REVOLVING, WAREHOUSE AND TERM LOAN AGREEMENT
                                  by and among


                              Cavalier Homes, Inc.,
                        Cavalier Homes of Alabama, Inc.,
                         Cavalier Homes of Texas, Inc.,
                             Star Industries, Inc.,
                        Buccaneer Homes of Alabama, Inc.,
                    Brigadier Homes of North Carolina, Inc.,
                              Mansion Homes, Inc.,
                           Homestead Homes, Inc., and
                        Cavalier Acceptance Corporation,

                                  as Borrowers

                                       and

                             First Commercial Bank,

                                    as Lender

                                   Dated as of

                                February 17, 1994









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                                TABLE OF CONTENTS
                                                                             No.
ARTICLE I
     DEFINITIONS    ........................................................   1
           1.1      Defined Terms...........................................   1
           1.2      Accounting Terms........................................   1
           1.3      Construction of Terms...................................   1

ARTICLE II
     THE REVOLVING LOAN ....................................................   2
           2.1      General Terms...........................................   2
           2.2      Disbursement of the Revolving Loan .....................   4
           2.3      The Revolving Note......................................   4
           2.4      Payments of Principal...................................   4
           2.5      Interest Rate and Payments of Interest..................   4
           2.6      Payment to Lender.......................................   5
           2.7      Use of Proceeds.........................................   5
           2.8      [Intentionally Omitted.]................................   5
           2.9      Letters of Credit.......................................   5
           2.10     Commitment and Usage Fees...............................   6

ARTICLE III
     THE WAREHOUSE LOAN AND THE TERM LOANS..................................   6
           3.1      General Terms...........................................   6
           3.2      Disbursement of the Warehouse Loan and the Term Loan(s).   7
           3.3      (A)      The Warehouse Note.............................   7
                    (B)      The Term Note(s)...............................   7
           3.4      Payments of Principal...................................   7
           3.5      Prepayment..............................................   7
           3.6      Interest Rate and Payments of Interest..................   8
           3.7      Payment to Lender.......................................   9
           3.8      Use of Proceeds.........................................  10
           3.9      Commitment Fee..........................................  10

ARTICLE IV
     CONDITIONS PRECEDENT...................................................  10
           4.1      Documents Required for the Closing......................  10
           4.2      Documents Required for Subsequent Advances..............  11
           4.3      Additional Conditions to the Term Loan(s)...............  12
           4.4      Additional Required Documents...........................  12
           4.5      Certain Events..........................................  13
           4.6      Legal Matters...........................................  13

ARTICLE V
     COLLATERAL SECURITY....................................................  13
           5.1      Composition of the Collateral...........................  13
           5.2      Rights in Property Held by Lender.......................  14
           5.3      Rights in Property Held Either by Borrowers or by Lender  14
           5.4      Priority of Liens.......................................  14
           5.5      Perfection..............................................  14
           5.6      Chattel Paper or Instruments............................  15
           5.7      Release of Documentation For Eligible Contracts.........  15
           5.8      Power of Attorney.......................................  16



<PAGE>





ARTICLE VI
     REPRESENTATIONS AND WARRANTIES.........................................  17
           6.1      Original................................................  17
           6.2      Additional Representations and 
                    Warranties of Cavalier Acceptance.......................  20
           6.3      Reliance By Cavalier Acceptance on Dealer Representations 22

ARTICLE VII
     COVENANTS OF BORROWERS.................................................  22
           7.1      Affirmative Covenants...................................  23
           7.2      Negative Covenants......................................  27
           7.3      Financial Covenants.....................................  29
           7.4      Interpretation and Consolidation........................  30

ARTICLE VIII
     ADDITIONAL COVENANTS OF CAVALIER ACCEPTANCE............................  31
           8.1      Affirmative Covenants...................................  31
           8.2      Negative Covenants......................................  32
           8.3      Financial Covenants.....................................  32

ARTICLE IX
     DEFAULT................................................................  33
           9.1      Events of Default.......................................  33
           9.2      Acceleration............................................  35
           9.3      Remedies................................................  35
           9.4      Right of Set-Off........................................  36
           9.5      Demand Obligations......................................  36
           9.6      Special Remedies........................................  36

ARTICLE X
     MISCELLANEOUS..........................................................  37
           10.1     Construction............................................  37
           10.2     Further Assurances......................................  37
           10.3     Indemnity...............................................  37
           10.4     Enforcement and Waiver by Lender........................  37
           10.5     Expenses of Lender......................................  38
           10.6     Notices.................................................  38
           10.7     Indemnity, Waiver and Release by Borrowers..............  39
           10.8     Reliance on this Agreement..............................  39
           10.9     Participation...........................................  40
           10.10    No Partnership or Joint Venture.........................  40
           10.11    Governing Law...........................................  40
           10.12    JURISDICTION; WAIVERS...................................  40
           10.13    Binding Effect, Assignment..............................  41
           10.14    Termination.............................................  41
           10.15    Obligations Unconditional and Absolute..................  42
           10.16    Entire Agreement, Amendments............................  42
           10.17    Severability............................................  42
           10.18    Headings................................................  42
           10.19    Counterparts............................................  42
           10.20    Seal....................................................  42




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                             SCHEDULES AND EXHIBITS


Schedule I          -        Defined Terms
Schedule II         -        Borrower Exceptions
Exhibit II.6.1(B)   -        Other Corporate or Fictitious Names
Exhibit II.6.1(D)   -        Mergers, Acquisitions, and Certain Changes
Exhibit II.6.1(I)   -        Claims, Litigation
Exhibit A           -        Form of Term Note
Exhibit B           -        Request for Advance - Revolving Loan
Exhibit B-1         -        Request for Advance - Warehouse Loan
Exhibit C           -        Compliance Certificate - Consolidated
Exhibit C-1         -        Compliance Certificate - Cavalier Acceptance
Exhibit D           -        Subrogation and Contribution Agreement
Exhibit E           -        Assumption Agreement
Exhibit F           -        Existing Liens
Exhibit G           -        Qualification to do Business
Exhibit H           -        Places of Business and Locations of the Collateral
Exhibit I           -        Existing Indebtedness
Exhibit J           -        States of Incorporation of Consolidated Entities
Exhibit K           -        Cavalier Homes's Ownership of Consolidated Entities




<PAGE>





                    REVOLVING, WAREHOUSE AND TERM LOAN AGREEMENT


                  THIS  REVOLVING,  WAREHOUSE  AND  TERM  LOAN  AGREEMENT  (this
"Agreement"), dated as of February 17, 1994 is made by and among Cavalier Homes,
Inc., a Delaware  corporation  ("Cavalier  Homes"),  Cavalier  Homes of Alabama,
Inc., an Alabama corporation, Cavalier Homes of Texas,Inc., a Texas corporation,
Star Industries, Inc., a Delaware corporation, Buccaneer Homes of Alabama, Inc.,
an  Alabama  corporation,  Brigadier  Homes of  North  Carolina,  Inc.,  a North
Carolina  corporation,  Mansion  Homes,  Inc.,  a  North  Carolina  corporation,
Homestead  Homes,  Inc.,  a  Georgia   corporation,   and  Cavalier   Acceptance
Corporation, an Alabama corporation ("Cavalier Acceptance"),  (collectively, the
"Initial   Participating   Subsidiaries";   Cavalier   Homes  and  the   Initial
Participating  Subsidiaries,  together  with all entities who  hereafter  become
Participating  Subsidiaries or  Participating  Partnerships,  being  hereinafter
sometimes  collectively  referred to as the  "Borrowers"),  and First Commercial
Bank, an Alabama state banking corporation (the "Lender"),


                                W I T N E S S E T H:


                  WHEREAS,  Borrowers have requested Lender to lend to Borrowers
up to the sum of $5,000,000 on a revolving loan basis,  and Lender is willing to
do so, but solely upon the terms and subject to the conditions  hereinafter  set
forth; and

                  WHEREAS,  Cavalier  Acceptance  has  requested  Lender to make
available  to Cavalier  Acceptance a warehouse  and term loan  facility of up to
$8,000,000  to provide  financing  for  Cavalier  Acceptance's  originating  and
funding of loans to purchase manufactured homes, and Lender is willing to do so,
but solely upon the terms and subject to the conditions hereinafter set forth.

                  NOW,  THEREFORE,  in  consideration  of  the  promises  herein
contained,  and each  intending to be legally bound hereby,  the parties  hereto
agree as follows:


                                    ARTICLE I

                                   DEFINITIONS

         1.1      Defined Terms.  Defined terms used herein are as set forth  on
Schedule I attached hereto.

         1.2 Accounting  Terms.  Accounting terms used and not otherwise defined
in this Agreement have the meanings  determined  by, and all  calculations  with
respect to accounting or financial  matters  unless  otherwise  provided  herein
shall be computed in accordance with, Generally Accepted Accounting Principles.

         1.3  Construction  of  Terms.  Whenever  used  in this  Agreement,  the
singular  number  shall  include  the plural and the  plural the  singular,  and
pronouns of one gender shall include all genders. References herein to articles,
sections,   paragraphs  or   subparagraphs  or  the  like  shall  refer  to  the
corresponding  articles,  sections,  paragraphs or  subparagraphs or the like of
this Agreement. The words "hereof",  "herein", and terms of similar import shall
refer to this entire Agreement.  Unless the context clearly requires  otherwise,
the use of the words "including",  "such as", or terms of similar meaning, shall
not be construed to imply the exclusion of any other particular elements.


                                   ARTICLE II

                               THE REVOLVING LOAN

         2.1      General Terms.

                  (A)  Subject  to  the  terms  hereof,   Lender  will  lend  to
Borrowers,  jointly and severally  (except as limited by the terms of subsection
(D)of this Section 2.1 or by the terms of the Assumption Agreements), from  time
to time until the Loan Termination  Date for the  Revolving  Loan,  such sums in
integral  multiples  of $10,000 as Borrowers  may  request,  but which shall not
exceed,  in the  aggregate  principal  amount at any one time  outstanding,  the
lesser of:

                       (1)      The Borrowing Base, or
                       (2)      The Revolving Loan Commitment.

                  (B)  Subject to the terms  hereof,  Borrowers  may jointly and
severally borrow, repay without penalty or premium, and reborrow hereunder, from
the date of this  Agreement  until the Loan  Termination  Date for the Revolving
Loan. If at any time the unpaid principal  balance of the Revolving Loan exceeds
the  amount  Borrowers  could  borrow at such time under the  formula  set forth
above,  Borrowers shall  immediately and without demand pay such sums to Lender,
in multiples of $10,000 to the extent  necessary to reduce the Revolving Loan to
an amount which Borrowers could borrow at that time under such formula.

                  (C)  Each    Participating    Subsidiary   and   Participating
Partnership,  separately and severally,  hereby appoints and designates Cavalier
Homes as such party's agent and  attorney-in-fact to act on behalf of such party
for all purposes of the Loan  Documents.  Cavalier Homes shall have authority to
exercise  on  behalf  of  each   Participating   Subsidiary  and   Participating
Partnership  all  rights and  powers  that  Cavalier  Homes  deems,  in its sole
discretion,  necessary,  incidental or  convenient  in connection  with the Loan
Documents,   including  the  authority  to  execute  and  deliver  certificates,
documents,  agreements and other  instruments  referred to in or contemplated by
the Loan Documents,  request Advances hereunder, request the issuance of Letters
of Credit,  receive all proceeds of Advances under the Revolving  Loan, give all
notices,  approvals  and  consents  required or  requested  from time to time by
Lender and take any other actions and steps that a Participating Subsidiary or a
Participating  Partnership could take for its own account in connection with the
Loan  Documents  from  time to time,  it being the  intent of the  Participating
Subsidiaries  and the  Participating  Partnerships  to grant to  Cavalier  Homes
plenary  power  to act on  behalf  of the  Participating  Subsidiaries  and  the
Participating   Partnerships  in  connection  with  and  pursuant  to  the  Loan
Documents.  The appointment of Cavalier Homes as agent and  attorney-in-fact for
the  Participating  Subsidiaries and the  Participating  Partnerships  hereunder
shall  be  coupled  with an  interest  and be  irrevocable  so long as any  Loan
Document  shall remain in effect.  The Lender need not obtain any  Participating
Subsidiary's  or  Participating  Partnership's  consent or approval  for any act
taken by Cavalier Homes  pursuant to any Loan Document,  and all such acts shall
bind  and  obligate  Cavalier  Homes,  the  Participating  Subsidiaries  and the
Participating  Partnerships,  jointly  and  severally.  Lender  may  rely on any
representation  or request made or action taken by Cavalier  Homes in connection
with the Loan Documents as authorized by the Participating  Subsidiaries and the
Participating  Partnerships.  Each  Participating  Subsidiary and  Participating
Partnership  forever  waives and  releases  any claim  (whether now or hereafter
arising)  against  Lender  based on Cavalier  Homes' lack of authority to act on
behalf  of  any  Participating   Subsidiary  or  Participating   Partnership  in
connection with the Loan Documents.

                  (D)  The  liability of  each  Participating  Partnership  with
respect  to  the  Obligations  shall  be  limited  to an  amount  equal  to  its
Partnership  Liabilities.  The liability of each  Participating  Subsidiary with
respect to the Obligations shall be limited to an amount equal to the greater of
(i) 95% of the  Participating  Subsidiary's  Net Worth (as hereinafter  defined)
from time to time; or (ii) the amount that in a legal proceeding  brought within
the  applicable  limitations  period is determined by the final,  non-appealable
order of a court having  jurisdiction over the issue and the applicable  parties
to be the amount of value  given by Lender,  or  received  by the  Participating
Subsidiary,  in exchange for the  obligations  of the  Participating  Subsidiary
under this Agreement and the other Loan  Documents.  As used in this  subsection
(D),  "Net  Worth"  shall  mean  (x)  the  fair  value  of the  property  of the
Participating Subsidiary from time to time (taking into consideration the value,
if any of rights of  subrogation,  contribution  and  indemnity),  minus (y) the
total  liabilities  of  the  Participating   Subsidiary   (including  contingent
liabilities [discounted in appropriate instances],  but excluding liabilities of
the   Participating   Subsidiary   under  this  Agreement  and  the  other  Loan
Documents)from time to time.

                  (E)  Each  of  the  Initial  Participating   Subsidiaries  (i)
acknowledges  that it has had full and complete access to the underlying  papers
relating  to the  Obligations  and all other  papers  executed  by any Person in
connection  with the  Obligations,  has reviewed  them and is fully aware of the
meaning  and  effect  of  their   contents;   (ii)  is  fully  informed  of  all
circumstances that bear upon the risks of executing this Agreement and the other
Loan  Documents and which a diligent  inquiry  would reveal;  (iii) has adequate
means to obtain  from the other  Borrowers  on a  continuing  basis  information
concerning  the other  Borrowers'  financial  condition  and is not depending on
Lender to provide such information,  now or in the future;  and (iv) agrees that
Lender shall have no obligation to advise or notify it or to provide it with any
data or information.

                  (F) Each of the Initial  Participating   Subsidiaries   hereby
agrees that its obligations   and   liabilities  with respect to the Obligations
other than the  Warehouse  Note and the Term  Note(s) are joint and several with
the other  Borrowers,  continuing,  absolute and  unconditional  (subject to the
provisions  of  subsection  (D) of  this  Section  2.1 ).  Without  limiting  he
generality of the  foregoing,  the  obligations  and  liabilities of each of the
Initial  Participating  Subsidiaries  with respect to the Loans and the Notes or
under the  Security  Documents  shall  not be  released,  discharged,  impaired,
modified or in any way affected by (i) the invalidity or unenforceability of any
Loan  Document,  (ii) the failure of Lender to give such  Initial  Participating
Subsidiary  a  copy  of any  notice  given  to any  other  Borrower,  (iii)  any
modification,  amendment or supplement of any obligation,  covenant or agreement
contained in any Loan  Document,  (iv) any  compromise,  settlement,  release or
termination of any obligation,  covenant or agreement in any Loan Document,  (v)
any waiver of payment,  performance  or  observance  by or in favor of any other
Borrower of any obligation,  covenant or agreement under any Loan Document, (vi)
any consent, extension,  indulgence or other action or inaction, or any exercise
or  non-exercise  of any right,  remedy or  privilege  with  respect to any Loan
Document,  (vii) the extension of time for payment or  performance of any of the
Obligations,  (viii) the release or  discharge  of Lender's  claims  against any
Collateral  now or any  time  hereafter  securing  any  of  the  Obligations  or
Borrowers,  or any of them,  by  operation of law or otherwise or (ix) any other
matter that might be otherwise  raised in avoidance of, or in defense against an
action to enforce,  the  obligations  of such Initial  Participating  Subsidiary
under this Agreement, the Loans, the Notes or any other Loan Document.

                  (G) None of the Borrowers will exercise any rights that it may
acquire by way of subrogation  under this Agreement or any of the Loan Documents
or any  Subrogation  and  Contribution  Agreement  referred to in subsection (H)
below, by any payment made hereunder or under any of the other Loan Documents or
otherwise,  until all the Obligations  have been paid in full and this Agreement
has been terminated. If any amount shall be paid to a Borrower on account of any
such subrogation  rights at any time when all of the Obligations  shall not have
been paid in full and this  Agreement  terminated,  such amount shall be held in
trust for the  benefit  of Lender  and shall be paid  forthwith  to Lender to be
credited to and applied toward the Obligations, whether matured or unmatured, in
accordance with the terms of the Loan Documents.

                  (H)  Borrowers  will not amend or waive any  provision  of the
Subrogation and  Contribution  Agreement  entered into by Borrowers of even date
herewith,  nor  consent  to  any  departure  by  any  party  thereto  from  such
Subrogation  and  Contribution  Agreement  or from any similar  Subrogation  and
Contribution  Agreements  executed  by  other  Participating   Subsidiaries  and
Participating  Partnerships after the Closing, without having obtained the prior
written consent of Lender to such amendment, waiver or consent.

         2.2  Disbursement of the Revolving Loan.  Lender will credit or pay the
proceeds of each Advance under the Revolving Loan to the deposit  account of any
Borrower  with Lender or in such other manner as  Borrowers  and Lender may from
time to time agree.

         2.3 The  Revolving  Note.  Borrowers'  joint and several  obligation to
repay the Revolving Loan shall be evidenced by  the Revolving  Note, which shall
be duly executed by the  Borrowers  who are signatories  hereto and joined in by
each  Subsidiary  and  Controlled  Partnership  that  becomes  a   Participating
Subsidiary or Participating  Partnership  after the Closing,  under the terms of
an Assumption Agreement.

         2.4 Payments of Principal.  If not earlier demanded pursuant to Section
9.2 or  Section  9.5  hereof,  the  outstanding    principal  balance   of   the
Revolving Loan shall be due and payable to Lender on the Loan  Termination  Date
for the Revolving Loan. Such Loan Termination Date includes the date that demand
is made by Lender,  which  demand may be made at any time in  Lender's  sole and
absolute discretion.
         2.5      Interest Rate and Payments of Interest.

                  (A)  Interest on the Revolving  Loan shall be  calculated  and
 paid as follows:

                       (1)      Interest   on   the  principal  balance   of the
                                Revolving Loan,  from time to time  outstanding,
                                will be  payable  at the  rate  (the  "Revolving
                                Rate")  equal to the Prime Rate in  effect  from
                                time to time  until  maturity,  and two  percent
                                (2%)  above the   Prime Rate in effect from time
                                to  time  after  maturity,   whether  by demand,
                                acceleration or  otherwise.

