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

                                    FORM 10-K
                                    ---------

(Mark One)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
         For the fiscal year ended December 31, 2005
         -------------------------------------------
                                                         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                       (IRS Employer
incorporation or organization)                        Identification No.)

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

                                 (256) 747-9800
                                 ---------------
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act:

    Title of each class              Name of each exchange on which registered
    -------------------              -----------------------------------------
Common Stock, $0.10 Par Value               American Stock Exchange

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

Indicate by check mark if the registrant is a well-known  seasoned  issuer,
as defined in Rule 405 of the Securities Act. Yes __ No X

Indicate by check mark if the  registrant  is not required to file reports
pursuant to Section 13 or Section  15(d) of the Act. Yes __ No X

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __

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

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non- accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

    Large accelerated filer_    Accelerated filer X     Non- accelerated filer _

Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).  Yes  __ No X

The aggregate market value of the voting common equity held by non-affiliates
computed by reference to the closing price of such stock on the American Stock
Exchange as of July 2, 2005, was $79,195,479.

    The number of shares outstanding of each of the registrant's classes of
      common stock, as of March 13, 2006.
                     Common, $0.10 par value: 18,303,905
                     ------------------------

                       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 23, 2006.


<PAGE>


                              CAVALIER HOMES, INC.
                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 2005

                                     PART I

ITEM 1.           BUSINESS (dollars in thousands)

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

The Company has three reportable segments, home manufacturing, financial
services, and retail. The Company's reportable segments are organized around
products and services. Revenue, operating income (loss), identifiable assets and
other financial data of the Company's industry segments for the three years
ended December 31, 2005 are contained in Note 12 of Notes to Consolidated
Financial Statements in Part II.

In February 2005, the Company announced its decision to close, and subsequently
closed an underperforming home manufacturing plant in Ft. Worth, Texas, which
accounted for about 10% of total revenue and 11% of floor shipments in 2004.

During 2005, the Company entered into agreements as a subcontractor to provide
2,638 homes to the Federal Emergency Management Agency ("FEMA") as part of that
agency's hurricane relief efforts. In September 2005, the Company re-opened its
Winfield, Alabama facility in order to assist in the production of the FEMA
units.

Home Manufacturing Operations
At December 31, 2005, the Company owned seven home manufacturing facilities
(excluding idled facilities) engaged in the production of manufactured homes,
one plant that manufactures laminated wallboard and a cabinet manufacturing
operation. See "Item 2. Properties." The Company's operating home manufacturing
facilities normally function on a single-shift, five-day week basis with the
approximate annual capacity to produce 19,000 floors depending on model mix and
geographic demand.

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

The following table sets forth certain sales information for 2005, 2004, and
2003:
<TABLE>
<CAPTION>
<S>                                                       <C>                             <C>                     <C>    <C>


                                                                      For the Year Ended December 31,
                                                       ----------------------------------------------------------------------------
                                                          2005                    2004                 2003
                                                       ----------              ----------          ----------
Number of homes sold:
Floor shipments:
              Floor shipments continuing operations         11,141               9,611                10,909
            Floor shipments discontinued operations            148               1,161                 1,502
                                                       ------------            ---------            ---------
Total floor shipments                                       11,289              10,772                12,411
                                                       ============            =========            =========
Home shipments:
               Single section continuing operations          3,201       44%     1,874       30%         859         13%
             Single section discontinued operations             20        0%        75        1%          14          0%
                Multi section continuing operations          3,941       55%     3,844       60%       5,025         76%
              Multi section discontinued operations             64        1%       543        9%         744         11%
                                                       ------------    ------- ---------   -------   --------      -------
Total shipments                                              7,226      100%     6,336      100%       6,642        100%
                                                       ============    ======= =========   =======   =========     =======
</TABLE>

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

<PAGE>


Construction of a home begins by welding steel frame members together and
attaching axles, wheels and tires. The frame is then moved through the plant,
stopping at a number of workstations where various components and sub-assemblies
are attached. Certain sub-assemblies, such as floors, cabinets, ceilings and
wall systems, are assembled at off-line workstations. It takes approximately two
to four days to complete construction of a home. The completed home is sold
ready for connection to customer-supplied utilities. The Company believes the
efficiency gained in producing many homes of similar design and in a controlled
manufacturing environment affords the Company faster completion time, greater
consistency to specifications, and more predictable costs than a traditional
site-built home.

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

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

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

Products
The Company's homes include both single-section and multi-section models, with
the substantial majority of such products being "HUD Code Homes" which are
manufactured homes that meet the specifications of the National Manufactured
Home Construction and Safety Standards Act of 1974, as amended, and administered
by the U.S. Department of Housing and Urban Development ("HUD"). Additionally,
the Company produced modular homes, which are constructed to either local or
regional building codes. The sections of some of the modular homes we produce
are built on wooden floor systems and transported on carriers that are
subsequently removed when positioned at the home site. Single-section homes are
16 feet wide and 80 feet in length and contain approximately 1,200 square feet.
The multi-section models consist of two or more floor sections that are joined
at the home site, vary in length from 48 to 80 feet and contain approximately
1,200 to 2,300 square feet. The Company provided specialized homes for FEMA's
disaster relief efforts in both 2004 and 2005. Disaster relief products were
single-section homes 14 feet wide and 66 feet in length (2004) and 14 feet wide
and 60 feet in length (2005) and contained approximately 900 square feet.

The Company currently offers approximately 500 different models of manufactured
homes, including modular homes, with a variety of decors that are marketed under
multiple brand names. The homes typically include a living room, dining area,
kitchen, two to four bedrooms and two bathrooms. Each home contains a cook
top/range and oven, refrigerator, microwave, dishwasher, water heater and
central heating. Customers also may choose from available options including gas
appliances, kitchen cabinets, and various decor packages, recessed frames for
use with permanent foundations and wind load and thermal options for use in
certain geographic areas.

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

The Company's inventory backlog was approximately $36,600 at December 31, 2005
compared to approximately $8,700 at December 31, 2004. The Company's inventory
levels, taking into account the number of operating facilities, are historically
lower at year end during the idle period and return to normal levels at the end
of the first quarter of the year. However, inventory levels were higher than
normal at December 31, 2005 due to restrictions by FEMA on its shipments, which


<PAGE>

prevented the Company from delivering a number of finished homes at year end.

Independent Dealer Network, Sales and Marketing
At December 31, 2005, the Company had 117 participating dealer locations selling
the Company's homes under its Exclusive Dealer Program, which included four
Company-owned retail locations. In addition, the Company markets its homes
through approximately 190 active non-exclusive independent dealer locations.

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

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

                   As of December 31,                             2005      2004     2003
----------------------------------------------------------      -------   -------  --------

Number of independent exclusive dealer locations                   113       127       129

Percentage of manufactured home sales (excluding FEMA sales)        70%       62%       49%
</TABLE>

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

Approximately 93.2% of the Company's sales in 2005 (excluding FEMA) were to
dealers operating sales centers in the Company's core states as follows: North
Carolina - 15.3%, Louisiana - 12.6%, Alabama - 12.2%, Florida - 10.3%, Georgia -
10.6%, South Carolina - 8.5%, Mississippi - 7.5%, Missouri - 5.4%, Arkansas -
5.3%, Tennessee - 3.2%, and Oklahoma - 2.3%.

Generally, the Company has written agreements with its independent dealers,
which may be terminated at any time by either party, with or without cause,
after a short notice period. The Company does not have any control over the
operations of, or financial interests in, any of its independent dealers,
including any of its independent exclusive dealers. The largest independent
dealer accounted for approximately 5.0% of sales in 2005, excluding FEMA-related
sales. During 2005, hurricane disaster relief homes accounted for 25.6% of
sales.

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

The Company's sales force is generally organized based on a geographic region
with a regional sales manager and sales representatives who are compensated
primarily on a commission basis. The sales representatives are charged with the
day-to-day servicing of the needs of the Company's independent dealers,
including its exclusive dealers. The Company markets its homes through product
promotions, participation in regional manufactured housing shows, advertisements
in local media and trade publications. As of December 31, 2005, the Company
maintained a sales force of 28 full-time salesmen and four full-time general
sales managers.

Retail Financing and Insurance Activities
A significant factor affecting sales of manufactured homes is the availability
and terms of financing. CIS purchases qualifying retail installment sales
contracts for manufactured homes sold primarily through the Company's dealer
network. Through its wholly owned insurance agency, the Company sells
commissioned insurance products primarily to retail purchasers of the Company's
homes.

CIS seeks to provide competitive financing terms to customers of the Company's
dealers. CIS currently offers various conventional loan programs which require a
down-payment ranging from 5% to 20% of the purchase price. Repayment terms
generally range from 180 to 360 months, depending upon the type of home and
amount financed, the amount of the down payment and the customer's
creditworthiness. CIS's loans are secured by a purchase money security interest
in the manufactured home and, in certain instances, a mortgage on real property
pledged as additional collateral. As of December 31, 2005, all of CIS's
outstanding loans were secured. Loans purchased by CIS normally provide a fixed
rate of interest with equal monthly payments and are non-recourse to the dealer.


<PAGE>

The interest rates applicable to CIS's loan portfolio as of such date generally
ranged from 8% to 14%, and the approximate weighted average annual percentage
interest rate was 10.4%. Currently, CIS operates in most of the states in which
the Company has independent exclusive dealers.

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

Beginning in 1998, the business focus of CIS changed from building, holding and
servicing a portfolio of loans to purchasing loans from retail customers of its
dealers that are subsequently sold to other financial institutions, with limited
recourse. The recourse provisions obligate CIS to repurchase the loan from
certain third party financial institutions if any of the first four payments on
a loan become 90 days delinquent. The Company has never been obligated to
repurchase the loans under the limited recourse provisions of these contracts.
Additionally, the Company is growing its volume of land/home loans, many of
which are construction loans, for which the length of time involved in closing
the sale transaction is greater in comparison to a typical chattel (home only)
loan. These loans are also sold to third party financial institutions. CIS does
not retain the servicing function and does not earn interest income on those
sold loans. Although the level of CIS's future activities cannot presently be
determined, the Company expects to utilize internally generated working capital
and amounts generated from sales of loans under the retail finance agreements
discussed in the previous paragraph to fund the purchase of retail installment
sale contracts on homes sold by the Company's dealers and may use borrowings to
develop a portfolio of such installment sale contracts. The Company believes
that its relationships with its dealers will assist the development of this
business strategy.

The Company maintains a reserve for estimated credit losses on installment sale
contracts owned by CIS to provide for future losses based on the Company's
historical loss experience, current economic conditions and portfolio
performance. Amounts provided for credit losses were $857, $75 and $354 in 2005,
2004, and 2003, respectively. Additionally, as a result of defaults, early
payoffs and repossessions, net of recoveries, $842, $152 and $183 were charged
against the reserve in 2005, 2004, and 2003, respectively. The reserve for
credit losses at December 31, 2005 was $968 as compared to $953 at December 31,
2004 and $1,030 at December 31, 2003.

In 2005, 2004 and 2003, CIS repossessed 16, 14, and 15 homes. The Company's
inventory of repossessed homes was 9 homes at December 31, 2005, as compared to
17 homes at December 31, 2004, and 10 homes at December 31, 2003. The Company's
net losses resulting from repossessions on CIS purchased loans as a percentage
of the average principal amount of such loans outstanding for fiscal 2005, 2004
and 2003 was 6.87%, 1.53% and 1.71%, respectively. There can be no assurance
that the Company's future results with respect to delinquencies and
repossessions will be consistent with its past experience.

The loan portfolio contains loans identified as presenting uncertainty with
respect to collectibility (customers in bankruptcy). These loans totaled $631
(16 loans) and $502 (14 loans) at December 31, 2005 and 2004, respectively, and
are excluded from the following two tables.

At December 31, 2005 and December 31, 2004, delinquencies, except for loans
identified as presenting uncertainty with respect to collectibility, expressed
as a percentage of the total number of installment sale contracts which CIS
owned were as follows:

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

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

       2005              320                     1.56%               0.00%              0.00%             1.56%

       2004              221                     2.72%               0.91%              2.72%             6.35%

</TABLE>

At December 31, 2005 and December 31, 2004, delinquencies, except for loans
identified as presenting uncertainty with respect to collectibility, expressed
as a percentage of the total outstanding principal balance of installment sale
contracts which CIS owned were as follows:

<PAGE>
<TABLE>
<CAPTION>
<S>                       <C>                   <C>                  <C>                   <C>           <C>
                     Total Value                                Delinquency Percentage
                                        ------------------------------------------------------------------------
December 31,         of Contracts          30 Days             60 Days            90 Days            Total
                   -----------------    ---------------    ----------------   ----------------  ----------------

       2005            $15,067                   1.46%               0.00%              0.00%             1.46%

       2004             $8,839                   3.02%               0.72%              3.39%             7.13%
</TABLE>

Certain operating data relating to CIS are set forth in the following table:
<TABLE>
<CAPTION>
<S>                                              <C>                    <C>                  <C>
                                                                  December 31,
                                             -------------------------------------------------------
                                                  2005                2004               2003
                                             ----------------    ---------------    ----------------
Total loans receivable                    $           15,067 $            8,839 $            10,114
Allowance for credit losses               $              968 $              953 $             1,030
Number of loans outstanding                              320                221                 259
Net loss ratio on average
   outstanding principal balance                       6.87%              1.53%               1.71%
Weighted average annual
   percentage rate                                     10.4%              11.0%               11.1%
</TABLE>

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

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

The risk of loss under repurchase agreements is lessened by the fact that (i)
sales of the Company's manufactured homes are spread over a relatively large
number of independent dealers, the largest of which accounted for approximately
5.0% of sales in 2005, excluding FEMA-related homes, (ii) the price the Company
is obligated to pay under such repurchase agreements declines based on
predetermined amounts over the period of the agreement (generally 18 to 24
months) and (iii) the Company historically has been able to resell homes
repurchased from lenders. As of December 31, 2005, the maximum amount for which
the Company is contingently liable under such agreements was approximately
$52,000 for which the Company had a recorded reserve for repurchase commitments
of $1,270. See "Item 7. Management's Discussion and Analysis: Critical
Accounting Estimates."

Quality Control, Warranties and Service
The Company believes the quality in materials and workmanship, continuous
refinement in design and production procedures as well as price and other market
factors, are important elements in the market acceptance of manufactured homes.
The Company maintains a quality control inspection program at various production
stages. The Company's manufacturing facilities and the plans and specifications
of its HUD-code manufactured homes have been approved by a HUD-designated
agency. An independent, HUD-approved third-party regularly inspects the
Company's HUD-code manufactured homes for compliance during construction.
Modular product is also inspected and/or certified on a state-by-state basis.

The Company provides the initial retail homebuyer with a one-year limited
warranty against manufacturing defects in the home's construction. Warranty
services after the sale are performed, at the expense of the Company, by Company
 <PAGE>

personnel, dealers or independent contractors. Additionally, direct warranties
often are provided by the manufacturers of specific components and appliances.

The Company generally employs a full-time service manager at each of its home
manufacturing units and at December 31, 2005, employed 116 full-time service
personnel to provide administrative and on-site service and to correct
production deficiencies that are attributable to the manufacturing process.
Warranty service constitutes a significant cost to the Company, and management
of the Company has placed emphasis on diagnosing potential problem areas to help
minimize costly field repairs. At December 31, 2005, the Company had established
a reserve for future warranty claims of $13,190 relating to homes sold, based
upon management's assessment of historical experience factors and current
industry trends.

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

According to the Manufactured Housing Institute's ("MHI") Monthly Economic
Report, in December 2005 there were 67 manufacturers of manufactured homes which
operated 217 facilities compared to 66 manufacturers which operated 210
facilities in December 2004. The Company's market share industry wide was 4.6%
in 2005 and in 2004. In our Company's core states, its market share was 9.9% at
December 31, 2005 and 10.0% at December 31, 2004, respectively. At December 31,
2005, the Company's core states consisted of North Carolina, Louisiana, Alabama,
Georgia, South Carolina, Arkansas, Tennessee, Oklahoma, Florida, Mississippi,
and Missouri.

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

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

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

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

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


<PAGE>

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

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

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

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

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

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

Employees
As of December 31, 2005, the Company had 2,119 employees, of whom 1,765 were
engaged in home manufacturing and supply distribution, 28 in sales, 115 in
warranty and service, 162 in general administration, 2 in delivery, 31 in
finance and insurance services and 16 in the operation of retail locations. In
addition, at year end, the Company employed 81 individuals, covered by a
collective bargaining agreement, who were leased to another manufacturer
pursuant to an agreement entered into in 2003 for which the Company is fully
reimbursed related expenses. At year-end, other than the leased employees, none


<PAGE>

of the Company's employees were covered by a collective bargaining agreement.
Management considers its relations with its employees to be good.

Available Information
Additional information regarding our executive officers and Board of Directors
may be obtained in the Proxy Statement relating to our 2006 Annual Meeting of
Stockholders. In addition, we periodically file reports and other information
with the Securities and Exchange Commission ("SEC") under the Securities
Exchange Act of 1934. The public may read and copy any materials at the SEC's
Public Reference Room at 100F Street, NE, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The public reports, proxy and information statements
filed with the SEC of electronic filers can be accessed via the SEC's Internet
website (http://www.sec.gov). Additionally, the public may request copies of our
documents by calling our Investor Relations Department at (256) 747-9800; or
visit our website at http://www.cavhomesinc.com. We make available, free of
charge, through the Investor Relations portion of our website, our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, and amendments to such reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.

ITEM 1A.          RISK FACTORS

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

The manufactured housing industry is both cyclical and seasonal in nature, and
the industry as a whole has declined significantly over the past seven years.
The manufactured housing industry is highly cyclical and seasonal and has
experienced wide fluctuations in aggregate sales in the past, resulting in the
failure of many manufacturing concerns. Many of the same national and regional
economic and demographic factors that affect the broader housing industry also
affect the market for manufactured homes. Historically, most sectors of the home
building industry, including the manufactured housing industry, have been
affected by the following, among other things:

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

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

Percentage Increase (Decrease) in Floor Shipments through 2005:
1992...............21%   1997...........1%
1993...............22%   1998...........8%   2002..............(11)%
1994...............23%   1999..........(4)%  2003..............(21)%
1995...............12%   2000..........(26)% 2004..............(3)%
1996...............10%   2001..........(21)% 2005.............. 6%

During much of the 1990s, the manufactured housing industry experienced
increases in both the number of retail dealers and manufacturing capacity, which
we believe ultimately created slower retail turnover, higher dealer inventories
and increased price competition. Industry results for 2005 posted the first
increase since 1998 with floor shipments increasing over 2004 by 6% due to
industry wide orders by the Federal Emergency Management Agency ("FEMA") as part
of that agency's hurricane disaster relief efforts. The Manufactured Housing
Institute ("MHI") estimated FEMA shipments in the last four months of 2005
totaled approximately 17,000 floors, and in 2004 approximated 4,000. In


<PAGE>

addition, the number of retail dealers failing and repossessions of manufactured
homes have significantly improved in 2005. Some manufactured housing wholesale
and retail lenders also have discontinued business in the industry, and some of
the remaining lenders have raised their interest rates and tightened their
credit standards. We believe these conditions reflect that the manufactured
housing industry is in a down cycle, which has had a material adverse effect on
Cavalier's results of operations and financial condition. Sales in the
manufactured housing industry are also seasonal in nature, with sales of homes
traditionally being stronger in April through October and weaker during the
first and last part of the calendar year. While seasonality did not
significantly impact Cavalier's business from 1992 through 1996, when industry
shipments were steadily increasing, the continued tightening of competitive
conditions seems to signal a return to the industry's traditional seasonal
patterns. Approximately 93.2% of the Company's sales in 2005 were to dealers
operating sales centers in the Company's core states. We cannot predict how long
the tightening of competitive and industry conditions will last, or what the
extent of their impact will be on the future results of operations and financial
condition of Cavalier. Industry projections for wholesale shipments in 2006 are
in the range of 146,000 to 160,000.

Our business strategy includes plans to grow our business in a competitive
environment, and we may not be able to sustain profitability if we fail to
maintain and strengthen our market share. Cavalier's current business strategies
are to:
o   control costs in light of currently prevailing industry conditions;
o   attempt to generate an increase in sales in an increasingly competitive
    environment;
o   return to consistent profitability;
o   develop our exclusive and independent dealer network;
o   pursue the financing, insurance and other activities of CIS and the
    financial services segment;
o   attempt to further develop modular home sales base; and
o   eliminate redundant products to streamline production in an
    effort to reduce costs.

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

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

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

<PAGE>


Industry inventories of completed homes have been very high, which may impact
retail demand and our ability to sell additional homes at current prices.
Changes in the level of retail inventories in the manufactured housing industry,
either up or down, can have a significant impact on the Company's operating
results. For example, due to the rapid expansion of the retail distribution
network in the manufactured housing industry that occurred in much of the
1990's, there was an imbalance between industry retail inventories and consumer
demand for manufactured homes. The deterioration in the availability of retail
financing, along with competition from repossessed homes, extended the inventory
adjustment period beyond what was originally expected. If these trends were to
continue, or if retail demand were to significantly weaken further, the
inventory overhang could result in even greater intense price competition,
further pressure on profit margins within the industry, and have a material
adverse effect on Cavalier. The Company's inventory at all retail locations,
including Company-owned retail sales centers, declined in 2005 to $71,000 from
$99,600 in 2004, with $13,300 of the reduction resulting from the closure of the
Ft. Worth, Texas facility. Cavalier believes that inventories of its homes are
at levels which are more consistent with retail demand. In spite of these
efforts, significant unfavorable developments or further deterioration within
the industry would undoubtedly have an adverse impact on Company operating
results.

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

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

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

We sell a majority of our homes to dealers who finance the purchases under floor
plan arrangements, which requires us to enter into contingent repurchase
agreements to repurchase the homes from the lender in certain circumstances.
Manufactured housing companies customarily enter into repurchase and other
recourse agreements with lending institutions, which have provided wholesale
floor plan financing to dealers. A majority of Cavalier's sales are made to
dealers located primarily in the South Central and South Atlantic regions of the
United States pursuant to repurchase agreements with lending institutions. These
agreements generally provide that we will repurchase our products from the
lending institutions at a declining price based upon the Company's original
invoice date and price in the event such product is repossessed upon a dealer's
default. The risk of loss under repurchase agreements is lessened by the fact
that (1) sales of our manufactured homes are spread over a relatively large
number of independent dealers; (2) the price that Cavalier is obligated to pay
under such repurchase agreements generally declines over the period of the
agreement and also declines during such period based on predetermined amounts;
and (3) Cavalier has been able to resell homes repurchased from lenders. While



<PAGE>

we have established a reserve for possible repurchase losses, we cannot assure
investors that we will not incur material losses in excess of these reserves in
the future.

Our decisions regarding credit risk could be inaccurate and our reserve for
credit losses could be inadequate, which could adversely affect our financial
condition and results of operations. Cavalier purchases retail installment
finance loans that have been originated by our dealers. We maintain a reserve
for estimated credit losses on installment sale contracts owned by CIS to
provide for future losses based on our historical loss experience, current
economic conditions and portfolio performance. It is difficult to predict with
any certainty the appropriate reserves to establish, and we cannot assure
investors that CIS will not experience losses that exceed Cavalier's loss
reserves and have a material adverse effect on Cavalier's results of operations
and financial condition. Volatility or a significant change in interest rates
might also materially affect CIS's and Cavalier's business, results of
operations or financial condition.

