                          (1,470)        (1,203)          (637)
  Retirement of preferred stock, including dividends                                                                         (1,052)
  Retirement of common stock                                                                     (157)
  Other                                                                                                          750
                                                                                           ----------     ----------     ----------
           Net cash provided by financing activities                                            3,286         13,044          2,730

NET INCREASE IN CASH AND CASH EQUIVALENTS                                                       7,525          6,691          1,694

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                                   29,751         23,060         21,366
                                                                                           ----------     ----------     ----------

CASH AND CASH EQUIVALENTS, END OF YEAR                                                     $   37,276     $   29,751     $   23,060
                                                                                           ==========     ==========     ==========


See notes to consolidated financial statements.

</TABLE>

                                       29
<PAGE>

CAVALIER HOMES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------


1.    BUSINESS COMBINATION AND BASIS OF PRESENTATION

      On December 31, 1997, Belmont Homes, Inc.  ("Belmont") was merged with and
      into a subsidiary  of Cavalier  Homes,  Inc.  ("Cavalier"),  and 7,555,121
      shares of  Cavalier's  common stock were issued in exchange for all of the
      outstanding  common stock of Belmont.  The merger was  accounted  for as a
      pooling  of  interests,  and,  accordingly,   the  accompanying  financial
      statements have been restated to include the financial  position,  results
      of operations and cash flows of Belmont for all periods presented.

      Revenues  and net  income for the  separate  companies,  and the  combined
      amounts presented in the consolidated  financial statements are as follows
      (in thousands, excluding non-recurring merger and related costs in 1997):



                                        1997             1996            1995

      Revenues:
        Cavalier                $      336,343  $       349,354  $      274,250
        Belmont                        224,845          227,817         148,304
                                --------------  ---------------  --------------
      Combined                  $      561,188  $       577,171  $      422,554
                                ==============  ===============  ==============

      Net income:
        Cavalier                $       10,428  $        15,366  $        9,020
        Belmont                          5,688           12,113           8,610
                                --------------  --------------   --------------
      Combined                  $       16,116  $        27,479  $       17,630
                                ==============  ===============  ==============


      Certain  amounts  from  Belmont's  prior  financial  statements  have been
      reclassified to conform to Cavalier's presentation.

      In connection with the merger,  Cavalier  recorded charges of $7.4 million
      in the quarter ended December 31, 1997. These charges are nonrecurring and
      include $2.5 million  from the earn-out  provision  contained in the Stock
      Purchase Agreement between Belmont and the shareholders of Bellcrest, $0.9
      million for severance costs  associated with the  consolidation of certain
      administrative functions,  $3.1 million for printing,  investment banking,
      legal,  accounting  and other  fees,  and $0.9  million  for  other  costs
      associated  with  combining  and  realigning  the  operations  of the  two
      companies.  Of the merger and related costs of $7.4 million,  $5.2 million
      is recorded as an accrued  liability in the consolidated  balance sheet at
      December 31, 1997.

2.    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  (hereinafter collectively referred to as 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. Intercompany
      profits, transactions and balances have been eliminated in consolidation.

      Nature of Operations - The Company  designs and  manufactures a wide range
      of  high  quality  manufactured  homes  which  are  sold to a  network  of
      independent  dealers  located  primarily in the  southeast,  southwest and
      midwest regions of the United States.  In addition,  through its financial
      services segment, the Company offers retail installment sale financing and
      related  insurance  products  for  manufactured  homes  sold  through  the
      Company's independent exclusive dealer network.

      Accounting   Estimates  -  The  preparation  of  financial  statements  in
      conformity  with  generally  accepted   accounting   principles   requires

                                       30
<PAGE>

      management  to make  estimates  and  assumptions  that affect the reported
      amounts of assets and liabilities and disclosure of  contingencies  at the
      date of the financial  statements and the reported  amounts of revenue and
      expenses  during the reporting  periods.  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  maturity of
      those  instruments.  Additional  information  concerning the fair value of
      other financial instruments is disclosed in Notes 4 and 5.

      Cash  Equivalents - The Company  considers  all highly liquid  investments
      with original maturities of 90 days or less to be cash equivalents.

      Marketable  Securities - Marketable  securities  have been  classified  as
      available  for  sale  in  the  consolidated  balance  sheet  according  to
      management's  intent.  Marketable  securities  are stated at fair value of
      $1,097 at  December  31,  1996.  The  Company  had no amounts  invested in
      marketable securities at December 31, 1997.

      Inventories  -  Inventories  consist  primarily of raw  materials  and are
      stated at the lower of cost (first-in, first-out method) or market. During
      1997, 1996, and 1995, the Company purchased raw materials of approximately
      $10,573,  $11,645 and $7,900,  respectively,  from certain joint  ventures
      referred to previously.

      Property, Plant and Equipment - Property, plant and equipment is stated at
      cost and  depreciated  primarily  over the  estimated  useful lives of the
      related assets using the straight-line method. Maintenance and repairs are
      expensed as incurred.  The Company paid or accrued  $270,  $73 and $690 in
      1997, 1996 and 1995, respectively, for construction of plant facilities to
      a company in which a  stockholder  and  director  of the Company is also a
      stockholder.

      Goodwill - Goodwill  represents  the excess of the purchase price over the
      fair value of the net assets acquired and is being amortized over 15 to 25
      years using the straight-line method.

      If facts and  circumstances  indicate  that  goodwill may be impaired,  an
      assessment  will be made by the Company to  determine  if a  writedown  is
      required or if its estimated useful life should be revised. The assessment
      will be based primarily on forecasted operating income, including interest
      expense,  depreciation and amortization other than goodwill;  supplemented
      if  necessary  by an  independent  appraisal  of fair  value.  The Company
      believes  that no impairment of goodwill has occurred and that no revision
      of its estimated useful life is required.

      Revenue  Recognition - Sales of manufactured homes to independent  dealers
      are  recorded as of the date the home is shipped to the  dealer,  with the
      exception of one of the Company's  subsidiaries  which employs  drivers to
      deliver its homes; accordingly, sales are recorded upon delivery (at which
      time title  passes) by this  subsidiary.  All sales are final and  without
      recourse except for the contingency  described in Note 10. Interest income
      on  installment  contracts  receivable  is  recognized  using the interest
      method.

      Product  Warranties  - The Company  provides a one-year  limited  warranty
      covering  defects in material or workmanship in home  structure,  plumbing
      and  electrical  systems.  A liability  is provided for  estimated  future
      warranty costs relating to homes sold, based upon management's  assessment
      of historical experience factors and current industry trends.

      Allowance for Losses on  Installment  Contracts - The Company has provided
      an allowance for estimated  future losses  resulting from retail financing
      activities of Cavalier  Acceptance  Corporation  ("CAC"),  a  wholly-owned
      subsidiary,  primarily  based upon  management's  assessment of historical
      experience and current industry trends.