                       (2)      Each   time the Prime   Rate  shall change,  the
                                Revolving   Rate   shall   change   concurrently
                                with such change in the Prime Rate.

                       (3)      Interest shall be calculated on   the basis   of
                                a 360-day year, by    multiplying  the   product
                                of the principal amount    outstanding   and the
                                applicable rate by the actual number   of   days
                                elapsed,   and    dividing    by  360.   Accrued
                                interest   through  the   last    day  of   each
                                calendar    month  shall  be payable on the 15th
                                day of each  month  commencing   March 15, 1994,
                                and   at    maturity,   whether    by    demand,
                                acceleration or otherwise.

                       (4)      Borrowers   agree to    pay a late charge  equal
                                to five  percent  (5%)   of   the  amount of the
                                payment which is late, but not   more   than the
                                maximum  amount  allowed  by   applicable    Law
                                (the "Late Charge"),   as   follows:  (a) if any
                                scheduled  payment  is  late   twenty  (20) days
                                or more or  (b)  if any   scheduled   payment is
                                late  ten  (10)   days  or more,  and two (2) or
                                more   scheduled   payments   have    been  late
                                twenty (20) days  or  more  since  February 1 of
                                the  year  in  which  such scheduled  payment is
                                late    ten   (10)    days    or   more.    This
                                subparagraph   does  not  extend any payment due
                                date  expressly  stated  in  the   Agreement  or
                                any  other  Loan   Document  and does not in any
                                way prevent  or  estop   Lender  from  requiring
                                that payments  be  made  by  Borrowers  strictly
                                when due.  Unless   accepted   by  Lender,   and
                                unless accompanied by  all  other  amounts  then
                                due to Lender, the  tender  of such  payment  by
                                Borrowers does not  cure  any Event  of  Default
                                arising  from  the  payment  default upon  which
                                such Late Charge was assessed.

                  (B)  If, at any time, the  Revolving  Rate or the Late  Charge
shall be deemed by any competent court of law,  governmental  agency or tribunal
to exceed the maximum rate of interest permitted by any applicable  Laws,  then,
for such time as the  Revolving  Rate or Late Charge,  as  applicable,  would be
deemed excessive,  its application shall be suspended and there shall be charged
instead the maximum rate of interest permissible under such Laws, and any excess
interest or charges actually  collected by Lender shall be credited as a partial
prepayment of principal.

         2.6 Payment to Lender.  All sums payable to Lender  hereunder  shall be
paid directly to Lender in United States Dollars and immediately available funds
at the place  payment is due. If Lender  shall send to Borrowers  statements  of
amounts  due  hereunder,   such  statements  shall  be  considered  correct  and
conclusively binding on Borrowers unless Borrowers notify Lender to the contrary
within thirty (30) days of the receipt of any statement  that any Borrower deems
to be  incorrect.  Alternatively,  at its sole  discretion,  Lender  may  charge
against any deposit  account of any  Borrower  all or any part of any amount due
hereunder.

         2.7 Use of Proceeds.  The proceeds of the Revolving  Loan shall be used
by  Borrowers  initially  to renew and extend all  existing  loans or letters of
credit of  Borrowers  with Lender and  thereafter  for general  working  capital
purposes.

         2.8      [Intentionally Omitted.]

         2.9      Letters of Credit.

                  (A) At the request of Cavalier Homes,  Lender may from time to
time, but at its sole  discretion,  issue   Letters   of  Credit for the account
of Borrowers  in such amounts as requested by Borrowers  and approved by Lender;
provided,  however,  that the maximum aggregate amount of outstanding  Letter of
Credit  Obligations  shall not exceed,  when added to the  Revolving  Loan,  the
maximum amount available to Borrowers under Section 2.1 (A) hereof. Each request
by  Borrowers  for issuance of a Letter of Credit shall be submitted by Cavalier
Homes on behalf of Borrowers on Lender's then-standard application and agreement
form for Letters of Credit,  shall obligate  Borrowers to reimburse  Lender upon
demand for any  amounts  drawn upon the Letter of Credit and for such other sums
as specified therein, shall be executed by a duly authorized officer of Cavalier
Homes and, if Lender should  require,  shall be submitted to Lender at least two
(2)  business  days prior to the  proposed  date of issuance  for such Letter of
Credit.  In  consideration  for  Lender's  issuance  of any  Letter  of  Credit,
Borrowers  shall pay to  Lender a fee for the  issuance  of each such  Letter of
Credit  equal to one  percent  (1%) per  annum of the  amount  of the  Letter of
Credit.  This fee  shall be due and  payable  upon the  issuance  of a Letter of
Credit and Lender may, at its election,  obtain payment of any such fee, if such
fee is not paid upon  issuance of the Letter of Credit,  either by debiting  any
account of any Borrower in the amount of such fee or making an Advance under the
Revolving Loan Commitment for the purpose of paying such fee. Any such Letter of
Credit issued by Lender shall be in form and substance  satisfactory  to Lender,
shall be in an amount that does not exceed the maximum  amount  permitted  under
this  subsection  (A) and shall expire by its terms on a date not later than the
Loan Termination Date for the Revolving Loan.

                  (B) If a  draft drawn under any Letter of Credit is  presented
to Lender and  honored by Lender,  Borrowers  shall,  immediately  upon  written
demand of Lender,  reimburse Lender for the amount of such draft,  together with
interest thereon, from the date such draft is honored by Lender to and including
the date of  reimbursement by Borrowers,  at the rate of interest  applicable to
Advances  under the  Revolving  Loan  Commitment.  If  Borrowers  should fail to
reimburse  Lender upon such  demand,  Lender at its option may, but shall not be
required  to, and without  further  notice to or demand upon  Borrowers, make an
Advance  for the  purpose of paying to Lender the amount due to Lender  together
with interest  thereon.  Any Advance made by Lender under subsection (A) or this
subsection  (B) of this Section 2.9, shall for all purposes under this Agreement
be treated as an Advance under the Revolving Loan Commitment,  and the amount of
any such Advance  shall be included as part of the unpaid  principal  balance of
the Revolving Loan.

                  (C) Notwithstanding  any  other   provision of this Agreement,
this  Agreement  shall no   be terminated  by  Borrowers   at any  time   during
which any   Letter of   Credit   is in effect.  The  provisions of  this Section
2.9 shall govern the  issuance of any Letter of Credit  issued by Lender for the
account of Borrowers,  but this Agreement does not require or obligate Lender to
issue any such Letters of Credit,  with the issuance  thereof  being at Lender's
sole discretion.

         2.10  Commitment  and Usage  Fees.  At Closing and upon the renewal (if
applicable) of the Revolving Loan,  Borrowers shall pay to Lender the Commitment
Fee for the Revolving Loan. In addition, Borrowers shall pay to Lender an annual
Usage Fee based upon the average  amount of the Revolving  Loan  outstanding  as
follows:  If the  average  outstanding  balance of the  Revolving  Loan  exceeds
$1,000,000,  Borrowers shall pay to Lender a Usage Fee of $5,000; if the average
outstanding  balance of the Revolving Loan exceeds  $1,500,000,  Borrowers shall
pay to Lender a Usage Fee of $10,000;  and if the average outstanding balance of
the Revolving Loan exceeds $2,000,000, Borrowers shall pay to Lender a Usage Fee
of $15,000.  These Usage Fees (which are not cumulative) shall be measured as of
the 15th day of  December  each year,  and shall be based upon the prior  twelve
(12)  months (or  portion  thereof).  If  Borrowers  do not pay any Usage Fee to
Lender upon written demand,  Lender at its option may, but shall not be required
to, and without further notice or demand upon Borrowers, make an Advance for the
purpose of paying to Lender the  amount of such Usage Fee.  Any such  Advance so
made by Lender  shall for all  purposes  under this  Agreement  be treated as an
Advance under the Revolving Loan Commitment,  and the amount of any such Advance
shall be included as part of the unpaid principal balance of the Revolving Loan.



                                   ARTICLE III

                      THE WAREHOUSE LOAN AND THE TERM LOANS

         3.1      General Terms.


                  (A) Subject to the terms hereof,  Lender shall make  available
to Cavalier Acceptance a short-term warehouse loan (the "Warehouse Loan") in the
maximum principal amount, at any time outstanding, of up to $2,000,000.  Subject
to the provisions of subsection (C) below,  indebtedness  outstanding  under the
Warehouse Loan may be converted to a Term Loan,  whereupon the principal  amount
so  converted  will  thereupon  again be available to be advanced as part of the
Warehouse  Loan;  provided,  however,  that  the  maximum  amount  of  principal
outstanding  under the  Warehouse  Loan an all Term  Loan(s)  shall  not  exceed
$8,000,000 (the outstanding principal balance of the Warehouse Loan and all Term
Loan(s) is herein referred to, in the aggregate, as the "$8,000,000 Loan").

                  (B) Subject to the terms hereof,  Lender will lend to Cavalier
Acceptance,  from time to time until the Loan Termination Date for the Warehouse
Loan,  such sums in integral  multiples of $500,000 as Cavalier  Acceptance  may
request by not less than one (1)  business  day's  notice to  Lender,  but which
Advances  shall not exceed,  in the aggregate  principal  amount at any one time
outstanding, the sum of $2,000,000.

                  (C) Until the Loan  Termination  Date for the Warehouse  Loan,
and so long as no Event of Default  shall have occurred and be  continuing,  and
subject to the satisfaction of all conditions precedent contained in Article IV,
indebtedness  owing  under the  Warehouse  Loan may,  at the option of  Cavalier
Acceptance,  be converted to a Term Loan.  The Eligible  Contracts  delivered by
Cavalier  Acceptance  to Lender with respect to each Term Loan shall for certain
purposes  hereunder  be  allocated  to such Term Loan (the  "Allocated  Eligible
Contracts").

                  (D) If at  any  time  the  unpaid  principal  balance  of  the
Warehouse Loan shall exceed  $2,000,000,  Cavalier  Acceptance shall immediately
and without demand pay such sum to Lender, in multiples of $10,000, as necessary
to reduce the Warehouse Loan to an amount which Cavalier Acceptance could borrow
at that time under such formula.  If at any time the unpaid principal balance of
any Term Loan  shall  exceed  80% of the  aggregate  outstanding  balance of the
Allocated Eligible Contracts for such Term Loan, then Cavalier  Acceptance shall
have thirty (30) days within  which to (1)  substitute  a  replacement  Eligible
Contract  to  increase  the  aggregate  outstanding  principal  balance  of  the
Allocated  Eligible  Contracts  for such Term Loan,  and/or (2) pay such sums to
Lender,  in  multiples of $10,000,  all as necessary to reduce  the  outstanding
principal  balance  of such  Term  Loan to not more  than  80% of the  aggregate
outstanding  principal balance of the Allocated Eligible Contracts for such Term
Loan.

         3.2  Disbursement  of the Warehouse  Loan and the Term Loan(s).  Lender
will credit or pay the proceeds of each  Advance  under the  Warehouse  and Term
Loan Commitment to Cavalier  Acceptance's deposit account with Lender or in such
other manner as Cavalier  Acceptance and Lender may from time to time agree. The
Term  Loan(s)  will  be  advanced  solely  as a  conversion  to a Term  Loan  of
indebtedness outstanding under the Warehouse Loan.

         3.3      (A) The Warehouse Note.  Cavalier    Acceptance's   obligation
to repay the  Warehouse  Loan  shall be evidenced by the Warehouse Note.

                  (B) The Term Note(s).  At the time of the establishment of any
Term Loan,  Cavalier  Acceptance will execute and deliver to Lender a Term Note,
evidencing  the  principal  amount  so  converted,  and will pay to  Lender  all
interest then accrued but unpaid on said principal amount.  The principal amount
of any Term Note shall not be less than $2,000,000.

         3.4      Payments of Principal.

                  (A) The Warehouse  Loan. If not earlier  demanded  pursuant to
Section 9.2, the outstanding  principal  balance of the Warehouse Loan  shall be
due and payable to Lender on the Loan Termination Date for the Warehouse Loan.

                  (B) The Term  Loan(s).  If not  earlier  demanded  pursuant to
Section  9.2,  the   principal  of    each  Term  Loan   shall   be  payable  in
eighty-three(83)  monthly  installments,  beginning on the 15th day of the month
next succeeding the date of the applicable Term Note, and continuing on the same
day of each month  thereafter  until the seventh  anniversary  date of each such
Term Note, at which time all outstanding  principal of such Term Loan,  together
with all  accrued but unpaid  interest  thereon,  shall be payable.  The monthly
installments  payable  on each Term Loan shall be the  amount  required,  at the
applicable  interest  rate, to repay such Term Loan,  in full, in  substantially
equal monthly payments.

         3.5 Prepayment. The Term Loan(s) may be prepaid, in full, upon not less
than thirty (30) days notice and, if such prepayment (including any payment made
upon  acceleration  of the  maturity  date  upon the  occurrence  of an Event of
Default) in full should occur during the fixed-rate  period for any Term Loan, a
premium  equal to one  percent  (1%) of the  amount of the  prepayment  shall be
payable;  provided,  however, that no such premium shall be due if the funds for
such  prepayment  are  obtained  by any  Borrower  other than as proceeds of the
refinancing by another lender of any Loan; and provided further,  however,  that
no  premium  shall  be  due  on  any  mandatory   prepayment   required  by  the
immediately-following  sentence.  In addition to the prepayments specified under
Section  3.1(D),  the  $8,000,000  Loan shall be  subject  to certain  mandatory
prepayments  in  the  event  that  Cavalier   Acceptance   shall  have  received
prepayments  to it of Chattel  Paper  which  constitutes  Collateral  under this
Agreement (regardless of whether such Chattel Paper is classified as an Eligible
Contract), as follows: (1) In the event that Cavalier Acceptance shall receive a
principal prepayment upon an Allocated Eligible Contract, then 80% of the amount
of such prepayment  shall be due to Lender as a prepayment to Lender of the Term
Loan to which such Allocated  Eligible  Contract was  allocated;  and (2) in the
event that Cavalier  Acceptance should receive a prepayment of any other Chattel
Paper constituting Collateral under this Agreement, then the full amount of such
prepayment  shall be due to Lender as a  prepayment  to be  applied by Lender to
such Indebtedness outstanding upon the $8,000,000 Loan as Lender may elect.

         3.6      Interest Rate and Payments of Interest.

                  (A) The Warehouse  Loan.  Interest on the Warehouse Loan shall
be calculated and paid as follows:

                       (1)      Interest  on   the  principal  balance  of   the
                                Warehouse     Loan,   from    time     to   time
                                outstanding,  will  be   payable   at  the  rate
                                (the  "Warehouse  Rate") of  one  percent   (1%)
                                above  the  Prime  Rate  in  effect from time to
                                time  until  maturity,  and   three percent (3%)
                                above  the  Prime Rate in  effect   from time to
                                time   after   maturity,  whether   by   demand,
                                acceleration or otherwise.

                       (2)      Each time the  Prime   Rate   shall  change, the
                                Warehouse   Rate  shall   change    concurrently
                                with such change in the Prime Rate.

                       (3)      Interest shall be   calculated on   the basis of
                                a 360-day year, by    multiplying  the   product
                                of the principal   amount  outstanding   and the
                                applicable rate   by  the actual number  of days
                                elapsed,   and   dividing   by    360.   Accrued
                                interest   through    the    last  day  of  each
                                calendar  month shall be payable on   the   15th
                                day of each month   commencing   March 15, 1994,
                                and at maturity, whether by demand, acceleration
                                or otherwise.

                       (4)      Cavalier  Acceptance    agrees  to    pay a late
                                charge  equal  to five  percent  (5%)   of   the
                                amount of the payment which   is late,   but not
                                more  than the  maximum    amount    allowed  by
                                applicable  Law    (the    "Late  Charge"),   as
                                follows:  (a)   if any    scheduled  payment  is
                                late  twenty (20) days or more   or (b)   if any
                                scheduled  payment  is  late   ten  (10) days or
                                more, and two (2)or more   scheduled    payments
                                have  been  late    twenty    (20)  days or more
                                since  February  1 of the year in   which   such
                                scheduled  payment  is late   ten   (10) days or
                                more. This  subparagraph  does   not extend  any
                                payment  due date  expressly    stated    in the
                                Agreement or any   Security  Document   and does
                                not in any way   prevent or   estop  Lender from
                                requiring  that payments be made   by   Cavalier
                                Acceptance     strictly   when   due.     Unless
                                accepted by Lender,  and    unless   accompanied
                                by all  other   amounts then due to Lender,  the
                                tender   of     such    payment    by   Cavalier
                                Acceptance    does   not  cure    the  Event  of
                                Default  arising  from the    payment    default
                                upon which   such  Late   Charge   was assessed.

                  (B) The Term  Loan(s).  Interest  on each Term  Loan  shall be
calculated and paid as follows:

                      (1)       Interest  on   the    principal  balance of each
                                Term  Loan,  from time   to   time  outstanding,
                                will be payable  at   a rate  (the "Term  Rate")
                                that will   be fixed   for five years at the per
                                annum  rate of    interest    equal to 240 basis
                                points (2.40%) above   the   Five Year Treasury.
                                For any Term  Loan,    the   Five Year  Treasury
                                shall be measured by   adding,  on   the date of
                                calculation, the   Five   Year Treasury rates as
                                have been made    available   on   the  thirteen
]                               (13)   Mondays    immediately    preceding  (but
                                not  including) the   date   of   the Term Note,
                                and   dividing   such   sum  by   thirteen (13).
                                Lender   will   furnish   to   Cavalier  Homes a
                                report  of   the   Five    Year   Treasury  each
                                week.  After    five   years,  such  fixed rate
                                shall convert to   a floating   rate of interest
                                equal   to     three-quarters  of  one   percent
                                (.75%) above the Prime   Rate   in effect   from
                                time to time;   provided,  however,  that   such
                                floating  rate  shall   never be less than   the
                                original  fixed rate for   such   Term Note, and
                                shall  never   be  greater (prior   to maturity)
                                than   the   original  fixed rate  multiplied by
                                1.50.   The  Term  Rate in  effect   from   time
                                to     time   after    maturity,   whether    by
                                acceleration  or   otherwise,  shall   be  equal
                                to  the  applicable   Term Rate in effect  prior
                                to said maturity plus two percent (2.00%).

                      (2)       During  any  period   of  time in    which   the
                                interest  rate  for any   Term   Loan is  not  a
                                fixed  rate,  each time   the   Prime Rate shall
                                change,  the Term  Rate   for   such  Term  Loan
                                shall    change   contemporaneously   with  such
                                change in the Prime Rate.

                      (3)       Interest shall be   calculated   on the basis of
                                a   360-day   year, by  multiplying  the product
                                of the principal amount  outstanding   and   the
                                applicable rate by   the   actual number of days
                                elapsed,   and   dividing   by  360.     Accrued
                                interest   through   the   last    day  of  each
                                calendar  month  shall  be  payable on   the due
                                date of   each  payment  of principal  under the
                                Term Note.