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

We obtain our raw materials from a limited number of suppliers, and
unavailability or price increase in raw materials could have a material adverse
effect on our financial condition and results of operations. The availability
and pricing of raw materials used in the production of homes may significantly
affect Cavalier's operating costs. Sudden increases in demand for these
construction materials, as has recently occurred, caused by natural disasters or
other market forces can greatly increase the costs of materials or limit the
availability of such materials. Increases in costs cannot always be reflected
immediately in prices, especially in competitive times, and, consequently, may
adversely impact Cavalier's profitability. Further, a reduction in the
availability of raw materials also may affect our ability to meet or maintain
production requirements.

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

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

We are dependent on the services of our management team, and the unexpected
loss of key officers may adversely affect our operations. Cavalier's success
depends highly upon the personal efforts and abilities of its current executive
officers. Specifically, Cavalier relies on the efforts of its President and
Chief Executive Officer, David A. Roberson, its Chief Operating Officer, Gregory
A. Brown, and its Vice President, Chief Financial Officer and
Secretary-Treasurer, Michael R. Murphy. The loss of the services of one or more
of these individuals could have a material adverse effect upon our business. We
do not have employment or non-competition agreements with any of our executive
officers. Our ability to continue to work through the industry's current
downturn will depend upon our ability to attract and retain experienced
management personnel.


<PAGE>

We are subject to extensive regulation affecting the production, sale, financing
and insuring of manufactured housing, which could adversely affect our
profitability. Cavalier is subject to a variety of federal, state and local laws
and regulations affecting the production, sale, financing and insuring of
manufactured housing. We suggest you refer to the section above under the
heading "Regulation" for a description of many of these laws and regulations.
Cavalier's failure to comply with such laws and regulations could expose us to a
wide variety of sanctions, including closing one or more manufacturing
facilities. Governmental bodies have regulatory matters affecting our operations
under continuous review and we cannot predict what effect (if any) additional
laws and regulations promulgated by HUD would have on us or the manufactured
housing industry. Failure to comply with laws or regulations applicable to or
affecting Cavalier, or the passage in the future of new and more stringent laws
affecting Cavalier, may adversely affect us.

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

Our liability for estimated warranties may be inadequate, which could materially
and adversely affect our business, financial condition and results of
operations. Cavalier is subject to warranty claims in the ordinary course of its
business. Although we maintain reserves for such claims, which to date have been
adequate, there can be no assurance that warranty expense levels will remain at
current levels or that such reserves will continue to be adequate. A large
number of warranty claims exceeding our current warranty expense levels could
have a material adverse effect on Cavalier's results of operations.

The market price of our common stock will fluctuate and could fluctuate
significantly, causing our common stock to trade at prices below the current
market price. The Company's common stock is currently traded on the American
Stock Exchange. The market price of the Company's common stock may be subject to
significant fluctuations in response to variations in the Company's operating
results and other factors affecting the Company specifically, the manufactured
housing industry generally, and the stock market generally.

ITEM 1B. UNRESOLVED STAFF COMMENTS

On January 1, 2005, the Company adopted the provisions of FASB Interpretation
("FIN") No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements No. 5, 57, and 107 and a rescission of FASB
Interpretation No. 3, issued by the FASB in November, 2002, applicable for new
guarantees issued or modified after December 31, 2002.

The Company's decision to adopt the provisions of FIN 45 effective January 1,
2005 was determined after reviewing guarantees issued or modified after December
31, 2002. The Company initially concluded that guarantees provided under
repurchase agreements were "grandfathered" under the provisions of FIN 45, as
such repurchase agreements were entered into prior to January 1, 2003. The
Company reconsidered its evaluation of FIN 45 in 2004 and determined that FIN 45
would be applicable to guarantees issued for independent dealer inventory
purchases on or after January 1, 2003. The Company later determined that the
"triggering event" of the guarantee was not the reissue or modification of the
repurchase agreement itself, but rather upon each sale of a home to a dealer and
this methodology was included in the adoption of FIN 45 in January 2005. The
Company performed an analysis of the impact of implementing FIN 45 for each of
the two years ended December 31, 2004 and 2003 and concluded such impact was not
material to consolidated revenue and net loss (income) on an annual basis.

On June 27, 2005 the Company received Securities and Exchange Commission (the
"Commission") staff comments on our 2004 Form 10-K, 10-K/A, and Form 10-Q
filings for the first and second quarters of 2005 regarding, among other things,
the proper recognition and disclosure of the contingent FIN 45 liability for
guarantees with inception dates for homes sold after the effective date of FIN
45.

<PAGE>


As of the date of filing the 2005 Form 10-K, management has provided a written
response to all Commission staff correspondence. Management believes the written
responses have substantially addressed all open comments and the Company has
incorporated disclosure required by the Commission into this 2005 Form 10-K. The
Commission staff indicates that the Company must file its 2005 Form 10-K prior
to the Commission's determination of closure of the outstanding comments. The
Company cannot ultimately predict the date of resolution of the unresolved
comments, the results of the Commission review, or the resulting impact of
additional review, if any, to our financial statements.

For further information related to our revised accounting policy and the effects
on prior period results relating to the Reserve for Repurchase Commitments and
the adoption of FIN 45, see Critical Accounting Estimates and other related
discussion contained in Management's Discussion and Analysis of Financial
Condition and Results of Operations, the Quarterly Statistics Table and related
footnotes within Item 8 - Financial Statements and Supplementary Data, and Notes
1 and 11 of Notes to Consolidated Financial Statements located in Financial
Statements and Supplementary Data sections of this report.

ITEM 2.  PROPERTIES (dollars in thousands)

The following table sets forth the location and approximate square footage for
each principal facility of the Company, separated by segment, as of December 31,
2005:

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

</TABLE>

(a) Certain of the facilities listed as owned are financed under industrial
    development bonds.
(b) Certain of the idled facilities are leased to third parties under leasing
    arrangements, which, in some cases, include options to purchase.

In general, the manufacturing facilities are in good condition and are operated
at capacities which range from approximately 65% to 68%, excluding idled
facilities and the reopening of Winfield in the fourth quarter of 2005.

ITEM 3.  LEGAL PROCEEDINGS

Litigation is subject to uncertainties and the Company cannot predict the
probable outcome or the amount of liability of individual litigation matters
with any level of assurance. 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. The Company's liability
under some of this litigation is covered in whole or in part by insurance.


<PAGE>

Anticipated legal fees and other losses, in excess of insurance coverage,
associated with these lawsuits are accrued at the time such cases are identified
or when additional information is available such that losses are probable and
reasonably estimable. 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's
results of operations, financial position or liquidity.

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

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

                                     PART II

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

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

<TABLE>
<CAPTION>
<S>                                        <C>             <C>
                                          Closing Sales Price
                                        -------------------------
                                          High          Low
                                        -----------   -----------
Year ended December 31, 2005
     Fourth Quarter                         $6.60        $5.45
     Third Quarter                           8.04         4.50
     Second Quarter                          5.45         3.24
     First Quarter                           5.56         5.10

Year ended December 31, 2004
     Fourth Quarter                         $5.99       $ 5.17
     Third Quarter                           5.85         3.88
     Second Quarter                          6.59         5.00
     First Quarter                           5.85         2.98
</TABLE>
As of February 27, 2006, the Company had approximately 320 shareholders of
record and 5,800 beneficial holders of its common stock, based upon information
in securities position listings by registered clearing agencies upon request of
the Company's transfer agent.

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

Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2005 regarding
compensation plans (including individual compensation arrangements) under which
common stock of the Company is authorized for issuance.

<PAGE>


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

                                          EQUITY COMPENSATION PLAN INFORMATION

                                 Number of securities to        Weighted-average exercise        Number of securities
                                 be issuedupon exercise         price of outstanding options,    remaining available for
                                 of outstanding options,        warrants and rights              future issuance under equity
                                 warrants and rights                                             compensation plans (excluding
                                                                                                 securities reflected in column (a))

     Plan Category                      (a)                               (b)                             (c)
____________________________________________________________________________________________________________________________________
Equity Compensation Plans
   Approved by Stockholders          1,721,672                         $ 9.32                         1,518,834 32

Equity Compensation Plans
   not Approved by Stockholders         17,000                         $ 3.40                                -
____________________________________________________________________________________________________________________________________
Total                                1,738,672                         $ 9.26                         1,518,834 26
</TABLE>

See Note 8 to the Consolidated Financial Statements for information regarding
the material features of the above plans. Each of the above plans provides that
the number of shares with respect to which options may be granted, and the
number of shares of Company common stock subject to an outstanding option, shall
be proportionately adjusted in the event of a subdivision or consolidation of
shares or the payment of a stock dividend on Company common stock, and the
purchase price per share of outstanding options shall be proportionately
revised.

Pursuant to a common stock repurchase program approved by the Company's Board of
Directors, a total of 3,168,800 shares have been purchased at a cost of $24,842.
The Company retired 2,151,500 of the repurchased shares at December 31, 1999,
with the remaining shares being recorded as treasury stock. During 2005, the
Company reissued 34,000 treasury shares upon the exercise of stock options. At
December 31, 2005, the Company has authority under the program to acquire up to
831,200 additional shares.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data regarding
the Company for the periods indicated. The statement of operations data, the
balance sheet data, and other data of the Company for each of the years in the
five year period ended December 31, 2005 have been derived from the consolidated
financial statements of the Company. The Company's audited financial statements
as of December 31, 2005 and 2004, and for each of the years in the three-year
period ended December 31, 2005, including the notes thereto and the related
reports of the Company's independent registered public accountants, are included
elsewhere in this report. The selected consolidated financial data should be
read in conjunction with the consolidated financial statements (including the
notes thereto) and the other financial information contained elsewhere in this
report, and with the Company's consolidated financial statements and the notes
thereto appearing in the Company's previously filed Annual Reports on Form 10-K.


<PAGE>
<TABLE>
<CAPTION>
<S>                                                         <C>             <C>            <C>           <C>        <C>
                                                                              Year Ended December 31,
                                                         -------------------------------------------------------------------
                                                            2005          2004          2003          2002         2001
                                                         ------------  ------------  ------------  -----------  ------------
                                                                  (dollars in thousands, except per share amounts)
Statement of Operations Data

Revenue:
     Home manufacturing net sales                     $      259,532 $     201,358  $    208,387 $    322,216 $     293,169
     Financial services                                        3,002         2,444         2,673        2,690         3,088
     Retail                                                    9,498         7,938         7,948        7,908         6,968
     Other                                                         -             -             -        1,274         6,280
                                                         ------------  ------------  ------------  -----------  ------------
     Total revenue                                           272,032       211,740       219,008      334,088       309,505
Cost of sales                                                219,435       172,244       182,432      281,738       257,562
                                                         ------------  ------------  ------------  -----------  ------------
     Gross profit                                             52,597        39,496        36,576       52,350        51,943
Selling, general and administrative                           40,284        34,415        38,199       57,601        61,897
Impairment and other related charges                             143             -           750        5,525         1,003
                                                         ------------  ------------  ------------  -----------  ------------
Operating income (loss)                                       12,170         5,081        (2,373)     (10,776)      (10,957)
Other income (expense):
   Interest expense                                           (1,314)       (1,075)       (1,065)      (1,495)       (1,935)
   Other, net                                                    851           561           696          929         1,403
                                                         ------------  ------------  ------------  -----------  ------------
                                                                (463)         (514)         (369)        (566)         (532)
                                                         ------------  ------------  ------------  -----------  ------------

Income (loss) from continuing operations before
 income taxes                                                 11,707         4,567        (2,742)     (11,342)      (11,489)
Income tax provision (benefit)                                   (32)           75          (518)       5,716          (600)
Equity in earnings (losses) of equity-method investees           775           980           369          384          (485)
                                                         ------------  ------------  ------------  -----------  ------------
Income (loss) from continuing operations                      12,514         5,472        (1,855)     (16,674)      (11,374)
Loss from discontinued operations, including
        gain on disposal of $439 (2005)                       (1,599)       (2,231)       (2,715)      (3,834)       (2,644)
                                                         ------------  ------------  ------------  -----------  ------------

Income (loss) before cumulative effect of change in
        accounting principle                                  10,915         3,241        (4,570)     (20,508)      (14,018)
Cumulative effect of change in accounting principle,
  net of tax                                                       -             -             -      (14,162)            -
                                                         ------------  ------------  ------------  -----------  ------------
Net income (loss)                                     $       10,915 $       3,241 $      (4,570)$    (34,670)$     (14,018)
                                                         ============  ============  ============  ===========  ============
Income (loss) per share:
     Basic:

        From continuing operations                    $          .69 $         .30 $        (.11)$       (.94)$        (.65)
        From discontinued operations                            (.09)         (.12)         (.15)        (.22)         (.15)
       Cumulative effect of change in accounting
         principle                                                 -             -             -         (.80)            -
                                                         ------------  ------------  ------------  -----------  ------------
        Net income (loss)                             $          .60 $         .18 $        (.26)$      (1.96)$        (.80)
                                                         ============  ============  ============  ===========  ============
        Weighted average shares outstanding               18,118,619    17,879,939    17,666,192   17,664,901    17,580,499
                                                         ============  ============  ============  ===========  ============
     Diluted:

        From continuing operations                    $          .68 $         .30 $        (.11)$       (.94)$        (.65)
        From discontinued operations                            (.09)         (.12)         (.15)        (.22)         (.15)
       Cumulative effect of change in accounting
         principle                                                 -             -             -         (.80)            -
                                                         ------------  ------------  ------------  -----------  ------------
        Net income (loss)                             $          .59 $         .18 $        (.26)$      (1.96)$        (.80)
                                                         ============  ============  ============  ===========  ============
        Weighted average shares outstanding               18,356,795    18,178,394    17,666,192   17,664,901    17,580,499
                                                         ============  ============  ============  ===========  ============

Other Data

Capital expenditures                                  $        1,410 $         786 $         327 $      2,062 $       3,496
                                                         ============  ============  ============  ===========  ============

Balance Sheet Data
Working capital                                       $       24,216 $      12,967 $       7,813 $     12,346 $      18,183
Total assets                                          $      132,821 $      98,230 $      98,533 $    130,071 $     174,116
Long-term debt                                        $        7,631 $      11,400 $      13,089 $     22,643 $      23,999
Stockholders' equity                                  $       57,845 $      45,167 $      40,987 $     45,536 $      80,192

</TABLE>
In the fourth quarter of 2005, the Company became aware that paragraph 11 b. of
Interpretation ("FIN") No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to
Others, an interpretation of FASB Statements No. 5, 57, and 107 and a rescission
of FASB Interpretation No. 3, should be applied to record the changes in its
reserve for repurchase commitments against revenue rather than in selling,
general and administrative expenses. Accordingly, the Company classified the
portion of its change in repurchase accrual previously included in selling,
general and administrative expenses to revenue in 2005. The related amount for
2002 though 2004 included in selling, general and administrative expenses was
insignificant and not reclassified.


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

Overview
Cavalier Homes, Inc. and its subsidiaries produce, sell and finance manufactured
housing. The manufactured housing industry is cyclical and seasonal and is
influenced by many of the same economic and demographic factors that affect the
housing market as a whole. As a result of the growth in the industry during much
of the 1990s, the number of retail dealerships, manufacturing capacity and
wholesale shipments expanded significantly, which ultimately created slower
retail turnover, higher retail inventory levels and increased price competition.
The industry also has been impacted by an increase in dealer failures, a severe
reduction in available consumer credit and wholesale (dealer) financing for
manufactured housing, more restrictive credit standards and increased home

repossessions which re-enter home distribution channels, each of which
contributed to a reduction in wholesale industry shipments to a 42 year low in
2004. Industry results for 2005 posted the first increase since 1998 with floor
shipments increasing over 2004 by 6% due to industry wide orders by the Federal
Emergency Management Agency ("FEMA") as part of that agency's hurricane disaster
relief efforts. The Manufactured Housing Institute ("MHI") estimated FEMA
shipments in the last four months of 2005 totaled approximately 17,000 floors,
and in 2004 approximated 4,000. Factoring out the effects of the FEMA orders in
both 2005 and 2004, industry shipments are stable.

Industry/Company Shipments and Market Share
MHI reported that wholesale floor shipments were down 58% cumulatively from
January 1, 1999 through December 31, 2005 as noted in the following table:

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

                                                        Floor Shipments
          -----------------------------------------------------------------------------------------------------------
                          Nationwide                                           Cavalier's Core 11 States
          ------------------------------------------------------  ---------------------------------------------------
                    Increase                  Increase                             Increase                   Increase
                   (decrease)                (decrease)          Market           (decrease)                 (decrease)       Market
 Year  Industry  from prior year  Cavalier    from prior year    Share  Industry   from prior year  Cavalier  from prior year  Share
-----  --------  ---------------  --------    ---------------  -------  ---------  ---------------- --------- --------------   -----
 1999   582,498                    34,294                        5.9%     284,705                       30,070                10.6%
 2000   431,787      -25.9%        18,590        -45.8%          4.3%     199,276       -30.0%          15,941    -47.0%       8.0%
 2001   342,321      -20.7%        21,324         14.7%          6.2%     149,162       -25.1%          17,884     12.2%      12.0%
 2002   304,370      -11.1%        21,703          1.8%          7.1%     124,127       -16.8%          18,039      0.9%      14.5%
 2003   240,180      -21.1%        12,411        -42.8%          5.2%      87,265       -29.7%          10,584    -41.3%      12.1%
 2004   232,824       -3.1%        10,772        -13.2%          4.6%      88,958         1.9%           8,912    -15.8%      10.0%
 2005   246,750        6.0%        11,289          4.8%          4.6%     105,508        18.6%          10,487     17.7%       9.9%
</TABLE>

During this industry downturn, the Company's shipments fell in 1999 and 2000
disproportionately to the industry decline which the Company believes was due to
its strategy, early in the downturn, of working closely with its dealers to
assist them in reducing retail inventories, thereby reducing the risk of failure
of dealers distributing Company homes. The years 2001 and 2002 resulted in
significant market share gains for the Company due mainly to its aggressive
marketing strategies, especially product offerings, which were core to its plan
for returning to profitability. The Company believes its reduction in market
share in 2003 and 2004 was due to several factors. External causes include an
intensely competitive marketplace and a lack of chattel (home only) financing
for all homes, especially single-section homes, in the industry. Internally, the
Company's momentum was negatively impacted by the consolidation of its sales
force and the closing of six home manufacturing facilities in 2002. During 2005,
the Company entered into agreements with two companies to build 2,638
single-section homes for delivery to FEMA as part of that agency's disaster
relief for the Gulf Coast states hit by hurricanes. Under the agreements, the
Company shipped 2,219 single-section homes, which accounted for 25.6% of 2005
sales. In 2004, the Company shipped 1,023 single-section homes under FEMA
related agreements. During 2005, the Company's floor shipments increased 4.8%
over 2004, while industry wide shipments increased 6.0%, with the Company's
market share being 4.6%. In the Company's core states, its market share was 9.9%
with shipments increasing 17.7% compared to the industry increase of 18.6 % in
those states. Periodically, the Company reviews the composition of its sales by
state and redefines the states included in its core states calculation. Because
the Company has increased shipments into Tennessee and Florida, the Company
redefined the composition of its core states calculation to include Tennessee
and Florida for 2005 and 2004. The Company's core states consist of Louisiana,
North Carolina, Tennessee, Alabama, South Carolina, Georgia, Mississippi,
Arkansas, Missouri, Oklahoma, and Florida.

Industry Finance Environment
A major factor contributing to the manufactured housing industry growth in the
1990s was the relaxation of credit standards due to intense competition, which
ultimately resulted in a change in the financing approach in the industry due to
underperforming manufactured housing loans. Throughout the past seven years, the
industry has been impacted significantly by reduced financing available at both
the wholesale and retail levels, with several lenders exiting the marketplace or
limiting their participation in the industry, coupled with more restrictive
credit standards and increased home repossessions which re-enter home
distribution channels and limit wholesale shipments of new homes. While the
current industry trend is toward more land/home (real estate) financing rather
than chattel or home only loans, additional chattel lending availability could
result in renewed demand for single-section products. While land/home financing
generally offers more favorable credit terms to the retail buyer of manufactured
housing, the length of time involved in closing land/home transactions is
greater. The anticipated infusion of new and competitive lending capacity, which
the Company believes is essential to support demand at higher levels, has not
materialized. Until there is substantial entry of finance resources to the
manufactured housing market, the Company believes a meaningful expansion for the
industry will be delayed. In April 2005, General Electric's commercial finance
unit announced it had agreed to purchase the majority of Bombardier Capital,
Inc.'s inventory financing unit, which includes manufactured housing floor plan
lending. The Company does not expect the purchase of Bombardier's floor plan to
have a material effect on Cavalier's dealers' ability to finance its product.

<PAGE>
Raw Materials Cost and Gross Margin
Although gross margin has increased in 2005 over 2004, the Company's gross
margin has been negatively impacted by (1) price increases in substantially all
raw materials (certain prices continue to increase) and (2) overall commodity
pressures (i.e., global demand and capacity constraints and rising oil prices).
While the Company seeks to offset rising costs through increasing its selling
prices, sudden increases in raw material costs, coupled with dealers' order
backlogs, can affect the timing and ability of the Company to pass on its cost
increases. The Company is uncertain at this time as to the impact the extent and
duration of the increased costs will have on the Company's future revenue and
earnings. The Company is currently on allocation from its traditional vendors
for insulation, gypsum and shingles.

Capacity and Overhead Cost
In response to the continued weakening of industry market conditions, the
Company closed eight manufacturing facilities between the fourth quarter of 2002
and the third quarter of 2003. In February 2005, the Company closed its Ft.
Worth, Texas facility. The Company generally has been able to sell to the
customers of these plants (with the exception of the Pennsylvania and Texas
plants) from one or more of the Company's current operating plants. The
remaining plants also handle dealer sales and customer service for the Company's
homes. In terms of operating costs, the Company has made cost reductions in
virtually all areas of operations, including its exclusive dealer and marketing
programs and its administrative personnel and associated costs. In September
2005, the Company re-opened its Winfield, Alabama facility in order to assist in
the production of the FEMA units mentioned above and incurred $251 in capital
expenditures in conjunction with reopening the Winfield facility. The Company is
continuing to evaluate its options regarding capacity and expects the Winfield
facility to remain open to fulfill anticipated demand as the Gulf Coast region
is re-built following the hurricane damages.

Debt and Liquidity
The Company improved its long-term debt position by making scheduled principal
repayments as well as making additional principal repayments from proceeds from
sales of certain property. During 2005, the Company reduced long-term debt by
$3,976 from $13,105 to $9,129.

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

                                             Industrial     Real Estate
                                             Development      Term
                                              Bonds           Loan          Totals
                                           ------------   ------------   -----------
Balance, beginning of year               $       6,248  $       6,857  $     13,105
Principal repayments:
  Scheduled                                     (1,338)          (288)       (1,626)
  From proceeds of property sales                    -         (2,350)       (2,350)
                                           ------------   ------------   -----------
Balance, end of year                     $       4,910  $       4,219  $      9,129
                                           ============   ============   ===========

</TABLE>

During the fourth quarter of 2005, the Company borrowed $17,750 under the
revolving line of credit, in order to fund the Company's short term cash needs
required to fulfill the outstanding FEMA-related order. During the first quarter
of 2006, the line of credit balance was paid in full. The Company did not have
any amounts outstanding under the revolving line of credit at December 31, 2004.
As of December 31, 2005, the Company had outstanding accounts receivable related
to the sales of FEMA homes of $35,365, of which $28,746 had been collected
through March 9, 2006.