      Insurance - The Company's  workmen's  compensation,  product liability and
      general liability insurance coverages (with the exception of Belmont whose
      insurance is provided  under fully insured  policies)  are provided  under
      incurred loss,  retrospectively  rated premium plans. Under this plan, the
      Company  incurs  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
      when  sufficiently  reliable  data is  available  in  accordance  with the
      consensus   reached  in  Emerging  Issues  Task  Force  Issue  No.  93-14,
      Accounting for Multiple-Year  Retrospectively Rated Insurance Contracts by
      Insurance Enterprises and Other Enterprises.

                                       31
<PAGE>

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

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

                                                               1997         1996          1995

      Weighted average common shares outstanding              19,835       19,363        16,630

      Dilutive effect of stock options and warrants              193          436           427
                                                        ------------   -----------  -----------

      Weighted average common shares outstanding,
        assuming dilution                                     20,028       19,799        17,057
                                                        ============   ===========  ===========

      </TABLE>

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

      Reclassifications  -  Certain  amounts  from the prior  periods  have been
      reclassified to conform to the 1997 presentation.

3.    ACQUISITIONS

      On October 24, 1996,  in a  transaction  accounted  for using the purchase
      method of  accounting,  the Company  completed its purchase of 100% of the
      stock of Bellcrest Homes, Inc.  ("Bellcrest")  through the cash payment of
      $9,500.

      The effects of the acquisition at the purchase date were as follows:

      Decrease in cash, net                                             $ 7,145
      Increase in other current assets                                    3,422
      Increase in property, plant and equipment                           3,525
      Increase in goodwill and other assets                               6,762
      Increase in current liabilities                                     4,756
      Increase in long-term debt and deferred income taxes                1,808

        The  following  unaudited  pro forma data is  provided  for  comparative
        purposes and are not necessarily indicative of actual results that would
        have been achieved had the acquisition of Bellcrest been  consummated at
        an earlier date and are not  necessarily  indicative of future  results.
        Assuming  that the  acquisition  was  consummated  on  January  1, 1995,
        unaudited  pro forma  revenues,  net income and  diluted  net income per
        share,   after   giving   effect  to  certain   adjustments,   including
        amortization of goodwill and other assets, increased interest expense on
        debt related to the acquisition,  increased  depreciation  expense,  and
        related  income tax effects,  for the years ended  December 31, 1996 and
        1995 follow:

                                                          1996            1995

        Revenues                                      $ 607,056       $ 450,718
        Net income                                       27,570          17,756
        Diluted net income per share                       1.39            1.04


        Under the terms of the Bellcrest Stock Purchase  Agreement,  the Company
        was  required  to  pay  the  former  Bellcrest  shareholders  additional
        consideration  in an amount not to exceed $3,500 in the aggregate in the

                                       32
<PAGE>

        event Bellcrest attained certain stated levels of earnings before income
        taxes for the three-month period ended December 31, 1996 and for each of
        the years ending  December 31, 1997 and 1998.  During 1997,  the Company
        paid  $1,000,  the amount  earned and  accrued  for 1996,  to the former
        shareholders.  In addition,  in connection with the merger  described in
        Note  1,  the  Company   paid  the   remaining   $2,500  to  the  former
        shareholders.

        In conjunction with this acquisition, a former Bellcrest shareholder was
        issued  warrants  for the  purchase of 75,000  shares of Belmont  common
        stock.  The warrants,  which expire in October 2001, are  exercisable at
        $14.66 per share and their fair value at the issue date was estimated to
        be negligible. None of these warrants have been exercised as of December
        31, 1997. In connection  with the merger,  these warrants were converted
        to warrants to purchase  60,000  shares of Cavalier  common  stock at an
        exercise price of $18.34 per share.

        In October 1995 the Company  acquired,  in a  transaction  accounted for
        using the purchase  method of  accounting,  all the  outstanding  common
        stock of Spirit Homes, Inc. ("Spirit") for $9,800, consisting of cash of
        $2,450 and debt of $7,350.

        The  following  unaudited  pro forma data are provided  for  comparative
        purposes and are not necessarily indicative of actual results that would
        have been achieved had the acquisition of Spirit been  consummated at an
        earlier  date and are not  necessarily  indicative  of  future  results.
        Assuming  that the  acquisition  was  consummated  on  January  1, 1995,
        unaudited  pro forma  revenues,  net income and  diluted  net income per
        share,   after   giving   effect  to  certain   adjustments,   including
        amortization of goodwill and other assets, increased interest expense on
        debt related to the acquisition,  increased  depreciation  expense,  and
        related income tax effects, for the year ended December 31, 1995 follow:


        Revenues                                                       $460,378
        Net income                                                       18,618
        Diluted net income per share                                       1.09


4.    INSTALLMENT CONTRACTS RECEIVABLE

      CAC does not  exclusively  finance sales for any dealer;  all dealers have
      other  financing  sources  available to offer to their  retail  customers.
      Standard loan programs  require minimum down payments,  ranging from 0% to
      20% of the purchase price of the home, on all installment  contracts based
      on the  creditworthiness  of the borrower.  In addition,  CAC 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 CAC upon default by the borrower.

      CAC's  portfolio  consists of fixed rate  contracts  with  interest  rates
      generally  ranging from 9.25% to 14.0% at December 31, 1997 and 1996.  The
      average  original  term of the  portfolio  was  approximately  217 and 208
      months at December 31, 1997 and 1996, respectively.

      Estimated principal payments under installment contracts receivable are as
      follows:

      Year Ending December 31,

           1998                                                      $    1,254
           1999                                                           1,398
           2000                                                           1,559
           2001                                                           1,738
           2002                                                           1,938
        Thereafter                                                       41,259
                                                                      ---------

          Total                                                       $  49,146
                                                                      =========
                                       33
<PAGE>

      Activity  in the  allowance  for losses on  installment  contracts  was as
      follows:

                                                    1997       1996        1995

      Balance, beginning of year                $    941    $   551     $   350
      Provision for losses                         1,329        778         311
      Charge-offs, net                              (998)      (388)       (110)
                                                  -------    -------     -------

      Balance, end of year                      $  1,272    $   941     $   551
                                                  =======    =======     =======


      On  February  17,  1998,   the  Company   reached  an  agreement  to  sell
      approximately $25 million of its existing loan portfolio at a premium.

      At December 31, 1997 and 1996,  the  estimated  fair value of  installment
      contracts  receivable  was $50,103 and $36,205,  respectively.  These fair
      values  were  estimated   using  current  market  value  for  the  $25,000
      previously  noted and discounted  cash flows and interest rates offered by
      CAC on similar contracts at the time for the remaining portfolio.

5.    CREDIT ARRANGEMENTS

      The Company has a $23,000  revolving,  warehouse and  term-loan  agreement
      (the  "Credit  Facility")  with its primary  bank,  whose  president  is a
      director of the Company.  The Credit Facility contains a revolving line of
      credit which provides for borrowings  (including  letters of credit) of up
      to 80% and 50% of the Company's eligible (as defined) accounts  receivable
      and  inventories,  respectively,  up to a maximum of $5,000.  Interest  is
      payable under the revolving line of credit at the bank's prime rate (8.50%
      and 8.25% at December  31, 1997 and 1996,  respectively).  No amounts were
      outstanding  under the  revolving  line of credit at December  31, 1997 or
      1996.