                      (4)       Cavalier  Acceptance    agrees  to  pay a   late
                                charge  equal  to five  percent  (5%)   of   the
                                amount of the payment  which is late,   but   no
                                more  than   the  maximum    amount  allowed  by
                                applicable    Law  (the   "Late   Charge")    as
                                follows:  (a) if  any   scheduled   payment   is
                                late  twenty (20)  days or  more or (b)  if  any
                                scheduled  payment  is  late ten   (10)  days or
                                more, and two (2) or  more  scheduled   payments
                                have  been    late   twenty  (20)  days or  more
                                since  February  1 of the  year  in  which  such
                                scheduled   payment is  late  ten  (10)  days or
                                more.  This  subparagraph  does  not  extend any
                                payment   due   date  expressly   stated  in the
                                Agreement or any  Security   Document  and does
                                not in any way prevent   or estop  Lender   from
                                requiring  that   payments be   made by Cavalier
                                Acceptance    strictly    when   due.     Unless
                                accepted by  Lender,   and  unless   accompanied
                                by all  other  amounts then   due to Lender, the
                                tender   of   such     payment   by     Cavalier
                                Acceptance   does   not    cure  the  Event   of
                                Default   arising  from the   payment    default
                                upon which such Late Charge was assessed.

                  (C) If, at any time,  the Warehouse  Rate,  the Term Rate or a
Late Charge shall be deemed by any competent court of law,  governmental  agency
or tribunal to exceed the maximum rate of interest  permitted by any  applicable
Laws,  then, for such time as the Warehouse  Rate, the Term Rate or Late Charge,
as applicable, would be deemed excessive, its application shall be suspended and
there shall be charged  instead the maximum rate of interest  permissible  under
such Laws, and any excess interest or charges actually collected by Lender shall
be credited as a partial prepayment of principal.

         3.7 Payment to Lender.  All sums payable to Lender  hereunder  shall be
paid directly to Lender in United States Dollars and immediately available funds
at the  place  payment  is due.  If Lender  shall  send to  Cavalier  Acceptance
statements of amounts due hereunder, such statements shall be considered correct
and  conclusively  binding on Cavalier  Acceptance  unless  Cavalier  Acceptance
notifies  Lender to the contrary  within  thirty (30) days of its receipt of any
statement which it deems to be incorrect. Alternatively, at its sole discretion,
Lender may charge against any deposit account of Cavalier  Acceptance all or any
part of any amount due hereunder.

         3.8 Use of Proceeds.  The proceeds of the Warehouse  Loan shall be used
by Cavalier Acceptance to reimburse itself, in part, for working capital used by
it to originate and fund loans  (evidenced  by Chattel Paper falling  within the
definition of an Eligible Contract) for the purchase of manufactured homes.

         3.9  Commitment  Fee.  Cavalier  Acceptance  shall pay to Lender at the
Closing a Commitment Fee for the $8,000,000 Loan equal to $36,000.  With respect
to such fee,  $20,000  shall be deemed  fully  earned by Lender and shall not be
refundable  to  Cavalier  Acceptance.  With  respect  to  the  remainder  of the
Commitment  Fee,  up to  $16,000  of such fee shall be  refundable  to  Cavalier
Acceptance based upon usage of the $8,000,000 Loan. The usage refund will be the
amount determined by multiplying $16,000 times the Unused Percentage. As used in
this Section 3.9, the term "Unused  Percentage" shall be equal to 1.00 minus the
"Used  Percentage",  with the Used  Percentage  calculated by dividing the total
amount advanced under the $8,000,000 Loan by $8,000,000. Usage shall be measured
as of the Loan Termination Date.


                                   ARTICLE IV

                              CONDITIONS PRECEDENT

         The  obligation  of Lender to make the Loans and any Advance under this
Agreement, and the issuance by Lender of any Letter of Credit, is subject to the
following conditions precedent:

         4.1 Documents  Required for the Closing.  Prior to the  disbursement of
the initial Advance, the following  instruments and documents,  duly executed by
all proper Persons, shall have been delivered to Lender:

                  (A)  This Agreement;
                  
                  (B)  The Revolving Note;

                  (C)  The Warehouse Note;

                  (D)  The financing statements required by Section 5.5;

                  (E)  A  certificate  of  Cavalier   Homes'  and  each  Initial
Participating  Subsidiary's corporate secretary, in form satisfactory to Lender,
dated as of the date of this  Agreement,  certifying  as to the  incumbency  and
signatures of the officers of each such  Borrower  signing this  Agreement,  the
Revolving Note (and for Cavalier Acceptance,  the Warehouse Note), and the other
Loan  Documents,  and each  other  document  to be  delivered  pursuant  hereto,
together with the following documents attached thereto:

                      (1)      A copy   of   resolutions  of    such  Borrower's
                               board  of   directors authorizing the  execution,
                               delivery and performance of this Agreement,   the
                               Revolving  Note  (and  for   Cavalier Acceptance,
                               the Warehouse Note) and the other Loan Documents,
                               and each other document to be delivered  pursuant
                               hereto; and

                      (2)      A copy, certified as of   the most   recent  date
                               practicable  by   the   judge  of  probate of the
                               county  in which such  Borrower's   articles   or
                               certificate of   incorporation   is filed  or the
                               secretary   of  state  of the  state   where such
                               Borrower  is  incorporated,  as   appropriate, of
                               such   Borrower'   articles  or   certificate  of
                               incorporation;

                  (F) A copy  of the  bylaws  of  each  of  Cavalier  Homes  and
Cavalier  Acceptance  (attached  to the  appropriate  certificate  of  corporate
secretary for each such Borrower);

                  (G) Certificates,  as of the most recent dates practicable, of
the  aforesaid  secretaries  of state,  the  secretary of state of each state in
which each Borrower is qualified as a foreign  corporation and the department of
revenue or taxation of each of the foregoing  states, as to the good standing of
such Borrower;

                  (H) A written opinion of John W Lowe,  Esq., legal counsel for
Borrowers,  dated as of the date of this  Agreement and addressed to Lender,  in
form satisfactory to Lender;

                  (I) The   Closing   Certificate,  in form satisfactory to
Lender;

                  (J) A  Compliance  Certificate  as of a date not more than one
(1) day prior to the initial Advance,  substantially in the form of Exhibit C or
Exhibit C-1, as appropriate, attached hereto and incorporated herein, certifying
a Borrowing  Base under the Revolving Loan  Commitment or a Contracts  Borrowing
Base under the Warehouse and Term Loan Commitment,  as appropriate,  of not less
than the amount of the requested initial Advance;

                  (K) The Commitment Fees;

                  (L) The Pledge  Agreements,  in form  satisfactory  to Lender,
together  with  certificates  representing  the  shares  pledged  thereby,  duly
endorsed in blank;

                  (M) The Guaranty Agreement, in form satisfactory to Lender;

                  (N)  Chattel  Paper  evidencing  contracts  funded by Cavalier
Acceptance  on or before  December 31, 1993 (and which if funded after such date
would be an Eligible  Contract),  in the aggregate  principal amount of not less
than $2,500,000, duly pledged to Lender as Collateral;

                  (O) The Assignment of Life Insurance,  in form satisfactory to
Lender;

                  (P) The Subrogation and Contribution Agreement,  substantially
in the form of Exhibit D, attached hereto and incorporated herein;

                  (Q)  The  binders  for the  insurance  policies  described  in
Section 7.1(E) of this Agreement (such insurance  policies shall be delivered to
Lender within sixty (60) calendar days of the date of Closing); and

                  (R) The payment of accrued costs and expenses   under  Section
10.5 of this Agreement.

         4.2 Documents Required for Subsequent Advances.  At the time of, and as
a condition to, each  subsequent  Advance under the Revolving Loan Commitment or
the Warehouse and Term Loan Commitment,  Cavalier Homes or Cavalier  Acceptance,
as  appropriate,  shall have duly delivered to Lender the following  instruments
and documents duly executed by all proper parties:

                  (A) A  Compliance  Certificate,  substantially  in the form of
Exhibit  C  or  Exhibit  C-1,  attached  hereto  and  incorporated   herein,  as
appropriate,  current  for  the  month  in  which  each  Advance  is  requested,
acceptable to Lender; and

                  (B) A  Request  for  Advance,  substantially  in the  form  of
Exhibit  B  or  Exhibit  B-1,  attached  hereto  and  incorporated   herein,  as
appropriate.

Borrowers  hereby  agree (i) that Lender shall be entitled to rely upon the most
recent  Compliance  Certificate in its possession until the same are superseded,
respectively,  by  another  such  certificate,  and (ii) that each  Request  for
Advance shall  constitute a confirmation of the  representations  and warranties
contained in the most recent such certificates then in Lender's  possession,  as
well as those contained in Article hereof.

         4.3  Additional  Conditions  to the  Term  Loan(s).  Conversion  of the
Indebtedness  owing  under the  Warehouse  Loan to a Term Loan is subject to the
following additional conditions precedent:

                  (A) Cavalier  Acceptance shall have delivered to Lender a duly
authorized and executed Term Note pertaining to such Term Loan;

                  (B)  The  original  principal  amount  of  any  Term  Note  is
$2,000,000;

                  (C) The original  principal  amount of any Term Note shall not
be more than 80% of the aggregate outstanding principal balance of the Allocated
Eligible Contracts furnished to and acceptable as collateral by Lender;

                  (D) Lender and its counsel  shall be satisfied in all respects
with the enforceability  against Cavalier  Acceptance of any Term Note delivered
to evidence a Term Loan;

                  (E)  Cavalier  Acceptance  shall  have  provided  to  Lender a
schedule of the Allocated Eligible Contracts delivered at the time of conversion
for such Term Loan,  setting out such  information as may be required by Lender,
but  which  shall  include, among other  things, the name and account number for
each individual borrower, the outstanding principal balance  of such  borrower's
Eligible  Contract,  and the date through which payment has been made, and shall
have provided the executed original Eligible  Contracts and such other documents
related to the Eligible Contracts as Lender may require or request. Lender, upon
receipt of the  foregoing  documents  shall have a reasonable  amount of time to
review the same for conformity to Lender's  collateral  review standards and the
requirements  of  this  Agreement.  If any  document  submitted  relative  to an
Eligible Contract  requires  correction or otherwise to be conformed to Lender's
collateral  review  standards,  then such document shall be returned to Cavalier
Acceptance for  correction  and the Chattel Paper to which the document  relates
shall  be  ineligible  as an  Eligible  Contract  and for  funding  the  Advance
requested.  With the prior written  consent of Lender,  Cavalier  Acceptance may
provide  Eligible  Contract(s) in substitution for the Chattel Paper which fails
to meet Lender's collateral review standards.

         4.4      Additional Required Documents.

                  (A) Lender  shall also have  received on or before the date on
which a Subsidiary becomes a Participating  Subsidiary (i) a certificate of each
Subsidiary's corporate secretary,  in form satisfactory to Lender and certifying
as to the  incumbency  and  signatures of the officers of each such  Subsidiary,
together with the following documents attached thereto:

                      (1)      A  copy of   resolutions  of   such  Subsidiary's
                               board of directors  authorizing  the   execution,
                               delivery and performance of this  Agreement,  the
                               Revolving Note and the other     Loan  Documents,
                               and each other document to  be delivered pursuant
                               hereto;

                      (2)      A copy, certified as  of   the   most recent date
                               practicable  by  the   judge   of  probate of the
                               county in   which such   Subsidiary's    articles
                               or   certificate   of  incorporation  is filed or
                               the  secretary    of state  of   the state  where
                               such Subsidiary is incorporated, as  appropriate,
                               of such Subsidiary's  articles  or certificate of
                               incorporation; and

                      (3)      At Lender's request, a copy of such  Subsidiary's
                               bylaws;

(ii)  certificates,  as of the most recent dates  practicable  of the  aforesaid
secretaries  of  state,  the  secretary  of  state of each  state in which  each
Subsidiary is qualified as a foreign  corporation  and the department of revenue
or taxation of each of the  foregoing  states,  as to the good  standing of such
Subsidiary; (iii) a written opinion of John W Lowe, Esq., legal counsel for each
Subsidiary and addressed to Lender, in form  satisfactory to Lender;  (iv) fully
executed  copies  of all Loan  Documents  that  this  Agreement  requires  to be
executed or delivered  (or both) by such  Subsidiary  (including a duly executed
Subrogation and Contribution Agreement and a duly executed Assumption Agreement,
in the case of any Subsidiary that becomes a Participating  Subsidiary after the
Closing,  and  fully  executed  Security  Documents);  and (v)  such  additional
supporting documents as Lender or its counsel may reasonably request.

                  (B) Lender  shall also have  received on or before the date on
which a Controlled Partnership becomes a Participating Partnership (i) a copy of
the partnership  agreement  under which such Controlled  Partnership was formed,
certified as true and correct on and as of the date of which Loan  Documents are
executed and delivered by such Controlled Partnership; (ii) a written opinion of
John W Lowe, Esq.,  legal counsel for such Controlled  Partnership and addressed
to Lender,  in form  satisfactory  to Lender;  (iii) duly executed copies of all
Loan  Documents  that this  Agreement  requires to be executed or delivered  (or
both) by such  Controlled  Partnership  (including  a duly  executed  Assumption
Agreement,   in  the  case  of  any  Controlled   Partnership   that  becomes  a
Participating  Partnership  after  the  Closing,  and  fully  executed  Security
Documents);  and (iv)  such  additional  supporting  documents  as Lender or its
counsel may reasonably request.

         4.5  Certain  Events.  At the  time  of the  initial  Advance,  of each
subsequent  Advance under any of the Loans and of the issuance of each Letter of
Credit:

                  (A) The  representations  and  warranties  set  forth  in this
Agreement  shall  be true  and  correct  with the same  effect  as  though  such
representations  and  warranties  had  been  made on the date  the  Advance  was
requested  and on the  date  of the  Advance,  as the  case  may be,  except  as
otherwise expressly provided;

                  (B) No Event of Default shall have occurred and be continuing,
and no event shall have  occurred  and be  continuing  that,  with the giving of
notice or passage of time or both, would be an Event of Default;

                  (C) No  material  adverse  change  shall have  occurred in the
financial condition of any Borrower since the date of this Agreement; and

                  (D) No demand for payment shall have been made by Lender;

                  (E)  Cavalier  Homes  and  Cavalier  Acceptance  shall be full
compliance  with the  provisions of Section 7.3 or Section 8.3, as  appropriate,
hereof; and

                  (F) All of the Loan  Documents  shall  have  remained  in full
force and effect.

         4.6  Legal  Matters.  At the time of the  disbursement  of the  initial
Advance, and of each subsequent Advance,  under the Revolving Loan Commitment or
under the Warehouse and Term Loan Commitment, and of the issuance of each Letter
of Credit, all legal matters incidental thereto shall be satisfactory to counsel
to Lender.


                                    ARTICLE V

                               COLLATERAL SECURITY

         5.1  Composition  of the  Collateral.  The property in which a security
interest is   granted    pursuant  to the  provisions  of  Sections  5.2 and 5.3
hereof  or  pursuant  to the  provisions  of any  Security  Document  is  herein
collectively  called the "Collateral." The Collateral and all of each Borrower's
other  property  of any  kind  held  by  Lender,  shall  stand  as one  general,
continuing collateral security for all Obligations and may be retained by Lender
until all  Obligations  have been  satisfied in full and Lender's  commitment to
lend under this Agreement has been terminated.
         
         5.2 Rights in  Property  Held by  Lender.  As  security  for the prompt
satisfaction of all  Obligations,  each Borrower  hereby assigns,  transfers and
conveys to Lender all of such  Borrower's  right,  title and interest in and to,
and grants Lender a lien on and a security  interest in, all amounts that may be
owing from time to time by Lender to such Borrower in any  capacity,  including,
without  limitation,  any balance or share  belonging to such  Borrower,  of any
deposit or other account with Lender,  which lien and security interest shall be
independent of any right of set-off which Lender may have.

         5.3 Rights in  Property  Held  Either by  Borrowers  or by  Lender.  As
further security for the prompt satisfaction of all Obligations,  in addition to
any other or further security provided under any of the Security Documents, each
Borrower  hereby  assigns  to Lender  all of such  Borrower's  right,  title and
interest in and to, and grants Lender a lien upon and security  interest in, all
of the following,  wherever  located,  whether now owned or hereafter  acquired,
together  with  all  replacements  therefor  and  proceeds  (including,  without
limitation,  insurance proceeds) thereof (all of which shall constitute original
Collateral under this Agreement):

                  (A)  Accounts;

                  (B)  Chattel Paper;

                  (C)  Contracts;

                  (D)  Contract Rights;

                  (E)  Documents;

                  (F)  Eligible Contracts;

                  (G)  General Intangibles;

                  (H)  Instruments;

                  (I)  Inventory;

                  (J)  Rights  as  seller of  Goods   and  rights  to  returned,
                       repossessed  or  reclaimed Goods; and

                  (K)  All Records pertaining to any of the Collateral.

         5.4  Priority of Liens.  The  foregoing  liens shall be first and prior
liens except for Permitted Liens.

         5.5      Perfection.

                  (A) Each Borrower will:

                      (1)      Execute such  financing   statements   (including
                               amendments thereto and continuation    statements
                               thereof),   in   form satisfactory   to Lender as
                               Lender  may  from  time  to time specify;

                      (2)      Pay, or    reimburse    Lender for  paying,   all
                               costs and taxes of filing    or  recording    the
                               same in  such   public  offices  as  Lender   may
                               designate;

                      (3)      Deliver   such  of   the Collateral  which in the
                               sole judgment of Lender  is   best  perfected  by
                               possession, to  Lender or its designated    agent
                               or bailee; and

                      (4)      Take such other steps as Lender may from time  to
                               time  direct,  including,  without    limitation,
                               the noting of Lender's  lien on   the  Collateral
                               and on any  certificates  of     title  therefor,
                               all  to  perfect  Lender's   security interest in
                               the Collateral.

                  (B)  Each  of  Cavalier  Homes,  Star  Industries,  Inc.,  and
Cavalier 0Acceptance will further:

                       (1)      Execute   such   stock  powers  relating  to the
                                Pledged Stock, in form   satisfactory  to Lender
                                as   Lender  may  from time  to   time  specify;

                       (2)      Pay,  or   reimburse    Lender for  paying,  all
                                costs for the transfer of   the   Pledged Stock;

                       (3)      Deliver the Pledged Stock  to    Lender  or  its
                                designated agent or bailee; and

                       (4)      Take such other steps as Lender may   from  time
                                to  time  direct,   all  to    perfect  Lender's
                                security interest in the  Collateral.

                  (C)  In  addition  to the  foregoing,  and  not in  limitation
 thereof:

                       (1)      A    carbon, photographic, or other reproduction
                                of  this  Agreement  shall  be   sufficient as a
                                financing  statement and   may   be filed in any
                                appropriate  office in lieu thereof; and,

                       (2)      To the extent lawful,  each   Borrower    hereby
                                appoints    Lender   as   its   attorney-in-fact
                                (without requiring   Lender to act   as such) to
                                execute any   financing    statement in the name
                                of such  Borrower,  and    to perform  all other
                                acts  that Lender deems appropriate to   perfect
                                and continue  its security interest in,  and  to
                                protect  and   preserve,   the Collateral.

