February 29, 2000



Cavalier Homes, Inc.
Post Office Box 300
Addison, Alabama 35570
Attention:  Mr. Mike Murphy, Chief Financial Officer

Re:      Amended and Restated Revolving and Term Loan Agreement

Gentlemen:

                  Pursuant to a  Revolving,  Warehouse  and Term Loan  Agreement
dated as of February 17, 1994, as amended March 14, 1996, and as further amended
June 1,  1998 (as  heretofore  amended,  the  "Loan  Agreement"),  by and  among
Cavalier  Homes,  Inc.,  certain of its  Subsidiaries  and  Cavalier  Acceptance
Corporation   (collectively,   the   "Borrowers")   and  First  Commercial  Bank
("Lender"),  we have made available to the Borrowers,  jointly and severally,  a
Revolving Loan of up to $10,000,000.00,  and to Cavalier Acceptance  Corporation
("Cavalier   Acceptance"),   a  Warehouse  and  Term  Loan  Facility  of  up  to
$25,000,000.00 (the "$25,000,000.00 Loan").

                  This letter shall serve as our  commitment  and agreement with
you that,  subject to the terms and  conditions  set forth  herein,  Lender will
agree to renew the Revolving Loan,  increase the maximum dollar amount available
to the  Borrowers  under the  Revolving  Loan,  continue  to make  available  to
Cavalier Acceptance Corporation the Term Loan(s), and make certain other changes
to the Loan Agreement, all as specified herein. Unless otherwise defined in this
letter,  capitalized  terms herein will have the  meanings  given to them in the
Loan Agreement.

                  Our  agreement  set  forth  herein  shall  be  subject  to the
execution  of an Amended  and  Restated  Revolving  and Term Loan  Agreement,  a
Joinder  Agreement and such other loan  documentation  as we and our counsel may
require,  and containing such terms and conditions as we may reasonably  require
and as may be customary for such agreements,  and it is expressly understood and
agreed that none of the  amendments  and changes  specified  in this letter will
become  effective  unless  and until  all such  definitive  documents  have been
executed and all other conditions to their effectiveness have been satisfied.

                  Subject  to  the  foregoing  and  pursuant  to the  terms  and
conditions  hereinafter  described,  this will serve as our commitment to you as
follows:

<PAGE>
                  1.       (a)      Increase in Revolving Loan  Commitment:  The
Revolving Loan Commitment shall be increased from $10,000,000 to $35,000,000.00.

                           (b)      Reduction of Revolving Rate:  The definition
of "LIBOR  Rate"  shall be  amended  to mean the Base  LIBOR Rate plus 200 basis
points (2.00%).  The definition of "Revolving Rate" shall be amended to mean the
per annum rate of interest  equal to the Prime Rate in effect from time to time,
as adjusted as follows:  (i) until maturity of the Revolving Note the Prime Rate
shall be reduced by one-half of one percent (0.50%),  and (ii) after maturity of
the Revolving Note, whether by demand, acceleration or otherwise, the Prime Rate
shall be increased by two percent (2.00%).

                           (c)      Interest    Options   for   Revolving  Loan:
Article  II of the Loan  Agreement  shall  be  amended  so that  the  applicable
interest rate for the Revolving Loan will be equal to whichever of the following
rates shall, from time to time, be selected by the Borrower:  (i) the Prime Rate
minus one-half of one percent (0.50%),  or (ii) Three-month (90 days) LIBOR plus
200 basis points (2.00%).

                  2.       Availability  of Advances:  Availability  of Advances
under the Revolving Loan shall be extended to April 15, 2002.

                  3.       Warehouse  Loan:  Article  III  shall be  amended  to
delete  the  availability  of the Warehouse Loan entirely.

                  4.       Term Loan:  Article  III shall be  amended to provide
that Cavalier Acceptance has the option to draw down on the Revolving Loan up to
and until April 15, 2002 and to convert the amount so advanced  into a term loan
subject to all the existing  terms and  conditions  applicable  to the Term Loan
under the current Loan  Agreement;  provided that any amounts repaid on any term
loan will be  available  for  reborrowing  under the  Revolving  Loan;  provided
further that in no event shall the aggregate outstanding principal amount of the
Revolving Loan and the Term Loan(s) exceed $35,000,000.00.