Outlook
For 2005, the manufactured housing industry posted a strong increase over 2004
shipments due largely to the impact of FEMA orders after hurricanes devastated
housing in many areas in the Gulf Coast region. MHI estimated the manufactured
housing industry provided approximately 17,000 homes for FEMA during 2005
compared to 4,000 homes for 2004. During 2005, the Company shipped 2,219
single-section homes under FEMA related agreements and shipped 419 homes
remaining under the agreements in the first quarter of 2006. Beyond 2005, the
Company believes the massive storm damage will create opportunities for both the
industry and the Company's growth outside of the temporary housing supplied
through FEMA orders in 2005. Cavalier expects that strain on conventional home
building resources will likely cause some of those looking to replace damaged
homes to consider manufactured housing, including modular homes, as a viable
alternative to traditional site-built housing. The Company expects rebuilding
efforts to impose greater strains on availability of certain building materials
which will likely result in increased costs. Longer term, substantial entry of
competitive lending capacity in the industry, which the Company believes is
essential to support demand at higher levels, is needed for a meaningful
expansion for the industry. The Company believes the steps taken to reduce its
costs and lower its breakeven point coupled with the remaining deliveries under
the FEMA agreements have positioned Cavalier to continue with profitable
operations into 2006. While the Company currently expects the results of
operations for 2006 to be profitable, changes in general economic conditions


<PAGE>
that affect consumer purchases, availability of adequate financing sources,
increases in repossessions or dealer failures and extended commodity price
increases could affect the results of operations of the Company.

Results of Operations
The following table summarizes certain financial and operating data, including,
as applicable, the percentage of total revenue:
<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                                                 For the Year Ended December 31,
                                                                ------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA                                      2005                  2004                   2003
                                                                --------------------   --------------------  ---------------------
Revenue:
  Home manufacturing net sales                                $  259,532             $ 201,358             $  208,387
  Financial services                                               3,002                 2,444                  2,673
  Retail                                                           9,498                 7,938                  7,948
                                                                ---------              --------              ---------
Total revenue                                                    272,032     100.0%    211,740      100.0%    219,008      100.0%
Cost of sales                                                    219,435      80.7%    172,244       81.3%    182,432       83.3%
                                                                ---------  ---------   --------   ---------  ---------   ---------
     Gross profit                                                 52,597      19.3%     39,496       18.7%     36,576       16.7%
Selling, general and administrative                               40,284      14.8%     34,415       16.3%     38,199       17.4%
Impairment and other related charges                                 143       0.1%          -        0.0%        750        0.3%
                                                                ---------  ---------   --------   ---------  ---------   ---------
Operating income (loss)                                           12,170       4.5%      5,081        2.4%     (2,373)      -1.1%
                                                                ---------  ---------   --------   ---------  ---------   ---------
Other income (expense):
   Interest expense                                               (1,314)     -0.5%     (1,075)      -0.5%     (1,065)      -0.5%
   Other, net                                                        851       0.3%        561        0.3%        696        0.3%
                                                                ---------              --------              ---------
                                                                    (463)                 (514)                  (369)
                                                                ---------              --------              ---------
Income (loss) from continuing operations before income taxes      11,707                 4,567                 (2,742)
Income tax  provision (benefit)                                      (32)                   75                   (518)
Equity in earnings of equity-method investees                        775                   980                    369
                                                                ---------              --------              ---------
Income (loss) from continuing operations                          12,514       4.6%      5,472        2.6%     (1,855)      -0.8%
                                                                ---------              --------              ---------
Discontinued operations:
   Loss from discontinued operations, net of gain
     on disposal of $439 in 2005                                  (1,599)     -0.6%     (2,231)      -1.1%     (2,715)      -1.2%
   Income tax provision (benefit)                                      -                     -                      -
                                                                ---------              --------              ---------
Loss from discontinued operations                                 (1,599)               (2,231)                (2,715)
                                                                ---------              --------              ---------
Net income (loss)                                             $   10,915       4.0%  $   3,241        1.5% $   (4,570)      -2.1%
                                                                =========              ========              =========

                                                                                 For the Year Ended December 31,
                                                                ------------------------------------------------------------------
OPERATING DATA SUMMARY                                            2005                  2004                   2003
                                                                --------------------   --------------------  ---------------------
Home manufacturing sales:
Floor shipments:
                       Floor shipments continuing operations      11,141                 9,611                 10,909
                     Floor shipments discontinued operations         148                 1,161                  1,502
                                                                ---------              --------              ---------
Total floor shipments                                             11,289                10,772                 12,411
                                                                =========              ========              =========
Home shipments:
                        Single section continuing operations       3,201      44.3%      1,874       29.6%        859       12.9%
                      Single section discontinued operations          20       0.3%         75        1.2%         14        0.2%
                         Multi section continuing operations       3,941      54.5%      3,844       60.6%      5,025       75.7%
                       Multi section discontinued operations          64       0.9%        543        8.6%        744       11.2%
                                                                ---------  ---------   --------   ---------  ---------   ---------
Total shipments                                                    7,226     100.0%      6,336      100.0%      6,642      100.0%
Shipments to company owned retail locations                         (188)      2.6%       (175)       2.8%       (140)       2.1%
FEMA Shipments (all single section)                               (2,219)     30.7%     (1,023)      16.1%          -        0.0%
                                                                           ---------              ---------
                                                                ---------  ---------   --------   ---------  ---------   ---------
Wholesale shipments to independent retailers                       4,819      66.7%      5,138       81.1%      6,502       97.9%
                                                                =========  =========   ========   =========  =========   =========
Retail sales:
                                              Single section          53      27.0%         49       25.7%         51       24.9%
                                               Multi section         143      73.0%        142       74.3%        154       75.1%
                                                                ---------              --------              ---------
Total sales                                                          196                   191                    205
                                                                =========              ========              =========
Cavalier produced homes sold                                         178      90.8%        165       86.4%        179       87.3%
                                                                =========              ========              =========
Used homes sold                                                       18       9.2%         26       13.6%         26       12.7%
                                                                =========              ========              =========
Installment loan purchases                                      $ 42,235               $ 33,323              $ 37,780
Capital expenditures                                               1,410                   786                    327
Home manufacturing facilities - operating                              7                     7                      7
Independent exclusive dealer locations                               113                   127                    129
Company owned stores                                                   4                     4                      3
</TABLE>

<PAGE>

2005 Compared to 2004

Revenue
Total revenue for 2005 was $272,032, increasing $60,292, or 28.5%, from 2004
revenue of $211,740.

Home manufacturing net sales accounted for virtually the entire increase, rising
to $259,532 from $201,358 in 2004. Home shipments, from continuing operations,
were 7,142 in 2005 as compared to 5,718 in 2004, increasing 24.9 %, with floor
shipments increasing by 15.9%. Single-section home shipments, as a percentage of
total shipments, increased to 44.3% in 2005 from 29.6% in 2004, primarily due to
the Company's participation in building single-section homes as part of the FEMA
disaster relief for victims of the 2005 hurricanes, of which 2,219 homes were
shipped in 2005 compared to 1,023 homes in 2004. Of these shipments, excluding
FEMA units, 70% in 2005 and 62% in 2004 were to exclusive dealers. Cavalier
attributes the increase in sales and shipments primarily to the FEMA units
shipped. Inventory of the Company's product at all retail locations, including
Company-owned retail sales centers, decreased 28.7% to approximately $71,000 at
December 31, 2005 from $99,600 at year end 2004, with $13,300 of the reduction
resulting from the closure of the Ft. Worth, Texas facility.

Revenue from CIS Financial Services, Inc. ("CIS"), the Company's wholly-owned
finance subsidiary, increased for 2005 to $3,002 compared to $2,444 in 2004. For
2005, CIS purchased contracts of $42,235 and sold installment contracts totaling
$34,625. In 2004, CIS purchased contracts of $33,323 and re-sold installment
contracts totaling $31,905. CIS does not retain the servicing function and does
not earn the interest income on these re-sold loans. The increase in the
installment loan portfolio at December 31, 2005 is primarily due to a higher
volume of land/home loans, many of which are construction loans, for which the
length of time involved in closing the sale transaction is greater in comparison
to a typical chattel (home only) loan. Included in the installment loan
portfolio at December 31, 2005 is $6,972 of land/home loans, of which $3,056
have been sold subsequent to the end of the year through March 10, 2006. At
December 31, 2004, the Company's installment loan portfolio included $642 of
land/home loans.

Revenue from the retail segment was $9,498 for 2005 compared to $7,938 for 2004,
an increase of $1,560 primarily due to sales at the North Carolina retail
location that was opened in October 2004.

Gross Profit
Gross profit was $52,597, or 19.3% of total revenue for 2005, versus $39,496, or
18.7% of total revenue, in 2004. The $13,101 increase in gross profit and 0.6%
increase in gross margin is primarily the result of higher comparable sales
prices beginning to recover the steady increases in raw material costs taking
place over the past year. Gross profit also was favorably impacted by higher
production levels of a large number of homes with like specifications for the
FEMA related orders, primarily in the fourth quarter of 2005. The Company has
experienced price increases in substantially all raw materials (certain prices
continue to increase) and overall commodity pressures (i.e., global demand and
capacity constraints and rising oil prices).

Selling, General and Administrative
Selling, general and administrative expenses during 2005 were $40,284, or 14.8%
of total revenue, versus $34,415 or 16.3% of total revenue in 2004, an increase
of $5,869, or 17.0%. The overall increase included (1) a $3,688 increase in
salaries, including engineering costs, and incentive compensation based on
improved profitability of the Company, (2) increased insurance costs, primarily
general and product liability, of $814, and (3) a $782 increase in losses on the
Company's installment loan portfolio, including homes repossessed. These
increases were offset by a $736 reduction in accounting and auditing fees
associated with compliance efforts under Section 404 of the Sarbanes-Oxley Act
of 2002.

Impairment and Other Related Charges
During 2005, the Company recorded impairment and other related charges of $143
($143 after tax or $0.00 per diluted share) to writedown property, plant and
equipment in connection with the valuation of a home manufacturing facility
closed in a prior year.

Operating Income (Loss)
Operating income for 2005 was $12,170, compared to $5,081 in 2004. Segment
operating results were as follows: (1) Home manufacturing operating income,
before intercompany eliminations, was $18,121 in 2005 as compared to $10,235 in
2004. The increased home manufacturing operating income is primarily due to
improved gross profit as and the Company's participation in building
single-section homes as part of the FEMA disaster relief as discussed above. (2)
Financial services operating income was $34 in 2005 as compared to $539 in 2004.
The revenue increase from the financial services segment was primarily offset by
increases in losses on the Company's installment loan portfolio as discussed
above. (3) The retail segment's operating loss improved from $113 in 2004 to
almost breakeven in 2005 primarily due to startup costs associated with a new
retail location opened in the fourth quarter of 2004 that did not recur in 2005.


<PAGE>

(4) General corporate operating expense, which is not identifiable to a specific
segment, increased from $5,472 in 2004 to $5,726 in 2005 primarily due to
increased incentive compensation costs paid on improved corporate earnings in
2005 offset by reduced expenses associated with compliance efforts under the SOX
Act of 2002.

Other Income (Expense)
Interest expense increased primarily due to higher interest charges on amounts
outstanding under the retail floor plan agreement in 2005 of which lower amounts
were outstanding in 2004 and for borrowings under the revolving line of credit
in 2005 to fund short term cash requirements to complete the FEMA order. These
increases in interest expense were offset somewhat by decreased interest charges
on lower debt amounts outstanding on Industrial Development Revenue Bonds and
the real estate term loan.

Other, net is comprised primarily of interest income (unrelated to financial
services). Other, net increased $290 due to higher interest income rates earned
in 2005 on invested funds.

Income (Loss) from Continuing Operations before Income Taxes
The Company's 2005 pre-tax income from continuing operations was $11,707,
reflecting an improvement from $4,567 in 2004, due to the factors discussed
above.

Income Taxes
In 2005, the Company recorded a $32 income tax benefit as a result of the
utilization of net operating loss carryforwards against current taxable income
and the reduction of a valuation allowance for deferred tax assets. Realization
of deferred tax assets (net of recorded valuation allowances) is largely
dependent upon future profitable operations and future reversals of existing
taxable temporary differences. In 2004, pursuant to SFAS No. 109, Accounting for
Income Taxes, because the Company had operated at a cumulative loss in its three
most recent calendar years and because it believed difficult competitive and
economic conditions might continue for the foreseeable future, a $19,607
valuation allowance was recorded to fully reserve net deferred tax assets.
However, in 2005, as a result of continued improvements in operating performance
and projected income and tax liability for 2006, the Company reversed a portion
of the deferred tax asset valuation allowance realizing $1,314 in deferred tax
benefits. In assessing the need for a valuation allowance, the Company
considered all positive and negative evidence, including anticipated operating
results, scheduled reversals of deferred tax liabilities, and tax planning
strategies. Because the Company believes challenging industry conditions
persist, the Company believes that under the standards of SFAS No. 109 it is not
appropriate to record income tax benefits in excess of the benefit projected to
be realized in 2006. As of December 31, 2005, the Company maintained a valuation
allowance of $13,782. The valuation allowance may be reversed to income in
future periods to the extent that the related deferred income tax assets are
realized or the valuation allowances are otherwise no longer required.

Equity in Earnings of Equity-Method Investees
The Company's equity in earnings of equity-method investees was $775 for 2005 as
compared to $980 for 2004.

Income (Loss) from Discontinued Operations
In February 2005, the Company announced its decision to close an underperforming
home manufacturing plant in Ft. Worth, Texas, which accounted for about 10% of
total revenue and 11% of floor shipments in 2004 and had net property, plant and
equipment of $2,403 at December 31, 2004. During 2004, the Company recorded
impairment and other related charges of $209 ($209 after tax or $0.01 per
diluted share) for writedowns for certain property, plant and equipment related
to the closing. The Ft. Worth plant employed approximately 150 people, each of
whom received a severance benefit paid at the date the employee ceased rendering
service. The Company has incurred all expected employee termination costs, and
during 2005, recorded involuntary termination benefits of $878 ($878 after tax
or $0.06 per diluted share). The Company sold the Ft. Worth facility in June
2005 realizing a gain of $439. These amounts are included in the line item "Loss
from discontinued operations" in the accompanying income statements. The Ft.
Worth facility's loss was $1,599 in 2005 as compared to $2,231 in 2004.

Emerging Issues Task Force (EITF) No. 03-13, Applying the Conditions in
Paragraph 42 of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, in Determining Whether to Report Discontinued Operation,
defines the assessment period to consider classification of a disposed component
as discontinued operations. Such assessment period begins at the point a
disposed component meets the criteria to be classified as held for sale or is
disposed of through one year after the component is actually disposed. The
disposal of the property, plant and equipment of the Company's Ft. Worth
facility met the criteria to be classified as held for sale at the end of the
first quarter of 2005. Under the provisions of EITF 03-13, the Company updated
its evaluation of its continuing involvement through continued sales to dealers
of the Ft. Worth facility from its other home manufacturing plants at each
quarter end after the first quarter of 2005. Although the Company had hoped to


<PAGE>

retain a greater portion of the Ft. Worth facility's dealers and sales base,
during the fourth quarter of 2005, the sustained sales had fallen below 15% of
the prior year's sales from the Ft. Worth plant. Accordingly, in the fourth
quarter of 2005, it became appropriate under the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, for the Company
to classify its Ft. Worth operations as discontinued operations, and
accordingly, reclassified the information previously reported in its
consolidated statements of operations.

The Ft. Worth manufacturing operations generated revenue of $3,124 (2005),
$22,421 (2004) and $28,828 (2003). As noted above, the Company has not retained
the sales base of the majority of the dealers serviced by the Ft. Worth plant.

Net Income (Loss)
The Company's net income for 2005 was $10,915, or $0.59 per diluted share, as
compared to $3,241, or $0.18 per diluted share in 2004.

2004 Compared to 2003

Revenue
Total revenue for 2004 was $211,740, decreasing $7,268, or 3.3%, from 2003
revenue of $219,008.

Home manufacturing net sales accounted for virtually the entire decrease,
falling to $201,358 from $208,387 in 2003. Home shipments, from continuing
operations, were 5,718 in 2004 as compared to 5,884 in 2003, decreasing 2.8 %,
with floor shipments decreasing by 11.9%. Single-section home shipments, as a
percentage of total shipments, increased to 29.6% in 2004 from 12.9% in 2003,
primarily due to the Company's participation in building single-section homes as
part of the FEMA disaster relief for victims of the 2004 hurricanes, of which
1,023 homes were shipped in 2004. Of these shipments, excluding FEMA units, 62%
in 2004 and 49% in 2003 were to exclusive dealers. Cavalier attributes the
decrease in sales and shipments primarily to continuing adverse industry
conditions which effects were partially offset by the FEMA units shipped.
Despite the Company's increase in sales prices to try and offset the increase in
raw materials prices, the average price of homes sold remained about the same
from $36,500 in 2003 to $36,400 in 2004, which was due to the higher number of
single-section homes sold as a result of the FEMA units shipped. The
single-section homes have a lower selling price than multi-section homes.

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

Revenue from the financial services segment decreased for 2004 to $2,444
compared to $2,673 in 2003. For 2004, CIS purchased contracts of $33,323 and
sold installment contracts totaling $31,905. In 2003, CIS purchased contracts of
$37,780 and re-sold installment contracts totaling $35,953. CIS does not retain
the servicing function and does not earn the interest income on these re-sold
loans.

Revenue from the retail segment was $7,938 for 2004 compared to $7,948 for 2003.
The Company opened a new retail location in the fourth quarter of 2004.

Gross Profit
Gross profit was $39,496 or 18.7% of total revenue, for 2004, versus $36,576 or
16.7% of total revenue in 2003. The $2,920 increase in gross profit is primarily
the result of lower trailing costs associated with the plants closed during the
last quarter of 2002 and the third quarter of 2003 and sales price increases in
2004 over 2003. However, the Company's gross margin has been negatively impacted
by (1) price increases in substantially all raw materials (certain prices
continue to increase and show no signs of stabilization) and (2) overall
commodity pressures (i.e. global demand and capacity constraints and rising oil
prices). Despite the Company's increase in sales prices to try and offset the
increase in raw materials price, the average price of homes sold remained about
the same. This was due to the higher number of single-section homes sold as a
result of the FEMA units shipped. The single-section homes have a lower selling
price than multi-section homes.

Selling, General and Administrative
Selling, general and administrative expenses during 2004 were $34,415 or 16.3%
of total revenue, versus $38,199 or 17.4% of total revenue in 2003, a decrease
of $3,784, or 9.9%. The overall decrease includes a decrease of $1,263 in
employee benefits costs (primarily health insurance), a decrease in service
expenses of $2,605, which were partially offset by increases in audit and
accounting fees of $1,170 due to expenses associated with compliance efforts
under the SOX Act of 2002. The SOX compliance efforts included attestation fees
paid to the independent registered public accounting firm and to a lesser
extent, consulting fees to other parties to support management's assessment


<PAGE>

activities. Included in 2003 were recoveries of $475 from an insurance
subrogation matter and $251 from a dealer of a prior period loss.

In conjunction with the review of its critical accounting estimates, the Company
evaluated its historical loss factors applied to the reserve for repurchase
commitments, including changes in dealers' circumstances and industry
conditions, for those dealers deemed to be probable of default. At the time,
based on continuing improvements in dealers' circumstances (for which the
Company's financial statement is positively impacted), the Company recorded a
change in accounting estimate reducing the reserve for each year by $340 (2005),
$380 (2004) and $1,260 (2003). The Company's losses, under its inventory
repurchase agreements, have significantly improved in recent years, with
payments totaling $86 (2005), $717 (2004) and $1,133 (2003). While overall
industry conditions remain stable, it is problematic to forecast future
dealer failures.

Impairment and Other Related Charges
During 2003, the Company recorded impairment and other related charges of $750
($750 after tax or $0.04 per diluted share) in connection with the closing of a
home manufacturing facility in August 2003, the pending sale of another home
manufacturing facility closed in December 2002 and the closing of an
underperforming retail location in August 2003. The charge included writedowns
of $551 for property, plant and equipment and $199 for involuntary termination
benefits which were recorded as incurred and paid.

Operating Income (Loss)
Operating income for 2004 was $5,081, compared to an operating loss of $2,373 in
2003. Segment operating results were as follows. (1) Home manufacturing
operating income, before intercompany eliminations, was $10,235 in 2004 as
compared to $1,275 in 2003. The increased home manufacturing operating income is
primarily due to improved gross profit, improved selling, general, and
administrative expenses, and the Company's participation in building
single-section homes as part of the FEMA disaster relief for victims of the 2004
hurricanes as discussed above. (2) Financial services operating income was $539
in 2004 as compared to income of $537 in 2003. (3) The retail segment's
operating loss increased from $41 in 2003 to $113 in 2004 primarily due to
startup costs associated with a new retail location opened in the fourth quarter
of 2004 and income from a 2003 release of the Company from a recourse liability
that did not recur in 2004. (4) General corporate operating expense, which is
not identifiable to a specific segment, increased from $4,439 in 2003 to $5,472
in 2004 primarily due to expenses associated with compliance efforts under the
SOX Act of 2002. The SOX compliance efforts included attestation fees paid to
the independent registered public accounting firm and to a lesser extent,
consulting fees to other parties to support management's assessment activities.

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

Other, net is comprised primarily of interest income (unrelated to financial
services). Other, net decreased $135 due to lower interest income rates earned
in 2004 on invested funds.

Income (Loss) from Continuing Operations before Income Taxes
The Company's 2004 pre-tax income from continuing operations was $4,567,
reflecting an improvement over the pre-tax loss of $2,742 in 2003, due to the
factors discussed above.

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

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

Income (Loss) from Discontinued Operations
The Ft. Worth facility's loss, accounted for as discontinued operations, was
$2,231 in 2004 as compared to $2,715 in 2003. During 2004, the Company recorded


<PAGE>

impairment and other related charges of $209 ($209 after tax or $0.01 per
diluted share) for writedowns for certain property, plant and equipment related
to the closing.

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

Liquidity and Capital Resources

<TABLE>
<CAPTION>
<S>                                                                                            <C>
                                                                       Balances as of December 31,
                                                               -------------------------------------------
(dollars in thousands)                                            2005            2004           2003
                                                               ------------   -------------   ------------

Cash, cash equivalents & certificates of deposit             $      14,379 $        31,674 $       32,393
Working capital                                              $      24,216 $        12,967 $        7,813
Current ratio                                                     1.4 to 1        1.3 to 1       1.2 to 1
Long-term debt                                               $       7,631 $        11,400 $       13,089
Ratio of long-term debt to equity                                 0.1 to 1        0.3 to 1       0.3 to 1
Installment loan portfolio                                   $      15,067 $         8,839 $       10,114
</TABLE>

2005
Cash decreased $17,295 from $31,674 at December 31, 2004 to $14,379 at December
31, 2005. Operating activities used net cash of $35,078 primarily due to
          (a) an increase in accounts receivable of $35,173 which is due for
          shipments of FEMA disaster relief homes,
          (b) an inventory increase of $12,394, of which over $5,000 represents
          finished homes the Company was unable to deliver due to FEMA's
          inability to accept receipt in a timely fashion, with most of the
          remaining inventory increase representing raw materials purchased to
          support higher levels of production,
          (c) the net purchase of installment contracts of $6,817,
          (d) a slight offset of the above uses of cash by an increase of $3,526
          in accounts payable for increased inventory purchases, and
          (e) an offset for year 2005 net income of $10,915.

Historically, the FEMA receivables are outstanding for a longer period of time
than the Company's other receivables. Of the $35,365 receivables outstanding
under the FEMA contracts at December 31, 2005, $28,746 has been collected
through March 9, 2006. Additionally, subsequent to year-end all FEMA related
homes have been delivered.

The Company's capital expenditures were $1,410 during 2005 primarily for normal
property, plant and equipment additions and replacements as well as $251 of
capital expenditures incurred in conjunction with reopening the Winfield,
Alabama facility in 2005. The Company estimates that it will incur an additional
$200 - $300 in capital expenditures during 2006 related to the Winfield
facility. Additionally, the Company had $3,537 of proceeds from the sale of
property plant and equipment, which were primarily from the sale of the Ft.
Worth facility in the second quarter which has been accounted for at year end as
discontinued operations in the accompanying consolidated statements of
operations.