      The  warehouse and term-loan  agreement  contained in the Credit  Facility
      provide for borrowings of up to 80% of the Company's eligible (as defined)
      installment sale contracts,  up to a maximum of $18,000.  Interest on term
      notes is fixed for a period of five years from issuance at a rate based on
      the weekly average yield on five-year  treasury  securities  averaged over
      the preceding 13 weeks, plus 2%, and floats for the remaining two years at
      a rate  (subject to certain  limits)  equal to the bank's  prime rate plus
      .75%.  The  warehouse  component  of  the  Credit  Facility  provides  for
      borrowings of up to $2,000 with interest  payable at the bank's prime rate
      plus 1%.  However,  in no event may the aggregate  outstanding  borrowings
      under the warehouse  and term-loan  agreement  exceed  $18,000.  Under the
      Credit  Facility,  $50 was  outstanding  under the warehouse  component at
      December 31, 1997, and $12,694 and $3,866 was  outstanding  under the term
      loan portion at December 31, 1997 and 1996, respectively.

      The Credit Facility contains certain restrictive and financial  covenants,
      which,  among other things,  limit the aggregate of dividend  payments and
      purchases of treasury stock to 50% of consolidated  net income for the two
      most recent years, contain restrictions on the Company's ability to pledge
      assets, incur additional  indebtedness and make capital expenditures,  and
      require the Company to maintain certain defined financial ratios.  Amounts
      outstanding  under  the  Credit  Facility  are  secured  by  the  accounts
      receivable and inventories of the Company,  loans purchased and originated
      by CAC,  and the capital  stock of certain of the  Company's  consolidated
      subsidiaries.  The bank's commitment under the Credit Facility will expire
      in April 1998.

      On March 13, 1998, the Company  reached an agreement with its primary bank
      to extend its Credit  Facility for an additional two years and to increase
      available borrowings to $35,000. The renewal provides for a revolving line
      of credit  with a maximum of  $10,000  (an  increase  from  $5,000)  and a
      warehouse  line of $25,000 (an increase  from  $18,000)  which  includes a
      fixed  rate  term-loan  feature.   Terms  and  restrictive  covenants  are
      substantially the same as the expiring agreement.

      The Company has other lines of credit  with banks  totaling  $9,000  which
      expire at various dates  through July,  1998.  Amounts  outstanding  under
      these facilities  totaled $1,000 and $8,600 at December 31, 1997 and 1996,
      respectively.  Interest  rates under these lines range from prime to prime
      plus 2%.

      The Company has amounts  outstanding  under three  Industrial  Development
      Revenue  Bond issues  ("Bonds")  of $4,442 and $1,044 at December 31, 1997
      and 1996,  respectively.  Two of the bond issues bear interest at variable
      rates  ranging  from 4.0% to 5.4% and  mature  at  various  dates  through
      November  2007.  One of the  bond  issues  is  payable  in  equal  monthly
      installments  and bears  interest at 75% of the prime rate.  The bonds are
      collateralized by certain plant facilities.

                                       34
<PAGE>

      The Company  has a  term-loan  with a balance of $887 and $960 at December
      31, 1997 and 1996,  respectively,  bearing  interest at 7.95%,  payable in
      equal monthly installments through April, 2006.

      At  December  31,  1996,  the  Company's  other  long-term  debt,  with an
      outstanding  balance of $1,796,  consisted  of various  fixed and variable
      rate term loans  bearing  interest at rates  ranging  from 8.25% to 9.25%.
      These notes were paid in 1997.

      Principal repayment requirements on long-term debt are as follows:


      Year Ending December 31,


           1998                                                         $ 3,271
           1999                                                           2,452
           2000                                                           2,648
           2001                                                           2,594
           2002                                                           2,332
        Thereafter                                                        5,782
                                                                        -------

           Total                                                         19,079
      Less current portion                                                3,271
                                                                        -------

      Long-term debt                                                   $ 15,808
                                                                       ========

      The estimated fair value of outstanding borrowings was $19,261 and $16,111
      at  December  31,  1997  and  1996,  respectively.  These  estimates  were
      determined  using  rates at  which  the  Company  believes  it could  have
      obtained similar borrowings at that time.

      Cash paid for interest  during the years ended December 31, 1997, 1996 and
      1995 was $1,445, $910 and $1,619, respectively.

      The Company and certain of its equity  partners have jointly and severally
      guaranteed  revolving  notes for two  companies and a letter of credit for
      one  company in which the  Company  owns  various  equity  interests.  The
      guarantees are limited to various  percentages of the outstanding  debt up
      to a maximum  guaranty  of  $1,500.  At  December  31,  1997,  $3,000  was
      outstanding  under  the  various  guarantees,  of which  the  Company  had
      guaranteed $720.

6.    STOCKHOLDERS' EQUITY

      During the years ended December 31, 1996 and 1995, the Company's  Board of
      Directors  declared the  following  stock splits of the  Company's  common
      stock.  All applicable share and per share data have been restated to give
      effect to all stock splits.


         Declaration          Stock         Record               Distribution
            Date              Split          Date                    Date

       July 17, 1995         5 for 4     July 31, 1995         August 15, 1995
       January 22, 1996      3 for 2     January 31, 1996      February 15, 1996
       October 16, 1996      5 for 4     October 31, 1996      November 15, 1996

      The  Company  has  adopted  a  Stockholder  Rights  Plan.  The  terms  and
      conditions of the plan are 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.
      The  Rights,  when  exercisable,  entitle the holder to purchase a unit of
      0.80 one-hundredth share of Series A Junior Participating Preferred Stock,
      par value $.01, at a purchase price of $80 per share.  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

                                       35
<PAGE>

      Company at $.01 per Right under certain circumstances.  In connection with
      the merger,  Belmont  shareholders  received  one Right (as defined in the
      Rights Agreement) with respect to each Cavalier share received pursuant to
      the Merger Agreement.

      In  June  1995,   Belmont   completed  an  initial   public   offering  of
      approximately  1,570,000  (before stock split) shares of common stock. The
      net  proceeds  of  approximately  $15,283  were  used to  retire  debt and
      preferred  stock  and  for  working  capital.  In  January  1996,  Belmont
      completed  another public offering of approximately  640,000 (before stock
      split) shares of common stock. The net proceeds of  approximately  $11,725
      were used to retire debt and for working capital.