         5.6  Chattel   Paper  or   Instruments.   Each  Borrower  will  deliver
immediately  to Lender  any  Chattel  Paper or  Instruments  arising  out of the
Collateral  usually,  but not  exclusively,  as proceeds.  Further,  the parties
hereby  agree  that  such  Chattel  Paper  or  Instruments  constitute  original
Collateral  rather  than  proceeds;  but if  proceeds,  then  Lender's  security
interest created by this Agreement in the Chattel Paper or Instruments shall not
be claimed merely as proceeds.
         5.7  Release of  Documentation  For  Eligible  Contracts.  In the event
Cavalier  Acceptance or Lender shall  determine that a document  relative to any
Chattel  Paper or any Eligible  Contract  which has been  delivered to Lender in
connection  with the  conversion of the  Warehouse  Loan to a Term Loan fails to
meet Lender's collateral review standards or is otherwise  deficient  subsequent
to the initial  review by Lender,  then upon Cavalier  Acceptance's  delivery to
Lender of a trust  receipt  in form and  substance  satisfactory  to Lender  and
designating  the purpose for which  delivery is requested,  Lender shall deliver
such documents to Cavalier  Acceptance for  correction.  Within  forty-five (45)
days  of  Lender'  delivery  of any  such  nonconforming  document  to  Cavalier
Acceptance for correction, such document shall be corrected or otherwise conform
to  Lender's  collateral  review  standards,   or  the  Contract  to  which  the
nonconforming document relates shall be ineligible and Cavalier Acceptance shall
pay Lender the unpaid  principal  balance of such  Contract  or,  with the prior
written  consent of Lender,  shall  deliver to Lender  Eligible  Contract(s)  in
substitution for such Contract.

         5.8 Power of Attorney.  Each Borrower  hereby  constitutes and appoints
Lender,  or any other  person  whom  Lender may  designate,  as such  Borrower's
attorney-in-fact,  to  exercise  upon the  occurrence  of any Event of  Default,
solely at  Borrowers'  joint and  several  cost and  expense,  all or any of the
following powers, all of which powers, being coupled with an interest,  shall be
irrevocable until all Obligations shall have been performed and paid:

                  (A) To receive,  take,  endorse,  sign and deliver in Lender's
name or in the name of any Borrower any and all checks,  notes, drafts and other
instruments relating to Accounts and Eligible Contracts which constitute part of
the Collateral;

                  (B) To receive,  open and dispose of all mail addressed to any
Borrower  that relates to the  Collateral  and to notify postal  authorities  to
change  the  address  for the  delivery  thereof  to such  address as Lender may
designate;

                  (C) To  transmit  to  account  parties  and to  obligors  upon
Accounts and Eligible Contracts which constitute part of the Collateral,  notice
of Lender's interest therein,  and to demand and to receive from such Persons at
any time, in the name of Lender or of any Borrower or of the designee of Lender,
information concerning such Accounts,  such Eligible Contracts,  and the amounts
owing thereon;

                  (D) To notify such  Account  Debtors  and/or  obligors to make
payments on such Accounts and/or Eligible  Contracts  directly to Lender or to a
lock-box designated by Lender;

                  (E) To take or to bring,  in the name of Lender or in the name
of any Borrower,  all steps, action, suits or proceedings deemed by Lender to be
necessary  or  desirable  to effect  the  collection  of such  Accounts  or such
Eligible Contracts;

                  (F) To exercise all of the rights and  remedies of  Borrowers,
or any of them, with respect to the collection of the Accounts;

                  (G) To settle, adjust,  compromise,  extend, renew, discharge,
terminate or release the Accounts in whole or in part;

                  (H) To sell or assign the Accounts  upon such terms,  for such
amounts and at such time or times as Lender deems advisable;

                  (I)      To   take   control, in   any  manner, of any item of
payment on, or proceeds of, Collateral;

                  (J) To use the  information  recorded on or  contained  in any
data  processing  equipment and computer  hardware and software  relating to the
Collateral to which any Borrower has access; and

                  (K) To do all acts and  things  necessary,  in  Lender's  sole
judgment, to carry out the purposes of this Agreement.

                  All acts of such  attorney-in-fact  or designee taken pursuant
to this  Section 5.8 or Section  9.6 are hereby  ratified  and  approved by each
Borrower,  and said  attorney  or  designee  shall not be liable for any acts or
omissions nor for any error of judgment or mistake of fact or law.


                                   ARTICLE VI

                         REPRESENTATIONS AND WARRANTIES

         6.1 Original.  To induce Lender to enter into this  Agreement,  each of
the Borrowers jointly and severally represents and warrants to Lender, as of the
date  hereof  and,  except  as  otherwise  expressly  provided,  as of all times
(including,  without  limitation,  as of the date each Advance  under any of the
Loans is requested and made) until this Agreement is terminated in writing,  all
Obligations   hereunder  are  satisfied  and  no  commitments  hereunder  remain
outstanding, as follows:

                  (A) Cavalier Homes is a corporation  duly  organized,  validly
existing  and in good  standing  under the Laws of the State of  Delaware;  each
Consolidated  Entity is duly  organized,  validly  existing and in good standing
under the Laws of the state in which it is incorporated or formed,
all  as  set   forth  in  Exhibit J, attached hereto  and  incorporated  herein;
Cavalier  Homes  and  each  Consolidated  Entity has the lawful power to own its
properties   and  to   engage   in   the   business   it  conducts,  and is duly
qualified and in good  standing in the  jurisdictions wherein the nature of  the
business   transacted    by   it  or   property  owned    by    it   makes  such
qualification  necessary; the states  in   which   Cavalier   Homes   and   each
Consolidated  Entity is  qualified  to do  business  are set forth in Exhibit G,
attached hereto and incorporated herein; the percentage of ownership by Cavalier
Homes,  Star  Industries,  Inc. or Cavalier  Acceptance,  as applicable,  of the
outstanding  stock of each  Consolidated  Entity  is as  listed  in  Exhibit  K,
attached hereto and incorporated herein; the addresses of all places of business
and headquarters of Cavalier Homes and each Consolidated Entity are as set forth
in Exhibit H, attached hereto and incorporated  herein, and the addresses of all
places where the Collateral is located and a brief  description of the nature of
the Collateral at each such location are set forth in Exhibit H;

                  (B) Neither  Cavalier  Homes nor any  Consolidated  Entity has
used any corporate or fictitious  name other than the name for Cavalier Homes or
each Consolidated Entity as is used in this Agreement,  which is the same as the
name shown,  respectively,  on Cavalier  Homes' and each  Consolidated  Entity's
certificate or articles of incorporation  through the date of filing of the last
amendment thereto,  except as set forth in Exhibit II.6.1(B) attached hereto and
incorporated herein;

                  (C) None of the Borrowers is directly or indirectly controlled
by, or acting on behalf of, any Person which is an "Investment  Company," within
the meaning of the Investment Company Act of 1940, as amended;

                  (D) Neither  Cavalier  Homes nor any  Consolidated  Entity has
been the surviving  corporation in a merger,  acquired any business,  or changed
its principal  executive office within five (5) years and one (1) month prior to
the date hereof,  except as set forth in Exhibit II.6.1(D),  attached hereto and
incorporated herein;

                  (E) Neither Cavalier Homes nor any  Consolidated  Entity is in
default  with respect to any of its  existing  Indebtedness,  and the making and
performance of this Agreement,  the Notes, and the other Loan Documents will not
(immediately, or with the passage of time, the giving of notice, or both):

                      (1)      Violate the charter or by-law  provisions of  
                               any  Borrower,  or  violate any   Law or   result
                               in a default   under  any   contract,  agreement,
                               or   instrument  to   which   any Borrower or any
                               Consolidated  Entity  is a  party   or  by  which
                               any  Borrower or  any   Consolidated   Entity  or
                               its property  is bound; or

                      (2)      Result   in   the  creation or  imposition of any
                               security  interest  in, or lien  or   encumbrance
                               upon,   any  of  the assets  of any  Borrower  or
                               any  Consolidated  Entity,  except  in  favor  of
                               Lender;

                  (F) Each  Borrower  has the power and  authority to enter into
and perform this Agreement, the Notes to which it is a party, and the other Loan
Documents, and to incur the obligations herein and therein provided for, and has
taken all corporate action necessary to authorize the execution,  delivery,  and
performance of this Agreement,  the Notes to which it is a party,  and the other
Loan Documents;

                  (G) This  Agreement,  the Notes,  and the other Loan Documents
are, or when delivered will be, valid,  binding,  and  enforceable in accordance
with their respective terms;

                  (H) The Security Documents,  together with any UCC-1's and all
other  documents  filed in  connection  therewith,  create as  security  for the
Obligations,  a valid and enforceable perfected first priority security interest
in and  lien  on all of  each  Borrower's  rights,  title  and  interest  in the
Collateral,  in favor of Lender,  superior  and prior to the rights of all third
Persons and subject to no other liens.

                  (I) Except as  disclosed  in the  footnotes  to the  Financial
Statements  delivered to Lender,  or in Exhibit  II.6.1(I),  attached hereto and
incorporated herein, and except for matters in which an insurer has accepted the
defense without reservation of rights, there is no pending order, notice, claim,
litigation,  proceeding or investigation  against or affecting Cavalier Homes or
any  Consolidated  Entity that would  involve the payment of $250,000 or more if
adversely determined;

                  (J) Cavalier Homes and each  Consolidated  Entity has good and
marketable  title to all of its assets,  including the  Collateral,  free of any
security interest, encumbrance or lien, or claim of any third person except
 for Permitted Liens;

                  (K) The  Financial  Statements,  including  any  schedules and
notes  pertaining  thereto,  have been  prepared in  accordance  with  Generally
Accepted  Accounting  Principles  consistently  applied,  and fully  and  fairly
present the financial condition of Cavalier Homes and the Consolidated  Entities
as of the dates  thereof and the results of operations  for the periods  covered
thereby,  and there have been no material  adverse  changes in the  Consolidated
financial condition or business of Cavalier Homes and the Consolidated  Entities
from the dates of the Financial Statements to the date hereof;

                  (L) As of the date of the Financial Statements, Cavalier Homes
and the  Consolidated  Entities  had no  material  Indebtedness  of any  nature,
including,  without  limitation,  liabilities  for  taxes  and any  interest  or
penalties  relating  thereto,  except to the extent  reflected (in a footnote or
otherwise) and reserved  against in the Financial  Statements or as disclosed in
or  permitted  by  this  Agreement;  none  of the  Borrowers  knows  or has  any
reasonable  ground  to know of any  basis for the  assertion  against  it or any
Consolidated  Entity  of any  material  Indebtedness  of any  nature  not  fully
reflected and reserved against in the Financial Statements;

                  (M) Except as otherwise  permitted herein,  Cavalier Homes and
each Consolidated Entity have filed all federal, state and local tax returns and
other reports that they are required by Law to file prior to the date hereof and
which are material to the conduct of its  businesses,  have paid or caused to be
paid all taxes,  assessments  and other  governmental  charges  that are due and
payable  prior to the date  hereof,  and have made  adequate  provision  for the
payment  of such  taxes,  assessments  or  other  charges  accruing  but not yet
payable; none of the Borrowers has any knowledge of any deficiency or additional
assessment  in a  materially  important  amount in  connection  with any  taxes,
assessments  or charges not provided for on its books;  (N) Except to the extent
that the failure to comply would not  materially  interfere  with the conduct of
the  business of Cavalier  Homes or any  Consolidated  Entity,  each of Cavalier
Homes' and each Consolidated Entity has, to the best of its knowledge,  complied
with all applicable Law with respect to:

                   (N)  (1)  Any    restrictions,    specifications,   or  other
                             requirements   pertaining to products that Cavalier
                             Homes or any Consolidated  Entity      manufactures
                             or sells or to the   services that  Cavalier  Homes
                             or any Consolidated Entity performs;

                         (2)  The conduct of its businesses; and

                         (3)  The use, maintenance  and  operation  of the  real
                              and personal properties owned or leased   by it in
                              the conduct of its businesses;

                  (O) No  representation  or warranty by any Borrower  contained
herein  or in any  certificate  or  other  document  furnished  by any  Borrower
pursuant hereto contains any untrue statement of material fact or omits to state
a material fact necessary to make such representation or warranty not misleading
in light of the circumstances under which it was made;

                  (P) Each  consent,  approval or  authorization  of, or filing,
registration or  qualification  with, any Person that is required to be obtained
or effected by Cavalier Homes or any Consolidated Entity, in connection with the
execution  and  delivery  of this  Agreement,  the  Notes,  and the  other  Loan
Documents,  or the  undertaking or  performance  of any obligation  hereunder or
thereunder has been duly obtained or effected;

                  (Q) All existing Indebtedness of each Borrower:

                      (1)      For money borrowed; or

                      (2)      Under   any   security agreement,   mortgage,  or
                               agreement  covering   the  lease by any  Borrower
                               as lessee of real or personal property,

is described in Exhibit I, attached hereto and incorporated herein;

                  (R) To the  best of each  Borrower's  knowledge,  all  parties
(including each of Borrower and each Consolidated Entity) to any material lease,
contract  or  commitment  of any  kind  to  which  any  Borrower  or  any  other
Consolidated  Entity is a party have complied with the provisions of such lease,
contract  or  commitment;  no party is in  default  under  any  material  lease,
contract,  or other commitment  thereof and no event has occurred which, but for
the  giving  of notice or the  passage  of time,  or both,  would  constitute  a
default;

                  (S) Neither  Cavalier  Homes nor any  Consolidated  Entity has
made any  agreement  or taken any  action  which may cause any  Person to become
entitled to a commission or finder's fee as a result of the making of any of the
Loans;

                  (T) Cavalier Homes'  Consolidated  federal tax returns for all
years of operation,  including the fiscal year of Cavalier  Homes ended December
31, 1992,  have been filed with the Internal  Revenue  Service and have not been
challenged or have been challenged and finally resolved;

                  (U) Each  Benefit Plan  maintained  or  contributed  to by any
Borrower or any ERISA  Affiliate  that is a Pension Plan  satisfies  the minimum
funding  standards  of Section 302 of ERISA;  (1) there have been no  Reportable
Events (as  defined in Section  4043 of ERISA) or  Prohibited  Transactions  (as
defined in Section  408 of ERISA)  with  respect to any  Benefit  Plan;  (2) the
Internal Revenue Service has not issued a minimum funding waiver with respect to
any Benefit  Plan that is a Pension  Plan;  (3) none of the  Benefit  Plans is a
multiemployer  plan as defined in Section 3(37) of ERISA;  (4) each Benefit Plan
to which 4980B of the  Internal  Revenue Code of 1986,  as amended,  applies has
been operated in compliance therewith; and (5) no Benefit Plan provides benefits
to employees  beyond  retirement or other  termination of employment  other than
benefits  required by Section  4980B of the Internal  Revenue  Code of 1986,  as
amended.

                  (V) Each of Cavalier Homes and the  Consolidated  Entities is,
to the best of its knowledge, in compliance with all Environmental Laws;

                  (W) Each Borrower  owns or has the rights to use,  pursuant to
written licenses, all patents, trademarks and copyrights used or employed in its
business and products; and

                  (X)  No  Borrower's   Inventory  is  subject  to  any  license
agreement relating to patents, trademarks or copyrights which could, directly or
indirectly,  preclude or render  impracticable  the realization by Lender of the
value of such Inventory.

         6.2 Additional  Representations and Warranties of Cavalier  Acceptance.
To induce Lender to enter into this Agreement,  Cavalier  Acceptance  represents
and  warrants to Lender,  as of the date hereof and as of all times  (including,
without  limitation,  as of the date each Advance  under the  Warehouse and Term
Loan  Commitment  is requested  and made) until this  Agreement is terminated in
writing, all Obligations  hereunder are satisfied,  and no commitments hereunder
remain outstanding,  that with respect to each Eligible Contract included in the
Collateral:

                  (A)  All  parties  to the  Eligible  Contract  (including  any
co-buyer,  co-maker,  or  guarantor)  were of legal age and  otherwise had legal
capacity  to contract at the time they  signed the  Eligible  Contract,  and any
party identified as a "buyer" is, to the best knowledge of Cavalier  Acceptance,
not a "straw-man"  buyer acting on behalf of an undisclosed  third party, but is
instead intending to own and use the manufactured home described thereon;

                  (B) All  signatures on the Eligible  Contract  (including  the
signature of any co-buyer, co-maker, or guarantor) are genuine and, if made in a
representative  capacity,  were duly  authorized,  and the Eligible  Contract is
valid and enforceable in accordance with its terms;

                  (C) The address,  including the county of  residence,  of each
party to the  Eligible  Contract  as of the date of  execution  of the  Eligible
Contract is correctly shown on the Eligible Contract;

                  (D) The  Eligible  Contract  correctly  sets  forth  the  cash
selling  price and down  payment  made to the  dealer in cash  and/or the amount
allowed by the  dealer  for any  property  taken in trade,  and the  application
submitted  to Cavalier  Acceptance  in  connection  with the  Eligible  Contract
arising  therefrom is true and correct in all respects to the best  knowledge of
Cavalier  Acceptance,  and each of the Eligible  Contracts  and the  application
fully  and  accurately  disclose  any  incentive,  rebate,  refund,  or the like
provided to or on behalf of the purchaser,  directly or indirectly,  and whether
provided by the manufacturer and/or the dealer;

                  (E) The cash down payment made by the  purchaser  and shown on
the Eligible Contract does not represent,  either directly or indirectly, a loan
made by, or otherwise arranged by, the dealer to or for the purchaser;

                  (F) The Eligible Contract correctly describes the manufactured
home sold by the dealer to the purchaser;

                  (G) The sale of the manufactured  home covered by the Eligible
Contract  was a bona fide sale at retail in the regular  course of the  dealer's
business  or a sale  by  such  dealer  of a  manufactured  home  that  has  been
repossessed by Cavalier Acceptance;

                  (H) The manufactured  home described in the Eligible  Contract
is not subject to any lien, encumbrance or security interest except any security
interest created in favor of Cavalier Acceptance;

                  (I) No  party  has  required  credit  life  insurance,  credit
disability  insurance,  accident and health  insurance or any other insurance of
any kind (other than property damage  insurance) in connection with the Eligible
Contract and the purchase of any such insurance  coverage is truly optional with
the purchaser;

                  (J)  The  purchaser  received  a fully  completed  copy of the
Eligible Contract at the time he or she signed it;

                  (K) Unless  Lender has  expressly  consented  in writing,  the
Eligible  Contract was not past due more than ninety (90) days (and the Eligible
Contract  has not  been  re-dated)  or  dishonored  at the  time it was  sold to
Cavalier Acceptance or pledged to Lender hereunder,  and Cavalier Acceptance has
no notice or knowledge of any claim,  defense,  or setoff to which the purchaser
is entitled;

                  (L) The dealer has  notified the  purchaser  that the Eligible
Contract  would be  submitted  to Cavalier  Acceptance,  at its office,  and the
purchaser has been notified of the appropriate  address of such office, and that
all payments are to be made by the purchaser only to Cavalier  Acceptance or its
assigns,  and the dealer has not received  any payment on the Eligible  Contract
except for payments disclosed to Cavalier  Acceptance in writing at the time the
Eligible Contract is offered for sale to Cavalier Acceptance;