During 2005, the Company paid out charges for involuntary termination benefits
of $878 as discussed above related to the closing of the Ft. Worth, Texas home
manufacturing facility. There were no comparable payments in the 2004 period,
and the Company does not expect to incur any additional impairment charges
relating to the Ft. Worth, Texas facility.

The decrease in long-term debt for 2005 was due to scheduled principal payments
of $1,626 and a $2,350 pay-down on the real estate term loan using a portion of
the proceeds from the property sales mentioned above. During the fourth quarter
of 2005, the Company borrowed $17,750 under the revolving line of credit, in
order to fund the Company's short term cash needs required to fulfill the
outstanding FEMA order. During the first quarter of 2006, the line of credit
balance was paid in full. The borrowings under our retail floor plan agreement
increased to $1,990 by December 31, 2005 from $1,071 at December 31, 2004
primarily for the opening of a new retail location in the fourth quarter of
2004.

Proceeds of stock options generated cash of $1,109 in 2005.

Working capital, at year end, improved by $11,249 to $24,216 due in part to
earnings in 2005.

The increase in the installment loan portfolio at December 31, 2005 is primarily
due to a higher volume of land/home loans, many of which are construction loans,
for which the length of time involved in closing the sale transaction is greater
in comparison to a typical chattel (home only) loan. Included in the installment
loan portfolio at December 31, 2005 is $6,972 of land/home loans, of which
$3,056 have been sold subsequent to the end of the year through March 10, 2006.
As the Company increases its land/home loan purchases, short-term cash
requirements will increase due to the length of time involved in consummating
the sales transaction. The Company expects to utilize cash on hand to fund these
loan purchases.

2004
Cash decreased $719 to $31,674 at December 31, 2004 from $32,393 at December 31,
2003. Operating activities used net cash of $930 primarily due to
          (a) an increase in accounts receivable of $2,321 which is primarily
          for shipments of FEMA disaster relief homes,
          (b) an inventory increase of $3,945 due in part to higher levels of
          production in our home manufacturing plants and some raw material
          purchases in anticipation of increasing prices,
          (c) the net purchase of installment contracts of $959,
          (d) a slight offset of the above uses of cash by an increase of $451
          in accounts payable for increased inventory purchases, and
          (e) an offset for year 2004 net income of $3,241.

On average, the FEMA receivables were outstanding for a longer period of time
than the Company's other receivables; however, the outstanding FEMA-related
receivables $2,513 were collected in 2005.

The Company's capital expenditures were $786 during 2004 primarily for normal
property, plant and equipment additions and replacements. Additionally, the
Company had $2,320 of proceeds from the sale of property plant and equipment,
primarily from the sale of a previously idled manufacturing facility of which
$1,697 was paid on long-term debt.

The decrease in long-term debt for 2004 was due to scheduled principal payments
of $1,734 and a $1,697 pay-down on the real estate term loan using a portion of
the proceeds from the property sales mentioned above.

The Company entered into a retail floor plan agreement during 2004 for its
Company-owned retail stores and borrowed $1,071 to support its retail locations'
inventory purchases.

Proceeds of stock options generated cash of $939 in 2004.

2003
Cash decreased $2,546 to $32,393 at December 31, 2003 from $34,939 at December
31, 2002. Operating activities used net cash of $902 primarily due to
          (a) a decrease in other assets and liabilities of $13,202
          (b) a decrease of $3,216 in accounts payable
          (c) an offset of the above for an inventory decrease of $7,323,
          (d) an accounts receivable decrease of $1,414, and
          (e) the net purchase of installment contracts of $1,203
(a) through (d) are primarily related to changes in assets and liabilities of
home manufacturing facilities closed at the end of 2002

The Company's capital expenditures were $327 during 2003 primarily for normal
property, plant and equipment additions and replacements. Additionally, the
Company had $6,294 of proceeds from the sale of property plant and equipment,
primarily from the sales of a previously idled manufacturing facility of which
$3,500 was paid on long-term debt.

The decrease in long-term debt for 2003 was due to scheduled principal payments
of $1,454 and a $3,500 pay-down on the real estate term loan using a portion of
the proceeds from the property sales mentioned above. The Company paid off its
revolving line of credit from cash on hand and entered into its real estate term
loan in 2003, creating an additional net payment of $2,500.

Effective March 9, 2002 the Jobs Creation and Worker's Assistance Act was passed
which enabled companies to carry back net operating losses five years instead of
two years as under previous law. Due to the change in the law, the Company
received a refund of $6,425 in 2003.

Historically, the Company has funded its operating activities with cash flows
from operations supplemented by available cash on hand and, when necessary,
funds from its principal line of credit. During the industry downturn, the
Company benefited by $12,151 over this three year period from the proceeds from
sales of idle facilities as a replacement source of funds due to net operating
losses. Currently, the Company has two previously idled facilities that are
being marketed for sale; however, the Company cannot predict when or at what
amounts the facilities will ultimately be sold.

The Company's trend of cash used in operating activities over the past several
years is a direct result of the downturn in the industry and the Company's net
losses as a result. The industry has been impacted by an increase in dealer
failures, a severe reduction in available consumer credit and wholesale (dealer)
financing for manufactured housing, more restrictive credit standards and
increased home repossessions which re-enter home distribution channels. Each of
these factors contributed to a reduction in wholesale industry shipments to a
42-year low in 2004.

In response to industry market conditions, the Company has closed 17 home
manufacturing facilities since 1999. In terms of operating costs, the Company
has made cost reductions in virtually all areas of operations, including its
exclusive dealer and marketing programs and its administrative personnel and
associated costs. The Company is continuing to evaluate its options regarding
capacity, cost and overhead expense, the need for further plant, retail and
other consolidations, reductions, idling and closings and methods designed to
address the Company's financial performance, including cash flows, in light of
current and developing market and business conditions. Industry results for 2005
posted the first increase since 1998; and though the 2005 compared to 2004
improvement in industry shipments were driven by homes provided for hurricane
relief, dealer failures and repossessions of manufactured homes also have
significantly improved in 2005.

While the Company has two idle facilities for sale, Cavalier's return to
profitability in 2004 and 2005, combined with the closing and disposal of the
unprofitable Ft. Worth facility, we believe it will not be necessary to sell
these facilities to support operational cash needs assuming a reasonable
marketplace for our product.

During 2005, the Company entered into agreements as a subcontractor to provide
2,638 homes to the Federal Emergency Management Agency (FEMA) as part of that
agency's hurricane relief efforts. In order to fund the Company's short term
cash needs required to fulfill the orders of FEMA homes, on December 6, 2005,
the Company amended its credit facility (the "Credit Facility") with its primary
lender to provide for an available revolving line of credit during the period of
October 25, 2005 through April 30, 2006 (the "first temporary advance period")
of $50,000 and during the period of May 1, 2006 through July 31, 2006 (the
"second temporary advance period") of $25,000, effectively waiving temporarily
the tangible net worth requirement listed below. Additionally, on October 25,
2005, the capital expenditure covenant was modified to allow for capital
expenditures of $2,000 for the year ended December 31, 2005. The maturity date
under the revolving line of credit remains at April 2007.

The Credit Facility is comprised of a revolving line of credit which provides
for borrowings (including letters of credit) up to $25,000 ($50,000 during the
first temporary advance period) and a real estate term loan (14 year) component
of $10,000, which are cross-secured and cross-defaulted. The amount available
under the revolving line of credit, up to $25,000 ($50,000 during the first
temporary advance period), is equal to the lesser of an amount based on defined
percentages of accounts and notes receivable and inventories or certain levels
of tangible net worth plus all treasury stock purchases after December 31, 2003
(waived during the temporary advance periods), as noted in the following table.

<TABLE>
<CAPTION>
<S>         <C>                          <C>
  Tangible Net Worth              Credit Facility
        ("TNW")                      Available
------------------------      -------------------------

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

</TABLE>
At December 31, 2005, under the revolving line of credit, $26,341 was available
after deducting letters of credit of $5,909. During the fourth quarter of 2005,
the Company borrowed $17,750 under the revolving line of credit, in order to
fund the Company's short term cash needs required to fulfill the outstanding
FEMA order. During the first quarter of 2006, the line of credit balance was
paid in full. The Company did not have any amounts outstanding under the
revolving line of credit at December 31, 2004.

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


<PAGE>


<TABLE>
<CAPTION>
<S>        <C>                          <C>
  Tangible Net Worth
        ("TNW")                    Interest Rate
------------------------      -------------------------

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

</TABLE>
The bank's prime rate at December 31, 2005 and 2004 was 7.25% and 5.25%
respectively. A director of the Company served as president of the primary
lender until August 31, 2004. The Company made payments to its lender in the
amount $694 (2004) and $698 (2003) for interest, commitment fees, letter of
credit and various bond related fees.

The real estate term loan agreement contained in the Credit Facility provided
for borrowings of $10,000, of which $4,219 and $6,857 was outstanding at
December 31, 2005 and December 31, 2004, respectively. Interest on the term note
is fixed for a period of five years from issuance at 6.5% and may be adjusted at
5 and 10 years. Amounts outstanding under the real estate term loan are
collateralized by certain plant facilities and equipment.

The Credit Facility, as amended, contains certain restrictive and financial
covenants which, among other things, limit the Company's ability without the
lender's consent to (i) make dividend payments and purchases of treasury stock
in an aggregate amount which exceeds 50% of consolidated net income for the two
most recent years, (ii) mortgage or pledge assets which exceed in the aggregate
$1,000, (iii) incur additional indebtedness, including lease obligations, which
exceed in the aggregate $1,000, excluding floor plan notes payable which cannot
exceed $3,000 and (iv) make annual capital expenditures of $2,000 for the year
ended December 31, 2005 and $1,000, thereafter. In addition, the Credit Facility
contains certain financial covenants requiring the Company to maintain on a
consolidated basis certain defined levels of debt to tangible net worth ratio
(not to exceed 2.5 to 1) and cash flow to debt service ratio of not less than
1.35 to 1 commencing with the year ending December 31, 2005 and 1.5 to 1 for the
years ending December 31, 2006 and thereafter, and to maintain a current ratio,
as defined, of at least 1.0 to 1 and consolidated tangible net worth of at least
$23,000. The Credit Facility also requires CIS to comply with certain specified
restrictions and financial covenants. At December 31, 2005, the Company was in
compliance with its debt covenants.

The Company has amounts outstanding under five Industrial Development Revenue
Bond issues ("Bonds") which totaled $4,910 and $6,248 at December 31, 2005 and
2004, respectively. Four of the bond issues bear interest at variable rates
ranging from 4.85% to 5.40% and mature at various dates through April 2009. One
of the bond issues is payable in annual installments through 2013 with interest
payable monthly at a variable rate currently at 3.91% as determined by a
remarketing agent. The real estate term loan and the bonds are collateralized by
substantially all of the Company's plant facilities and equipment. Restricted
bond funds of $0 and $148 are reflected as a non-current asset in the
consolidated balance sheets as December 31, 2005 and 2004, respectively.

The Company has $1,990 and $1,071 of notes payable under a retail floor plan
agreement at December 31, 2005 and December 31, 2004, respectively. The notes
are collateralized by certain Company-owned retail stores' new home inventories
and bear interest rates ranging from prime to prime plus 2.5% but not less than
6% based on the age of the home.

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

The Company currently believes existing cash and funds available under the
Credit Facility, together with cash provided by operations, including expected
payments on outstanding receivables related to the FEMA order, will be adequate
to fund the Company's operations and plans for the next twelve months. However,
there can be no assurances to this effect. If it is not, or if the Company is
unable to remain in compliance with its covenants under its Credit Facility, the
Company would seek to maintain or enhance its liquidity position and capital
resources through modifications to or waivers under the Credit Facility,
incurrence of additional short or long-term indebtedness or other forms of
financing, asset sales, restructuring of debt, and/or the sale of equity or debt
<PAGE>

securities in public or private transactions, the availability and terms of
which will depend on various factors and market and other conditions, some of
which are beyond the control of the Company.

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

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

Contractual Obligations and Commitments (dollars in thousands)
The following table summarizes contractual obligations of the Company at
December 31, 2005. For additional information related to these obligations, see
Note 6 to the Consolidated Financial Statements. This table excludes long-term
obligations for which there is no definite commitment period. The Company's debt
consists primarily of fixed rate debt. However, there is one bond that has a
variable interest rate. The Company estimated the interest payments due for this
bond using 4.0% which is a slight increase from the latest applicable interest
rate. The Company does not have any contractual purchase obligations, and
historically, has not entered into contracts committing the Company to purchase
specified quantities of materials or equipment.
<TABLE>
<CAPTION>
<S>                                               <C>              <C>              <C>                <C>        <C>
                                                                             Payments Due by Period
                                                  ----------------------------------------------------------------------------------
                                                     Total      Less than 1 year   1 -3 years         4 - 5 years      After 5 years
                                                  ---------     ----------------   ----------        ------------      -------------
Note payable under revolving line of credit       $ 17,750          $ 17,750        $ -                $ -                $ -
Industrial development revenue bond issues           4,910             1,245          2,209              1,069                387
Real estate term loan                                4,219               253            559                638              2,769
Interest                                             2,562               670            735                481                676
Operating leases                                       281               112            165                  4                  -
                                                  ---------     ----------------   ----------        ------------     --------------
Total contractual cash obligations                $ 29,722          $ 20,030        $ 3,668            $ 2,192            $ 3,832
                                                  =========     ================   ===========       =============    ==============
</TABLE>
The following table summarizes contingent commitments of the Company at December
31, 2005, including contingent repurchase obligations, guarantees of debt for
equity-method investees and letters of credit. For additional information
related to these contingent obligations, see Note 11 to the Consolidated
Financial Statements and Critical Accounting Estimates below. Contingent
insurance plans' retrospective premium adjustments are excluded from this table
as there is no definite expiration period (see Critical Accounting Estimates
below).
<TABLE>
<CAPTION>
<S>                                               <C>                  <C>              <C>               <C>               <C>
                                                                     Amount of Commitment Expiration per Period
                                                 -----------------------------------------------------------------------------------
                                                    Total        Less than 1 year     1 -3 years      4 - 5 years     After 5 years
                                                  ----------    -----------------   --------------   -------------   --------------
Repurchase obligations   (1)                       $ 52,000           $ 7,000           $ 45,000         $ -                $ -
Guarantees               (2)                            860               174                303           279                104
Letters of credit        (3)                          5,909             5,909                  -          -                   -
                                                  ----------    -----------------   -------------    -------------   ---------------
Total commitments                                  $ 58,769          $ 13,083           $ 45,303         $ 279              $ 104
                                                  ==========    =================   ==============   =============   ===============
</TABLE>
  (1)      For a complete description of the contingent repurchase obligation,
           see Critical Accounting Estimates - Reserve for repurchase
           commitments. Although the commitments outstanding at December 31,
           2005 have a finite life, these commitments are continually replaced
           as the Company continues to sell its manufactured homes to dealers
           under repurchase and other recourse agreements with lending
           institutions which have provided wholesale floor plan financing to
           dealers. The cost, net of recoveries, of these contingent repurchase
           obligations to the Company was $(696) (2005), $(301) (2004), and
           $(225) (2003). The Company has a reserve for repurchase commitments
<PAGE>

           of $1,270 (2005) and $2,052 (2004) based on prior experience and an
           evaluation of dealers' financial conditions.

  (2)      The Company and certain of its equity partners have guaranteed
           certain debt for two companies in which the Company owns a one-third
           interest. The guarantees are limited to 40% of the outstanding debt.
           At December 31, 2005, $2,151 was outstanding under the guarantees, of
           which the Company had guaranteed $860. One of the companies has a
           lease purchase agreement with a third party to sell a facility
           financed by debt that the Company has guaranteed.

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

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

Product Warranties
Cavalier provides the initial retail homebuyer a one-year limited warranty
covering defects in material or workmanship in home structure, plumbing and
electrical systems. We record a liability for estimated future warranty costs
relating to homes sold, based upon our assessment of historical experience
factors and current industry trends. Factors we use in the estimation of the
warranty liability include historical sales amounts and warranty costs related
to homes sold and any outstanding service work orders. We have a reserve for
estimated warranties of $13,190 (2005) and $13,255 (2004). Although we maintain
reserves for such claims, based on our assessments as described above, which to
date have been adequate, there can be no assurance that warranty expense levels
will remain at current levels or that such reserves will continue to be
adequate. A large number of warranty claims or per claim costs exceeding our
current warranty expense levels could have a material adverse effect on
Cavalier's results of operations.

Insurance
Cavalier's workers' compensation (prior to February 1, 1999, and after April 1,
2001), product liability and general liability insurance coverages were provided
under incurred loss, retrospectively rated premium plans. Under these plans, we
incur insurance expense based upon various rates applied to current payroll
costs and sales. Annually, such insurance expense is adjusted by the carrier for
loss experience factors subject to minimum and maximum premium calculations.
Refunds or additional premiums are estimated and recorded when sufficiently
reliable data is available. We were contingently liable at December 31, 2005 for
future retrospective premium adjustments up to a maximum of approximately
$23,856 in the event that additional losses are reported related to prior years.
We recorded an estimated liability of approximately $5,002 (2005) and $5,401
(2004) related to these contingent claims. Claims exceeding our current expense
levels could have a material adverse effect on Cavalier's results of operations.

Reserve for repurchase commitments
Manufactured housing companies customarily enter into repurchase agreements with
lending institutions, which provide wholesale floor plan financing to dealers. A
majority of Cavalier's sales are made to dealers located primarily in the South
Central and South Atlantic regions of the United States pursuant to repurchase
agreements with lending institutions. These agreements generally provide that we
will repurchase our new products from the lending institutions in the event of
dealer default. Our risk of loss under repurchase agreements is reduced by the
following factors: (1) sales of our manufactured homes are spread over a
relatively large number of independent dealers, the largest of which accounted
for approximately 5.0% of sales in 2005, excluding FEMA-related sales; (2) the
price that Cavalier is obligated to pay under such repurchase agreements
declines based on predetermined amounts over the period of the agreement
(generally 18 to 24 months), and (3) Cavalier historically has been able to
resell homes repurchased from lenders.


<PAGE>


The Company applies FASB Interpretation ("FIN") No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57, and 107
and a rescission of FASB Interpretation No. 3 and SFAS No. 5, Accounting for
Contingencies, to account for its liability for repurchase commitments. Under
the provisions of FIN 45, issuance of a guarantee results in two different types
of obligations: (1) a non-contingent obligation to stand ready to perform under
the repurchase commitment (accounted for pursuant to FIN 45) and (2) a
contingent obligation to make future payments under the conditions of the
repurchase commitment (accounted for pursuant to SFAS No. 5). Cavalier reviews
the retail dealers' inventory to estimate the amount of inventory subject to
repurchase obligation which is used to calculate (1) the fair value of the
non-contingent obligation for repurchase commitments and (2) the contingent
liability based on historical information available at the time. During the
period in which a home is sold (inception of a repurchase commitment), the
Company records the greater of these two calculations as a liability for
repurchase commitments and as a reduction to revenue.

     (1) The Company estimates the fair value of the non-contingent portion of
         its manufacturer's inventory repurchase commitment under the provisions
         of FIN 45 when a home is shipped to dealers whose floor plan financing
         includes Cavalier's repurchase commitment. The fair value of the
         inventory repurchase agreement has been estimated on a "pooled dealer"
         approach based on the creditworthiness of the independent dealers, as
         determined by the floor plan institution, and is derived using an
         income approach. Specifically, the fair value of the inventory
         repurchase agreement is determined by calculating the net present value
         of the difference in (a) the interest cost to carry the inventory over
         the maximum repurchase liability period at the prevailing floor plan
         note interest rate and (b) the interest cost to carry the inventory
         over the maximum repurchase liability period at the interest rate of a
         similar type loan without a manufacturer's repurchase agreement in
         force.

     (2) The Company estimates the contingent obligation to make future payments
         under its manufacturer's inventory repurchase commitment for the same
         pool of commitments as used in the fair value calculation above and
         records the greater of the two calculations. This SFAS No. 5 contingent
         obligation is estimated using historical loss factors, including the
         frequency of repurchases and the losses experienced by the Company for
         repurchased inventory.

Additionally, subsequent to the inception of the repurchase commitment, the
Company evaluates the likelihood that it will be called on to perform under the
inventory repurchase commitments. If it becomes probable that a dealer will
default and a SFAS No. 5 loss reserve should be recorded, then such contingent
liability is recorded equal to the estimated loss on repurchase. Based on
identified changes in dealers' financial conditions, the Company evaluates the
probability of default for the group of dealers who are identified at an
elevated risk of default and applies a probability of default to the group,
based on historical default rates. In this default probability evaluation, we
review repurchase notifications received from floor plan sources and review our
dealer inventory for expected repurchase notifications based on various
communications from the lenders and the dealers as well as for dealers who, we
believe, are experiencing financial difficulty. The Company's repurchase
commitments for the dealers in the category of elevated risk of default are
excluded from the pool of commitments used in both of the calculations at (1)
and (2) above. Changes in the reserve are recorded as an adjustment to revenue.

Following the inception of the commitment, the recorded reserve is reduced over
the repurchase period and is eliminated once the dealer sells the home. The
maximum amount for which we are contingently liable under repurchase agreements
approximated $52,000 at December 31, 2005. We have a reserve for repurchase
commitments of $1,270 (2005) and $2,052 (2004).

Changes in the level of retail inventories in the manufactured housing industry,
either up or down, can have a significant impact on the Company's operating
results. The deterioration in the availability of retail financing, along with
significant competition from repossessed homes, experienced in recent years,
extended the inventory adjustment period for excess industry retail inventory
levels beyond what was originally expected. If these trends were to continue, or
if retail demand were to significantly weaken, the inventory overhang could
result in even greater intense price competition, cause further pressure on
profit margins within the industry, and have a material adverse effect on
Cavalier. Cavalier believes that inventories of its homes are at levels which
are more consistent with retail demand, although we cannot provide investors
assurances to this effect. The Company's inventory at all retail locations,
including Company-owned retail sales centers, declined 34% in 2004 from 2003 and
declined by 29% from 2004 to 2005. The reduction in retail inventory, and
corresponding reduction in repurchase commitments, has been impacted in the last
two years by the leveling of retail inventory with demand and by the industry's
involvement in the production of FEMA-related houses that do not carry a
repurchase commitment. In 2006, as FEMA-related production is replaced by
traditional dealer purchases that carry inventory repurchase commitments, the
Company anticipates the non-contingent portion of the reserve for repurchase
commitments to increase.


<PAGE>


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

Deferred Tax Asset
Realization of deferred tax assets (net of recorded valuation allowances) is
largely dependent upon future profitable operations and future reversals of
existing taxable temporary differences. In 2004, pursuant to SFAS No. 109,
Accounting for Income Taxes, because the Company had operated at a cumulative
loss in its three most recent calendar years and because it believed difficult
competitive and economic conditions might continue for the foreseeable future, a
$19,607 valuation allowance was recorded to fully reserve net deferred tax
assets. However, in 2005, as a result of continued improvements in operating
performance and projected income and tax liability for 2006, the Company
reversed a portion of the deferred tax asset valuation allowance realizing
$1,314 in deferred tax benefits. In assessing the need for a valuation
allowance, the Company considers all positive and negative evidence, including
anticipated operating results, scheduled reversals of deferred tax liabilities,
and tax planning strategies. Because the Company believes challenging industry
conditions persist, the Company believes that under the standards of SFAS No.
109 it is not appropriate to record income tax benefits in excess of the benefit
projected to be realized in 2006. As of December 31, 2005, the Company
maintained a valuation allowance of $13,782. The valuation allowance may be
reversed to income in future periods to the extent that the related deferred
income tax assets are realized or the valuation allowances are otherwise no
longer required.