      Supplemental  diluted net income per share for 1996 and 1995, based on net
      income after adjustment for dividends on preferred stock and the after tax
      effect of  interest  expense on debt  repaid  with  proceeds  of the above
      offerings,  and on the weighted average shares of common stock outstanding
      for 1996 and  1995,  giving  effect to the  number  of shares  sold in the
      offerings,  the proceeds of which were used to repay such preferred  stock
      and debt,  is as follows  assuming  the  transactions  were  effective  on
      January 1, 1995:

                                                       1996               1995

      Net income, as adjusted                     $   27,526         $   18,072
                                                  ==========         ==========

      Diluted net income per share                $     1.39         $     0.98
                                                  ==========         ==========

      Weighted average shares outstanding,
        assuming dilution                         19,868,292         18,364,945
                                                  ==========         ==========


7.    STOCK PLANS

      Dealership Stock Option Plan -

      -    During  1995,  the  Company's   Board   of  Directors   approved  the
           Dealership  Stock Option Plan of Cavalier  Homes,  Inc.  (the "Dealer
           Plan"),  under which an aggregate of 562,500  shares of the Company's
           common  stock may be issued to the eligible  independent  dealerships
           (as  defined in the Dealer  Plan) at a price equal to the fair market
           value of the Company's  common stock as of a date during the calendar
           quarter determined by the plan administrator for which such option is
           to be granted.  Options granted under the Dealer Plan are immediately
           exercisable  and expire three years from the grant date.  Since these
           options  have been  granted to  persons  other  than  employees,  the
           Company  adopted  the  recognition  and  measurement   provisions  of
           Statement of Financial  Accounting  Standards No. 123, Accounting for
           Stock-Based  Compensation  ("SFAS  123"),  for  Dealer  Plan  options
           granted after December 15, 1995.

       Employee and Director Plans:

       -   The   Company  adopted  and the  shareholders  approved  the 1996 Key
           Employee  Stock  Incentive  Plan (the "1996 Plan") which provides for
           both  incentive  stock  options  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 (or, in certain circumstances, a separate sub-committee) of
           the Board of Directors. As of December 31, 1997, the aggregate number
           of shares  available  under the 1996  Plan was  1,461,701  (including
           57,965 shares  canceled from the Company's 1993  Non-qualified  Stock
           Option Plan and 471,200 shares made available in connection  with the
           Belmont merger). On January 1 of each year, an additional 1.5% of the
           then outstanding  common stock becomes  available for grant.  Options
           granted under the 1996 Plan generally  expire ten years from the date
           of grant.

       -   During   1996,  the  Company further  amended  the 1993  Amended  and
           Restated  Non-employee  Directors  Plan   (the   "1993   Non-employee
           Directors  Plan") to provide for the  issuance of stock  options,  at
           fair market  value on the date of grant, to non-employee directors to
           acquire up to  625,000 shares of common stock.  Options are generally
           granted  upon  a   directors  initial  election  to  the  Board   and
           automatically on an annual basis  thereafter.  Options granted  under
           this plan are generally exercisable after six months from the date of
           grant and must be exercised within ten years from such  date,  except
           under certain conditions.

       -   During  1996, the Company adopted the Cavalier Homes,  Inc.  Employee
           Stock Purchase Plan under which an aggregate of 625,000 shares of the

                                       36
<PAGE>

           Company's  common  stock  may be  issued to  eligible  employees  (as
           defined) at a price equal to the lesser of 85% of the market price of
           the stock as of the first day (January 1 or July 1) or last day (June
           30 or December 31) of the Payment Periods (as defined). Employees may
           elect to have a portion of their  compensation  withheld,  subject to
           certain limits, to purchase the Company's common stock.

      Compensation expense recorded in connection with these plans for the years
      ended December 31, 1997 and 1996 was not material.

      On July 25, 1996, substantially all employee stock options granted in 1996
      at prices  between $15.40 and $16.60 were repriced to an exercise price of
      $13.60. On January 17, 1997, substantially all employee stock options then
      exerciseable  at a price of $12.00 or higher were  repriced to an exercise
      price of $10.625. In addition, on January 17, 1997, an option issued under
      the 1993 Non-employee  Director's Plan to purchase 25,000 shares at $15.40
      per share was  canceled  and  reissued  for 17,250  shares at $10.625  per
      share.

      The Company has adopted the Cavalier Homes, Inc. Dividend Reinvestment and
      Stock  Purchase  Plan,  under which the Company may issue an  aggregate of
      200,000 shares of the Company's common stock to eligible  participants (as
      defined).  Participants in the Plan may purchase  additional shares of the
      Company's  common stock by reinvesting the cash  distributions  on all, or
      part, of their shares,  or by investing both their cash  distributions and
      optional cash payments. The purchase price of the stock will be the higher
      of 95% of the  average  daily  high and low sale  prices of the  Company's
      common  stock  on the  four  trading  days  including  and  preceding  the
      Investment  Date (as  defined)  or 95% of the  average  high and low sales
      prices on the Investment Date.

      The Company applied Accounting Principles Board Opinion No. 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 the fair value on the date of grant. 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 123, the
      Company's  net income and net income per share would  approximate  the pro
      forma amounts below:

                                             1997           1996           1995

      Net income:
        As reported                       $ 10,247       $ 27,479       $ 17,630
        Pro forma                         $  8,661       $ 24,888       $ 17,515

      Basic net income per share:
        As reported                       $   0.52       $   1.42       $   1.06
        Pro forma                         $   0.44       $   1.29       $   1.05

      Diluted net income per share:
        As reported                       $   0.51       $   1.39       $   1.03
        Pro forma                         $   0.43       $   1.26       $   1.03

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


                                1997               1996                1995

      Dividend yield            1.13 %              0.66 %             1.35 %
      Expected volatility       0.44 %              0.41 %             0.43 %
      Risk free interest rate   6.12 %              5.99 %             6.50 %
      Expected lives            3.0 years           3.0 years          3.2 years

      SFAS 123 does not apply to awards  prior to 1995.  The effects of applying
      SFAS 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 reflected in the Company's financial statements have
      been credited to additional paid-in-capital. These benefits, which totaled
      $-0- (1997), $3,692 (1996), and $281 (1995), represent a noncash financing
      transaction for purposes of the consolidated statements of cash flows.

                                       37
<PAGE>

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

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

                                                                                                                  Weighted
                                                                                          Weighted                 Average
                                                                                           Average                Fair Value
                                                                Shares                  Exercise Price           At Grant Date

      Shares under option:
        Outstanding at January 1, 1995                        1,206,854                    $  4.17
          Granted:
            Price = Fair Value                                  183,049                       6.39                    $ 2.24
            Price < Fair Value                                   22,299                       8.73                      2.77
          Exercised                                            (174,804)                      3.99
          Cancelled                                             (43,941)                      7.09
                                                            ------------


      Outstanding at December 31, 1995                         1,193,457                   $  4.51
        Granted:
          Price = Fair Value                                   1,640,833                     14.42                    $ 4.73
          Price < Fair Value                                      28,833                     13.70                      3.75
        Exercised                                               (912,083)                     4.92
        Cancelled                                               (489,431)                    15.90
                                                             ------------

      Outstanding at December 31, 1996                         1,461,609                   $ 11.76
        Granted at Fair Value                                    858,425                     10.61                    $ 3.52
          Exercised                                               (1,000)                     4.27
          Cancelled                                             (564,420)                    13.75
                                                             ------------

      Outstanding at December 31, 1997                         1,754,614                   $ 10.56
                                                             ============                 =========

      Options exercisable as of December 31, 1997              1,536,986                   $ 10.37
                                                             ============                 =========

      Options exercisable as of December 31, 1996                649,947                   $ 10.17
                                                             ============                 =========

      Options exercisable as of December 31, 1995              1,076,235                   $  4.25
                                                             ============                 =========

</TABLE>

      Stock  options  available  for future  grants at  December  31,  1997 were
      1,197,516 under all of the Company's various stock option plans.