                  (M) There has been  delivered or caused to be delivered to the
appropriate  authority  within ten (10) days  following  the date upon which the
purchaser took possession of the manufactured home a duly completed  application
for a certificate of title for the vehicle  described in the Eligible  Contract,
Cavalier Acceptance is shown as the "first lienholder" on said application,  and
the  application  was  accompanied  by the existing  certificate of title or the
manufacturer's  certificate of origin for the home described on the  application
and the appropriate fee, or, if the home is not subject to the title laws, there
has been delivered to Cavalier  Acceptance a financing statement which correctly
described the home as  collateral,  is signed by the  purchaser as "debtor",  is
executed by the dealer as "secured party", shows the correct name and address of
the purchaser as "debtor",  and shows  Cavalier  Acceptance  as either  "secured
party" or "assignee of secured party";

                  (N) The manufactured  home described on the Eligible  Contract
is new unless expressly designated on the Eligible Contract as "used";

                  (O) The manufactured home identification  number and/or serial
number  shown  on  the  Eligible  Contract  and  on  the  certificate  of  title
application and/or financing statement are true and correct;

                  (P) The sale which gave rise to the Eligible  Contract was not
solicited at the residence of the purchaser and is not subject to rescission or,
if  solicited  at a location  deemed  under  applicable  law to  constitute  the
residence of the purchaser and to give rise to a right of rescission,  notice of
such right of rescission was duly given to all persons entitled  thereto,  which
right has expired without being exercised;

                  (Q)  Either  the  manufacturer  or the  dealer  has  agreed to
service and repair the home  described  on the Eligible  Contract in  accordance
with any  warranty  made by the dealer or the  manufacturer  with respect to the
home;

                  (R)  All  insurance   premiums  financed  under  the  Eligible
Contract have been paid, except as otherwise disclosed in writing;

                  (S) The person  executing  the Eligible  Contract on behalf of
the  dealer,  including  its  execution  as the  seller  of the  home and as the
assignor of the Eligible Contract to Cavalier  Acceptance,  was fully authorized
to execute and deliver the  Eligible  Contract on behalf of the dealer,  and the
representations,  warranties and covenants set forth in the dealer's  assignment
for each Eligible  Contract  are,  upon  delivery of such  Eligible  Contract to
Cavalier Acceptance the valid and binding obligations of the dealer;

                  (T) Cavalier  Acceptance has good title to, and full right and
power to assign to Lender the Eligible  Contract,  and the Eligible  Contract is
not subject to any lien, encumbrance, or prior assignment;

                  (U) All  requirements  of all  applicable  federal  and  state
consumer  protection  laws and  regulations  in  connection  with  the  Eligible
Contract and the sale of the home described thereon have been complied with;

                  (V)  If  the   Eligible   Contract   is  a   Federal   Housing
Administration  contract, the manufactured  home and the home site upon which it
has  been  or  will be  placed  meet  all  applicable  eligibility  requirements
promulgated by the Department of Housing and Urban  Development  (HUD),  and the
requirements set forth in HUD's regulations,  including, without limitation, the
requirement  that certain  certificates  be  furnished by the dealer  and/or the
purchaser to Cavalier Acceptance concerning and evidencing such compliance, have
been complied with;

                  (W) In  connection  with  any  sale  or  attempted  sale  of a
manufactured home to any person,  the dealer did not hold itself out as an agent
of Cavalier  Acceptance for any purpose,  and did not make any  representations,
assurance or other  statements  of any kind to any such person which  purport in
any way on behalf of or binding upon Cavalier Acceptance; and

                  (X) The manufactured  home is insured by the purchaser thereof
against  loss,  theft or damage  (including  both  collision  and  comprehensive
coverages) in an amount not less than the lesser of the unpaid  balance owing on
the Eligible Contract or the average retail value of the home, under a policy of
insurance  which  provides for payment to Cavalier  Acceptance in the event of a
loss covered by the policy.

         6.3 Reliance By Cavalier Acceptance on Dealer  Representations.  Lender
and  Cavalier  Acceptance  recognize  that,  in making the  representations  and
warranties  specified in Section 6.2 of this Agreement,  Cavalier Acceptance has
relied,  in those  instances  where  knowledge  of the matters  contained in the
representations  and  warranties  would not be within the personal  knowledge of
Cavalier  Acceptance,  upon  representations and warranties provided to Cavalier
Acceptance by the mobile home dealer from whom Cavalier  Acceptance acquired the
particular Eligible Contract.  To that end, Lender and Cavalier Acceptance agree
that so long  as  such  representations  and  warranties  are  made by  Cavalier
Acceptance in good faith and without  knowledge that any such  representation or
warranty  contained  in  Section  6.2 is  incorrect  when  made,  then  any such
misrepresentation  (if any)  shall  not be  deemed  to be an  Event  of  Default
hereunder,  and the only effect of such misrepresentation shall be to cause such
Chattel Paper to thereupon cease to be an Eligible Contract for purposes of this
Agreement.




                                   ARTICLE VII

                             COVENANTS OF BORROWERS

         Each Borrower does hereby jointly and severally covenant and agree with
Lender  that,  so  long as any of the  Obligations  remains  unsatisfied  or any
commitments hereunder remain outstanding, and thereafter until this Agreement is
terminated in writing, it will comply, and it will cause the other Borrowers and
other  Consolidated  Entities  to  comply,  at  all  times  with  the  following
covenants, unless the Lender in a particular instance shall have given its prior
written consent to the contrary:

         7.1      Affirmative Covenants.

                  (A)  Each  Borrower  will  take  and  will  cause  each  other
Consolidated  Entity  to take all  necessary  steps to  preserve  its  corporate
existence and franchises and comply with all present and future Laws  applicable
to it in the operation of its businesses and all material agreements to which it
is subject.

                  (B) Each Borrower will use the proceeds of the Revolving  Loan
only for the  purposes  set forth in Section 2.7, and will  furnish to   Lender
such evidence as it may reasonably require with respect to such use.

                  (C) Cavalier Homes will furnish to Lender:

                      (1)      Within   thirty (30) days after the close of each
                               calendar month:

                                    (i)      A  Consolidated  and  consolidating
                                             income  statement of Cavalier Homes
                                             and the  Consolidated  Entities for
                                             such period; and
                                    (ii)     A  Consolidated  and  consolidating
                                             balance sheet of Cavalier Homes and
                                             the Consolidated Entities as of the
                                             end of such period

                               all in reasonable  detail,  subject to   year-end
                               audit adjustments;

                      (2)      Within  ninety  (90) days after the close of each
                               fiscal year of Cavalier Homes:

                                    (i)      A    Consolidated    statement   of
                                             Stockholders'    Equity    and    a
                                             Consolidated   statement   of  Cash
                                             Flows  of  Cavalier  Homes  and the
                                             Consolidated   Entities   for  such
                                             fiscal year;

                                    (ii)     Consolidated   and    consolidating
                                             income statements of Cavalier Homes
                                             and the  Consolidated  Entities for
                                             such fiscal year; and

                                    (iii)    Consolidated   and    consolidating
                                             balance  sheets of  Cavalier  Homes
                                             and the Consolidated Entities as of
                                             the end of such fiscal year

                               all  in    reasonable     detail,  including  all
                               supporting    schedules      and  comments;   the
                               Consolidated  statements    and   balance  sheets
                               to be   audited   by  an   independent  certified
                               public   accountant   selected  by Cavalier Homes
                               and  acceptable   to Lender,   and   certified by
                               such    accountants    to have  been  prepared in
                               accordance      with      Generally      Accepted
                               Accounting   Principles,   consistently  applied,
                               by   Cavalier    Homes  and    the   Consolidated
                               Entities,   except  for    any    inconsistencies
                               explained  by   such   accountants to Lender,  in
                               form    satisfactory  to   Lender;   in addition,
                               Cavalier   Homes  will    obtain     from    such
                               independent  certified   public  accountants  and
                               deliver to  Lender,   within    ninety  (90) days
                               after   the   close  of   each  fiscal    year of
                               Cavalier Homes,  their   written   statement that
                               in making the examination  necessary   to   their
                               certification    they     have     obtained    no
                               knowledge   of   any    Event    of   Default  by
                               Cavalier  Homes   or    any  other  Borrower,  or
                               disclosing all Events of  Default   of   Cavalier
                               Homes or any  other    Borrower  of   which  they
                               have obtained    knowledge;  provided,   however,
                               that  in    making   their     examination   such
                               accountants  shall    not  be   required    to go
                               beyond  the  bounds  of     generally    accepted
                               auditing   procedures    for  the    purpose   of
                               certifying    financial     statements;    Lender
                               shall  have the   right  from   time  to  time to
                               discuss the  affairs  of    Cavalier  Homes   and
                               the  Consolidated    Entities    directly    with
                               Cavalier   Homes'  independent   certified public
                               accountant    after    notice to Cavalier  Homes
                               and  opportunity   of    Cavalier  Homes  to   be
                               present at any such discussions;

                     (3)       Contemporaneously     with    each   monthly  and
                               year-end  financial    report required   by   the
                               foregoing   paragraphs,    and at  any additional
                               time in  Lender's    discretion  or   when    any
                               material deterioration  in   the   Borrowing Base
                               would be  disclosed    thereby,   a    Compliance
                               Certificate,  wherein    in    addition   to  the
                               financial    information   reported    in    such
                               Compliance    Certificate,    the   president  or
                               chief  financial   officer  of  Cavalier    Homes
                               shall    certify   that   he   has   individually
                               reviewed  the   provisions   of  this   Agreement
                               and  that  a   review   of  the   activities   of
                               Borrowers   and   the   Consolidated     Entities
                               during such  year  or  monthly   period,  as  the
                               case may be,  has been   made  by  or  under  the
                               supervision     of    the    signer    of    such
                               certificate    with   a   view   to   determining
                               whether  each   Borrower   has  kept,   observed,
                               performed  and  fulfilled  all  its   obligations
                               under this   Agreement,  and  that, to  the  best
                               of  his    knowledge  each Borrower  has observed
                               and   performed   each  and   every   undertaking
                               contained   in  this   Agreement   and is  not at
                               the time in   Default   in  the   observance   or
                               performance    of   any  of   the     terms   and
                               conditions   hereof  or, if any  Borrower   shall
                               be  so   in   Default,    specifying   all   such
                               Defaults  and  Events of Default of which he  may
                               have knowledge;

                      (4)      Promptly  after  sending    or  making  available
                               or  filing of  the  same,  copies of all   10-K's
                               and  10-Q's that  any Borrower   sends  or  makes
                               available to  its   stockholders  and  all  other
                               registration  statements  and  reports  that  any
                               Borrower   files    with   the   Securities   and
                               Exchange Commission or  any   successor   Person,
                               which are requested by Lender;

                      (5)      Contemporaneously    with    each      Compliance
                               Certificate for  the   Revolving Loan,   an aging
                               as of the  end of  the calendar   month or  other
                               period  to   which   each     such     Compliance
                               Certificate     pertains,    in   such  form  and
                               detail as shall be  satisfactory  to Lender,  of:

                                    (i)      The then Eligible Accounts, and

                                    (ii)     All other Accounts of each Borrower
                                             certified by the president or chief
                                             financial officer of Cavalier Homes
                                             to be complete and correct;

                      (6)      At  Lender's    request,  a    listing   of  each
                               Borrower's   Inventory,    in  such   form   and
                               detail  as  shall be  satisfactory   to   Lender,
                               showing the amount, size, grade,    manufacturer,
                               and cost of each item   or   group   thereof  and
                               identifying  Eligible Inventory,   certified   by
                               the   president   or   chief   financial  officer
                               of  Cavalier  Homes to be   complete and correct;
                               and

                      (7)      Upon  Lender's   request    from  time  to   time
                               copies of any   or   all agreements,   contracts,
                               or  commitments   of  the  type  referred   to in
                               Section 6.1 (R) hereof.

                  (D) Cavalier Homes and each Consolidated  Entity will maintain
its Inventory, Equipment, real estate and other properties in good condition and
repair (normal wear and tear  excepted),  and will pay and discharge or cause to
be paid and  discharged  when due, the cost of repairs to or  maintenance of the
same,  and will pay or cause to be paid all rental or mortgage  payments  due on
such  real  estate.  In  addition,  Borrowers  jointly  and  severally  agree to
reimburse Lender for any reasonable  expenses  incurred by Lender to protect and
preserve the Collateral pursuant to Section 5.5 (C).

                  (E) Cavalier Homes and each Consolidated Entity will maintain,
or cause to be maintained,  public  liability  insurance,  and fire and extended
coverage  insurance  on all  tangible  assets  owned  by it,  naming  Lender  as
mortgagee and loss payee in all policies  insuring the  Collateral,  all in such
form and  amounts  as are  consistent  with  industry  practices  and with  such
insurers  as may be  satisfactory  to  Lender.  Such  policies  shall  contain a
provision  whereby  they cannot be canceled  except  after ten (10) days written
notice to Lender. Borrowers will furnish to Lender such evidence of insurance as
Lender may require.  Borrowers  hereby jointly and severally  agree that, in the
event Cavalier Homes or any Consolidated Entity fails to pay or cause to be paid
the  premium  on any  such  insurance,  Lender  may do so and be  reimbursed  by
Borrower therefor.  Lender is hereby appointed each Borrower's  attorney-in-fact
(without  requiring  Lender to act as such) to  endorse  any check  which may be
payable to such  Borrower to collect such  returned or unearned  premiums or the
proceeds of such insurance, and any amount so collected may be applied by Lender
toward satisfaction of any of the Obligations.

                  (F) Cavalier Homes and the  Consolidated  Entities will pay or
cause to be paid when due all taxes,  assessments  and charges or levies imposed
upon it or on any of its  property or which it is  required to withhold  and pay
over,  except where  contested  in good faith by  appropriate  proceedings  with
adequate  reserves  therefor  having  been set aside on their  books;  provided,
however, that Cavalier Homes and the Consolidated Entities shall pay or cause to
be paid all such  taxes,  assessments,  charges  or  levies  forthwith  whenever
foreclosure on any lien that attached (or security therefor) appears imminent.

                  (G) Cavalier Homes and the  Consolidated  Entities will,  when
requested to do so, make  available for  inspection by Lender's duly  authorized
representatives  any of its books and  Records,  and will  furnish to Lender any
information  regarding  its business  affairs and financial  condition  within a
reasonable time after written request therefor. Cavalier Homes and each Borrower
will and will cause each of the other Consolidated Entities to keep proper books
of record and account in which full,  true and correct  entries in all  material
respects shall be  substantially in conformity with GAAP and all requirements of
Law shall be  satisfied  in all  dealings  and  transactions  in relation to its
business and  activities.  Cavalier Homes and each Borrower will, and will cause
each of the  other  Consolidated  Entities  to,  permit  Lender's  officers  and
designated  representatives to visit and inspect,  during normal business hours,
any of the  properties  of such  Borrower or such  Consolidated  Entity,  and to
examine the books of account of such Borrower or such Consolidated Entity and to
discuss the affairs,  finances,  accounts of such Borrower or such  Consolidated
Entity,  and be advised as to the same by, its and their  officers,  all at such
reasonable times and intervals and to such reasonable  extent as Lender may from
time to time request. In connection with the foregoing, Lender agrees to utilize
such documents,  materials and information  solely and exclusively in connection
with  this  Agreement  and  the  other  Loan  Documents  and  the   transactions
contemplated  herein and therein to exercise  its best  efforts to keep all such
documents,  materials and  information  delivered or made available by Borrowers
confidential  from anyone other than Persons  employed or retained by Lender who
are expected to be engaged in evaluating,  approving, structuring, and enforcing
or administering the Loans; provided, however, that nothing herein shall prevent
Lender from disclosing such information;

                  (1)      to  any  actual or  potential assignee or participant
                           of any loan or  note;  provided that such assignee or
                           participant  shall be subject to this Section;

                  (2)      upon  order of any  court or  administrative   agency
                           after it, to the  extent  practical,  gives notice to
                           Cavalier  Homes  pursuant to which   Cavalier   Homes
                           or  the   affected     Borrower may seek a protective
                           order against such disclosure;

                   (3)      upon  request or demand of any regulatory  agency or
                            authority having jurisdiction over Lender;

                   (4)      which has been publicly disclosed; 

                   (5)      in connection with any litigation;

                   (6)      to  the  extent reasonably required in    connection
                            with the  exercise of any remedy hereunder;

                   (7)      to Lender's  legal  counsel and independent auditors
                            in   connection   with   Lender's business.

                  (H) Cavalier Homes and each  Consolidated  Entity will collect
its Accounts and Eligible contracts and sell its Inventory  only in the ordinary
course of business.

                  (I)  Cavalier  Homes and each  Consolidated  Entity  will keep
accurate and complete Records of its Accounts, Eligible Contracts, Inventory and
Equipment, consistent with sound business practices.

                  (J)  Cavalier  Homes and each  Consolidated  Entity  will give
immediate notice to Lender of:

                       (1)      Any    litigation   or   proceeding (other  than
                                matters in which an insurer  has   accepted  the
                                defense  without  reservation    of   rights) in
                                which it is a party if  an   adverse    decision
                                therein  would  require   it to  pay over   more
                                than $250,000; and

                        (2)      The   institution     of   any  other  suit  or
                                 proceeding involving it that might   materially
                                 and   adversely    affect   its     operations,
                                 financial condition, property    or    business
                                 prospects.

                  (K) Within ten (10) days of Lender's  request  therefor,  each
Borrower  will  furnish  to Lender  any or all of the  following:  (a) copies of
federal income tax returns filed by such Borrower;  (b) such Borrower's  bylaws;
and (c) a  complete  list of  Benefit  Plans  that such  Borrower  and its ERISA
Affiliates have ever maintained or to which it or they have contributed.

                  (L) Cavalier Homes and each Consolidated  Entity will pay when
due (or within  applicable grace periods) all Indebtedness  exceeding $50,000 in
amount  due  third  Persons,  except  when the  amount  thereof,  not to  exceed
$250,000,  is being contested in good faith by appropriate  proceedings and with
adequate  reserves  therefor  being set aside on the books of Cavalier Homes and
each Consolidated Entity.

                  (M) Cavalier  Homes and each  Consolidated  Entity will notify
Lender immediately if it becomes aware of the occurrence of any Event of Default
or of any  fact,  condition  or event  that  only  with the  giving of notice or
passage  of time or both,  could  become an Event of  Default,  or if it becomes
aware of any  material  adverse  change  in the  business  prospects,  financial
condition (including, without limitation, proceedings in bankruptcy, insolvency,
reorganization,  or the  appointment  of a receiver or  trustee),  or results of
operations of Cavalier Homes, or any Consolidated  Entity,  or of the failure of
Cavalier  Homes or any  Consolidated  Entity to observe any of its  undertakings
hereunder or under any of the Loan Documents.

                  (N) Cavalier  Homes and each  Consolidated  Entity will notify
Lender  thirty (30) days in advance of any change in the  location of any of its
places of business or the discontinuance of any existing place of business,  and
will notify Lender within  fifteen (15) day after the  establishment  of any new
place of business.

                  (O) Cavalier  Homes and each  Consolidated  Entity will notify
Lender  thirty (30) days in advance of any change in the  location or use of any
of the  Collateral  and within  thirty (30) days after any change in  condition,
aside from normal wear and tear, of any of the Collateral.