Related Party Transactions
The Company purchased raw materials of approximately $21,586, $17,680, and
$14,580 from MSR Forest Products, LLC, and Alliance Homes, Inc. during 2005,
2004 and 2003, respectively, each companies in which Cavalier owns a minority
interest.

Mr. Thomas A. Broughton, III, a director of the Company, served as the president
of First Commercial Bank, the Company's primary lender, through August 31, 2004.
The Company made payments to its lender in the amount of $694 (2004) and $698
(2003) for interest, commitment, letter of credit and various bond related fees.
See Note 6 to the consolidated financial statements for additional information
regarding the Company's credit facility.

The Company recorded net income (loss) of investees accounted for by the equity
method of $775, $980, and $369 for the years ended December 31, 2005, 2004, and
2003, respectively. Additionally, the Company and certain of its equity partners
have guaranteed certain debt for two companies in which the Company owns a
one-third interest. For additional information related to these guarantees, see
footnote (2) under Contractual Obligations and Commitments above.

The Company used the services of a law firm, Lowe, Mobley & Lowe, a partner of
which, Mr. John W Lowe, is also a director of the Company. The Company paid
legal fees to this firm of 414 (2005), $346 (2004), and $378 (2003). In
addition, the law firm received, from the proceeds of the settlement of a
Company claim, an indirect legal fee payment of $74 in 2005.

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

Recently Issued Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, Accounting for Stock-Based
Compensation, a revision of SFAS No. 123, which supersedes Accounting Principles
Board Opinion 25 Accounting for Stock Issued to Employees. In April 2005, the
effective date of SFAS No. 123R was postponed until fiscal years beginning after
June 15, 2005. The fair value method of accounting for stock based awards
pursuant to SFAS No. 123R will require the Company to record compensation cost
over the vesting period of awards of equity instruments based on the grant date
fair value of the award and applies to new awards issued, awards modified,
repurchased or cancelled and unvested awards after the effective date. SFAS No.
123R also requires the benefits of tax deductions in excess of recognized
compensation cost be reported as a financing cash flow, rather than as an
operating cash flow as required under previous literature. This requirement will
reduce net operating cash flows and increase net financing cash flows after the
effective date.


<PAGE>


In November 2004, the FASB issued Statement No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4.  SFAS No. 151 requires that abnormal amounts
of idle facility expenses, freight, handling costs, and wasted material
(spoilage) be recognized as current period charges.  SFAS No. 151 also requires
that the "allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities." Normal capacity is
defined as "the production expected to be achieved over a number of periods or
seasons under normal circumstances, taking into account the loss of capacity
resulting from planned maintenance." This statement becomes effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company does not expect the adoption of this statement to have a material effect
on the Company's consolidated financial statements.

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

ITEM 7A:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

The Company purchases retail installment contracts from its dealers, at fixed
interest rates, in the ordinary course of business, and periodically resells a
majority of these loans to financial institutions under the terms of retail
finance agreements. The periodic resale of installment contracts reduces the
Company's exposure to interest rate fluctuations, as the majority of contracts
are held for a short period of time. The Company's portfolio consisted of fixed
rate contracts with interest rates generally ranging from 8.0% to 14.0% and an
average original term of 265 months at December 31, 2005. The Company estimated
the fair value of its installment contracts receivable at $15,287 using
discounted cash flows and interest rates offered by CIS on similar contracts at
December 31, 2005.

The Company has one industrial development revenue bond issue that is exposed to
interest rate changes. Since this borrowing is floating rate debt, an increase
in short-term interest rates would adversely affect interest expense.
Additionally, Cavalier has four industrial development revenue bond issues at
fixed interest rates. The Company estimated the fair value of its debt
instruments at $8,806 using rates at which the Company believes it could have
obtained similar borrowings at December 31, 2005.

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

                                                         Assumed Annual Principal Cash Flows
                                      --------------------------------------------------------------------------
(dollars in thousands)                    2006          2007      2008      2009      2010    Thereafter   Total    Fair value
                                          ----          ----      ----      ----      ----    ----------   -----    ----------

Installment loan portfolio              $ 7,703 a      $ 111     $ 123     $ 136     $ 151    $ 6,843    $ 15,067    $ 15,287
(weighted average interest
 rate - 10.4%)
                                                          Expected Principal Maturity Dates
                                      --------------------------------------------------------------------------
(dollars in thousands)                    2006          2007      2008      2009      2010    Thereafter   Total    Fair value
                                          ----          ----      ----      ----      ----    ----------   -----    ----------

Notes payable and long-term debt        $ 1,498      $ 1,570   $ 1,198   $ 1,263     $ 444    $ 3,156    $ 9,129     $ 8,806
(weighted average interest
 rate - 5.6%)

a  The Company has recorded an allowance for credit losses of $968, primarily based upon management's assessment of historical
    experience factors and current economic conditions.
</TABLE>
Additionally, the Company has a revolving line of credit and a note payable
under a retail floor plan agreement that are exposed to interest rate changes,
as they are floating rate debt based on the prime interest rate. These
borrowings are excluded from the above table since there is no scheduled payout
or maturity date for either of these obligations. During the fourth quarter of
2005, the Company borrowed $17,750 under the revolving line of credit, in order
to fund the Company's short term cash needs required to fulfill the outstanding
FEMA order. During the first quarter of 2006, the line of credit balance was
paid in full. The Company did not have any amounts outstanding under the
revolving line of credit at December 31, 2004. The bank's prime rate at December
31, 2005 and 2004 was 7.25% and 5.25% respectively. The Company has $1,990 and
$1,071 of notes payable under a retail floor plan agreement at December 31, 2005
and December 31, 2004, respectively. The notes bear interest rates ranging from
prime to prime plus 2.5% but not less than 6% based on the age of the home
 <PAGE>

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

o        the cyclical and  seasonal nature  of the manufactured housing industry
         and the economy generally;
o        the severe and continuing downturn in the manufactured housing
         industry;
o        limitations in Cavalier's ability to pursue its business strategy;
o        changes in demographic trends, consumer preferences and Cavalier's
         business strategy;
o        changes  and  volatility  in  interest  rates and the  availability
         of capital;
o        changes  in  the  availability of retail (consumer) financing;
o        changes  in  the  availability  of wholesale (dealer) financing;
o        changes in level of industry retail inventories;
o        the   ability  to  attract  and  retain  quality  independent  dealers,
         executive officers and other key personnel;
o        competition;
o        contingent repurchase and guaranty obligations;
o        uncertainties regarding Cavalier's retail financing activities;
o        the potential unavailability and price increases for raw materials;
o        the potential unavailability of manufactured housing sites;
o        regulatory constraints;
o        the potential for additional warranty claims;
o        litigation;
o        the potential volatility in the Company's stock price; and
o        the potential for deficiencies in internal controls over financial
         reporting or in disclosure controls and procedures.

Any or all of the forward-looking statements in this report, in the 2005 Annual
Report to Stockholders, in the Annual Report on Form 10-K for the year ended
December 31, 2005 and in any other public statements the Company makes may turn
out to be wrong. These statements may be affected by inaccurate assumptions the
Company might make or by known or unknown risks and uncertainties. Many factors
listed above will be important in determining future results. Consequently, no
forward-looking statement can be guaranteed. Actual future results may vary
materially.

The Company undertakes no obligation to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
You are advised, however, to consult any further disclosures the Company makes
on related subjects in future filings with the Securities and Exchange
Commission or in any of the Company's press releases. Also note that, in the
Annual Report on Form 10-K for the period ending December 31, 2005, under the
heading "Risk Factors," the Company has provided a discussion of factors that it
thinks could cause the actual results to differ materially from expected and
historical results. Other factors besides those listed could also adversely
affect Cavalier. This discussion is provided as permitted by the Private
Securities Litigation Reform Act of 1995.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Selected Quarterly Financial Data (Unaudited)

The table below sets forth certain unaudited quarterly financial data for the
two years ended December 31, 2005 and 2004. The Company believes that the
following quarterly financial data includes all adjustments necessary for a fair
presentation, in accordance with accounting principles generally accepted in the
United States of America. The following quarterly financial data should be read
in conjunction with the other financial information contained elsewhere in this


<PAGE>
report. The operating results for any interim period are not necessarily
indicative of results for a complete year or for any future period.
<TABLE>
<CAPTION>
<S>                                                             <C>             <C>              <C>              <C>    <C>
         Quarterly Statistics
         Comparison of Operating Results (Unaudited)
         (Dollars in thousands except per share amounts)

                                                              Fourth         Third         Second       First
                                                              Quarter        Quarter       Quarter      Quarter       Total
                                                              ---------------------------------------------------------------
2005
----------------------------------------------------------
Revenue (as originally reported):
         Home manufacturing                                    $ 96,445      $ 53,605     $ 55,863    $ 55,354     $ 261,267
         Financial services                                         766           942          781         513         3,002
         Retail                                                   2,403         2,638        2,646       1,811         9,498
                                                              ----------   -----------  -----------  ----------    ----------
         Total revenue                                           99,614        57,185       59,290      57,678       273,767
                                                              ----------   -----------  -----------  ----------    ----------
Home manufacturing (effect of change)
         Discontinued operations                           a        (35)          (74)        (119)     (2,874)       (3,102)
         Repurchase commitments reclassification           b         38           180          831         318         1,367
                                                              ----------   -----------  -----------  ----------    ----------
         Total                                                        3           106          712      (2,556)       (1,735)
                                                              ----------   -----------  -----------  ----------    ----------
Revenue (as adjusted):
         Home manufacturing                                      96,448        53,711       56,575      52,798       259,532
         Financial services                                         766           942          781         513         3,002
         Retail                                                   2,403         2,638        2,646       1,811         9,498
                                                              ----------   -----------  -----------  ----------    ----------
         Total revenue                                           99,617        57,291       60,002      55,122       272,032
                                                              ----------   -----------  -----------  ----------    ----------
Gross profit (as originally reported)                            22,741        11,333        9,340       8,323        51,737
         Discontinued operations                           a       (494)          (76)          81         (18)         (507)
         Repurchase commitments reclassification           b         38           180          831         318         1,367
                                                              ----------   -----------  -----------  ----------    ----------
Gross profit (as adjusted)                                       22,285        11,437       10,252       8,623        52,597
                                                              ----------   -----------  -----------  ----------    ----------
Net income (loss)                                                10,715         1,585          769      (2,154)       10,915
Basic net income (loss) per share                          c       0.59          0.09         0.04       (0.12)         0.60
Diluted net income (loss) per share                        c       0.58          0.09         0.04       (0.12)         0.59
</TABLE>
<TABLE>
<CAPTION>
<S>                                                                <C>           <C>          <C>        <C>             <C>
2004
----------------------------------------------------------
Revenue (as originally reported):
         Home manufacturing                                    $ 73,426      $ 56,945     $ 51,226    $ 42,182     $ 223,779
         Financial services                                         576           647          679         542         2,444
         Retail                                                   2,035         2,411        1,962       1,530         7,938
                                                              ----------   -----------  -----------  ----------    ----------
         Total revenue                                           76,037        60,003       53,867      44,254       234,161
                                                              ----------   -----------  -----------  ----------    ----------
Home manufacturing (effect of change)
         Discontinued operations                           a     (5,939)       (5,829)      (5,007)     (5,646)      (22,421)
                                                              ----------   -----------  -----------  ----------    ----------
         Total                                                   (5,939)       (5,829)      (5,007)     (5,646)      (22,421)
                                                              ----------   -----------  -----------  ----------    ----------
Revenue (as adjusted):
         Home manufacturing                                      67,487        51,116       46,219      36,536       201,358
         Financial services                                         576           647          679         542         2,444
         Retail                                                   2,035         2,411        1,962       1,530         7,938
                                                              ----------   -----------  -----------  ----------    ----------
         Total revenue                                           70,098        54,174       48,860      38,608       211,740
                                                              ----------   -----------  -----------  ----------    ----------
Gross profit (as originally reported)                            14,923        10,508        8,719       7,592        41,742
         Discontinued operations                           a       (559)         (620)        (543)       (524)       (2,246)
                                                              ----------   -----------  -----------  ----------    ----------
Gross profit (as adjusted)                                       14,364         9,888        8,176       7,068        39,496
                                                              ----------   -----------  -----------  ----------    ----------
Net income (loss) (as originally reported)                 d      4,654         1,068         (599)     (1,882)        3,241
         Impact of delayed adoption of FIN 45              e        248            35         (127)       (156)            -
                                                              ----------   -----------  -----------  ----------    ----------
Net income (loss) (as restated)                                   4,902         1,103         (726)     (2,038)        3,241
                                                              ----------   -----------  -----------  ----------    ----------
Basic net income (loss) per share (as originally reported) c       0.26          0.06        (0.03)      (0.11)         0.18
         Impact of delayed adoption of FIN 45             c, e     0.01          0.00        (0.01)      (0.01)        (0.00)
                                                              ----------   -----------  -----------  ----------    ----------
Basic net income (loss) per share (as restated)           c, e     0.27          0.06        (0.04)      (0.12)         0.18
                                                              ----------   -----------  -----------  ----------    ----------
Diluted net income (loss) per share (as originally reportedc       0.25          0.06        (0.03)      (0.11)         0.18
         Impact of delayed adoption of FIN 45             c, e     0.01          0.00        (0.01)      (0.01)        (0.00)
                                                              ----------   -----------  -----------  ----------    ----------
Diluted net income (loss) per share (as restated)         c, e     0.26          0.06        (0.04)      (0.12)         0.18
                                                              ----------   -----------  -----------  ----------    ----------
</TABLE>
<PAGE>

a     In the fourth quarter of 2005,  under the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets,  and  related
EITF Issue No.  03-13,  the  Company  classified  its Ft.  Worth  operations as
discontinued  operations,  and accordingly, reclassified the information
previously reported.

b     In the fourth quarter of 2005, the Company became aware that paragraph
11 b. of Interpretation ("FIN") No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to
Others, an interpretation of FASB Statements No. 5, 57, and 107 and a rescission
of FASB Interpretation No. 3, should be applied to record the changes in its
reserve for repurchase commitments against revenue rather than in selling,
general and administrative expenses. Accordingly, the Company reclassified the
portion of its change in repurchase accrual previously included in selling,
general and administrative expenses to revenue in 2005. The amount for 2004
included in selling, general and administrative expenses was insignificant and
not reclassified.

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

d     In conjunction with the review of its critical accounting estimates,
quarterly, the Company evaluated its historical loss factors applied to the
reserve for repurchase commitments, including changes in dealers' circumstances
and industry conditions, for those dealers deemed to be probable of default. At
the time, based on continuing improvements in dealers' circumstances (for which
the Company's financial statement is positively impacted), the Company recorded
a change in accounting estimate reducing the reserve by $469 (Q2 2005), $627 (Q4
2004) and $199 (Q2 2004), during the periods of significant change in estimated
reserve amounts.

e     The Company's financial statements for each quarter of fiscal 2004 are
restated herein to correct an error in the application of FIN 45; however, there
is no net income change to the full fiscal year of 2004. The Company adopted FIN
45 in the fourth quarter of 2004, notwithstanding the fact that FIN 45 applied
to guarantees issued or modified after December 31, 2002. The restatement also
corrects the Company's failure to record the FIN 45 fair value non-contingent
liability amount when such amount exceeded the SFAS No. 5 contingent liability
amount. The effect of the correction on net income (loss) and related per share
amounts for each quarter of 2004 is noted in the above table. The cumulative
effect of the Company's error in its failure to record the greater FIN 45 fair
value non-contingent liability amount in 2003, which was not significant, is
reflected in the adjustment of the first quarter of 2004 and as such, the
restatement had no cumulative effect on retained earnings or other appropriate
components of equity or net assets in the statement of financial position, as of
the beginning of the first quarter of 2004.


<PAGE>


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

             Index to Consolidated Financial Statements and Schedule

Management's Report on Internal Control Over Financial Reporting             39

Reports of Independent Registered Public Accounting Firms                    40

Consolidated Balance Sheets                                                  42

Consolidated Statements of Operations                                        43

Consolidated Statements of Stockholders' Equity                              44

Consolidated Statements of Cash Flows                                        45

Notes to Consolidated Financial Statements                                   46


Schedule -

         II - Valuation and Qualifying Accounts                              62



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



<PAGE>


MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
Exchange Act Rule 13a-15(f). The Company's internal control system was designed
to provide reasonable assurance to management and board of directors regarding
the preparation and fair presentation of published financial statements. Under
the supervision and with the participation of the Company's management,
including its Chief Executive Officer and its Chief Financial Officer, the
Company's management conducted an evaluation of the effectiveness of internal
control over financial reporting based on the framework in Internal Control:
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission ("COSO"), as of December 31, 2005.

Based on the evaluation under the criteria contained in the framework of
Internal Control: Integrated Framework, the Company's management concluded that
its internal control over financial reporting was effective as of December 31,
2005.

Management's assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2005 has been audited by Carr, Riggs
and Ingram, LLC, an independent registered public accounting firm, as stated in
their report below.



/s/ DAVID A. ROBERSON
---------------------
Director and Principal Executive

/s/ MICHAEL R. MURPHY
---------------------
Chief Financial Officer and Principal Accounting Officer


March 16, 2006



<PAGE>


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheet of Cavalier Homes,
Inc. and subsidiaries (the "Company") as of December 31, 2005, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. Our audit also included the financial statement schedule
listed in the Index at Item 15(a) for the year ended December 31, 2005. We also
have audited management's assessment, included in the accompanying Management's
Report on Internal Control Over Financial Reporting, that Cavalier Homes, Inc.
and subsidiaries maintained effective internal control over financial reporting
as of December 31, 2005, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for these financial statements and schedule, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on these financial statements and
schedule, an opinion on management's assessment, and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cavalier Homes,
Inc. and subsidiaries as of December 31, 2005, and the consolidated results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein. Also in our opinion,
management's assessment that Cavalier Homes, Inc. and subsidiaries maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Furthermore, in our opinion,
Cavalier Homes, Inc. and subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).


/s/ CARR, RIGGS & INGRAM, LLC
Birmingham, Alabama
March 16, 2006


<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

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

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


/s/DELOITTE & TOUCHE LLP
Birmingham, Alabama
March 28, 2005 (March 16, 2006 as to the effects of the discontinued operations
described in Note 2)


<PAGE>


 <TABLE>
<CAPTION>
<S>                                                                <C>            <C>
                          CAVALIER HOMES, INC. AND SUBSIDIARIES
                               CONSOLIDATED BALANCE SHEETS
                               DECEMBER 31, 2005 AND 2004
                     (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
-----------------------------------------------------------------------------------------

                                                                2005            2004
                                                             -----------     ------------
 ASSETS
 CURRENT ASSETS:
      Cash and cash equivalents                            $     14,379    $      31,674
      Accounts receivable, less allowance for losses of
          $56 (2005) and $85 (2004)                              39,453            4,279
      Notes and installment contracts receivable - current,
       including held for resale $7,603 (2005) and
       $2,011 (2004)                                              7,703            2,086
      Inventories                                                27,303           14,909
      Other                                                       2,723            1,267
                                                             -----------     ------------
             Total current assets                                91,561           54,215
                                                             -----------     ------------

 PROPERTY, PLANT AND EQUIPMENT:
      Land                                                        3,778            5,279
      Buildings and improvements                                 34,668           36,976
      Machinery and equipment                                    30,118           31,252
                                                             -----------     ------------
                                                                 68,564           73,507
      Less accumulated depreciation and amortization             38,988           39,762
                                                             -----------     ------------
             Total plant, property and equipment, net            29,576           33,745
                                                             -----------     ------------

 INSTALLMENT CONTRACTS RECEIVABLE, less
     allowance for credit losses of $968 (2005) and
     $953 (2004)                                                  6,396            5,801
                                                             -----------     ------------

 OTHER ASSETS                                                     5,288            4,469
                                                             -----------     ------------
 TOTAL                                                     $    132,821    $      98,230
                                                             ===========     ============

 LIABILITIES AND STOCKHOLDERS' EQUITY
 CURRENT LIABILITIES:
      Note payable under revolving line of credit          $     17,750    $           -
      Current portion of long-term debt                           1,498            1,705
      Note payable under retail floor plan agreement              1,990            1,071
      Accounts payable                                            7,821            4,295
      Amounts payable under dealer incentive programs             7,087            4,252
      Accrued compensation and related withholdings               6,147            3,754
      Accrued insurance                                           6,270            6,609
      Estimated warranties                                       13,190           13,255
      Reserve for repurchase commitments                          1,270            2,052
      Other                                                       4,322            4,255
                                                             -----------     ------------
           Total current liabilities                             67,345           41,248
                                                             -----------     ------------
 DEFERRED INCOME TAXES                                                -              415
                                                             -----------     ------------
 LONG-TERM DEBT                                                   7,631           11,400
                                                             -----------     ------------

 COMMITMENTS AND CONTINGENCIES (NOTE 11)

 STOCKHOLDERS' EQUITY:
      Series A Junior Participating Preferred stock,
       $0.01 par value; 200,000 shares authorized,
        none issued                                                   -                -
      Preferred stock, $0.01 par value; 300,000 shares
       authorized, none issued                                        -                -
     Common stock, $0.10 par value; 50,000,000 shares
       authorized, 19,285,705 (2005) and 18,992,574
       (2004) shares issued                                       1,929            1,899
      Additional paid-in capital                                 58,275           56,861
      Retained earnings (accumulated deficit)                     1,423           (9,492)
      Treasury stock, at cost; 983,300 (2005) and
       1,017,300 (2004) shares                                   (3,782)          (4,101)
                                                             -----------     ------------
          Total stockholders' equity                             57,845           45,167
                                                             -----------     ------------
 TOTAL                                                     $    132,821    $      98,230
                                                             ===========     ============
 See notes to consolidated financial statements.
</TABLE>

<PAGE>


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

                                  CAVALIER HOMES, INC. AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENTS OF OPERATIONS
                          FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
                              (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
-------------------------------------------------------------------------------------------------

                                                            2005          2004          2003
                                                         ------------  ------------  ------------

 REVENUE                                                $    272,032  $    211,740  $    219,008
                                                         ------------  ------------  ------------

 COST OF SALES                                               219,435       172,244       182,432

 SELLING, GENERAL AND ADMINISTRATIVE                          40,284        34,415        38,199


 IMPAIRMENT AND OTHER RELATED CHARGES                            143             -           750
                                                         ------------  ------------  ------------

                                                             259,862       206,659       221,381
                                                         ------------  ------------  ------------

 OPERATING INCOME (LOSS)                                      12,170         5,081        (2,373)
                                                         ------------  ------------  ------------

 OTHER INCOME (EXPENSE):
     Interest expense                                         (1,314)       (1,075)       (1,065)
     Other, net                                                  851           561           696
                                                         ------------  ------------  ------------
                                                                (463)         (514)         (369)
                                                         ------------  ------------  ------------

 INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
  INCOME TAXES                                                11,707         4,567        (2,742)

 INCOME TAX PROVISION (BENEFIT)                                  (32)           75          (518)

 EQUITY IN EARNINGS OF EQUITY-METHOD INVESTEES                   775           980           369
                                                         ------------  ------------  ------------

 INCOME (LOSS) FROM CONTINUING OPERATIONS                     12,514         5,472        (1,855)

     LOSS FROM DISCONTINUED OPERATIONS, NET OF GAIN
      ON DISPOSAL OF $439 IN 2005                             (1,599)       (2,231)       (2,715)
                                                         ------------  ------------  ------------

 NET INCOME (LOSS)                                      $     10,915  $      3,241  $     (4,570)
                                                         ============  ============  ============

 INCOME (LOSS) PER SHARE:

 BASIC:

  FROM CONTINUING OPERATIONS                            $       0.69  $       0.30  $      (0.11)

  FROM DISCONTINUED OPERATIONS                                 (0.09)        (0.12)        (0.15)
                                                         ------------  ------------  ------------

  NET INCOME (LOSS)                                     $       0.60  $       0.18  $      (0.26)
                                                         ============  ============  ============

  WEIGHTED AVERAGE SHARES OUTSTANDING                     18,118,619    17,879,939    17,666,192
                                                         ============  ============  ============

 DILUTED:

  FROM CONTINUING OPERATIONS                            $       0.68  $       0.30  $      (0.11)

  FROM DISCONTINUED OPERATIONS                                 (0.09)        (0.12)        (0.15)
                                                         ------------  ------------  ------------

  NET INCOME (LOSS)                                     $       0.59  $       0.18  $      (0.26)
                                                         ============  ============  ============

  WEIGHTED AVERAGE SHARES OUTSTANDING                     18,356,795    18,178,394    17,666,192
                                                         ============  ============  ============

 See notes to consolidated financial statements.
</TABLE>


<PAGE>


        <TABLE>
<CAPTION>
<S>                                   <C>              <C>         <C>            <C>             <C>          <C>
                                  CAVALIER HOMES, INC. AND SUBSIDIARIES
                              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                            FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
                                           (DOLLARS IN THOUSANDS)
---------------------------------------------------------------------------------------------------------------------------

                                                                                Retained
                                Common stock     Common        Additional       earnings        Treasury
                                number of         stock          paid-in      (accumulated       stock           Total
                                  shares                         capital        deficit)
                               -------------  --------------  --------------  -------------   -------------  --------------

 BALANCE, JANUARY 1, 2003        18,682,944  $        1,868  $       55,932  $      (8,163) $       (4,101) $       45,536
   Stock options exercised           10,000               1              13              -               -              14
   Income tax benefit
   attributable to exercise
   of stock options                       -               -               7              -               -               7
   Net loss                               -               -               -         (4,570)              -          (4,570)
                               -------------  --------------  --------------  -------------   -------------  --------------

 BALANCE, DECEMBER 31, 2003      18,692,944           1,869          55,952        (12,733)         (4,101)         40,987
   Stock options exercised          299,630              30             909              -               -             939
   Net income                             -               -               -          3,241               -           3,241
                               -------------  --------------  --------------  -------------   -------------  --------------

 BALANCE, DECEMBER 31, 2004      18,992,574           1,899          56,861         (9,492)         (4,101)         45,167
   Stock options exercised          293,131              30             760              -             319           1,109
   Income tax benefit
    attributable to exercise
    of stock options                      -               -             654              -               -             654
   Net income                             -               -               -         10,915               -          10,915
                               -------------  --------------  --------------  -------------   -------------  --------------

 BALANCE, DECEMBER 31, 2005      19,285,705  $        1,929  $       58,275  $       1,423  $       (3,782) $       57,845
                               =============  ==============  ==============  =============   =============  ==============

 See notes to consolidated financial statements.