                                       38
<PAGE>


      The  following  table  summarizes  information  concerning  stock  options
      outstanding at December 31, 1997:

    <TABLE>

    <CAPTION>
                                            Options Outstanding                       Options Exercisable
                              ------------------------------------------------  --------------------------------

      <S>                          <C>               <C>            <C>           <C>               <C>
                                                       Weighted
                                                       Average      Weighted                        Weighted
                                                      Remaining     Average                         Average
         Range of                    Number          Contractual    Exercise        Number          Exercise
      Exercise Prices              Outstanding          Life         Price        Exercisable        Price

      $0.55 - $4.27                  219,421             6.19       $  4.00        207,833          $  4.00
      $4.43 - $10.50                 218,989             7.27          8.08        173,989             7.95
         $10.63                      765,249             9.05         10.63        765,249            10.63
      $11.25 - $13.33                273,495             7.34         13.05        116,055            12.70
      $13.60 - $16.60                277,460             7.92         15.06        273,860            15.06
                                   ---------                                     ---------

      $0.55 - $16.60               1,754,614             8.02       $ 10.56      1,536,986          $ 10.37
                                   =========          ========      ========     =========         ========

</TABLE>

8.    INCOME TAXES

      Provision for income taxes consist of:


                                     1997           1996           1995
      Current:
        Federal                    $ 9,574       $ 15,456      $ 10,904
        State                          921          2,258         1,223
                                  ---------      ---------      --------

                                    10,495         17,714        12,127
                                  ---------      ---------      --------

      Deferred:
        Federal                     (2,368)          (712)         (777)
        State                          (35)          (295)         (182)
                                  ---------      ---------      --------

                                    (2,403)        (1,007)         (959)
                                  ---------      ---------     ---------

      Total                        $ 8,092       $ 16,707      $ 11,168
                                  =========      =========     =========


      Total income tax expense for 1997,  1996,  and 1995 is different  from the
      amount that would be computed by applying the expected  federal income tax
      rate of 35% to income before income taxes. The reasons for this difference
      are as follows:

      <TABLE>

      <S>                                                 <C>            <C>              <C>
                                                             1997           1996             1995

      Income tax at expected federal income tax rate      $ 6,419        $ 15,465          $ 9,941
      State income taxes, net of federal tax effect           651           1,810            1,168
      Non-taxable life insurance proceeds                    (525)           (655)
      Non-deductible operating expenses                       387             107              171
      Effect of graduated tax rates                                                           (121)
      State jobs tax credits                                  (40)           (471)            (344)
      Non-deductible merger related expenses                1,085
      Other                                                   115             451              353
                                                          -------         -------          -------

                                                          $ 8,092        $ 16,707         $ 11,168
                                                          =======         =======          =======
      </TABLE>

                                       39
<PAGE>

      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, 1997 and 1996 were as follows:


                                                          1997          1996
                                                       ------------------------
                                                          Assets (Liabilities)
                                                       ------------------------
      Current differences:
      Warranty expense                                 $   4,058      $   3,358
      Inventory capitalization                               512            463
      Allowance for losses on receivables                    939            666
      Accrued expenses                                     1,132          1,525
      Other                                                  599            470
                                                       ---------      ---------

                                                       $   7,240      $   6,482
                                                       =========      =========

      Noncurrent differences:
      Depreciation and basis differential
        of acquired assets                             $  (1,796)     $  (1,815)
      Goodwill                                              (726)          (534)
      Merger related expenses                              1,331
      Other                                                  894            407
                                                        ---------      ---------

                                                       $    (297)     $  (1,942)
                                                        =========      =========


      Cash paid for income taxes for the years ended December 31, 1997, 1996 and
      1995 was $10,632, $12,387 and $10,055, respectively.

9.    EMPLOYEE BENEFIT PLANS

      The Company has self-funded  group medical plans which are administered by
      third party  administrators.  The Plans have reinsurance coverage limiting
      liability  for any  individual  employee loss to a maximum of $75, 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 $5,067,  $2,893 and
      $2,682 for years ended December 31, 1997, 1996 and 1995, respectively.

      The  Company  sponsors  employee  401(k)  retirement  plans  covering  all
      employees who meet participation requirements.  Employee contributions are
      limited to a  percentage  of  compensation  as  defined in the Plans.  The
      amount  of  the  Company's  matching   contribution  is  discretionary  as
      determined by the Board of Directors.  Company  contributions  amounted to
      $545,  $420 and $375 for the years ended December 31, 1997, 1996 and 1995,
      respectively.

10.   COMMITMENTS AND CONTINGENCIES

      Operating Leases:

      Five  of  the  Company's   manufacturing   facilities  and  one  component
      distribution  center are leased under separate  operating lease agreements
      (the "Related  Leases") with  partnerships  or companies  whose owners are
      certain  officers,  directors or stockholders of the Company.  The Related
      Leases  require  monthly  payments  ranging from $4 to $22 and provide for
      lease terms ending from July 1998 to March 2001 as well as renewal  option
      periods.  The Related  Leases also contain  purchase  options  whereby the
      Company can purchase  the  respective  manufacturing  facility for amounts
      ranging from $875 to $1,900 at any time during the lease terms.

      The  Company  also  leases  three  other  manufacturing  facilities  under
      operating leases with unrelated  parties.  These leases currently  require
      monthly payments ranging from $3 to $14 and provide for lease terms ending
      from  March  1999 to June  2017 as well as  renewal  option  periods.  The
      Company has the option  under one of these  leases to (i) cancel the lease
      at any time after  October  2001 with a one year notice and (ii)  purchase
      the manufacturing facility for $995 at any time during the lease term. The
      Company  also has the option under two of these leases to cancel the lease
      after  the  first  five  years  with 180 days and  twelve  months  notice,
      respectively.

      The Company  leases  delivery  trucks from some of its drivers who deliver
      homes for  dealers.  Rentals for these trucks are based on a rate per mile
      and the leases are  cancelable  by either  party upon thirty days  notice.
      Rent expense  under these leases was  approximately  $2,305,  $3,140,  and
      $2,647   for  the  years  ended  December  31,  1997,  1996,  and  1995,
      respectively.

                                       40
<PAGE>

      Future minimum rents payable under  operating  leases that have initial or
      remaining  noncancelable  lease terms in excess of one year as of December
      31, 1997 are as follows:


      Year Ending December 31,

           1998                                                         $ 1,087
           1999                                                             754
           2000                                                             569
           2001                                                             235
           2002                                                             149
           Thereafter                                                       441
                                                                       --------

           Total                                                        $ 3,235
                                                                       ========



      Total rent  expense  was  $1,418,  $1,242  and $1,044 for the years  ended
      December 31, 1997,  1996 and 1995,  respectively,  including rents paid to
      related parties of $817 (1997), $765 (1996) and $723 (1995).