                  5.       Fees and  Charges:  In consideration of the  Lender's
issuance  of this  letter,  the  Borrowers  shall  pay to Lender  the  following
commitment  and  utilization  fees,  each of which  when  paid  shall be  deemed
fully-earned and non-refundable:

                           (a)      Cavalier  Homes,  Inc.  shall pay to  Lender
a commitment  fee equal to 30 basis points  (0.30%)  multiplied by the Revolving
Loan Commitment ($105,000.00).

                           (b)      The  Borrowers shall pay to Lender an annual
non-usage  fee equal to 25 basis points  (0.25%)  multiplied  by the Unused Line
Amount.  The  Unused  Line  Amount  will be the  amount by which  $35,000,000.00
exceeds the average  outstanding balance of the Revolving Loan for the preceding
term.  The Unused Line  Amount  shall be payable on April 15, 2001 and April 15,
2002.
<PAGE>
                  The  Borrowers   shall   further   be   jointly  and severally
responsible  for the  payment of all legal  costs or fees  incurred by Lender in
connection  with the preparation of the  documentation  necessary to provide for
the matters described in this letter.  The Borrowers  acknowledge and agree with
Lender  that each of the fees  described  in the  paragraphs  above are fair and
reasonable  payments  to be made by  Borrowers  to Lender on account of the loan
commitments  provided  herein,  and each of the  Borrowers  understand  that the
obligation to pay such fees shall be absolute and  unconditional,  regardless of
whether the transactions contemplated hereby are closed.

                  6.       Joinder  to  Loan  Agreement:   It  is   acknowledged
and contemplated that each wholly owned Subsidiary of Cavalier Homes, Inc. shall
be a co-borrower  under the Loan Agreement,  and Cavalier Homes, Inc. will cause
each of its Subsidiaries that are not presently parties to the Loan Agreement to
execute such documents as may be reasonably  required by the Lender in order for
such Subsidiary to become a Participating Subsidiary under the Loan Agreement as
well as for Lender to perfect its first priority security interest in the assets
of each such Subsidiary.

                  7.       Amended   and   Restated  Revolving   and Term   Loan
Agreement.  The availability of the funds to be provided to the Borrowers and to
Cavalier Homes and Cavalier  Acceptance  shall be governed by and subject to all
terms and  conditions  presently  set forth in the Loan  Agreement,  as shall be
amended and restated to contain such  additional  terms and provisions as may be
required  by  Lender.  Lender  and  Borrowers  will  enter  into  certain  other
amendments to the Loan documents, including but not limited to, additional UCC-1
financing  statements,  security  agreements,  and pledge agreements,  as may be
required by Lender. Such Amended and Restated Revolving and Loan Agreement shall
specifically include, but not necessarily be limited to, the following:

                           (a)      Covenant 7.2(U) shall be amended to increase
the   maximum   aggregate   capital   expenditures   for any   fiscal   year  to
$15,000,000.00.

                           (b)      Covenant 7.2(H)(6) shall be amended to add a
proviso that notwithstanding the limitation on Indebtedness secured by Permitted
Liens  and  lease  obligations,  Cavalier  may  incur  up to  $25,000,000.00  of
indebtedness   to  be  used  for  the  purchase  of  inventory  for  its  retail
manufactured  housing sales  operations and with such  indebtedness  permissibly
secured by a prior  perfected lien on such inventory in favor of such floor plan
lender(s);
<PAGE>
                           (c)      Covenant 7.2(M) shall be   amended to  add a
subsection (5) as follows:  (5) Any eligible equity investment (as determined in
Borrowers'  reasonable  discretion) in an annual  aggregate amount not to exceed
$500,000.)

                           (d)      Covenant  7.2(G) shall be amended to provide
that Cavalier  Homes may guaranty up to $75,000.00 in principal  amount of lines
of credit used for such dealer to purchase such Inventory.