                  (P) Each Borrower and each ERISA Affiliate will:

                      (1)      Fund each of its Pension  Plans,   if   any,   in
                               accordance  with   no  less    than  the  minimum
                               funding  standards  set  forth   in   Section 302
                               of ERISA;

                      (2)      At  Lender's request, furnish to Lender, promptly
                               after  filing the same,  copies of   all  reports
                               or  statements  filed with  the    United  States
                               Department  of  Labor,    the    Pension  Benefit
                               Guaranty Corporation, or   the   Internal Revenue
                               Service with respect to any Benefit Plans;

                      (3)      Promptly  advise Lender of the occurrence of  any
                               Reportable Eventor Prohibited  Transaction,  each
                               as defined in ERISA, with  respect to any Benefit
                               Plan; and

                      (4)      Promptly  advise Lender  of the   issuance   of a
                               funding  waiver by the  Internal Revenue  Service
                               with respect to any Pension Plan.

                  (Q) Cavalier  Homes and each  Consolidated  Entity will comply
with all  Environmental  Laws, and will handle,  store,  treat,  discharge,  and
dispose of any Hazardous  Materials  only in compliance  with all  Environmental
Laws.

                  (R) Each Borrower will  maintain its primary  deposit  account
relationship with Lender.

         7.2      Negative Covenants.

                  (A) Neither  Cavalier Homes nor any  Consolidated  Entity will
change  its  name,  enter  into any  merger,  consolidation,  reorganization  or
recapitalization,  reclassify  its capital  stock,  or  liquidate  or  dissolve;
provided, however, that this clause (A) is not intended to prevent Borrower from
raising capital through any public debt or securities offering.

                  (B) Neither  Cavalier Homes nor any  Consolidated  Entity will
sell,  transfer,  lease or  otherwise  dispose of all or (except in the ordinary
course of business) any material part of its assets.

                  (C)  Unless  the  proceeds  of such  sale are  paid to  Lender
pursuant to this Agreement,  neither Cavalier Homes nor any Consolidated  Entity
will sell, or enter into any agreement to sell,  any of its Accounts or Eligible
Contracts.

                  (D) Neither  Cavalier Homes nor any  Consolidated  Entity will
sell,  lease,  transfer,  assign,  or otherwise dispose of any of the Collateral
except in the ordinary course of business and as permitted under this Agreement.

                  (E) Neither  Cavalier Homes nor any  Consolidated  Entity will
sell,  or otherwise  dispose of, or for any reason cease  operating,  any of its
divisions, franchises, or lines of business.

                  (F) Neither  Cavalier Homes nor any  Consolidated  Entity will
mortgage, pledge, grant or permit to exist a security interest in or lien, which
exceed, in the aggregate,  $1,000,000,  upon any of its real property, now owned
or leased or hereafter  acquired or leased,  except for Permitted Liens,  unless
such  Borrower  gives Lender thirty (30) days notice of its intent to grant such
lien and Lender expressly consents in writing thereto.

                  (G) Neither  Cavalier Homes nor any  Consolidated  Entity will
become  liable,  directly or  indirectly,  as  guarantor  or  otherwise  for any
obligation of any other Person,  except for guarantees existing and disclosed to
Lender  prior to Closing and  endorsements  of  commercial  paper for deposit or
collection  in the ordinary  course of business;  provided,  however,  that with
respect to dealers  selling  Inventory  manufactured  by any Borrower,  Cavalier
Homes may guaranty up to $50,000 in principal amount of lines of credit used for
such dealer to purchase such Inventory.

                  (H) Neither  Cavalier Homes nor any  Consolidated  Entity will
incur, create, assume, or permit to exist any Indebtedness except:

                      (1)      The Loans;

                      (2)      Loans  obtained by  Cavalier Homes from the First
                               National  Bank  of  Hamilton  not    to    exceed
                               $750,000  in  aggregate   principal amount;

                      (3)      Existing  Indebtedness as set forth in Exhibit I,
                               attached hereto and  incorporated herein,  to the
                               extent shown on such Exhibit I to  be   permitted
                               to  exist  after  the Closing;

                      (4)      Trade   indebtedness   incurred  in the  ordinary
                               course of business;

                      (5)      Contingent Indebtedness  permitted  by    Section
                               7.2(G); and

                      (6)      Indebtedness  secured by   Permitted  Liens   and
                               lease  obligations    not  to     exceed,  in the
                               aggregate, $2,500,000 with such Indebtedness  and
                               lease  obligations  not   to   exceed $50,000 for
                               Cavalier Acceptance); as used in this  paragraph,
                               the  term  "lease"   means a lease  that  is  not
                               reflected  on a     Consolidated balance sheet of
                               Cavalier Homes  and the Consolidated Entities and
                               should not  be  so  reflected    under    General
                               Accepted Accounting Principles.

                  (I) Cavalier Homes will not declare or pay any  dividends,  or
make any other payments or distributions on account of its capital stock, or any
payments to redeem,  purchase or retire any of its capital stock,  which exceed,
in the  aggregate for all such  payments,  fifty percent (50%) of the average of
itsConsolidated   net  income  determined  under  General  Accepted   Accounting
Principles,  consistently  applied,  by Cavalier Homes,  for the two most recent
fiscal  years  preceding  the period to which such  dividends  or  distributions
relate,  nor make any  assignment or transfer of Accounts,  Chattel  Paper,  or,
other than in the ordinary course of business, of Inventory.

                  (J) Other than any Consolidated Entity, neither Cavalier Homes
nor any Consolidated Entity will form any Subsidiary, or Controlled Partnership,
or make any  investment  in or make any loan in the nature of any  investment to
any Person, which, in the aggregate, exceed $1,050,000.

                  (K) Neither  Cavalier Homes nor any  Consolidated  Entity will
make any loan or  advance  to any of their  respective  officers,  shareholders,
directors or employees except for business travel and similar temporary advances
in the ordinary  course of business,  nor pay salary to executive and management
personnel  aggregating  in excess of the  Borrowers'  compensation  formula,  as
previously disclosed to Lender and as in effect as of December 31, 1993.

                  (L) Neither  Cavalier Homes nor any  Consolidated  Entity will
pay, in an aggregate amount in any fiscal year of Cavalier Homes(commencing with
the current  fiscal  year of Cavalier  Homes),  lease  obligations  in excess of
$1,500,000;  as used in this  paragraph,  the term "lease" means a lease that is
not  reflected  on a  Consolidated  balance  sheet  of  Cavalier  Homes  and the
Consolidated  Entities and should not be so reflected under  Generally  Accepted
Accounting Principles.

                  (M) Neither  Cavalier Homes nor any  Consolidated  Entity will
purchase or otherwise invest in or hold securities, non-operating real estate or
other non-operating assets, except:

                      (1)      Direct    obligations   of the United   States of
                               America;

                      (2)      The  present  investment as of the Closing in any
                               such assets; and

                      (3)      Operating   assets    that    hereafter    become
                               non-operating assets.

                  (N) Neither  Cavalier Homes nor any  Consolidated  Entity will
enter into any sale-leaseback transaction.

                  (O) [Intentionally omitted.]

                  (P) Neither  Cavalier  Homes nor an  Consolidated  Entity will
furnish to Lender any certificate or other document that will contain any untrue
statement of material fact or that will omit to state a material fact  necessary
to make it not  misleading  in light  of the  circumstances  under  which it was
furnished.

                  (Q) Neither  Cavalier Homes nor any  Consolidated  Entity will
directly or indirectly apply any part of the proceeds of any of the Loans to the
purchasing or carrying of any "margin  stock" within the meaning of Regulation U
or any regulations, interpretations or rulings thereunder.

                  (R) Neither  Cavalier Homes nor any  Consolidated  Entity will
treat, store, handle, discharge, or dispose of any Hazardous Materials except in
compliance with all Environmental Laws.

                  (S) Neither  Cavalier Homes nor any  Consolidated  Entity will
enter  into any  transaction  or series  of  transactions  where any  Affiliate,
officer, director or shareholder of Cavalier Homes or any Consolidated Entity or
any family  member or Affiliate of the  foregoing,  is a  counter-party  to such
transaction or series of  transactions;  unless such  transaction is on the same
terms as those  available to  unaffiliated  Persons on an  "arms-length"  basis;
provided,  however,  that this  covenant  is not  intended to prohibit or impede
Cavalier  Homes use of, or transfers  among the  Borrowers of,  working  capital
within its Consolidated group.

                  (T)  Neither  Cavalier  Homes nor any  Consolidated     Entity
will enter into any agreement  whereby title to any of Cavalier Homes' or    the
Consolidated  Entity's inventory passes to any  transferee  prior to delivery by
Cavalier Homes or the Consolidated Entity.

                  (U) Neither Cavalier Homes, nor the Consolidate Entities, will
make capital  expenditures  for the 1994 fiscal year of Cavalier Homes in excess
of  $3,000,000,  in the  aggregate,  or for any fiscal  year of  Cavalier  Homes
thereafter in excess of $2,000,000, in the aggregate.

         7.3      Financial Covenants.

                  (A) Cavalier Homes will maintain at all times:

                      (1)      Consolidated   Net   Working   Capital    of   at
                               least $3,500,000.

                      (2)      Consolidated    Tangible    Net    Worth  in  the
                               following   minimum amounts  calculated    as set
                               forth below:

                                    (i)     From  the  date  of    Closing   and
                                            thereafter  through 1994, an  amount
                                            equal to  the Consolidated  Tangible
                                            Net Worth  reflected in the  audited
                                            Financial   Statements  provided  to
                                            Lender  for  the  fiscal   year   of
                                            Cavalier    Homes   that   ended  on
                                            December 31, 1993;

                                    (ii)     As of January 1, 1995,  and on each
                                            January      1    thereafter,    the
                                            Consolidated  Tangible Net Worth  of
                                            Cavalier Homes  shall have increased
                                            by at  least   $2,000,000  over  the
                                            prior year's  Consolidated  Tangible
                                            Net  Worth  (provided,   that if the
                                            Consolidated  Tangible   Net   Worth
                                            shall  have   increased  during  any
                                            fiscal year by more than $2,000,000,
                                            other  than   in connection  with an
                                            issuance  of   stock   as  described
                                            below,   the    for   purposes    of
                                            measuring  the  $2,000,000  increase
                                            for the next   fiscal  year,    such
                                            excess  may   be   included   in the
                                            following year's calculations); and

                                    (iii)   In   addition  to  the  requirements
                                            specified  above,   Cavalier  Homes'
                                            minimum   Consolidated Tangible  Net
                                            Worth     requirement    shall    be
                                            automatically  increased  by the net
                                            proceeds   received    by   Cavalier
                                            Homes   in   connection   with   any
                                            issuance   or  conversion of capital
                                            stock.

                      (3)      A   ratio   of   Consolidated   Liabilities    to
                               Consolidated   Tangible  Net  Worth of not  more
                               than 2.0 to 1.0;  

                      (4)      A ratio of Consolidated  Cash    Flow   (measured
                               on a  historical  basis)   to   Debt  Service  of
                               not less than 1.50 to 1.00; and

                      (5)      A Borrowing Base such  that   the   amount of the
                               outstanding   Revolving Loan   will  not, at  any
                               time, exceed the Borrowing Base.

                  (B) Cavalier Homes will make capital contributions to Cavalier
Acceptance in the amount of $2,000,000 during 1994.

The covenant set forth in this subsection (B) of this Section 7.3 shall   remain
in effect as long as any of the $8,000,000 Loan or any other  Indebtedness  owed
by Cavalier Acceptance to Lender remains outstanding.

         7.4  Interpretation and  Consolidation.  Except as otherwise  expressly
provided in this  Article,  each  Borrower  shall also cause and require each of
the Consolidated Entities to observe and perform the covenants and agreements of
this Article that are to be observed and performed by such Borrower,  regardless
of whether any such covenant expressly refers to the Consolidated  Entities. All
financial covenants set forth in Section 7.3 shall be computed on a Consolidated
basis for  Cavalier  Homes  and the  Consolidated  Entities.  In  addition,  all
calculations  required to be made in  connection  with any  numerical  or dollar
limitations  set  forth  in  this  Article  shall  be  made  on  a  combined  or
Consolidated  basis  for  Cavalier  Homes  and  the  Consolidated  Entities,  in
accordance with Generally Accepted Accounting Principles,  but after elimination
of intercompany items.


                                  ARTICLE VIII

                      ADDITIONAL COVENANTS OF CAVALIER ACCEPTANCE

         Cavalier Acceptance does hereby covenant and agree with Lender that, so
long as any of the Obligations remains unsatisfied or any commitments  hereunder
remain  outstanding,  and  thereafter  until this  Agreement  is  terminated  in
writing,  it will  comply at all times with the  covenants  set forth in Article
hereof and the following additional covenants:

         8.1      Affirmative Covenants.

                  (A)  Cavalier   Acceptance   will  use  the  proceeds  of  the
$8,000,000 Loan only for the purposes set forth in Section 3.8, and will furnish
to Lender such evidence as it may reasonably require with respect to such use.

                  (B) Cavalier Acceptance will furnish to Lender:

                           (1)      Within  thirty  (30) days after the close of
                                    each calendar month:

                                    (i)      An  income  statement  of  Cavalier
                                             Acceptance for such period; and

                                    (ii)     A   balance   sheet   of   Cavalier
                                             Acceptance as of the end of    such
                                             period,

                                    all in reasonable  detail,  subject to year-
                                    end audit adjustments;

                           (2)      Contemporaneously   with  each  monthly  and
                                    year-end  financial   report   required  for
                                    Cavalier  Acceptance by this Section 8.1(B),
                                    and  at  any  additional  time  in  Lender's
                                    discretion     or    when    any    material
                                    deterioration  in  the  Contracts  Borrowing
                                    Base   would   be   disclosed   thereby,   a
                                    Compliance Certificate,  wherein in addition
                                    to the  financial  information  reported  in
                                    such Compliance  Certificate,  the president
                                    or  chief  financial   officer  of  Cavalier
                                    Acceptance   shall   certify   that  he  has
                                    individually reviewed the provisions of this
                                    Agreement   and   that  a   review   of  the
                                    activities  of  Cavalier  Acceptance  during
                                    such fiscal year or monthly  period,  as the
                                    case may be,  has been  made by or under the
                                    supervision    of   the   signer   of   such
                                    certificate   with  a  view  to  determining
                                    whether   Cavalier   Acceptance   has  kept,
                                    observed,  performed  and  fulfilled all its
                                    obligations under this Agreement,  and that,
                                    to  the  best  of  his  knowledge,  Cavalier
                                    Acceptance  has observed and performed  each
                                    and  every  undertaking  contained  in  this
                                    Agreement  and is not at the time in Default
                                    in the  observance or  performance of any of
                                    the  terms  and  conditions  hereof  or,  if
                                    Cavalier  Acceptance shall be so in Default,
                                    specifying  all such  Defaults and Events of
                                    Default of which he may have knowledge;

                           (3)      Contemporaneously   with   each   Compliance
                                    Certificate  for  the  $8,000,000   Loan,  a
                                    report as of the end of such month,  in such
                                    form and detail as shall be  satisfactory to
                                    Lender,  of  the  then  Eligible   Contracts
                                    certified by Cavalier Acceptance's president
                                    or chief financial officer to be complete
                         `          and correct; and

                           (4)      Contemporaneously   with   each   Compliance
                                    Certificate  for  the  $8,000,000   Loan,  a
                                    delinquency  report and repossession  status
                                    report  with  respect  to  all  of  Cavalier
                                    Acceptance's Chattel Paper, whether Eligible
                                    Contracts  or not,  each such report in such
                                    form and detail as shall be  satisfactory to
                                    Lender.

                  (C)  Cavalier  Acceptance  will,  at its  sole  expense,  when
requested to do so by Lender, cause its independent certified public accountants
(which  shall be  acceptable  to  Lender) to  provide  such  audit  confirmation
relating to the Eligible Contracts as may reasonably be required by Lender.

                  (D) So long as any Eligible  Contract  constitutes  Collateral
hereunder,  (i) Cavalier  Acceptance  agrees,  as trustee for Lender and without
compensation  by Lender,  to service all Eligible  Contracts and to use its best
efforts to effect  collection of all amounts  payable  thereunder as they become
due; (ii) Cavalier  Acceptance  shall  perform such duties  exclusively,  unless
Lender shall give written approval  otherwise;  and (iii) upon demand by Lender,
after an Event of Default, Cavalier Acceptance shall notify each purchaser under
an Eligible  Contract of the assignment to Lender of the Eligible Contract under
which he is obligated,  including in such notice instructions that the purchaser
shall  make  all   payments  on  the  Eligible   Contract  to  Lender,   or  its
subcontracting servicing agent, as Lender shall direct.



         8.2      Negative Covenants.

                  (A) Unless reasonably  determined by Cavalier Acceptance to be
in its and Lender's best  interest,  Cavalier  Acceptance  will not  compromise,
extend,  release,  or  adjust  payments  on any  Eligible  Contract  or  related
documentation,  accept a  conveyance  of  pledged  property  in full or  partial
satisfaction of any Eligible Contract, or release any security interest securing
any Eligible Contract.

                  (B) Cavalier  Acceptance  will not transfer,  sell,  assign or
deliver any  Eligible  Contract  pledged to Lender to any  person,  corporation,
partnership, association or trust other than Lender.

                  (C) Cavalier Acceptance will not grant, create, incur, permit,
assume or suffer to exist any mortgage, pledge, lien, security interest or other
encumbrance of any kind upon any Eligible  Contract now or hereafter  pledged to
Lender,  unless and until such  Eligible  Contract  has been  released  from the
security  interest granted to Lender,  except for (x) liens granted to Lender to
secure  the  Notes and the  Loans  and (y) such  non-consensual  liens as may be
deemed to arise as a matter of law.

                  (D) Unless reasonably  determined by Cavalier Acceptance to be
in its and Lender's best interest,  Cavalier Acceptance will not modify or waive
any term of any pledged Eligible Contract or release any obligor.

         8.3      Financial Covenants.  (A)  Cavalier Acceptance will   maintain
                  at all times:

                  (i)     Net Working Capital in the following minimum   amount:

                              During 1994 and thereafter..........$  500,000.00;

                  (ii) Tangible Net Worth in the following minimum amount:

                              During 1994 and thereafter..........$1,000,000.00;

                  (iii)   A ratio of  Liabilities  to Tangible  Net Worth of not
                          more than 3.0 to 1.0;

                  (iv)    A  Contracts  Borrowing  Base such that the  amount of
                          Cavalier Acceptance's outstanding $8,000,000 Loan will
                          not, at any time, exceed its Contracts Borrowing Base;

                  (v)     An Average  Repossession Ratio less than the following
                          maximum percentages:

                          until May 31,  1994 less  than  3.00%  June 1, 1994 to
                          September 30, 1994 less than 2.50% October 1, 1994 and
                          thereafter less than 2.30%;

                  (vi)    A  Charge-Off  Ratio less than the  following  maximum
                          percentages:

                          until May 31,  1994 less  than  2.50%  June 1, 1994 to
                          September 30, 1994 less than 2.20% October 1, 1994 and
                          thereafter less than 1.80%; and

                  (vii)   A ratio of Loan  Loss  Reserves  (after  deduction  of
                          losses   for   the   then-current   period)   to   the
                          then-outstanding   principal   balance   of   Cavalier
                          Acceptance's loan portfolio of not less than 2.00%.