      Contingent Liabilities and Other:

      a.    It is customary practice for companies in the  manufactured  housing
            industry to enter into repurchase and other recourse agreements with
            lending  institutions  which  have  provided  wholesale  floor  plan
            financing to dealers.  Substantially  all of the Company's sales are
            made to dealers located  primarily in the southeast,  southwest  and
            midwest  regions of the United States and are pursuant to repurchase
            agreements  with lending institutions.  These  agreements  generally
            provide for repurchase of the  Company's  products  from the lending
            institutions for the balance due them in the  event of  repossession
            upon  a dealer's  default.  Although  the  Company  is  contingently
            liable for an amount estimated to be $158,000 under these agreements
            as of December 31, 1997, such  contingency is mitigated  by the fact
            that (i) sales  of manufactured  homes are  spread over a relatively
            large number of dealers; (ii)  the price the Company is obligated to
            pay  under such  repurchase  agreements generally  declines over the
            period of the agreement; and (iii) the Company may be able to reduce
            its losses by the resale value of the homes which may be required to
            be  repurchased.  The  Company has an allowance for losses of $1,175
            (1997) and  $837 (1996) based on prior experience and current market
            conditions.  Management  expects no  material loss  in excess of the
            allowance.

      b.    Under  the  insurance  plans  described  in Note 2, the  Company  is
            contingently  liable at December  31, 1997 for future  retrospective
            premium  adjustments up to a maximum of approximately  $5,700 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 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.  Courts have
            certified several of these types of cases as class actions recently,
            and many of these types of  cases  have  resulted  in  large  damage
            awards, especially  large punitive damage awards.  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.

11.   INDUSTRY SEGMENT INFORMATION

      The Company's primary activities are the design,  production and wholesale
      sale of manufactured homes to a system of independent dealers. The Company
      also  offers   retail   financing  of  its  homes  through  its  exclusive
      independent dealer network.  For purposes of segment reporting,  corporate

                                       41
<PAGE>

      assets consist primarily of cash, certain property and equipment and other
      investments.  Operating  profit is considered to be income before  general
      corporate expenses, interest and income taxes.

Financial  information  for these segments is summarized in the following table:

<TABLE>

<S>                                      <C>                   <C>             <C>                    <C>
                                                                                  General
                                                               Financial         Corporate
                                          Manufacturing         Services       (Unallocated)          Total

  Year ended December 31, 1997:

  Revenues                                $     555,842          $ 5,346                               $ 561,188
  Operating income (loss)                        24,380            2,043          $ (9,342)               17,081
  Identifiable assets                           149,893           51,843             9,818               211,554
  Depreciation and amortization                   7,166              208               118                 7,492
  Capital expenditures                            9,515              265               406                10,186

Year ended December 31, 1996:

  Revenues                                $     573,838          $ 3,333                               $ 577,171
  Operating income (loss)                        41,719            1,257          $ (2,129)               40,847
  Identifiable assets                           151,594           38,175             6,618               196,387
  Depreciation and amortization                   5,588              129                43                 5,760
  Capital expenditures                           15,669              196               241                16,106

Year ended December 31, 1995:

  Revenues                                $     420,790          $ 1,764                               $ 422,554
  Operating income (loss)                        30,404              638          $ (2,334)               28,708
  Identifiable assets                           106,872           22,388             3,434               132,694
  Depreciation and amortization                   3,691               59                 7                 3,757
  Capital expenditures                           13,209              260                13                13,482

</TABLE>


                                    * * * * *












                                       42
<PAGE>

<TABLE>
<CAPTION>
                                              CAVALIER HOMES, INC. AND SUBSIDIARIES

                                          SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                       For the Years Ended December 31, 1997, 1996, and 1995
                                                       (Dollars in Thousands)

<S>                                     <C>             <C>            <C>            <C>          <C>             <C>
                                                          Increases     Additions
                                        Balance at      Attributable   Charged to     Charged                       Balance at
                                        Beginning of         to         Costs and     to Other                        End of
                                           Period       Acquisitions    Expenses      Accounts       Deductions       Period
                                         -------------  -------------  ------------  -----------   --------------  --------------
Allowance for losses on Accounts
   Receivable:
       Year Ended December 31, 1997    $           837                         527                        (189)     $      1,175
                                         ==============  ============  ============  ============  ==============   =============

       Year Ended December 31, 1996    $           787            51           225                        (226)     $        837
                                         ==============  ============  ============  ============  ==============   =============

       Year Ended December 31, 1995    $           675            12           153                         (53)     $        787
                                         ==============  ============  ============  ============  ==============   =============

Allowance for credit losses:
       Year Ended December 31, 1997    $           941                       1,329                        (998)     $      1,272
                                         ==============  ============  ============  ============  ==============   =============

       Year Ended December 31, 1996    $           551                         778                        (388)     $        941
                                         ==============  ============  ============  ============  ==============   =============

       Year Ended December 31, 1995    $           350                         311                        (110)     $        551
                                         ==============  ============  ============  ============  ==============   =============

Accumulated amortization of goodwill:
       Year Ended December 31, 1997    $         1,947                       1,068            87                    $      3,102
                                         ==============  ============  ============  ============  ==============   =============

       Year Ended December 31, 1996    $         1,165                         782                                  $      1,947
                                         ==============  ============  ============  ============  ==============   =============

       Year Ended December 31, 1995    $           723                         442                                  $      1,165
                                         ==============  ============  ============  ============  ==============   =============

Accumulated amortization of
     non-compete agreement:
       Year Ended December 31, 1997    $           221                          56                                  $        277
                                         ==============  ============  ============  ============  ==============   =============

       Year Ended December 31, 1996    $           189                          32                                  $        221
                                         ==============  ============  ============  ============  ==============   =============

       Year Ended December 31, 1995    $           122                          67                                  $        189
                                         ==============  ============  ============  ============  ==============   =============

Warranty reserve:
       Year Ended December 31, 1997    $        10,566                      24,357                      (23,223)    $     11,700
                                         ==============  ============  ============  ============  ==============   =============

       Year Ended December 31, 1996    $         7,265         1,176        21,380                      (19,255)    $     10,566
                                         ==============  ============  ============  ============  ==============   =============

       Year Ended December 31, 1995    $         4,757           540        14,537                      (12,569)    $      7,265
                                         ==============  ============  ============  ============  ==============   =============
</TABLE>














                                       43
<PAGE>

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

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
"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 20, 1998,  which  are  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
Interlock  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 20, 1998,  which  are incorporated herein by
reference.

ITEM 12.          SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

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 and for the Annual Meeting of Stockholders to be held on May 20,
1998, which are 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 20, 1998,
which are incorporated herein by reference.

                                    PART IV

ITEM 14.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS  ON
                  FORM 8-K

(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.

         Independent Auditors' Report                                24
         Consolidated Balance Sheets as of December 31, 1997         25
                           and 1996
         Consolidated Statements of Income for the years ended       27
                           December 31, 1997, 1996 and 1995
         Consolidated Statements of Stockholders' Equity for         28
                           the years ended December 31, 1997,
                           1996 and 1995
         Consolidated Statements of Cash Flows for the years         29
                           ended December 31, 1997, 1996 and
                           1995
         Notes to Consolidated Financial Statements                  30

         2.   The financial statement  schedules  required to be filed with this
report and the pages on which they may be found are as follows:

No.      Schedule Description                                 Form 10-K Page No.