</TABLE>

<PAGE>


        <TABLE>
<CAPTION>
<S>                                                                      <C>            <C>             <C>
                                  CAVALIER HOMES, INC. AND SUBSIDIARIES
                                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                            FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003
                                          (DOLLARS IN THOUSANDS)

                                                                     2005             2004             2003
                                                                 -------------    -------------    -------------

 OPERATING ACTIVITIES:
   Net  income (loss)                                          $       10,915   $        3,241    $      (4,570)
   Adjustments to reconcile net income (loss) to net cash
    used in operating activities:
        Depreciation and amortization                                   2,477            3,317            4,588
        Provision for (recovery of) credit and accounts
         receivable losses                                                856             (235)             173
        Gain on sale of property, plant and equipment                    (578)             (10)             (51)
        Impairment and other related charges                              143              209              750
        Other, net                                                       (196)            (980)            (461)
        Installment contracts purchased for resale                    (41,442)         (32,864)         (37,156)
        Sale of installment contracts                                  34,625           31,905           35,953
        Principal collected on installment contracts
         purchased for resale                                             205            2,066            2,197
        Changes in assets and liabilities:
             Accounts receivable                                      (35,173)          (2,321)           1,414
             Inventories                                              (12,394)          (3,945)           7,323
             Income taxes                                                 707              (53)           5,356
             Accounts payable                                           3,526              451           (3,216)
             Other assets and liabilities                               1,251           (1,711)         (13,202)

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

        Net cash used in operating activities                         (35,078)            (930)            (902)
                                                                 -------------    -------------    -------------


 INVESTING ACTIVITIES:
   Proceeds from disposition of property,
    plant and equipment                                                 3,537            2,320            6,294
   Capital expenditures                                                (1,410)            (786)            (327)
   Notes and installment contracts purchased for
    investment                                                           (831)            (496)            (627)
   Principal collected on notes and installment
    contracts purchased for investment                                    336              474              629
   Other investing activities                                             349              120             (173)
                                                                 -------------    -------------    -------------
         Net cash provided by investing activities                      1,981            1,632            5,796
                                                                 -------------    -------------    -------------

 FINANCING ACTIVITIES:
   Net borrowings  on note payable under
    revolving line of credit                                           17,750                -                -
   Net borrowings  on note payable under
    retail floor plan agreement                                           919            1,071                -
   Payments on long-term debt                                          (3,976)          (3,431)         (17,454)
   Proceeds from long-term borrowings                                       -                -           10,000
   Proceeds from exercise of stock options                              1,109              939               14

                                                                 -------------    -------------    -------------
        Net cash provided by (used in) financing activities            15,802           (1,421)          (7,440)
                                                                 -------------    -------------    -------------

 NET DECREASE IN CASH AND CASH EQUIVALENTS                            (17,295)            (719)          (2,546)

 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                          31,674           32,393           34,939

                                                                 -------------    -------------    -------------
 CASH AND CASH EQUIVALENTS, END OF YEAR                        $       14,379   $       31,674    $      32,393
                                                                 =============    =============    =============


 See notes to consolidated financial statements.

</TABLE>


<PAGE>


CAVALIER HOMES, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
--------------------------------------------------------------------------------

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation - The consolidated financial statements include the
accounts of Cavalier Homes, Inc. and its wholly-owned and majority-owned
subsidiaries (collectively, the "Company"). The Company's minority ownership
interests in various joint ventures are accounted for using the equity method
and are included in other assets in the accompanying consolidated balance sheets
(see Note 13). Intercompany transactions have been eliminated in consolidation.
See Note 12 for information related to the Company's business segments.

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

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

Fair Value of Financial Instruments - The carrying value of the Company's cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximates fair value because of the short-term nature of these instruments.
Additional information concerning the fair value of other financial instruments
is disclosed in Notes 4 and 6.

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

Accounts Receivable - Accounts receivable are carried at original invoice amount
less an estimated allowance for doubtful accounts. Management determines the
allowance for doubtful accounts by identifying troubled accounts and estimating
expected losses using historical experience.

Installment Contracts Receivable - Installment contracts receivable of CIS
Financial Services, Inc. ("CIS"), a wholly- owned subsidiary, are reported at
their outstanding unpaid principal balances reduced by any charge-off or
specific valuation accounts. The Company purchases the majority of its contracts
receivable with the intent to resell the loans, with limited recourse, to
financial institutions under the terms of retail financing agreements. The
recourse provisions obligate CIS to repurchase the loan from certain third party
financial institutions if any of the first four payments on a loan become 90
days delinquent. The Company has never been obligated to repurchase the loans
under the limited recourse provisions of these contracts. Such sales are
accounted for under the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. Loans purchased for resale are
recorded in the Company's balance sheet at the lower of cost or market and are
classified as held for sale if the Company has the intent and believes that it
has the ability to resell the loans within a one year from acquisition based on
the terms of retail financing agreements with various financial institutions.
Deferred loan origination costs are not significant.

Allowance for Credit Losses on Installment Contracts - The Company has provided
an allowance for estimated future credit losses resulting from retail financing
activities of CIS based on management's periodic evaluation of the Company's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral and current economic conditions. The allowance for
credit losses is increased by charges to income and decreased by charge-offs
(net of recoveries).

Inventories - Inventories are stated at the lower of cost (first-in, first-out
method) or market. Work-in-process and finished goods inventories include an
allocation for labor and overhead costs. Included in finished goods are
repossessed inventories of CIS which are recorded at estimated net realizable
value.


<PAGE>


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

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

Revenue Recognition - Revenue for manufactured homes sold to independent dealers
generally is recorded when all of the following conditions have been met; (a) an
order for the home has been received from the dealer, (b) an agreement with
respect to payment terms (usually in the form of a written or verbal approval
for payment has been received from the dealer's flooring institution), and (c)
the home has been shipped and risk of loss has passed to the dealer. All sales
are final and without recourse except for the contingency described in Note 11.
Estimated sales incentives, including rebates, payable to the Company's
independent retailers are accrued at the time of sale and are recorded as a
reduction of revenue. For Company-owned retail locations, revenue is recorded
when the home has been delivered and accepted by the retail customer, risk of
ownership has been transferred and funds have been received. Interest income on
installment contracts receivable is recognized using a method which approximates
the interest method. Accrual of interest income on installment contracts
receivable is suspended when a loan is contractually delinquent for 90 days or
more. The accrual is resumed when the loan becomes contractually current, and
past-due interest income is recognized at that time.

Product Warranties - The Company provides the retail home buyer a one-year
limited warranty covering defects in material or workmanship in home structure,
plumbing and electrical systems. The Company has provided a liability of $13,190
(2005) and $13,255 (2004) for estimated future warranty costs relating to homes
sold, based upon management's assessment of historical experience factors and
current industry trends. Activity in the liability for product warranty was as
follows:
<TABLE>
<CAPTION>
<S>                                                                                  <C>                <C>                  <C>
                                                                                     2005               2004                2003
                                                                                ----------------   ----------------    ------------
Balance, beginning of year                                                   $            13,255    $        13,475    $   15,000
Provision  for warranties issued in the current year                                      15,850             15,016        13,118
Adjustments for warranties issued in prior years                                            (580)              (593)        8,076
Payments                                                                                 (15,335)           (14,643)      (22,719)
                                                                                ----------------   ----------------    ------------
Balance, end of year                                                         $            13,190    $        13,255    $   13,475
                                                                                ================   ================    ============
</TABLE>

Reserve for Repurchase Commitments -
The Company is contingently liable under terms of repurchase agreements with
financial institutions providing inventory financing for retailers of its
products. These arrangements, which are customary in the industry, provide for
the repurchase of products sold to retailers in the event of default by the
retailer. The risk of loss under these agreements is spread over numerous
retailers. The price the Company is obligated to pay generally declines over the
period of the agreement (generally 18 - 24 months) and the risk of loss is
further reduced by the sales value of repurchased homes. The Company applies
FASB Interpretation ("FIN") No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to
Others, an interpretation of FASB Statements No. 5, 57, and 107 and a rescission
of FASB Interpretation No. 3 and SFAS No. 5, Accounting for Contingencies to
account for its liability for repurchase commitments. Under the provisions of
FIN 45, during the period in which a home is sold (inception of a repurchase
commitment), the Company records the greater of the estimated fair value of the
non-contingent obligation or a contingent liability under the provisions of SFAS
No. 5, based on historical information available at the time, as a reduction to
revenue. Additionally, subsequent to the inception of the repurchase commitment,
the Company evaluates the likelihood that it will be called on to perform under
the inventory repurchase commitments. If it becomes probable that a dealer will
default and a SFAS No. 5 loss reserve should be recorded, then such contingent
liability is recorded equal to the estimated loss on repurchase. Based on
identified changes in dealers' financial conditions, the Company evaluates the
probability of default for the group of dealers who are identified at an
elevated risk of default and applies a probability of default to the group,
based on historical default rates. Changes in the reserve are recorded as an
adjustment to revenue. Following the inception of the commitment, the recorded
reserve is reduced over the repurchase period and is eliminated once the dealer
sells the home.
<PAGE>


Insurance - The Company's workers' compensation (prior to February 1, 1999, and
after April 1, 2001), product liability and general liability insurance
coverages were provided under incurred loss, retrospectively rated premium
plans. Under these plans, the Company incurs insurance expense based upon
various rates applied to current payroll costs and sales. Annually, such
insurance expense is adjusted by the carrier for loss experience factors subject
to minimum and maximum premium calculations. Refunds or additional premiums are
estimated and recorded when sufficiently reliable data is available. The
Company's workers' compensation insurance coverage from February 1999 through
March 2001 was provided under a fully insured, large deductible policy, and
during 2001, the Company's product liability and general liability insurance
coverages were converted to a fully insured, large deductible policy.

Other Income (Expense): Other, net - Other, net included in the Company's
consolidated statement of operations caption is comprised primarily of interest
income (unrelated to financial services) and dividends received from an
unconsolidated investee accounted for under the cost method.
..
Net Income (Loss) Per Share - The Company reports two separate net income (loss)
per share numbers, basic and diluted. Both are computed by dividing net income
(loss) by the weighted average shares outstanding (basic) or weighted average
shares outstanding assuming dilution (diluted) as detailed below:

<TABLE>
<CAPTION>
<S>                                                                        <C>                <C>                <C>
                                                                          2005               2004               2003
                                                                     ----------------   ----------------   ----------------
Weighted average common shares outstanding - basic                        18,118,619         17,879,939         17,666,192
Dilutive effect if stock options were exercised                              238,176            298,455                  -
                                                                     ----------------   ----------------   ----------------
Weighted average common shares outstanding - diluted                      18,356,795         18,178,394         17,666,192
                                                                     ================   ================   ================
</TABLE>
Options that were potentially dilutive to basic net income per share were not
included in the computation of diluted net income per share because to do so
would have been anti-dilutive. All options in 2003 are excluded due to their
antidilutive effect as a result of the Company's net loss. The maximum
anti-dilutive options were 1,339,897, 1,371,420, and 2,686,000 for 2005, 2004,
and 2003, respectively.

Stock Based Compensation Plans - In December 2004, the FASB issued SFAS No.
123R, Accounting for Stock-Based Compensation, a revision of SFAS No. 123, which
supersedes Accounting Principles Board Opinion 25 Accounting for Stock Issued to
Employees. In April 2005, the effective date of SFAS No. 123R was postponed
until fiscal years beginning after June 15, 2005. The fair value method of
accounting for stock based awards pursuant to SFAS No. 123R will require the
Company to record compensation cost over the vesting period of awards of equity
instruments based on the grant date fair value of the award and applies to new
awards issued, awards modified, repurchased or cancelled and unvested awards
after the effective date. SFAS No. 123R also requires the benefits of tax
deductions in excess of recognized compensation cost be reported as a financing
cash flow, rather than as an operating cash flow as required under previous
literature. This requirement will reduce net operating cash flows and increase
net financing cash flows after the effective date.

Prior to the adoption of SFAS No. 123R on January 1, 2006, the Company has used
the intrinsic value method under APB No. 25. No compensation cost has been
recognized, as all options carried exercise prices equal to the market prices of
the underlying common stock on the dates of grant. The change to the fair value
method will be accounted for prospectively to all awards granted, modified, or
settled after January 1, 2006. Had compensation cost been determined based on
the fair value at the grant date for awards, the Company's net income (loss) and
net income (loss) per share would approximate the pro forma amounts below.

<TABLE>
<CAPTION>
<S>                                                                <C>                <C>               <C>
                                                                 2005               2004               2003
                                                            ---------------    ---------------    ---------------

Net income (loss), as reported                            $         10,915      $        3,241     $      (4,570)
Less:  Total stock-based employee compensation
  expense determined under fair value based method
  for all awards, net of related tax effects                            76                  42                 71
                                                            ---------------    ---------------    ---------------
  Pro forma                                               $         10,839      $        3,199     $      (4,641)
                                                            ===============    ===============    ===============

Income (loss) per share:
Basic:
  As reported                                             $           0.60      $        0.18      $       (0.26)
  Pro forma                                               $           0.60      $        0.18      $       (0.26)

Diluted:
  As reported                                             $           0.59      $        0.18      $       (0.26)
  Pro forma                                               $           0.59      $        0.18      $       (0.26)
</TABLE>

<PAGE>

Recently Issued Accounting Pronouncements - In November 2004, the FASB issued
Statement No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. SFAS
No. 151 requires that abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage) be recognized as current period
charges. SFAS No. 151 also requires that the "allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities." Normal capacity is defined as "the production expected
to be achieved over a number of periods or seasons under normal circumstances,
taking into account the loss of capacity resulting from planned maintenance."
This statement becomes effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. The Company does not expect the adoption of
this statement to have a material effect on the Company's consolidated financial
statements.

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

Reclassifications - Certain amounts from the prior periods have been
reclassified to conform to the 2005 presentation.

2.  DISCONTINUED OPERATIONS

In February 2005, the Company announced its decision to close an underperforming
home manufacturing plant in Ft. Worth, Texas, which accounted for about 10% of
total revenue and 11% of floor shipments in 2004 and had net property, plant and
equipment of $2,403 at December 31, 2004. During 2004, the Company recorded
impairment and other related charges of $209 ($209 after tax or $0.01 per
diluted share) for writedowns for certain property, plant and equipment related
to the closing. The Ft. Worth plant employed approximately 150 people, each of
whom received a severance benefit paid at the date the employee ceased rendering
service. The Company has incurred all expected employee termination costs, and
during 2005, recorded involuntary termination benefits of $878 ($878 after tax
or $0.06 per diluted share). The Company sold the property, plant and equipment
of the Ft. Worth facility in June 2005 realizing a gain of $439. These amounts
are included in the line item "Loss from discontinued operations" in the
accompanying income statements.

Emerging Issues Task Force (EITF) No. 03-13, Applying the Conditions in
Paragraph 42 of SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, in Determining Whether to Report Discontinued Operation,
defines the assessment period to consider classification of a disposed component
as discontinued operations. Such assessment period begins at the point a
disposed component meets the criteria to be classified as held for sale or is
disposed of through one year after the component is actually disposed. The
disposal of the property, plant and equipment of the Company's Ft. Worth
facility met the criteria to be classified as held for sale at the end of the
first quarter of 2005. Under the provisions of EITF 03-13, the Company updated
its evaluation of its continuing involvement through continued sales to dealers
of the Ft. Worth facility from its other home manufacturing plants at each
quarter end after the first quarter of 2005. Although the Company had hoped to
retain a greater portion of the Ft. Worth facility's dealers and sales base,
during the fourth quarter of 2005, the sustained sales had fallen below 15% of
the prior year's sales from the Ft. Worth plant. Accordingly, in the fourth
quarter of 2005, it became appropriate under the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, for the Company
to classify its Ft. Worth operations as discontinued operations, and
accordingly, reclassified the information previously reported in its
consolidated statements of operations.

Summary operating results of the discontinued operations for the years ended
December 31, 2005, 2004 and 2003 were:
<TABLE>
<CAPTION>
<S>                                                                         <C>                <C>               <C>
                                                                           2005               2004               2003
                                                                       --------------    ---------------     --------------

Revenue                                                              $         3,124   $         22,421    $        28,828
Loss from discontinued operations                                             (1,599)            (2,231)            (2,715)
</TABLE>

3.    IMPAIRMENT AND OTHER RELATED CHARGES

In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, the Company records the liability, measured at fair value,
for costs associated with an exit or disposal activity when the liability is
incurred. SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, provides that a long-lived asset or asset group that is to be sold shall
be classified as "held for sale" if certain criteria are met, including the


<PAGE>

expectation supported by evidence that the sale will be completed within one
year. The Company had idle assets of $8,343 (2005) and $10,262 (2004) recorded
at the lower of carrying value or fair value. Idle assets are comprised
primarily of closed home manufacturing facilities which the Company is
attempting to sell. Management does not have evidence at the balance sheet date
that it is probable that the sale of these assets will occur within one year,
and thus, in accordance with the requirements of SFAS No. 144, such assets are
classified as "held and used" and depreciation has continued on these assets.
During 2005, the Company reopened a home manufacturing plant in Winfield,
Alabama. The following paragraphs describe impairment and other related charges
recorded in the current and prior years on the most significant of the closed
facilities.

During 2005, the Company recorded impairment and other related charges of $143
($143 after tax or $0.00 per diluted share) to writedown property, plant and
equipment in connection with the valuation of a home manufacturing facility
closed in a prior year.

During 2003, the Company recorded impairment and other related charges of $750
($750 after tax or $0.04 per diluted share) in connection with the closing of a
home manufacturing facility in August 2003, the pending sale of another home
manufacturing facility closed in December 2002 and the closing of an
underperforming retail location in August 2003. The charge included writedowns
of $551 for property, plant and equipment and $199 for involuntary termination
benefits which were recorded as incurred and paid.

Payments of $8 (2004) and $1,612 (2003) were made against the reserve for lease
obligations and involuntary termination benefits established for exit or
disposal activities initiated before January 1, 2003. At December 31, 2005 and
2004, there were no reserves for lease and other obligations.

4.    INSTALLMENT CONTRACTS RECEIVABLE

CIS finances retail sales through the purchase of installment contracts
primarily from a portion of the Company's dealer network, at fixed interest
rates, in the ordinary course of business, and resells a majority of the loans
to financial institutions under the terms of retail finance agreements. CIS
enters into agreements to sell, with limited recourse, contracts in its
portfolio that meet specified credit criteria. The recourse provisions obligate
CIS to repurchase the loan from certain third party financial institutions if
any of the first four payments on a loan become 90 days delinquent. The Company
has never been obligated to repurchase the loans under the limited recourse
provisions of these contracts. Under these agreements, CIS sold $34,625,
$31,905, and $35,953 of contracts receivable and realized gains of $1,310, $940,
and $1,115 for the years ended December 31, 2005, 2004, and 2003, respectively.
Standard loan programs require minimum down payments, ranging from 5% to 20% of
the purchase price of the home, on all installment contracts based on the
creditworthiness of the borrower. CIS's portfolio consists of fixed rate
contracts with interest rates generally ranging from 8.0% to 14.0% and from 7.0%
to 15.0% at December 31, 2005 and 2004, respectively. The average original term
of the portfolio was approximately 265 and 270 months at December 31, 2005 and
2004, respectively. For loans held in its portfolio, CIS requires the borrower
to maintain adequate insurance on the home throughout the life of the contract.
Contracts are secured by the home which is subject to repossession by CIS upon
default by the borrower. At December 31, 2005, scheduled principal payments of
installment contracts receivable (including expected sales of contracts
receivable in 2006) are as follows:

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

 Year Ending
 December 31,
---------------------------
     2006                                 $     7,703
     2007                                         111
     2008                                         123
     2009                                         136
     2010                                         151
  Thereafter                                    6,843
                                            ----------

                     Total                $    15,067
                                            ==========

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


<PAGE>


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

                                 2005         2004          2003
                               ----------   ----------    ----------

Balance, beginning of year   $       953  $     1,030   $       859
Provision for credit losses          857           75           354
Charge offs, net                    (842)        (152)         (183)
                               ----------   ----------    ----------
Balance, end of year         $       968  $       953   $     1,030
                               ==========   ==========    ==========


</TABLE>

At December 31, 2005 and 2004, the estimated fair value of installment contracts
receivable, excluding loans identified as presenting uncertainty with respect to
collectibilty, was $15,287 and $8,366 respectively. These fair values were
estimated using discounted cash flows and interest rates offered by CIS on
similar contracts at such times.