                           (e)      Covenant   7.3(A)(1)  shall  be  amended  to
increase  the Net  Working  Capital  from at  least  $3,500,000.00  to at  least
$15,000,000.00 and to add a minimum current ratio requirement of 1.17 to 1.00.

                           (f)      Covenant   7.3(A)(2)  shall  be  amended  to
require that the sum of the following must be not less than  $100,000,000.00  at
all times: (A) Consolidated Tangible Net Worth, plus (B)(i) in fiscal year 2000,
that treasury  stock that has been purchased by Borrowers in year 2000, and (ii)
in fiscal year 2001, that treasury stock that has been purchased by Borrowers in
years 2000 and 2001.

                           (g)      Covenant   7.3(A)(4)  shall  be  amended  to
change the ratio of Consolidated  Cash Flow (measured on a historical  basis) to
Debt Service from not less than 1.50 to 1.00 to 1.75 to 1.00.

                           (h)      Covenant 7.3(A)(5), and all other references
contained in the Loan  Agreement to a Borrowing  Base,  will be deleted in their
entirety.

                  8.       Opinion of  Counsel:  The  Lender   will  be provided
with such opinion of counsel as it may request which verifies the authorization,
execution,  delivery and  enforcement of the Loan  Documents,  and pertaining to
such other matters as the Lender may require.

                  This letter is not intended  to, and does not,  contain all of
the terms,  provisions  and  conditions  to funding  that may be included in the
final loan documents,  which shall include,  among other provisions,  conditions
that will  require  that all  representations  and  warranties  made in the Loan
Agreement  shall be true and correct as of the date of the closing and  funding,
and providing  further that on the date of any Advance or Term Loan  Conversion,
no Default or Event of Default under the Loan Agreement  shall have occurred and
be continuing.

<PAGE>
                  Unless  accepted by you on or before  February 29, 2000,  this
offer  will  expire,  and the  various  transactions  described  herein  must be
consummated on or before March 31, 2000, or this commitment shall expire.

                  If the terms and conditions described herein are acceptable to
you,  please  indicate your acceptance by returning a signed copy of this letter
to me, together with the commitment fees of $105,000.00, not later than February
29, 2000.


                  We appreciate  the  opportunity  to provide this financing for
you.

                                            Very truly yours,

                                             /s/ James D. Williams
                                            -----------------------------
                                            James D. Williams
                                            Vice President




                  Accepted and agreed to this 29th day of February, 2000.

                                            FOR ALL BORROWERS:

                                            CAVALIER HOMES, INC.

                                            By:  /s/ Michael R. Murphy
                                                --------------------------------
                                            Its: Chief Financial Officer
                                                --------------------------------

                                            CAVALIER ACCEPTANCE CORPORATION


                                            By:  /s/ June Martin
                                                --------------------------------
                                            Its: Secretary
                                                --------------------------------

March 29, 2000



Mr. Mike Murphy
Chief Financial Officer
Cavalier Homes
P.O. Box 300
Addison, AL  35570

Dear Mike,

Per our  discussion,  First  Commercial  Bank will  agree to make the  following
changes to the new restated and amended  loan  agreement  which is to close this
Friday, March 31, 2000.

1)       Covenant  7.3(A)(2)  shall be amended  to  require  that the sum of the
         following  must be not  less  than  $90,000,000.00  at all  times:  (A)
         Consolidated  Tangible Net Worth, plus (B)(i) in fiscal year 2000, that
         treasury  stock that has been  purchased by Borrowers in year 2000, and
         (ii) in fiscal year 2001,  that treasury  stock that has been purchased
         by Borrowers in years 2000 and 2001.

2)       The  definition  of tangible  net worth  shall be amended.  Section (F)
         under the definition of Tangible Net Worth regarding  deferred expenses
         will be deleted.

Please call me if you have any further questions on this matter.

Sincerely,


/s/ James D. Williams
----------------------
James D. Williams
Vice President