II       Valuation and Qualifying Accounts                           43

                                       44
<PAGE>

         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.

(3)           Articles of Incorporation and By-laws.

*             (a)    The Amended and  Restated  Certificate of  Incorporation of
the Company, filed as Exhibit 3(a) to the  Company's  Annual Report on Form 10-K
for the year  ended December 31, 1993,  and  the  amendment  thereto,  filed  as
Exhibit 3(b) to the  Company's Quarterly  Report on Form  10-Q for  the  quarter
ended June 27, 1997.

*             (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(d) to the Company's  Quarterly  Report on  Form  10-Q  for the quarter
ended June 27, 1997, and  the  amendment  thereto  filed as Exhibit  3(e) to the
Company's Quarterly  Report  on Form 10-Q  for  the  quarter ended September 26,
1997.

(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 October 16, 1996,  between Virginia
Cary  L.  McDonald  and  Star  Industries,  Inc.  regarding  the  lease  of  the
manufacturing  facility  located in  Robbins,  North Carolina,  filed as Exhibit
10(b) to the Company's  Annual  Report on  Form 10-K for the year ended December
31, 1996.

*             (c)      Assignment   and   Assumption   Agreement   between  Star
Industries,  Inc.  and  Cavalier  Industries,  Inc. regarding  the  lease of the
manufacturing  facility  located in  Robbins,  North Carolina,  filed as Exhibit
10(c) to the Company's  Annual Report on  Form 10-K for the year  ended December
31, 1996.

*             (d)      Cavalier  Homes,  Inc.  Amended  and  Restated   Dividend
Reinvestment  and  Stock  Purchase  Plan,  filed  as Appendix A to the Company's
Registration Statement on Form S-3 (Registration No. 333-48111).

*  **         (e)      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.

*  **         (f)      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.

*  **         (g)      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.

*  **         (h)      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.

                                       45
<PAGE>

*  **         (i)      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.

   **         (j)      Amendment  to  Cavalier  Homes, Inc. Key Employee
Stock Incentive Plan, effective December 30, 1997.

   **         (k)      Amendment  to  Cavalier Homes,  Inc.  Key  Employee Stock
Incentive Plan, effective January 23, 1998.

*  **         (l)      Amendments  to  the  Cavalier  Homes,  Inc.   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.

*  **         (m)      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.

   **         (n)      Amendment  to  Cavalier  Homes, Inc. Amended and Restated
Nonemployee Directors Plan.

*             (o)      Option   and   Stock  Exchange  Agreement  by  and  among
Wheelhouse Structures, Inc., Shareholders  of Wheel House  Structures, Inc.  and
Cavalier Homes, Inc. dated as of  August  28, 1995, filed as Exhibit 2(a) to the
Company's  Registration  Statement  on Form S-3 (Registration No. 333-00607), as
amended.

*             (p)      Dealership  Stock  Option  Plan of Cavalier  Homes,  Inc.
filed as Exhibit 4(c) to the  Company's Registration Statement on Form S-3 dated
September 11, 1995 (Registration No. 33-62487).

*             (q)      Lease  Agreement between City of Mineral Wells, Texas and
Cavalier Homes of Texas dated  February 27, 1996,  filed as Exhibit 10(c) to the
Company's Annual Report on Form 10-K for the year ended December 31, 1995.

*             (r)      Stock Purchase Agreement, as amended,  by and among Astro
Mfg. Co., Inc., Shareholders of Astro Mfg. Co., Inc.  and Cavalier  Homes,  Inc.
dated as of October 14,  1994,  filed as Exhibit 2(a) to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1994.

*             (s)      Holdback  agreement  between  Cavalier  Homes,  Inc.  and
Raymond A. Peltcs, dated  October  28,  1994,  filed  as  Exhibit  2(b)  to  the
Company's  Quarterly  Report  on  Form 10-Q  for the quarter ended September 30,
1994.

*             (t)      Revolving,  Warehouse and Term  Loan Agreement  among the
Company and First  Commercial Bank  dated  February  17,  1994, filed as Exhibit
10(e) to the Company's  Annual  Report  on Form 10-K for the year ended December
31, 1993.

*             (u)      Amendments  to  the  Revolving,  Warehouse  and Term Loan
Agreement among the Company and First   Commercial  Bank  dated  March 14, 1996,
filed as Exhibit 10(d) to the  Company's Annual Report on Form 10-K for the year
ended December 31, 1995.

              (v)      Commitment  Letter from First Commercial Bank regarding a
two-year renewal to the Company's Loan Agreement.

*             (w)      Assumption Agreement dated as of January 2, 1997,  by and
among  the  Company,  First  Commercial  Bank  and  certain  subsidiaries of the
Company, filed as Exhibit 10(q) to the Company's Annual  Report on Form 10-K for
the year ended December 31, 1996.

*             (x)     Lease Agreement  between  Leonard  Properties and Cavalier
Homes of Texas, Inc. dated February 17, 1994, and amendment No. 1 thereto, filed
as Exhibit 10(f) to the Company's Annual Report on Form 10-K, for the year ended
December 31, 1993, and 10(a) to the Company's Quarterly  Report on Form 10-Q for
the quarter ended April 1, 1994, respectively.

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

*  **         (z)     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.

*             (aa)     Lease between  Cavalier Homes of Alabama, Inc. and Robert
L. Burdick, John W Lowe, and Jerry F. Wilson (now Estate of Jerry F. Wilson), as
tenants in common,  dated July 30, 1996, filed as Exhibit 10(u) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.

                                       46
<PAGE>

*             (bb)    Assignment and Assumption Agreement between Cavalier Homes
of Alabama, Inc. and Cavalier Homes,  Inc. regarding the lease between  Cavalier
Homes of Alabama, Inc. and  Robert L. Burdick, John W Lowe  and  Jerry F. Wilson
(now Estate of Jerry F. Wilson), filed as Exhibit 10(v) to the Company's  Annual
Report on Form 10-K for the year ended December 31, 1996.

*             (cc)    Commercial  Sub-Lease  between  Winston County  Industrial
Development  Association  and  Cavalier  Homes  of Alabama, Inc., dated March 5,
1993, filed as Exhibit 10(d) to the Company's Registration Statement on Form S-2
(Registration No. 33-59452).

*             (dd)     Assignment  and  Assumption  Agreement  between  Cavalier
Homes of Alabama, Inc. and Cavalier  Homes,  Inc.  regarding the Commercial Sub-
Lease  between  Cavalier Homes of  Alabama, Inc.  and  Winston County Industrial
Development Association,  filed as Exhibit 10(x)  to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.

*             (ee)     Sub-lease  Agreement  with  Option  to  Purchase  between
Winfield  Industrial  Development  Association,  Inc.  and  Buccaneer  Homes  of
Alabama, Inc. dated May 9, 1994, filed as Exhibit 10(k) to Amendment No.1 to the
Company's Registration Statement on Form S-2 (Registration No. 33-78644).