5.    INVENTORIES

Inventories consisted of the following:

<TABLE>
<CAPTION>
<S>                            <C>                <C>
                               2005              2004
                           --------------    --------------
Raw materials           $         17,611  $         11,326
Work-in-process                    1,305             1,159
Finished goods                     8,387             2,424
                           --------------    --------------
Total inventory         $         27,303  $         14,909
                           ==============    ==============

</TABLE>
During 2005, 2004, and 2003, the Company purchased raw materials of
approximately $21,586, $17,680, and $14,580, respectively, from joint ventures
in which the Company owns a minority interest.

6.    CREDIT ARRANGEMENTS

During 2005, the Company entered into agreements as a subcontractor to provide
2,638 homes to the Federal Emergency Management Agency (FEMA) as part of that
agency's hurricane relief efforts. In order to fund the Company's short term
cash needs required to fulfill the orders of FEMA homes, on December 6, 2005,
the Company amended its credit facility (the "Credit Facility") with its primary
lender to provide for an available revolving line of credit during the period of
October 25, 2005 through April 30, 2006 (the "first temporary advance period")
of $50,000 and during the period of May 1, 2006 through July 31, 2006 (the
"second temporary advance period") of $25,000, effectively waiving temporarily
the tangible net worth requirement listed below. Additionally, on October 25,
2005, the capital expenditure covenant was modified to allow for capital
expenditures of $2,000 for the year ended December 31, 2005. The maturity date
under the revolving line of credit remains at April 2007.

The Credit Facility is comprised of a revolving line of credit which provides
for borrowings (including letters of credit) up to $25,000 ($50,000 during the
first temporary advance period) and a real estate term loan (14 year) component
of $10,000, which are cross-secured and cross-defaulted. The amount available
under the revolving line of credit, up to $25,000 ($50,000 during the first
temporary advance period), is equal to the lesser of an amount based on defined
percentages of accounts and notes receivable and inventories or certain levels
of tangible net worth plus all treasury stock purchases after December 31, 2003
(waived during the temporary advance periods), as noted in the following table.
<TABLE>
<CAPTION>
<S>         <C>                          <C>
  Tangible Net Worth              Credit Facility
        ("TNW")                      Available
------------------------      -------------------------
Above $50,000                 30% of TNW
$50,000 - $38,000             $15,000
$38,000 - $23,000             $15,000 to zero (dollar
                              for dollar reduction)
</TABLE>
At December 31, 2005, under the revolving line of credit, $26,341 was available
after deducting letters of credit of $5,909. During the fourth quarter of 2005,
the Company borrowed $17,750 under the revolving line of credit, in order to
fund the Company's short term cash needs required to fulfill the outstanding
FEMA order. During the first quarter of 2006, the line of credit balance was
paid in full. The Company did not have any amounts outstanding under the
revolving line of credit at December 31, 2004.

<PAGE>


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

<TABLE>
<CAPTION>
<S>        <C>                          <C>
  Tangible Net Worth
        ("TNW")                    Interest Rate
------------------------      -------------------------

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

</TABLE>

The bank's prime rate at December 31, 2005 and 2004 was 7.25% and 5.25%
respectively. A director of the Company served as president of the primary
lender until August 31, 2004. The Company made payments to its lender in the
amount of $694 (2004) and $698 (2003) for interest, commitment fees, letter of
credit and various bond related fees.

The real estate term loan agreement contained in the Credit Facility provided
for borrowings of $10,000, of which $4,219 and $6,857 was outstanding at
December 31, 2005 and December 31, 2004, respectively. Interest on the term note
is fixed for a period of five years from issuance at 6.5% and may be adjusted at
5 and 10 years. Amounts outstanding under the real estate term loan are
collateralized by certain plant facilities and equipment.

The Credit Facility, as amended, contains certain restrictive and financial
covenants which, among other things, limit the Company's ability without the
lender's consent to (i) make dividend payments and purchases of treasury stock
in an aggregate amount which exceeds 50% of consolidated net income for the two
most recent years, (ii) mortgage or pledge assets which exceed in the aggregate
$1,000, (iii) incur additional indebtedness, including lease obligations, which
exceed in the aggregate $1,000, excluding floor plan notes payable which cannot
exceed $3,000 and (iv) make annual capital expenditures of $2,000 for the year
ended December 31, 2005 and $1,000, thereafter. In addition, the Credit Facility
contains certain financial covenants requiring the Company to maintain on a
consolidated basis certain defined levels of debt to tangible net worth ratio
(not to exceed 2.5 to 1) and cash flow to debt service ratio of not less than
1.35 to 1 commencing with the year ending December 31, 2005 and 1.5 to 1 for the
years ending December 31, 2006 and thereafter, and to maintain a current ratio,
as defined, of at least 1.0 to 1 and consolidated tangible net worth of at least
$23,000. The Credit Facility also requires CIS to comply with certain specified
restrictions and financial covenants. At December 31, 2005, the Company was in
compliance with its debt covenants.

The Company has amounts outstanding under five Industrial Development Revenue
Bond issues ("Bonds") which totaled $4,910 and $6,248 at December 31, 2005 and
2004, respectively. Four of the bond issues bear interest at variable rates
ranging from 4.85% to 5.40% and mature at various dates through April 2009. One
of the bond issues is payable in annual installments through 2013 with interest
payable monthly at a variable rate currently at 3.91% as determined by a
remarketing agent. The real estate term loan and the bonds are collateralized by
substantially all of the Company's plant facilities and equipment. Restricted
bond funds of $0 and $148 are reflected as a non-current asset in the
consolidated balance sheets as December 31, 2005 and 2004, respectively.

The Company has $1,990 and $1,071 of notes payable under a retail floor plan
agreement at December 31, 2005 and December 31, 2004, respectively. The notes
are collateralized by certain Company-owned retail stores' new home inventories
and bear interest rates ranging from prime to prime plus 2.5% but not less than
6% based on the age of the home.



<PAGE>


At December 31, 2005, principal repayment requirements on long-term debt are as
follows:

<TABLE>
<CAPTION>
<S>     <C>                                                        <C>
 Year Ending
 December 31,
---------------
       2006                                              $        1,498
       2007                                                       1,570
       2008                                                       1,198
       2009                                                       1,263
       2010                                                         444
    Thereafter                                                    3,156
                                                               -------------
                    Total                                         9,129
Less current portion                                              1,498
                                                               -------------
                    Long-term debt                       $        7,631
                                                               =============
</TABLE>

At December 31, 2005 and 2004, the estimated fair value of outstanding
borrowings was $8,806 and $13,001. These estimates were determined using rates
at which the Company believes it could have obtained similar borrowings at such
times.

Cash paid for interest during the years ended December 31, 2005, 2004, and 2003
was $1,234, $1,114, and $1,165, respectively.

7.    STOCKHOLDERS' EQUITY

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

Pursuant to a common stock repurchase program approved by the Company's Board of
Directors, a total of 3,168,800 shares have been purchased at a cost of $24,842.
The Company retired 2,151,500 of these shares at December 31, 1999, with the
remaining shares being recorded as treasury stock. During 2005, the Company
reissued 34,000 treasury shares upon the exercise of stock options. At December
31, 2005, the Company has authority under the program to acquire up to 831,200
additional shares.

8.    INCENTIVE PLANS

The Board of Directors of the Company adopted and the stockholders approved the
2005 Incentive Compensation Plan (the "2005 Incentive Plan") which provides for
both incentive stock options and non-qualified stock options. Additionally, the
2005 Incentive Plan provides for stock appreciation rights and awards of both
restricted stock and performance shares. Awards are granted at prices and terms
determined by the compensation committee of the Board of Directors. The term
over which awards granted under the 2005 Plan expire cannot exceed ten years
from the date of grant. The Company had a Key Employee Stock Incentive Plan (the
"1996 Plan"), but upon adoption of the 2005 Incentive Plan, the Company did not
make future grants under the 1996 Plan and the 1996 Plan was terminated.
However, the shares of common stock that remained available under the 1996 Plan
at the time of its termination were incorporated into the 2005 Incentive Plan,
along with any shares subject to options previously granted under the 1996 Plan
which lapse, terminate or are canceled up to a maximum of 1,500,000 shares.
Furthermore, the termination of the 1996 Plan did not affect any options which
were outstanding and unexercised under that Plan. As of December 31, 2005,
shares authorized for grant and available to be granted under the 2005 Incentive
Plan totaled 1,018,834 shares.

The Board of Directors of the Company adopted and the shareholders approved the
2005 Non-Employee Directors Stock Option Plan (the "2005 Non-Employee Directors
Plan") under which 500,000 shares of the Company's common stock were reserved
for grant to non-employee directors. Options are granted upon the director's
<PAGE>

initial election and automatically on an annual basis thereafter at fair market
value on the date of such grant. Stock option grants become exercisable at a
rate of 1/12th of the shares subject to the stock option on each monthly
anniversary of its date of grate and expire ten years from the date of grant.
The Company had a 1993 Non-employee Director Plan, (the "1993 Plan"), but upon
adoption of the 2005 Non-Employee Directors Plan, the Company did not make
future grants under the 1993 Plan and the 1993 Plan was terminated. However, the
termination of the 1993 Plan did not affect any options which were outstanding
and unexercised under that Plan. As of December 31, 2005, shares available to be
granted under the 2005 Non-Employee Directors Plan totaled 500,000 shares.

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

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

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

                                                                 2005               2004               2003
                                                            ---------------    ---------------    ---------------

Dividend yield                                                       0.00%              0.00%              0.00%
Expected volatility                                                 61.77%             62.51%             62.79%
Risk free interest rate                                              3.71%              3.52%              2.55%
Expected lives                                                   5.0 years          5.0 years          5.0 years

</TABLE>

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

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



<PAGE>


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

 <TABLE>
<CAPTION>
<S>                                                               <C>                   <C>                    <C>
                                                                                                            Weighted
                                                                                     Weighted                Average
                                                               Shares                 Average              Fair Value
                                                                                  Exercise Price          at Grant Date
                                                         --------------------   --------------------   --------------------

 OUTSTANDING, JANUARY 1, 2003                                      2,884,261                 $ 7.79
   Granted at fair value                                              75,000                   1.72                 $ 0.94
   Exercised                                                         (10,000)                  1.39
   Cancelled                                                        (474,674)                  6.71
                                                         --------------------

 OUTSTANDING, DECEMBER 31, 2003                                    2,474,587                 $ 7.84
   Granted at fair value                                              25,000                   2.99                 $ 1.67
   Exercised                                                        (299,630)                  3.14
   Cancelled                                                        (115,571)                  8.97
                                                         --------------------

 OUTSTANDING, DECEMBER 31, 2004                                    2,084,386                   8.39
   Granted at fair value                                              25,000                   5.51                 $ 3.05
   Exercised - increase in common shares                            (293,131)                  3.39
   Exercised - treasury shares reissued                              (34,000)                  3.40
   Cancelled                                                         (43,583)                  9.72
                                                         --------------------

 OUTSTANDING, DECEMBER 31, 2005                                    1,738,672                 $ 9.26
                                                         ====================   ====================


 Options exercisable at December 31, 2005                          1,738,672                 $ 9.26
                                                         ====================   ====================

 Options exercisable at December 31, 2004                          2,084,386                 $ 8.39
                                                         ====================   ====================

 Options exercisable at December 31, 2003                          2,474,587                 $ 7.84
                                                         ====================   ====================

</TABLE>

The following table summarizes information concerning stock options outstanding
at December 31, 2005:

<TABLE>
<CAPTION>
<S>                            <C>                 <C>            <C>              <C>              <C>
                                      Options Outstanding                         Options Exercisable
                    -----------------------------------------------------    ------------------------------

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

   $1.69 - $4.00               427,673              5.76   $        3.38           427,673  $         3.38
   $4.00 - $9.63                95,400              4.31            8.76            95,400            8.76
  $9.63 - $12.35               964,399              1.49           10.40           964,399           10.40
  $12.35 - $16.60              251,200              0.46           15.10           251,200           15.10
                        ---------------                                      --------------
  $1.69 - $16.60             1,738,672              2.55   $        9.26         1,738,672  $         9.26
                        ===============                      ============    ==============   =============

</TABLE>




<PAGE>


9.    INCOME TAXES

Provision (benefit) for income taxes consists of:

<TABLE>
<CAPTION>
<S>                                                                            <C>              <C>               <C>
                                                                              2005              2004              2003
                                                                         ---------------   ---------------   ---------------
Current
   Federal                                                             $           3350    $            -    $         (672)
   State                                                                            589                 75              154
   Reduction of current expense by net operating loss carryforward               (2,657)                -                 -
                                                                         ---------------   ---------------   ---------------
                                                                                  1,282                 75             (518)

Deferred
   Federal                                                             $           (983)  $             -    $            -
   State                                                                           (331)                -                 -
                                                                         ---------------   ---------------   ---------------
                                                                                 (1,314)                -                 -

Total                                                                  $            (32) $             75    $         (518)
                                                                         ===============   ===============   ===============

</TABLE>
The exercise of stock options resulted in a tax benefit and has been reflected
as a reduction of income taxes payable and an increase to additional paid-in
capital. Such benefits recorded were $654, $0 and $7 for the years ended
December 31, 2005, 2004 and 2003, respectively.

Total provision for income tax (benefit) differs from the amount of income tax
determined by applying the applicable U.S statutory federal income tax rate to
income (loss) before taxes as a result of the following differences:

<TABLE>
<CAPTION>
<S>                                                                            <C>               <C>              <C>
                                                                              2005              2004              2003
                                                                         ---------------   ---------------   ---------------

Income tax provision (benefit) at expected federal income tax rate     $           3813    $         1160    $       (1,781)
State income tax provision (benefit), net of federal tax effect                   1,213              (148)              712
Change in valuation allowance                                                    (5,825)             (916)            1,968
Expiration of carryforward items                                                    489                 -                 -
Non-deductible operating expenses                                                   107               124                24
Retrun to provision adjustments                                                     357                 -                 -
Adjustments to prior year's tax provisions                                            -               106            (1,345)
Other                                                                              (186)             (251)              (96)
                                                                         ---------------   ---------------   ---------------

Total                                                                  $            (32)  $            75   $          (518)
                                                                         ===============   ===============   ===============
</TABLE>

Realization of deferred tax assets (net of recorded valuation allowances) is
largely dependent upon future profitable operations and future reversals of
existing taxable temporary differences. In 2004, pursuant to SFAS No. 109,
Accounting for Income Taxes, because the Company had operated at a cumulative
loss in its three most recent calendar years and because it believed difficult
competitive and economic conditions might continue for the foreseeable future, a
$19,607 valuation allowance was recorded to fully reserve net deferred tax
assets. However, in 2005, as a result of continued improvements in operating
performance and projected income and tax liability for 2006, the Company
reversed a portion of the deferred tax asset valuation allowance realizing
$1,314 in deferred tax benefits. In assessing the need for a valuation
allowance, the Company considered all positive and negative evidence, including
anticipated operating results, scheduled reversals of deferred tax liabilities,
and tax planning strategies. Because the Company believes challenging industry
conditions persist, the Company believes that under the standards of SFAS No.
109 it is not appropriate to record income tax benefits in excess of the benefit
projected to be realized in 2006. As of December 31, 2005, the Company
maintained a valuation allowance of $13,782. The valuation allowance may be
reversed to income in future periods to the extent that the related deferred
income tax assets are realized or the valuation allowances are otherwise no
longer required.

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. Deferred tax assets and liabilities are comprised of the
following as of December 31, 2005 and 2004:


<PAGE>


<TABLE>
<CAPTION>
<S>                                                                       <C>           <C>
                                                                         2005           2004
                                                                         Assets (Liabilities)
                                                                      -----------------------------
  Current differences
     Warranty expense                                               $       4,834  $       5,052
     Inventory capitalization                                                 998            751
     Allowance for losses on receivables                                      382            412
     Accrued expenses                                                       2,792          3,131
     Repurchase commitments                                                   491            811
                                                                      ------------     ------------
                                                                            9,497         10,157
     Less valuation allowance                                               8,577          9,742
                                                                      ------------     ------------
Total                                                               $         920  $         415
                                                                      ============   ============


                                                                         2005           2004
                                                                         Assets (Liabilities)
                                                                      -----------------------------

Non-current differences
     Depreciation and basis differential of acquired assets         $       1,340  $         931
     Net operating loss and other carryforwards                             3,971          6,945
     Goodwill                                                                 251            292
     Other assets                                                             188          1,289
     Other liabilities                                                       (151)            (7)
                                                                      ------------   ------------
                                                                            5,599          9,450
     Less valuation allowance                                               5,205          9,865
                                                                      ------------   ------------
    Total                                                           $         394  $        (415)
                                                                      ============   ============

</TABLE>

In 2005 the Company utilized federal net operating loss carry forwards of $6,843
and state net operating loss carry forwards of $4,208 to reduce taxes otherwise
payable. At December 31, 2005, the Company had federal and state net operating
loss carryforwards of $746 and $57,146, respectively. The net operating loss
carryforwards will expire as follows:

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

                                                                        Federal         State
                                                                      ------------   ------------
     2010                                                           $         746  $           -
     2019                                                                       -             87
     2020                                                                       -         26,105
     2021                                                                       -          8,746
     2022                                                                       -         14,612
     2023                                                                       -          5,873
     2024                                                                       -          1,621
     2025                                                                       -            102

</TABLE>
The Company has recorded a liability for tax contingencies where it is likely
that certain tax return positions will be challenged and the Company's position
may not prevail. The liability for tax contingencies is calculated using
historical financial information, multiplied by the effective tax rate and
includes an applicable interest accrual applied where appropriate. The liability
for tax contingencies is adjusted when circumstances warrant, including the
progression of authority audits, emerging case law and legislation. Open tax
years for which the Company is subject to audit vary by tax jurisdiction. The
Company estimates the maximum liability for tax contingencies to be $643 and has
recorded a liability for tax contingencies of $268 (2005) and $300 (2004).

Net cash paid (received) for income taxes for the years ended December 31, 2005,
2004, and 2003 were $18, $128, and $(6,645), respectively.

10.   EMPLOYEE BENEFIT PLANS

The Company has self-funded group medical plans which are administered by third
party administrators. The medical plans have reinsurance coverage limiting
liability for any individual employee loss to a maximum of $100, with an
aggregate limit of losses in any one year based on the number of covered
employees. Incurred claims identified under the Company's incident reporting
system and incurred but not reported claims are funded or accrued based on


<PAGE>

estimates that incorporate the Company's past experience, as well as other
considerations such as the nature of each claim or incident, relevant trend
factors and advice from consulting actuaries. The Company has established
self-insurance trust funds for payment of claims and makes deposits to the trust
funds in amounts determined by consulting actuaries. The cost of these plans to
the Company was $1,579, $1,809, and $2,901 for years ended December 31, 2005,
2004, and 2003, respectively which includes $24, $62, and $161 related to the
Ft. Worth facility and included in the "Loss from discontinued operations" in
the accompanying consolidated statements of operations.

The Company sponsors an employee 401(k) retirement plan covering all employees
who meet participation requirements. Employee contributions are limited to a
percentage of compensation as defined in the plan. The amount of the Company's
matching contribution is discretionary as determined by the Board of Directors.
Company contributions amounted to $423, $413, and $422 for the years ended
December 31, 2005, 2004, and 2003, respectively.

11.   COMMITMENTS AND CONTINGENCIES

Operating Leases:
The Company is obligated under various operating lease agreements with varying
monthly payments and expiration dates through July 2008. Total rent expense
under operating leases was $238, $205, and $278 for the years ended December 31,
2005, 2004, and 2003, respectively.

Future minimum rents payable under operating leases that have initial or
remaining noncancelable lease terms in excess of one year at December 31, 2005
are as follows:

<TABLE>
<CAPTION>
<S>     <C>                                   <C>
      Year Ending
     December 31,
------------------------

    2006                             $        112
    2007                                      112
    2008                                       53
    2009                                        4
                                       -----------
                  Total              $        281
                                       ===========

</TABLE>

Contingent Liabilities and Other:
   a.      Under the repurchase agreements described in Note 1, the Company was
           contingently liable at December 31, 2005, to financial institutions
           providing inventory financing for retailers of its products up to a
           maximum of approximately $52,000 in the event the Company must
           perform under the repurchase commitments. The Company recorded an
           estimated liability of $1,270 at December 31, 2005 and $2,052 at
           December 31, 2004 related to these commitments. Activity in the
           reserve for repurchase commitments was as follows:

<TABLE>
<CAPTION>
<S>                                                             <C>     <C>      <C>
                                                              2005          2004        2003
                                                             -------      -------     -------

Balance, beginning of year                                $   2,052     $  3,070   $   4,000
Reduction for payments made on inventory repurchases            (86)        (717)     (1,133)
Recoveries on inventory repurchases                              -            -          428
Accruals for guarantees issued during the period              2,059        2,337       2,754
Reduction to pre-existing guarantees due to declining
 obligation or expired guarantees                            (2,415)      (2,258)     (1,719)
Changes to the accrual for pre-existing guarantees for
 those dealers deemed to be probable of default                (340)        (380)     (1,260)
                                                             -------      -------     -------
Balance, end of year                                      $   1,270     $  2,052   $    3,070
                                                             =======     =======      =======
</TABLE>
          In conjunction with the review of its critical accounting estimates,
          the Company evaluated its historical loss factors applied to the
          reserve for repurchase commitments, including changes in dealers'
          circumstances and industry conditions, for those dealers deemed to be
          probable of default. At the time, based on continuing improvements in
          dealers' circumstances (for which the Company's financial statement is
          positively impacted), the Company recorded a change in accounting
          estimate reducing the reserve for each year by $340 (2005), $380
          (2004) and $1,260 (2003).

   b.      Under the insurance plans described in Note 1, the Company was
           contingently liable at December 31, 2005 for future retrospective
           premium adjustments up to a maximum of approximately $23,856 in the
<PAGE>

           event that additional losses are reported related to prior years. The
           Company recorded an estimated liability of $5,002 at December 31,
           2005 and $5,401 at December 31, 2004 related to these contingent
           claims.

   c.      Litigation  is subject to  uncertainties  and the Company  cannot
           predict the probable  outcome or the amount of liability of
           individual  litigation  matters with any level of assurance.  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. The
           Company's  liability under some of this  litigation is covered in
           whole or in part by  insurance.  Anticipated  legal fees and other
           losses, in excess of insurance  coverage,  associated  with these
           lawsuits are accrued at the time such cases are  identified  or when
           additional  information is available such that losses are probable
           and reasonably  estimable.  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's  results of operations,
           financial  position or liquidity.  The  Company used the  services of
           a law firm in which a partner is also a director of the  Company.
           The Company paid legal fees to this firm of $414 (2005), $346 (2004),
           and $378 (2003).  In addition,  the law firm received,  from the
           proceeds of the settlement of a Company claim, an indirect legal fee
           payment of $74 in 2005.

   d.      The Company and certain of its equity partners have guaranteed
           certain debt for two companies in which the Company owns a one-third
           interest. The guarantees are limited to 40% of the outstanding debt.
           At December 31, 2005, $2,151 of debt was outstanding under the
           guarantees, of which the Company had guaranteed $860.

   e.      The Company has provided letters of credit totaling $5,909 as of
           December 31, 2005 to providers of certain of its surety bonds and
           insurance policies. While the current letters of credit have a finite
           life, they are subject to renewal at different amounts based on the
           requirements of the insurance carriers. The Company has recorded
           insurance expense based on anticipated losses related to these
           policies.

   f.      On June 27, 2005 the Company received Securities and Exchange
           Commission (the "Commission") staff comments on its 2004 Form 10-K,
           10-K/A, and Form 10-Q filings for the first and second quarters of
           2005 regarding, among other things, the proper recognition and
           disclosure of the FIN 45 contingent liability for repurchase
           commitments with inception dates for homes sold after the effective
           date of FIN 45.