         (B) Cavalier Acceptance shall not at any time:

                  (i)  Permit  the  ratio  of its  delinquent  retail  Contracts
measured  against (1) all Contracts prior to June 30, 1994 or (2) aged Contracts
(i.e., more than 120 days old) thereafter to exceed the following percentages:


                           number of days delinquent          maximum percentage

                           30 days
                           until May 31, 1994                     5.50%
                           June 1, 1994 to November 30, 1994      4.50%
                           December 1, 1994 and thereafter        3.25%;

                  (ii)     Make capital expenditures for any year in excess   of
                           $100,000; and

                  (iii)    Incur other  Indebtedness  or capital  leases for any
                           year in excess of $50,000.


                                   ARTICLE IX

                                     DEFAULT

         9.1  Events  of  Default.  The  occurrence  of any  one or  more of the
following events shall constitute a Default or an Event of Default hereunder:

                  (A) Any Borrower shall fail to pay when due any installment of
principal  under any of the Loans,  or any  interest or fee  payable  under this
Agreement or any Security  Document or other Loan Document;  provided,  however,
that a payment  default  described  in this clause (A) shall not  constitute  an
Event of Default  unless such payment  default  shall not have been cured within
ten (10) days of written notice thereof from the Lender and, provided,  further,
however,  that the foregoing proviso shall not apply during any calendar year if
two (2) such defaulted  payments shall previously have occurred in such calendar
year.

                  (B) (1) Any  Borrower  shall fail to observe or perform any of
its covenants contained in Sections 7.1(A), 7.1(E), 7.1(M), 7.2(A); or

                      (2) Any  Borrower  or   any   Consolidated  Entity   shall
fail to observe or perform any other  obligation  to be observed or performed by
it hereunder (other than any obligation of Cavalier Acceptance under Section 8.3
hereof),  or under  any of the  Notes to which it is a party or under any of the
other Loan  Documents,  and such  failure  shall  continue for fifteen (15) days
after the earlier of: (i) written  notice of such failure  from Lender;  or (ii)
Lender is notified or should have been notified of such failure  pursuant to the
provisions of Section 7.1(M).

                  (C) Any Borrower or any Consolidated  Entity shall (1) fail to
pay when due any Indebtedness  (other than the Loans) to Lender;  or (2) fail to
pay any  Indebtedness of more than $50,000 due any third Persons (other than any
Indebtedness  involving  bona  fide  disputes  of less than  $250,000)  and such
failure shall continue beyond any applicable grace period and shall not be cured
within  fifteen (15) days after written  notice  thereof from Lender to Cavalier
Homes.

                  (D)  Any  financial  statement,  representation,  warranty  or
certificate  made or  furnished by any  Borrower or any  Consolidated  Entity to
Lender in connection  with this  Agreement,  or as inducement to Lender to enter
into this  Agreement,  or in any separate  statement or document to be delivered
hereunder to Lender:  (1) shall be materially  false,  incorrect,  or incomplete
when made; or (2) shall become  materially  false or incorrect and remain so for
fifteen (15) days after the earlier of: (1) written  notice from Lender;  or (2)
Lender is notified or should have been  notified  pursuant to the  provisions of
Section 7.1(M).

                  (E) Any  Borrower or any  Consolidated  Entity shall admit its
inability to pay its debts as they mature,  or shall make an assignment  for the
benefit of itself or any of its creditors.

                  (F) Proceedings in bankruptcy,  or for  reorganization  of any
Borrower or any  Consolidated  Entity,  or for the  readjustment of any of their
respective  debts,  under the federal  Bankruptcy Code, as amended,  or any part
thereof,  or under any other Law,  whether  state or federal,  for the relief of
debtors,  now or hereafter  existing,  shall be commenced by any Borrower or any
Consolidated   Entity  or  shall  be  commenced  against  any  Borrower  or  any
Consolidated  Entity and shall not be discharged  within thirty (30) days of its
commencement.

                  (G) A receiver,  trustee or conservator shall be appointed for
any Borrower or any  Consolidated  Entity or for any  substantial  part of their
respective assets, or any proceedings shall be instituted for the dissolution or
the full or partial liquidation of any Borrower or any Consolidated  Entity, and
such receiver, trustee or conservator shall not be discharged within thirty (30)
days of his  appointment,  or such  proceedings  shall not be discharged  within
thirty (30) days of its commencement, or any Borrower or any Consolidated Entity
shall discontinue business or materially change the nature of its business.

                  (H) Any Borrower or any Consolidated Entity shall suffer final
judgments for payment of money  aggregating  in excess of $250,000 and shall not
discharge the same within a period of thirty (30) days unless,  pending  further
proceedings, execution has been effectively stayed.

                  (I) A creditor  of any  Borrower  or any  Consolidated  Entity
shall obtain  possession of any substantial part of the Collateral by any means,
including, without limitation, levy, distraint, replevin or self-help.

                  (J) The validity or enforceability  of this Agreement,  any of
the Notes,  or any other Loan Document shall be contested by any Borrower or any
Consolidated  Entity  or any of them  shall  deny  that  it has  any or  further
liability or obligation hereunder or thereunder.

                  (K) Any Pension  Plan shall fail to meet the  minimum  funding
standards of Section 302 of ERISA as now in effect or hereafter amended.

                  (L) A criminal  investigation  is  commenced  and results i an
indictment with respect to any Borrower or any Consolidated Entity.

                  (M) Any property of any Borrower or any Consolidated Entity is
seized by a  governmental  authority,  or a forfeiture  proceeding  is commenced
against Borrower or any Consolidated  Entity, or any property of any Borrower or
any Consolidated Entity.

                  (N) Any  default or event of default  shall occur under any of
the other Loan Documents.

         9.2 Acceleration. Immediately and without notice upon the occurrence of
an Event of  Default  specified  in  the  foregoing   Sections  9.1(E),  9.1(F),
9.1(G) or at Lender's  option upon the occurrence of any other Event of Default,
all Obligations,  whether hereunder or otherwise,  shall immediately  become due
and payable without further action of any kind on Lender's part.
         9.3  Remedies.  After the  occurrence  of any Event of Default,  Lender
shall have, in addition to the rights and remedies given to it by this Agreement
or any other Loan Document,  all those allowed by all applicable Law, including,
without  limitation,  the Uniform Commercial Code as enacted in any jurisdiction
in which any  Borrower  or any  Collateral  may be  located.  No right or remedy
conferred upon Lender in this Agreement is intended to be exclusive of any other
right or remedy  contained in the Notes,  this  Agreement,  or in any other Loan
Document,  and every such right or remedy  shall be  cumulative  in  addition to
every  other  right or remedy  contained  herein or therein or now or  hereafter
available to Lender pursuant to applicable Law, in equity or otherwise.  Without
limiting the generality of the foregoing, Lender may immediately, without demand
of performance and without other notice (except as specifically required by this
Agreement or the other Loan Documents, or as required by Law and which cannot be
waived) or demand  whatsoever  to Borrowers,  all of which are hereby  expressly
waived, and without  advertisement,  sell at public or private sale or otherwise
realize upon,  the whole or, from time to time, any part of the  Collateral,  or
any interest  which any  Borrower may have  therein.  After  deducting  from the
proceeds of sale or other disposition of the Collateral all expenses  (including
all reasonable  expenses for legal  services),  Lender shall apply such proceeds
toward the  satisfaction  of the  Obligations in such order as Lender may elect.
Any  remainder of the proceeds  after  satisfaction  in full of the  Obligations
shall be distributed as required by applicable  Law. Notice of any sale or other
disposition  shall be given to Cavalier  Homes on behalf of  Borrowers  at least
five (5) days before the time of any  intended  public sale or of the time after
which any intended private sale or other  disposition of the Collateral is to be
made,  which Borrowers  hereby agree shall be reasonable  notice of such sale or
other  disposition.  Borrowers  shall be jointly  and  severally  liable for any
deficiency.  Each Borrower agrees to assemble,  or to cause to be assembled,  at
its own  expense,  the  Collateral  at such  place or  places  as  Lender  shall
designate.  At any such sale or other  disposition,  Lender  may,  to the extent
permissible  under  applicable  Law,  purchase  the  whole  or any  part  of the
Collateral, free from any right of redemption on the part of any Borrower, which
right is hereby waived and released.  Without  limiting the generality of any of
the rights and remedies conferred upon Lender under this paragraph,  Lender may,
to the full extent permitted by applicable Law:

                  (A) Refuse to extend  further  Advances under any of the Loans
 or convert or permit to beconverted any Warehouse Loan to a Term Loan;

                  (B) Enter upon any Borrower's premises,  exclude therefrom any
Borrower  or  any  Affiliate  thereof,  and  take  immediate  possession  of the
Collateral,  either personally or by means of a receiver appointed by a court of
competent jurisdiction, using all necessary force to do so;

                  (C) At Lender's option,  use, operate,  manage and control the
Collateral in any lawful manner;

                  (D) Collect and receive all rents, income, revenue,  earnings,
issues and profits therefrom;

                  (E) Maintain, repair, renovate, alter or remove the Collateral
as Lender may determine in its sole discretion; and

                  (F) Collect all  Accounts in Lender's or any  Borrower's  name
and  take  control  of  any  cash  or  non-cash  proceeds  of  any or all of the
Collateral;

                  (G) Enforce  payment of any Accounts,  prosecute any action or
proceeding  with respect to Accounts,  extend the time of payment of any and all
Accounts,  make  allowances and  adjustments  with respect  thereto and to issue
credits in the name of the Lender or any Borrower;

                  (H) Settle,  compromise,  extend, renew, release, terminate or
discharge,  in whole or in part, any Account or deal with the same as Lender may
deem advisable; and

                  (I) Require any Borrower to open all mail only in the presence
of a representative of the Lender, who make take therefrom any remittance on any
of the Collateral.

         9.4 Right of  Set-Off.  Upon the  occurrence  of any Event of  Default,
Lender may, and is hereby authorized by each Borrower, at any time and from time
to time, to the fullest extent  permitted by applicable Law, and without advance
notice  to any  Borrower  (any  such  notice  being  expressly  waived  by  each
Borrower),  set-off and apply any and all deposits (general or special,  time or
demand, provisional or final) at any time held and any other Indebtedness at any
time  owing by Lender  to, or for the credit or the  account  of,  any  Borrower
against any or all of the  Obligations  of Borrowers  now or hereafter  existing
whether or not such  Obligations have matured and irrespective of whether Lender
has  exercised  any other  rights  that it has or may have with  respect to such
Obligations,   including  without  limitation,   any  acceleration  rights.  The
aforesaid  right of set-off may be exercised by Lender against  Borrowers or any
of the  Consolidated  Entities or against any trustee in  bankruptcy,  debtor in
possession,  assignee for the benefit of the creditors,  receiver, or execution,
judgment  or  attachment  creditor  of  Borrowers  or any  of  the  Consolidated
Entities, or such trustee in bankruptcy, debtor in possession,  assignee for the
benefit of creditors,  receiver, or execution,  judgment or attachment creditor,
notwithstanding  the  fact  that  such  right of  set-off  shall  not have  been
exercised  by Lender prior to the making,  filing or  issuance,  or service upon
Lender of, or of notice of, any such  petition;  assignment  for the  benefit of
creditors;  appointment or  application  for the  appointment of a receiver;  or
issuance of  execution,  subpoena,  order or warrant.  Lender agrees to promptly
notify  Cavalier  Homes  on  behalf  of borrowers  after  any such  set-off  and
application,  provided that the failure to give such notice shall not affect the
validity  of such  set-off  and  application.  The  rights of Lender  under this
Section 9.4,  Section 9.5  and  Section  9.6 are in   addition  to   the   other
rights and remedies (including, without imitation, any other  rights of set-off)
which Lender may have.

         9.5 Demand  Obligations.  All of the  Obligations  (other than the Term
Loan(s))  of  Borrowers  shall be due and  payable in full upon  demand  made by
Lender,  whether or not any Event of Default  has  occurred  and  whether or not
Lender reasonably deems itself to be insecure. Demand may be made at any time or
without reason.  The enumeration   in  Section 9.1   hereof of certain Events of
Default,  and the  enumeration of certain  remedies  available to Lender upon an
Event of Default (as  described in Sections , and  hereof),  does not in any way
limit the right of Lender to  otherwise  demand  payment  in the  absence of the
occurrence  of any Event of Default.  Demand is not thereby  qualified or in any
way relative in nature.
         
         9.6 Special Remedies.  Upon the occurrence of any Event of Default,  in
addition  to all rights and  remedies  provided  for in Article IX hereof,  each
Borrower agrees that Lender shall have the following  rights with respect to the
Collateral, and each will take all such steps as to permit Lender to realize the
benefit of such rights and as may be directed by Lender in connection therewith,
including, without limitation, the following:

                  (A)  Lender  or any other  Person  serving  as any  Borrower's
attorney-in-fact  under Section 5.8 of this Agreement shall have, in addition to
the powers set forth in  Section  5.8 or  otherwise,  the  following  rights and
powers: (i) to initiate contact with any Person with respect to the transfer and
vesting in Lender of the  Collateral  pledged to Lender,  and to request  and to
receive  confirmation  from any  Person  that all  rights of any  Borrower  with
respect to such  Collateral may be transferred to and exercised by Lender;  (ii)
to  notify  any and all  other  third  parties  as may be  deemed  necessary  or
desirable in order to insure a smooth and  efficient  transition of the Accounts
and Eligible Contracts pledged to Lender from any Borrower to Lender, including,
without  limitation,  the furnishing by any third parties of computer  services,
tax services,  insurance  services,  escrow services or similar  services to any
Borrower in connection  with its servicing  activities of loans  included in the
Collateral;  (iii) to exercise all or any of any Borrower's  rights and remedies
with  respect to its  Accounts  and its  Eligible  Contracts  pledged to Lender,
including, without limitation, the right to settle, adjust, compromise,  extend,
renew, discharge,  terminate or release any thereof, either in whole or in part,
or to sell,  assign,  transfer,  take control of, use and/or  dispose of, in any
manner,  all or any part of the  Collateral;  and (iv) to do all acts and things
necessary, in the sole judgment of Lender, to permit Lender to enjoy the benefit
of its security interest in the Collateral.

                  (B) Each  Borrower  agrees to  cooperate  fully with Lender in
connection  with any and all steps  taken by  Lender  under  Article  IX of this
Agreement,  including,  without limitation, the execution and delivery to Lender
and/or to third parties,  such additional documents,  notices,  certificates and
the like as to permit the  vesting in and  transfer  to Lender of the benefit of
its rights in and to the Collateral, including, without limitation, the Accounts
and Eligible Contracts pledged to Lender.


                                    ARTICLE X

                                  MISCELLANEOUS

         10.1  Construction.  The  provisions  of  this  Agreement  shall  be in
addition to those of any guaranty,  pledge or security agreement,  note or other
evidence of liability held by Lender,  all of which are incorporated  herein and
shall be construed as  complementary  to each other.  Nothing  herein  contained
shall prevent Lender from enforcing any or all other notes, guaranties,  pledges
or security agreements in accordance with their respective terms.

         10.2 Further Assurances.  From time to time, each Borrower will execute
and deliver to Lender such additional documents and will provide such additional
information  as Lender  may  reasonably  require  to carry out the terms of this
Agreement  and be  informed  of the status  and  affairs  of  Borrowers  and the
Consolidated Entities. Each Borrower will take any and all actions as reasonably
requested  by Lender to ensure  that  Lender  enjoys  the full  benefits  of the
security intended to be granted  hereunder and under the Security  Documents and
the other Loan Documents.

         10.3  Indemnity.  Borrowers  hereby  agree  to  jointly  and  severally
indemnify Lender and its officers,  directors, agents and attorneys against, and
to jointly and severally  hold Lender and all such other persons  harmless from,
any claims,  demands,  liabilities,  costs,  damages, and judgments  (including,
without limitation,  liability under any Environmental Laws and costs of defense
and attorneys' fees) resulting from any  representation  or warranty made by any
Borrower  or on any  Borrower's  behalf  pursuant  to Article of this  Agreement
having been false or inaccurate when made (including,  without limitation,  each
time that an Advance  under any of the Loans is  requested  or made) or becoming
and remaining false or inaccurate  thereafter,  or resulting from any Borrower's
breach  of any of the  covenants  set  forth  in  Article  or  Article  of  this
Agreement. This agreement of indemnity shall be a continuing agreement and shall
survive  payment  of the  Loans  and  termination  of  this  Agreement  and  the
Obligations hereunder.

         10.4  Enforcement and Waiver by Lender.  Lender shall have the right at
all times to enforce the provisions of this  Agreement,  each of the Notes,  and
the other Loan Documents in strict accordance with the terms hereof and thereof,
notwithstanding  any conduct or custom on Lender's  part in  refraining  from so
doing at any time or times. Lender's failure at any time or times to enforce its
rights under such provisions, strictly in accordance with the same, shall not be
construed as having  created a custom in any way or manner  contrary to specific
provisions  of this  Agreement  or as having in any way or  manner  modified  or
waived the same. All rights and remedies of Lender are cumulative and concurrent
and the  exercise of one right or remedy shall not be deemed a waiver or release
of any other right or remedy.

         10.5  Expenses  of  Lender.  Borrowers  will,  on demand,  jointly  and
severally reimburse Lender for all expenses,  including the fees and expenses of
legal  counsel  for  Lender,   reasonably   incurred  in  connection   with  the
preparation,  administration,  amendment,  modification,  renewal, extension, or
enforcement  of this  Agreement  and  the  other  Loan  Document  and any  other
documents  related to this Agreement and the collection or attempted  collection
of the Loans and the Notes;  provided,  however,  that Borrowers'  obligation to
reimburse Lender for the legal fees incurred in the initial preparation of these
documents shall be limited to $5,000.  If Borrowers  should fail to pay any such
expenses, Lender may, but shall not be obligated to, make such payment by making
an Advance under the Revolving Loan Commitment for such purpose,  without notice
to Borrowers. Any amounts paid or advanced by Lender under this Section or under
any of the Security  Documents  shall bear  interest at the rate  specified  for
Advances under the Revolving Loan Commitment.  The obligation of Borrowers under
this Section to pay all expenses incurred by Lender shall survive payment of the
Obligations and termination of this Agreement.