*             (ff)     Lease  Agreement  with Option to Purchase  between Marion
County Industrial Development Corporation, Inc. and Quality Housing Supply, Inc.
dated May 9, 1994,  filed as Exhibit 10(l)  to Amendment No. 1  to the Company's
Registration Statement on Form S-2 (Registration No. 33-78644).

*             (gg)     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.

*             (hh)     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.

*             (ii)     Guaranty Agreement between SouthTrust Bank of Alabama and
Cavalier Homes, Inc.  dated  June 20,  1997,  relating  to guaranty  payments by
Quality Housing Supply,  LLC, filed as Exhibit 10(a) to the Company's  Quarterly
Report on Form 10-Q for the quarter ended June 27, 1997.

*             (jj)     Guaranty  Agreement  between  AmSouth Bank of Alabama and
Cavalier Homes, Inc. dated June 11, 1997, relating to guaranty payments by Ridge
Point Manufacturing, filed as Exhibit 10(b) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 27, 1997.

*             (kk)     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.

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

*             (mm)     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.

*             (nn)     The  Agreement  and Plan of Merger dated August 14, 1997,
by and  among  the Company,  Crimson Acquisition Corp. and  Belmont Homes, Inc.,
filed as Exhibit 2 to the Company's Current Report on Form 8-K dated  August 19,
1997.

*             (oo)     Amendment  No. 1  to  the  Agreement  and  Plan of Merger
referenced  in  Exhibit 10(nn)  above  filed  as  Exhibit 10(e) to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 26, 1997.

* **          (pp)     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.

                                       47
<PAGE>

* **          (qq)     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.

*             (rr)     $2,000,000  Line  of  Credit,  dated  January  11,  1995,
between Belmont Homes, Inc. and  Colonial  Bank,  filed as an Exhibit to Belmont
Homes, Inc. Registration Statement on Form S-1, Registration No. 33-87868.

*             (ss)     $10,000,000  Revolving  Credit  Note,  dated November 10,
1995,  between Belmont Homes, Inc.  and Bank of Mississippi, filed as an Exhibit
to  Belmont  Homes,  Inc.  Registration  Statement  on  Form  S-1,  Registration
No. 33-80823.

*             (tt)     $10,000,000 Loan and Security Agreement,  dated  November
10, 1995,  between  Belmont Homes, Inc.  and  Bank of Mississippi,  filed as  an
Exhibit to Belmont Homes, Inc. Registration Statement on Form S-1,  Registration
No. 33-80823.

 *            (uu)     Stock  Purchase  Agreement  dated October 25, 1996, among
Belmont Homes, Inc., Bellcrest Holding Co., Inc.,  G. Hiller Spann, Joe H. Bell,
James M. Birdwell and Delroy Dailey, Jr., filed as an exhibit to  Belmont Homes,
Inc. Current Report on Form 8-K filed November 13, 1996, File No. 0-26142.

*             (vv)     First  Amendment  to  Stock  Purchase  Agreement  between
Belmont Homes, Inc. and the former  shareholders of  Bellcrest Homes, Inc. filed
as  Exhibit 10.1  to  Belmont Homes,  Inc.  Current  Report on Form 8-K filed on
September 8, 1997.

*             (ww)     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.

              (xx)     Agreement dated  March 10, 1998,  by and between Cavalier
Acceptance Corporation and Green Tree Financial Servicing Corporation.

              (yy)     Lease Agreement between the Industrial Developement Board
of the Town of Addison and  Cavalier  Homes  of  Alabama, a division of Cavalier
Manufacturing, Inc., dated November 1, 1997.

              (zz)     Commercial Sub-Lease and Agreement between Perfect
Panels, Inc. and Quality Housing Supply, Inc., dated July 1, 1996.

(11)              Statement re Computation of Per Share Earnings.

(21)              Subsidiaries of the Registrant.

(23)(a)           Consent of Deloitte & Touche LLP.

(23)(b)           Consent of KPMG Peat Marwick LLP

(23)(c)           Consent of Alday, Tillman, Giles & Wright, P. C.

(27)              Amended Financial Data Schedule.

(99)(a)           Independent Auditor's Report of KPMG Peat Marwick LLP

(99)(b)           Independent Auditor's Report of Alday, Tillman, Giles
                  & Wright, P. C.

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

(b)      Reports on Form 8-K.
         The Company filed a Current Report on  Form  8-K  on December 11, 1997,
reporting as an  Other  Event  a  prospectus  supplement  with  respect  to  the
institution of certain legal  proceedings against Belmont Homes,  Inc. and other
defendants.

                                       48
<PAGE>

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

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














                                       49
<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 30, 1998


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.

Signature                                   Title                      Date

/s/ DAVID A. ROBERSON              Director and Principal         March 30, 1998
---------------------------          Executive Officer

/s/ MICHAEL R. MURPHY               Director and Principal        March 30, 1998
----------------------------   Financial and Accounting Officer

/s/ BARRY DONNELL             Chairman of the Board and Director  March 30, 1998
----------------------------

/s/ THOMAS A. BROUGHTON, III               Director               March 30, 1998
----------------------------

/s/ JOHN W LOWE                            Director               March 30, 1998
 ---------------------------

/s/ LEE ROY JORDAN                         Director               March 30, 1998
----------------------------

/s/ GERALD R. MOORE                        Director               March 30, 1998
----------------------------

/s/ A. DOUGLAS JUMPER, SR.                 Director               March 30, 1998
----------------------------

/s/ MIKE KENNEDY                           Director               March 30, 1998
----------------------------

                                       50
<PAGE>

                                     INDEX



Exhibit
Number
-------

(10)          Material Contracts

              (j)      Amendment  to  Cavalier  Homes, Inc. Key
Employee Stock Incentive Plan, effective December 30, 1997.

              (k)      Amendment  to  Cavalier Homes,  Inc.  Key
Employee Stock Incentive Plan, effective January 23, 1998.

              (n)      Amendment  to  Cavalier  Homes, Inc. Amended
and Restated Nonemployee Directors Plan.

              (v)      Commitment  Letter from First Commercial Bank
regarding a two-year renewal to the Company's Loan Agreement.

              (xx)     Agreement dated  March 10, 1998,  by and
between Cavalier Acceptance Corporation and Green Tree Financial
Servicing Corporation.

              (yy)     Lease Agreement between the Industrial
Developement Board of the Town of Addison and  Cavalier  Homes of
Alabama, a division of Cavalier Manufacturing, Inc., dated
November 1, 1997.

              (zz)     Commercial Sub-Lease and Agreement between
Perfect Panels, Inc. and Quality Housing Supply, Inc., dated
July 1, 1996.


(11)              Statement re Computation of Per Share Earnings.

(21)              Subsidiaries of the Registrant.

(23)(a)           Consent of Deloitte & Touche LLP.

(23)(b)           Consent of KPMG Peat Marwick LLP

(23)(c)           Consent of Alday, Tillman, Giles & Wright, P. C.

(27)              Amended Financial Data Schedule. (Filed as an EDGAR
                  Exhibit only)

(99)(a)           Independent Auditor's Report of KPMG Peat Marwick LLP

(99)(b)           Independent Auditor's Report of Alday, Tillman, Giles
                  & Wright, P. C.

                                       51