           As of the date of filing the 2005 Form 10-K, management has provided
           a written response to all Commission staff correspondence. Management
           believes the written responses have substantially addressed all open
           comments and the Company has incorporated disclosure required by the
           Commission into this 2005 Form 10-K. The Commission staff indicates
           that the Company must file its 2005 Form 10-K prior to the
           Commission's determination of closure of the outstanding comments.
           The Company cannot ultimately predict the date of resolution of the
           unresolved comments, the results of the Commission review, or the
           resulting impact of additional review, if any, to its financial
           statements.

12.   SEGMENT INFORMATION

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

<PAGE>
<TABLE>
<CAPTION>
<S>                                                       <C>                  <C>                    <C>
                                                         2005                  2004                  2003
                                                   ------------------    ------------------    ------------------
Gross revenue:
  Home manufacturing                             $           267,500   $           207,997   $           213,510
  Financial services                                           3,002                 2,444                 2,673
  Retail                                                       9,498                 7,938                 7,948
                                                   ------------------    ------------------    ------------------
       Gross revenue                              $           280,000   $           218,379   $           224,131
                                                   ==================    ==================    ==================

Intersegment revenue:
  Home manufacturing                             $             7,968   $             6,639   $             5,123
  Financial services                                               -                     -                     -
  Retail                                                           -                     -                     -
                                                   ------------------    ------------------    ------------------
      Intersegment revenue                       $             7,968   $             6,639   $             5,123
                                                   ==================    ==================    ==================

Revenue from external customers:
  Home manufacturing                             $           259,532   $           201,358   $           208,387
  Financial services                                           3,002                 2,444                 2,673
  Retail                                                       9,498                 7,938                 7,948
                                                   ------------------    ------------------    ------------------
      Total revenue                              $           272,032   $           211,740   $           219,008
                                                   ==================    ==================    ==================

Operating income (loss):
  Home manufacturing                             $            18,121   $            10,235   $             1,275
  Financial services                                              34                   539                   537
  Retail                                                          (1)                 (113)                  (41)
  Elimination                                                   (258)                 (108)                  295
                                                   ------------------    ------------------    ------------------
  Segment operating income (loss)                             17,896                10,553                 2,066
  General corporate                                           (5,726)               (5,472)               (4,439)
                                                   ------------------    ------------------    ------------------
      Operating income (loss)                    $            12,170   $             5,081   $            (2,373)
                                                   ==================    ==================    ==================

Depreciation and amortization:
  Home manufacturing - continuing operations     $             2,187   $             2,418   $             3,402
  Home manufacturing - discontinued operations                    67                   172                   249
  Financial services                                              25                    29                    39
  Retail                                                          21                    17                    59
                                                   ------------------    ------------------    ------------------
  Segment depreciation and amortization                        2,300                 2,636                 3,749
  General corporate                                              177                   681                   839
                                                   ------------------    ------------------    ------------------
      Total depreciation and amortization        $             2,477   $             3,317   $             4,588
                                                   ==================    ==================    ==================

Capital expenditures:
  Home manufacturing                             $             1,295   $               599   $               289
  Financial services                                              17                    30                     8
  Retail                                                          10                    40                     -
                                                   ------------------    ------------------    ------------------
  Segment capital expenditures                                 1,322                   669                   297
  General corporate                                               88                   117                    30
                                                   ------------------    ------------------    ------------------
      Total capital expenditures                 $             1,410   $               786   $               327
                                                   ==================    ==================    ==================

Identifiable assets:
  Home manufacturing                             $            96,901   $            60,297   $            62,311
  Financial services                                          15,423                13,755                13,364
  Retail                                                       3,713                 3,296                 2,987
                                                   ------------------    ------------------    ------------------
  Segment assets                                             116,037                77,348                78,662
  General corporate                                           16,784                20,882                19,871
                                                   ------------------    ------------------    ------------------
      Total assets                               $           132,821   $            98,230   $            98,533
                                                   ==================    ==================    ==================
</TABLE>
The Financial services segment's operating profit includes net interest income
of $1,107, $1,010, and $1,136, and gains from the sale of installment contracts
of $1,310, $940, and $1,115, for the years ended December 31, 2005, 2004, and
2003, respectively.

The increase in identifiable assets of the home manufacturing segment primarily
relates to increases in accounts receivable and inventory in conjunction with
the FEMA related sales agreements. Identifiable assets for the General corporate
category include $3,728, $3,449, and $2,595 of investment in equity-method
investees at December 31, 2005, 2004, and 2003, respectively.

13.   EQUITY METHOD INVESTEES

The Company's minority ownership interests in its six joint ventures (of which
the Company owns various interest percentages) are accounted for using the
equity method and are included in other assets in the accompanying consolidated
<PAGE>

balance sheets in the amount of $3,728 (2005) and $3,449 (2004). The Company
recorded equity in earnings of equity-method investees of $775, $980, and $369
for the years ended December 31, 2005, 2004, and 2003, respectively. Dividends
received from investees accounted for by the equity method were $367, $209, and
$228 for the years ended December 31, 2005, 2004, and 2003, respectively. At
December 31, 2005, none of the Company's equity method investees were defined as
significant. At December 31, 2004, the Company's only significant minority
ownership interest is in WoodPerfect, Ltd., of which the Company owns a 35.42%
interest. Summarized information related to the combined group of equity
investees is as follows:

<TABLE>
<CAPTION>
<S>                                                         <C>
                                                           2004
                                                        ------------
Balance Sheet:
--------------
Current assets                                       $       18,304
Non-current assets                                   $        9,988
Current liabilities                                  $        8,834
Non-current liabilities                              $        3,964

Income Statement:
-----------------
Net sales                                            $       92,656
Gross profit                                         $       10,482
Income from continuing operations                    $        3,773
Net income                                           $        3,581

</TABLE>

14.   CONCENTRATION OF CREDIT RISK

The Company designs and produces manufactured homes which are sold to a network
of dealers located primarily in the South Central and South Atlantic regions of
the United States and under agreements, which may be terminated at any time by
either party, with or without cause, after a short notice period. The Company is
not dependent on any single dealer, and in 2005, the largest independent dealer,
accounted for approximately 5% of sales in 2005, excluding FEMA-related sales.

Additionally, in 2005, the Company entered into agreements with two companies to
build homes for delivery to FEMA as part of that agency's disaster relief for
the Gulf Coast states hit by hurricanes. Under the agreements, the Company built
2,219 single-section homes, which generated revenue of approximately $68,000 and
accounted for approximately 25.6% of sales in 2005. As of December 31, 2005, the
Company had outstanding accounts receivable related to these sales of $35,365.
Of this amount $28,746 had been collected through March 9, 2006.

CIS finances retail sales through the purchase of installment contracts
primarily from retail customers of a portion of the Company's dealer network and
resells a majority of the loans to financial institutions under the terms of
retail finance agreements. For loans held in its portfolio, CIS requires the
borrower to maintain adequate insurance on the home throughout the life of the
contract. Contracts are secured by the home which is subject to repossession by
CIS upon default by the borrower.



<PAGE>


<TABLE>
<CAPTION>
<S>                                               <C>                 <C>                <C>                <C>
                                           CAVALIER HOMES INC. AND SUBSIDIARIES
                                      SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                    For the Years Ended December 31, 2005, 2004 and 2003
                                                (Dollars in Thousands)

                                                                    Additions
                                                 Balance at        Charged to                            Balance at
                                                Beginning of        Costs and                              End of
                                                    Year            Expenses         Deductions             Year
                                               ---------------   ----------------  ----------------    ---------------
Allowance for losses on accounts receivable:
       Year Ended December 31, 2005        $               85                 (1)              (28)$               56
                                               ===============   ================  ================    ===============

       Year Ended December 31, 2004        $              102                (17)                - $               85
                                               ===============   ================  ================    ===============

       Year Ended December 31, 2003        $              145                  -               (43)$              102
                                               ===============   ================  ================    ===============

Deferred tax asset valuation allowance:
       Year Ended December 31, 2005        $           19,607                  -            (5,825)$           13,782
                                               ===============   ================  ================    ===============

       Year Ended December 31, 2004        $           20,523                  -              (916)$           19,607
                                               ===============   ================  ================    ===============

       Year Ended December 31, 2003        $           18,555              1,968                 - $           20,523
                                               ===============   ================  ================    ===============

</TABLE>
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
The Company's President/Chief Executive Officer and its Chief Financial Officer
have reviewed the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e)), as of the end of the period covered by this
report, and have determined such disclosure controls and procedures to be
effective in alerting them to material information relating to the Company that
may be required to be included in the Company's periodic filings. The Company's
disclosure controls and procedures also are designed with the objective of
ensuring that such information is accumulated and communicated to Company
management as appropriate to allow timely decisions regarding required
disclosure.

Changes in Internal Control Over Financial Reporting
Management of the Company assessed the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 and for each subsequent
quarter end in 2005 using the criteria issued by the Committee of Sponsoring
Organizations of the Treadway commission ("COSO") in Internal Control -
Integrated Framework. In completing its assessments, management identified the
following material weakness, previously identified at December 31, 2004, in the
design of internal control: The Company had a limited number of personnel within
its accounting function to identify, research, review and conclude on
non-routine or complex accounting matters. During 2005, the Company implemented
the following changes to internal control over financial reporting to address
the material weakness:

   (1)        Employed additional staff - During 2004, the Company's financial
              reporting staff were over-extended due to the unanticipated time
              constraints of the compliance efforts associated with Section 404
              of the Sarbanes-Oxley Act of 2002. The Company did not expect to
              be classified as an accelerated filer for the December 31, 2004
              year end, and as such, had performed limited procedures to prepare
              for compliance with Section 404 until the last half of 2004.
              Additionally, the Company did not anticipate the expansive scope
              of internal control testing that ultimately was required for the
              2004 year-end. Since December 31, 2004, the Company has hired
              three professional staff devoted full-time to its Section 404
              compliance efforts. The Company engaged a professional services
              firm with computer controls expertise to assist management in its
              risk assessment process in the area of computer controls.
              Additionally, subsequent to the end of the third quarter of 2005,
              the Company employed an individual with significant accounting
              experience within the Corporate accounting department to fill a
              position left vacant during the second quarter of 2005.

<PAGE>


   (2)        Trained staff on application of accounting pronouncements - During
              2005, the Company's financial reporting staff placed additional
              emphasis on continuing education, research and documentation of
              accounting pronouncements. To date, staff members have attended
              several accounting pronouncement update classes and subscribed to
              a well-recognized accounting literature publisher's research
              software.

   (3)        Engaged outside professional accounting services on an as needed
              basis to assist in accounting for non-routine or complex
              accounting matters - During 2005, the Company engaged outside
              professional accounting services on certain financial reporting
              matters. The Company also engaged a professional services firm
              with appropriate expertise to perform similar services as the need
              arises under a formal arrangement.

Based on the above changes to internal controls over financial reporting, and
the results of Management's Assessment of Internal Controls Over Financial
Reporting as of December 31, 2005, referenced in the report on page 39,
management of the Company believes the material weakness referred to above no
longer exists as of the assessment date.

During the first quarter of 2005, the Company's Nashville, North Carolina
manufacturing facility converted from its legacy system to SAP for its
Enterprise Resource Planning ("ERP") software. This facility was the final home
manufacturing location to convert to SAP, the Company's primary ERP system. In
performing the conversion, the Company adopted the controls and procedures in
place at its other facilities, which had previously converted to SAP. During the
second quarter of 2005, the Company upgraded its security files servers to
Windows 2003 from Windows NT4, which improved the Company's network security.

While the Company implemented the above changes to internal control over
financial reporting throughout the entire 2005 year, the changes identified
above are the only internal control changes that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting since December 31, 2004.


ITEM 9B. OTHER INFORMATION

None.
                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

For a description of the directors and executive officers of the Company, see
"Election of Directors," "Executive Officers and Principal Stockholders," and
"Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 23, 2006,
which are incorporated herein by reference.

For disclosure regarding the Company's Code of Ethics, see "Corporate
Governance" of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 23, 2006, which is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION

For a description of the Company's executive compensation, see "Election of
Directors," "Executive Officers and Principal Stockholders," "Executive
Compensation" (other than the "Report of the Compensation Committee on Executive
Compensation" and the "Performance Graph"), "Compensation Committee Interlocks
and Insider Participation," and "Certain Relationships and Related Transactions"
of the Company's Proxy Statement for the Annual Meeting of Stockholders to be
held on May 23, 2006, which are incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

For a description of the security ownership of management and certain beneficial
owners, see "Executive Officers and Principal Stockholders" of the Company's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 23,
2006, which is incorporated herein by reference.



<PAGE>


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 23, 2006,
which are incorporated herein by reference.

ITEM 14 .         PRINCIPAL ACCOUNTANTS FEES AND SERVICES

For a description of principal accountants fees and services, see "Fee
Disclosure" of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 23, 2006, which is incorporated herein by
reference.

                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

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

    Reports of Independent Registered Public Accounting Firms                 38
    Consolidated Balance Sheets as of December 31, 2005 and 2004              40
    Consolidated Statements of Operations for the years ended
           December 31, 2005, 2004 and 2003                                   41
    Consolidated Statements of Stockholders' Equity for the
           years ended December 31, 2005, 2004 and 2003                       42
    Consolidated Statements of Cash Flows for the years ended
           December 31,2005, 2004 and 2003                                    43
    Notes to Consolidated Financial Statements                                44

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

          II        Valuation and Qualifying Accounts                    60

         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 Composite Amended and Restated Certificate of Incorporation
         of the Company, filed as Exhibit 3(a) to the Company's Annual Report on
         Form 10-K for the year ended December 31, 1998.

         * (b) The Certificate of Designation of Series A Junior Participating
         Preferred Stock of Cavalier Homes, Inc. as filed with the Office of the
         Delaware Secretary of State on October 24, 1996 and filed as Exhibit A
         to Exhibit 4 to the Company's Registration Statement on form 8-A filed
         on October 30, 1996.

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

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

         * (a) Articles four, six, seven, eight and nine of the Company's
         Amended and Restated Certificate of Incorporation, as amended, included
         in Exhibit 3(a) above.

         * (b) Article II, Sections 2.1 through 2.18; Article III, Sections 3.1
         and 3.2; Article IV, Sections 4.1 and 4.3; Article VI, Sections 6.1
         through 6.5; Article VIII, Sections 8.1 and 8.2; and Article IX of the
         Company's Amended and Restated By-laws, included in Exhibit 3(c) above.

<PAGE>


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

(10)     Material contracts

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

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

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

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

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

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

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

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

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

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

         * (k) 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.

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

<PAGE>


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

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

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

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

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

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

         * (s) Fourth Modification to Amended and Restated Revolving Note, dated
         as of August 6, 2003, between the Company and First Commercial Bank,
         filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q
         for the quarter ended June 28, 2003.

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

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

          * (v) Seventh Amendment to Amended and Restated Revolving and Term
         Loan Agreement, dated as of October 25, 2005, between the Company and
         First Commercial Bank, filed as Exhibit 99.1 to the Company's Report on
         Form 8-K filed on October 31, 2005.

          * (w) Eighth Amendment to Amended and Restated Revolving and Term Loan
         Agreement, dated as of December 6, 2005, between the Company and First
         Commercial Bank, filed as Exhibit 99.1 to the Company's Report on Form
         8-K filed on December 7, 2005.

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

           (y) Revolving Note, under the Amended and Restated Revolving and Term
         Loan Agreement, dated as of December 6, 2005, between the Company and
         First Commercial Bank,

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

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

         * (bb) 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.

<PAGE>


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

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

         * (ee) 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.

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

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

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

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

         * ** (jj) 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.

         * ** (kk) 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.

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

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

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

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

         * ** (pp) 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.

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

          * ** (rr) Cavalier Homes, Inc. 2005 Incentive Compensation Plan, filed
         as an Appendix to the Company's definitive Proxy Statement for the
         Annual Meeting of Stockholders held May 24, 2005.

<PAGE>


         * ** (ss) Cavalier Homes, Inc. 2005 Non-Employee Directors Stock Option
         Plan, filed as an Appendix to the Company's definitive Proxy Statement
         for the Annual Meeting of Stockholders held May 24, 2005.

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

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

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

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

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

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

(21)     Subsidiaries of the Registrant.

(23)     Consents of Independent Registered Public Accounting Firms
            (a)  Carr, Riggs & Ingram, LLC
            (b)  Deloitte & Touche LLP

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

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

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


<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 16, 2006


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

Signature                   Title                                 Date

/s/ DAVID A. ROBERSON       Director and Principal Executive      March 16, 2006
-------------------------   Officer

/s/ MICHAEL R. MURPHY       Chief Financial Officer and           March 16, 2006
-------------------------   Principal Accounting Officer

/s/ BARRY DONNELL           Chairman of the Board and Director    March 16, 2006
-------------------------

/s/THOMAS A.BROUGHTON,III   Director                              March 16, 2006
-------------------------

/s/ JOHN W LOWE             Director                              March 16, 2006
 ------------------------

/s/ LEE ROY JORDAN          Director                              March 16, 2006
-------------------------

/s/ J. DON WILLIAMS         Director                              March 16, 2006
-------------------------

/s/ A. DOUGLAS JUMPER, SR.  Director                              March 16, 2006
-------------------------

/s/ BOBBY TESNEY            Director                              March 16, 2006
-------------------------


<PAGE>



                                      INDEX

Exhibit
Number


(10)(y)        Revolving Note, under the Amended and Restated Revolving and Term
               Loan Agreement, dated as of December 6, 2005, between the Company
               and First Commercial Bank,

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

(21)           Subsidiaries of the Registrant

(23)           Consents of Independent Registered Public Accounting Firms
                  (a)  Carr, Riggs & Ingram, LLC
                  (b)  Deloitte & Touche LLP

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

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


<PAGE>


<TABLE>
<CAPTION>
<S>                                                        <C>             <C>          <C>
                                                EXHIBIT 11
                                   CAVALIER HOMES, INC. AND SUBSIDIARIES
                                COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
                               (dollars in thousands except per share amounts)

                                                           For the Year Ended December 31,
                                                     -------------------------------------------
                                                         2005           2004           2003
                                                     -------------  -------------  -------------

 NET INCOME (LOSS) FROM CONTINUING OPERATIONS     $        12,514 $        5,472 $       (1,855)

 DISCONTINUED OPERATIONS:                                  (1,599)        (2,231)        (2,715)
                                                     -------------  -------------  -------------

 NET INCOME (LOSS)                                $        10,915 $        3,241 $       (4,570)
                                                     =============  =============  =============

 SHARES:

 WEIGHTED AVERAGE COMMON SHARES
     OUTSTANDING - BASIC                               18,118,619     17,879,939     17,666,192

 DILUTIVE EFFECT IF STOCK OPTIONS WERE EXERCISED          238,176        298,455              -
                                                     -------------  -------------  -------------

 WEIGHTED AVERAGE COMMON SHARES
     OUTSTANDING - DILUTED                             18,356,795     18,178,394     17,666,192
                                                     =============  =============  =============

 INCOME (LOSS) PER SHARE:

BASIC:

 FROM CONTINUING OPERATIONS                       $          0.69  $        0.30  $       (0.11)

 FROM DISCONTINUED OPERATIONS                               (0.09)         (0.12)         (0.15)
                                                     -------------  -------------  -------------

 NET INCOME (LOSS)                                $          0.60  $        0.18  $       (0.26)
                                                     =============  =============  =============
DILUTED:

 FROM CONTINUING OPERATIONS                       $          0.68  $        0.30  $       (0.11)

 FROM DISCONTINUED OPERATIONS                               (0.09)         (0.12)         (0.15)
                                                     -------------  -------------  -------------

 NET INCOME (LOSS)                                $          0.59  $        0.18  $       (0.26)
                                                     =============  =============  =============

</TABLE>



<PAGE>


                                   EXHIBIT 21
                         SUBSIDIARIES OF THE REGISTRANT

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





<PAGE>


                                  EXHIBIT 23(a)
                      CONSENT OF CARR, RIGGS & INGRAM, LLC


CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the registration statements on
Form S-8 (No. 333-06371,  No. 333-19833,  No. 333-90652, No.  333-20859,  No.
333-86232,  and No.  333-130994) and on Form S-3 (No.  333-18213 (as amended)
and No.  333-48111 (as amended)) of Cavalier  Homes,  Inc.  and  subsidiaries
of our report  dated March 16, 2006,  relating to our audits of the consolidated
financial statements and schedule of Cavalier Homes, Inc. and subsidiaries,
Cavalier Homes,  Inc. and subsidiaries'  management's  assessment of the
effectiveness of internal control over financial  reporting,  and the
effectiveness of internal control over financial reporting of Cavalier Homes,
Inc. and subsidiaries, included in this Annual Report on Form 10-K for the year
ended December 31, 2005.

/s/ Carr, Riggs & Ingram, LLC

Birmingham, Alabama
March 16, 2006



<PAGE>


                                  EXHIBIT 23(b)

                        CONSENT OF DELOITTE & TOUCHE LLP


CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos.
333-20859, 333-86232, 333-06371, 333-19833, 333-90652, 333-130994 on Form S-8
and Registration Statement Nos. 333-18213 (as amended) and 333-48111 (as
amended) on Form S-3 of our report dated March 28, 2005 (March 16, 2006 as to
the effects of the discontinued operations described in Note 2) relating to the
financial statements and financial statement schedule of Cavalier Homes, Inc.
and subsidiaries as of December 31, 2004 and for the years ended December 31,
2004 and 2003, appearing in the Annual Report on Form 10-K of Cavalier Homes,
Inc. for the year ended December 31, 2005.

/s/ Deloitte & Touche LLP

Birmingham, Alabama
March 16, 2006


<PAGE>


                                  EXHIBIT 31(a)

                                 CERTIFICATIONS


I, David A. Roberson, certify that:

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

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

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

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

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

                    b) Designed such internal control over financial reporting,
                    or caused such internal control over financial reporting to
                    be designed under our supervision to provide reasonable
                    assurance regarding the reliability of financial reporting
                    and the preparation of financial statements for external
                    purposes in accordance with generally accepted accounting
                    principles;

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

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

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

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

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


Date: March 16, 2006                       /s/ David A. Roberson
                                           ---------------------
                                           David A. Roberson
                                           President and Chief Executive Officer


<PAGE>


                                  EXHIBIT 31(b)

                                 CERTIFICATIONS

I, Michael R. Murphy, certify that:

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

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

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

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

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

                    b) Designed such internal control over financial reporting,
                    or caused such internal control over financial reporting to
                    be designed under our supervision to provide reasonable
                    assurance regarding the reliability of financial reporting
                    and the preparation of financial statements for external
                    purposes in accordance with generally accepted accounting
                    principles;

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

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

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

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

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


Date: March 16, 2006                             /s/ Michael R. Murphy
                                                 ---------------------
                                                 Michael R. Murphy
                                                 Chief Financial Officer


<PAGE>



                                  EXHIBIT 32(a)

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

In connection with Cavalier Homes, Inc. ("Company") Annual Report on Form 10-K
for the period ended December 31, 2005 ("Report"), the undersigned certifies
that:

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

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


Date:  March 16, 2006                      By:      /s/ David A. Roberson
                                                    ---------------------------
                                           David A. Roberson
                                           President and Chief Executive Officer



<PAGE>


                                  EXHIBIT 32(b)

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


In connection with Cavalier Homes, Inc. ("Company") Annual Report on Form 10-K
for the period ended December 31, 2005 ("Report"), the undersigned certifies
that:


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

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


Date:  March 16, 2006                  By:      /s/ Michael R. Murphy
                                                -------------------------------
                                       Michael R. Murphy
                                       Chief Financial Officer