         10.6  Notices.  Any notices or consents  required or  permitted by this
Agreement  shall be in writing and shall be deemed  delivered  if  delivered  in
person  or if  sent  by  first  class  mail,  postage  prepaid,  return  receipt
requested,  or  telegraph,  or  facsimile,  as follows,  unless such  address is
changed by written notice hereunder:

                  (A) If to any Borrower:

                           Cavalier Homes, Inc.
                           Post Office Box 300
                           Highway 41 North
                           Addison, Alabama 35540
                           Facsimile # (205) 747-1605
                           Attention:  Mr. David Roberson

                           with a copy to:

                           John W Lowe, Esquire
                           Post Office Box 576
                           1210 21st Street
                            Haleyville, Alabama 35565
                           Facsimile # (205) 486-4531

                  (B) If to Lender:

                           First Commercial Bank
                           2000 SouthBridge Parkway
                           Post Office Box 11746
                           Birmingham, Alabama  35202-1746
                           Facsimile #(205) 868-4898
                           Attention:  Mr. Paul B. Wallace

                           with a copy to:

                           Bradley, Arant, Rose & White
                           1400 Park Place Tower
                           2001 Park Place
                           Birmingham, Alabama 35203
                           Facsimile #(205) 251-9915
                           Attention: J. David Dresher, Esquire

         10.7 Indemnity,  Waiver and Release by Borrowers. To the maximum extent
permitted by applicable Law, each Borrower and each Consolidated Entity:

                  (A) Protects,  indemnifies,  and holds Lender  (including  any
Participant) and its employees, agents, representatives, officers, directors and
assigns,  harmless  against and of any and all  liabilities,  costs and expenses
(including  attorney's  fees,  court costs and  expenses),  judgments,  damages,
claims, demands, actions or proceedings by whomever asserted (including, but not
limited to,  retail  customers  with respect to the Chattel  Paper  constituting
Collateral  under this Agreement,  any person or persons who prosecute or defend
any  actions  or  proceedings  as  representative  of or on behalf of a class or
interest  group or any government  instrumentality,  body,  agency,  department,
commission or any administrative body or agency having jurisdiction  pursuant to
any  applicable  statute,  rule,  regulation,  order or decree)  arising out of,
connected  with,  or  resulting  from any claim or  defense  against  the dealer
selling the goods which gave rise to the applicable  Chattel  Paper,  or against
Cavalier Acceptance or any other Borrower,  whether such claim or defense arises
out of the Chattel Paper or the  underlying  sale of the home or otherwise,  and
whether the claim or defense is asserted in connection with the Lender's (or any
Participant's) attempting to collect the Chattel Paper or otherwise;

                  (B) Waives protest of all commercial paper at any time held by
Lender on which any Borrower is any way liable;

                  (C)  Except as the same may  herein be  specifically  granted,
waives notice of acceleration and of intention to accelerate;

                  (D)  Waives  notice  and   opportunity  to  be  heard,   after
acceleration  in the   manner  provided in Section  9.2,  before    exercise  by
Lender of the remedies of self-help,  set-off,  or of other  summary  procedures
permitted by any  applicable  Law or by any  agreement  with any Borrower or any
Consolidated  Entity,  and except where required hereby or by any applicable Law
which requirement cannot be waived,  notice of any other action taken by Lender;
and
                  (E) Releases  Lender and its officers,  attorneys,  agents and
employees  from all claims for loss or damage  caused by any act or  omission on
the part of any of them except gross negligence or willful misconduct.

         10.8     Reliance   on   this    Agreement.  There  are no  third-party
beneficiaries,  other than  Borrowers or Lender,  to this  Agreement or any   of
 the other Loan  Documents.  All  conditions  to  Lender's  obligations  to make
Advances under this Agreement are imposed  solely and  exclusively  for Lender's
benefit.  Neither  Borrowers nor any other Person shall have standing to require
satisfaction  of any such  condition  or be  entitled to assume that Lender will
refuse to make Advances in the absence of strict  compliance  with any or all of
such  conditions,  and neither  Borrower nor any other  Person or entity  shall,
under any circumstances, be deemed to be a beneficiary of any conditions hereof,
any or all of which conditions may be waived freely,  in whole or part by Lender
in its sole  discretion  at any time if Lender  deems it advisable to do so. The
parties  expressly  agree  that  whenever  notice is  required  to be given as a
condition precedent of the exercise of any right of Lender hereunder any failure
by Lender  to give such  notice  shall  result  only in  Lender's  inability  to
exercise  such  right in the  absence  of such  notice  and shall be of no other
consequence  whatsoever and give rise to no claim against Lender. This Agreement
shall not benefit and may not be relied upon by, any Person other than Borrowers
and Lender.  Nothing in this  Agreement or otherwise  creates an  obligation  on
Lender's  part to advise  Borrowers  or any other Person of whether any Advances
are available except upon an actual and bona fide request therefor.

         10.9  Participation.   Notwithstanding  any  other  provision  of  this
Agreement,  Borrowers  understand  that  Lender  may  enter  into  participation
agreements with Participants whereby Lender will allocate certain percentages of
its commitment to them.  Borrowers  acknowledge that, for the convenience of all
parties,  this  Agreement  is being  entered  into with Lender only and that its
Obligations hereunder are undertaken for the benefit of, and as an inducement to
any such Participant as well as Lender,  and Borrowers hereby grant to each such
Participant,  to the extent of its  participation in any of the Loans, the right
to set off deposit  accounts  maintained by any Borrower with such  Participant.
Each Borrower  authorizes  Lender to disclose  financial  and other  information
regarding such Borrower to Participants and potential Participants.

         10.10 No Partnership or Joint Venture.  Notwithstanding anything to the
contrary herein contained or implied, Lender, by this Agreement or by any action
pursuant  hereto or thereto,  shall not be deemed a partner,  joint  venturer or
participant  in the  venture of  Borrowers,  and  Borrowers  hereby  jointly and
severally  indemnify and agree to defend  Lender  harmless  (including,  without
limitation,  the payment of attorneys' fees) from any and all damages  resulting
from  such  allegation  or  construction  of  the  parties'  relationship.   The
requirements herein, and the restrictions imposed in this Agreement,  are solely
for the  protection  and benefit of Lender and shall not be  construed to create
any obligation on behalf of Lender to supervise, warn or disclose matters to any
Borrower.

         10.11  Governing Law. This Agreement is entered into and performable in
Jefferson County,  Alabama and the substantive Laws of the United States and the
State of Alabama,  without  giving effect to its principles of conflict of laws,
shall govern the  construction of this Agreement and the documents  executed and
delivered pursuant hereto, and the rights and remedies of the parties hereto and
thereto,  except to the extent that the location of any Collateral in a state or
jurisdiction  other  than  Alabama  requires  that the  perfection  of  Lender's
security interest hereunder, and the enforcement of certain of Lender's remedies
with respect to the  Collateral,  be governed by the laws of such other state or
jurisdiction.


                                                                         Initial
                                                                         Lender)



                                                                         Initial
                                                              (Cavalier Homes on
                                                        behalf of each Borrower)




         10.12    JURISDICTION; WAIVERS.

                  (A)      JURY WAIVER.  EACH BORROWER AND LENDER HEREBY EACH:

                           (1)      IRREVOCABLY    AND  UNCONDITIONALLY   WAIVES
THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING OR  COUNTERCLAIM OF ANY
TYPE AS TO ANY MATTER  ARISING  DIRECTLY OR INDIRECTLY OUT OF OR WITH RESPECT TO
THIS  AGREEMENT,  THE NOTES,  THE OTHER  LOAN  DOCUMENTS  OR ANY OTHER  DOCUMENT
EXECUTED IN CONNECTION HEREWITH OR THEREWITH; AND

                           (2)      AGREES  THAT ANY OF THEM MAY FILE A COPY  OF
THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING,  VOLUNTARY AND
BARGAINED-FOR AGREEMENT BETWEEN AND AMONG THE PARTIES IRREVOCABLY TO WAIVE TRIAL
BY JURY, AND THAT ANY DISPUTE OR CONTROVERSY OF ANY KIND WHATSOEVER BETWEEN THEM
SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT  JURISDICTION  BY A JUDGE SITTING
WITHOUT A JURY.

                  (B)      CONSENT   TO  JURISDICTION; WAIVER  OF   VENUE.  EACH
BORROWER AND LENDER HEREBY EACH:

                           (1)      KNOWINGLY AND  VOLUNTARILY  CONSENTS TO  THE
PERSONAL  JURISDICTION  OF ANY COURT OF COMPETENT  SUBJECT  MATTER  JURISDICTION
(WHETHER STATE OR FEDERAL) HOLDING IN BIRMINGHAM, JEFFERSON COUNTY, ALABAMA, FOR
THE  DETERMINATION  OF ANY CLAIM OR  CONTROVERSY  ARISING UNDER OR IN CONNECTION
WITH

<PAGE>





THIS  AGREEMENT,  THE NOTES OR ANY OTHER LOAN  DOCUMENT,  OR ANY OTHER  DOCUMENT
EXECUTED IN  CONNECTION  HEREWITH OR THEREWITH;  AND  KNOWINGLY AND  VOLUNTARILY
WAIVES ANY OBJECTION TO THE EXERCISE OF PERSONAL  JURISDICTION OVER IT OR ANY OF
THEM BY SAID  COURTS  ON THE  GROUND  THAT IT OR ANY OF THEM  DOES  NOT HAVE THE
REQUISITE  MINIMUM  CONTACTS  WITH THE STATE OF ALABAMA OR THAT EXERCISE OF SUCH
JURISDICTION OTHERWISE FAILS TO MEET THE REQUIREMENTS OF MINIMUM CONTACTS OR DUE
PROCESS UNDER THE CONSTITUTION OF THE UNITED STATES OR THE STATE OF ALABAMA; AND
AGREES THAT  SERVICE OF PROCESS ON IT OR ANY OF THEM AT ITS ADDRESS SET FORTH IN
SECTION 10.6 OF THE  AGREEMENT IN  ACCORDANCE  WITH   THE    PROVISIONS   OF THE
ALABAMA RULES OF CIVIL  PROCEDURE  WILL BE SUFFICIENT  NOTICE OF ANY  PROCEEDING
AGAINST ANY OF IT OR ANY OF THEM IN ANY SUCH COURT,  AND WAIVES ANY  REQUIREMENT
OF OTHER OR ADDITIONAL SERVICE OF PROCESS OR NOTICE OF ANY SUCH PROCEEDING;  AND
FURTHER  AGREES THAT EXERCISE OF  JURISDICTION  OVER IT OR ANY OF THEM BY COURTS
HOLDING IN BIRMINGHAM,  JEFFERSON  COUNTY,  ALABAMA SHALL BE IN ADDITION TO, AND
NOT IN LIEU OF, THE EXERCISE OF JURISDICTION OVER IT OR ANY OF THEM BY ANY OTHER
COURT OF COMPETENT JURISDICTION, WHETHER WITHIN OR WITHOUT THE STATE OF ALABAMA;
AND
                           (2)      KNOWINGLY AND    VOLUNTARILY    WAIVES   ANY
OBJECTION  THAT IT MAY NOW OR  HEREAFTER  HAVE TO THE  VENUE  OF ANY  ACTION  OR
PROCEEDING AGAINST IT OR ANY OF THEM IN ANY COURT MENTIONED  HEREINABOVE OR THAT
SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO
PLEAD OR CLAIM THE SAME.

         10.13 Binding  Effect,  Assignment.  This Agreement  shall inure to the
benefit of, and shall be binding upon, the  respective  successors and permitted
assigns of the parties  hereto.  No Borrower  has the right to assign any of its
rights or obligations hereunder without Lender's prior written consent.

         10.14  Termination.  The terms and provisions of this  Agreement  shall
continue  in effect  until  the  Obligations  shall  have  been  fully  paid and
performed,  and Lender shall have no further  obligation  whatsoever to make any
Advances under any of the Loans, issue any Letters of Credit or extend any other
credit or  accommodation,  and Lender and Borrowers  terminate this Agreement in
writing. Following any termination (if applicable),  the terms and provisions of
this Agreement  (excluding any obligation to lend or other commitment  hereunder
made by Lender),  and all of the covenants and promises of Borrowers  hereunder,
shall be automatically  reinstated if at any time all or any part of any payment
made upon the Obligations is rescinded or must for any reason be returned to the
Person making such payment, whether due to insolvency, bankruptcy,  dissolution,
appointment of a custodian or receiver,  or any other reason whatsoever,  all as
though such payment had not been made.

         10.15  Obligations   Unconditional   and  Absolute.   Borrowers  hereby
acknowledge  and agree  that  their  liability  to Lender  with  respect  to the
Obligations  are  continuing,   absolute,  unconditional  and,  except  for  the
$8,000,000  Loan, joint and several (subject to the provisions of Section (D) of
this  Agreement).   Notwithstanding  the  generality  of  the  foregoing,   each
Borrower's liability upon the Obligations shall remain in full force and effect,
and shall not be  affected,  discharged,  impaired  or  modified  in any  manner
whatsoever  due to (a) the  invalidity  or  unenforceability  of any of the Loan
Documents  executed by any other Person,  (b) any Borrower's  failure to receive
any notice given by Lender to any other Person, (c) any modification,  amendment
or  supplement  of any  covenant  or  agreement  contained  in  any of the  Loan
Documents executed by any third Person, (d) any compromise,  settlement, release
or termination of any promise,  agreement or other liability contained in any of
the Notes or any of the other Loan  Documents,  (e) any waiver granted by Lender
with  respect  to the  payment,  performance  or  observance  of any  promise or
agreement  contained  under any of the Loan  Documents,  (f) any  accommodation,
extension,  action or inaction  (including any exercise or  non-exercise  of any
right or remedy) with respect to any of the Loan Documents, (g) the extension of
maturity for the payment or performance of any of the  Obligations  due from any
Borrower or other third Person, or (h) the release, discharge, non-perfection or
impairment of Lender's  claims or rights  against any  Collateral  now or at any
time hereafter  securing any of the Obligations,  or the release or discharge of
any of Lender's claims or rights against any Borrower, guarantor or third Person
liable upon the Obligations,  whether any such release,  discharge or impairment
occurs due to operation of law, action or inaction by Lender, or otherwise.

         10.16 Entire  Agreement,  Amendments.  This  Agreement,  including  the
Schedules and Exhibits hereto,  all of which are hereby  incorporated  herein by
reference,  the other  Loan  Documents  and all  other  documents  executed  and
delivered pursuant hereto,  constitute the entire agreement between the parties,
and may be amended only by a writing signed on behalf of each party.

         10.17 Severability.  If any provision of this Agreement,  the Notes, or
the other Loan Documents  shall be held invalid under any  applicable  Law, such
invalidity  shall not affect any other provision of this Agreement or such other
instrument or agreement that can be given effect without the invalid  provision,
and, to this end, the provisions hereof are severable.

         10.18 Headings. The table of contents and article,  section,  paragraph
and subparagraph headings hereof are inserted for convenience of reference only,
and shall not alter, define, or be used in construing the text of such articles,
sections, paragraphs or subparagraphs.

         10.19  Counterparts.  This  Agreement  may be executed in any number of
counterparts,  each of which shall be deemed to be an original, but all of which
together shall constitute but one and the same instrument.

         10.20 Seal.  This Agreement is intended to take effect as an instrument
under seal.

               [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]



<PAGE>



                  IN WITNESS  WHEREOF,  the  parties  hereto  have  caused  this
Agreement to be executed by their respective duly authorized  officers as of the
day and year first above written.


                                              BORROWERS:

                                                CAVALIER HOMES, INC.

                                 By:    /s/ Jerry F. Wilson               [L.S.]
                                    --------------------------------------------
                                        Its:   President                
                                    --------------------------------------------


                                          CAVALIER HOMES OF ALABAMA, INC.


                                 By:    /s/ David A. Roberson             [L.S.]
                                    --------------------------------------------
                                  Its Secretary



                                          CAVALIER HOMES OF TEXAS, INC.


                                 By:    /s/ David A. Roberson             [L.S.]
                                    --------------------------------------------
                                  Its Secretary




                                              STAR INDUSTRIES, INC.



                                 By:    /s/ David A. Roberson             [L.S.]
                                    --------------------------------------------
                                  Its Secretary



                                        BUCCANEER HOMES OF ALABAMA, INC.


                                 By:    /s/ David A. Roberson             [L.S.]
                                    --------------------------------------------
                                  Its Secretary




<PAGE>



                                                                                

                                                BRIGADIER HOMES OF NORTH
                                                      CAROLINA, INC.


                                 By:    /s/ David A. Roberson             [L.S.]
                                    --------------------------------------------
                                  Its Secretary





                                                   MANSION HOMES, INC.



                                 By:    /s/ David A. Roberson             [L.S.]
                                    --------------------------------------------
                                  Its Secretary



                                              HOMESTEAD HOMES, INC.

                                 By:   /s/ David A. Roberson              [L.S.]
                                    --------------------------------------------
                                  Its Secretary




                                         CAVALIER ACCEPTANCE CORPORATION


                                 By:    /s/ Jerry F. Wilson, Jr.          [L.S.]
                                    --------------------------------------------
                                    Its:    President              




                                 LENDER:

                                                 FIRST COMMERCIAL BANK


                                  By:   /s/ Paul B. Wallace               [L.S.]
                                     -------------------------------------------
                                     Its Vice President



<PAGE>




                                                                      SCHEDULE I

                                  DEFINED TERMS


                  "Accounts",   "Chattel   Paper",   "Contracts",   "Documents",
"Equipment",   "Fixtures",   "General  Intangibles",   "Goods",   "Instruments",
"Inventory" and other terms not specifically defined in the Agreement shall have
the  same  respective  meanings  as are  given to  those  terms  in the  Uniform
Commercial  Code as  currently  adopted and in effect in the State of Alabama on
the date of the Agreement.

                  "Account Debtor" means any Person for which any Borrower holds
any right to payment arising from a bona fide outright sale or lease of Goods or
for services rendered by such Borrower to that Person.

                  "Advance"  means  each loan of money or credit  made to one or
more of the Borrowers by Lender under the Agreement.

                  "Affiliate"  shall  mean any  Person  (A)  which  directly  or
indirectly through one or more intermediaries  controls, or is controlled by, or
is under common control with, any Borrower,  or (B) five percent (5%) or more of
the equity interest of which is held  beneficially or of record by any Borrower.
The term "control" means the possession, directly or indirectly, of the power to
cause the direction of the management and policies of a Person,  whether through
the ownership of voting securities, by contract or otherwise.

                  "Agreement"  means  this  Revolving,  Warehouse  and Term Loan
Agreement, as may be amended or supplemented from time to time.

                  "Allocated Eligible Contracts" shall have the meaning ascribed
thereto in Section 3.1 of the Agreement.

                  "Assignment  of Life  Insurance"  means the  assignment of the
Insurance  Policy as Collateral,  duly authorized and executed by Cavalier Homes
at Closing  and in form  satisfactory  to  Lender,  as such  Assignment  of Life
Insurance may be hereafter supplemented or amended.

                  "Assumption  Agreement"  means each Assumption  Agreement duly
authorized and executed by each Subsidiary and Controlled Partnership that is to
become a Participating  Subsidiary or a Participating  Partnership after Closing
and  substantially  in the form of  Exhibit  E to the  Agreement,  as each  such
Assumption Agreement may be thereafter  supplemented or amended, and "Assumption
Agreements" means all of them, collectively.

                  "Average  Repossession Ratio" means the ratio of (A) the total
number of  repossession  for the current  fiscal year,  divided by the number of
months then-ended, to (B) the sum of the number of loans outstanding on the last
day of each month, divided by the number of months then-ended.

                  "Benefit  Plan" means any  employee  welfare  benefit  plan as
defined in Section 3(1) of ERISA or any employee pension benefit plan as defined
in Section 2(2) of ERISA.

                  "Borrower"  means each of  Cavalier  Homes,  Inc.,  a Delaware
corporation,  Cavalier Homes of Alabama, Inc., an Alabama corporation,  Cavalier
Homes of Texas,  Inc., a Texas  corporation,  Star Industries,  Inc., a Delaware
corporation, Buccaneer Homes of Alabama, Inc., an Alabama corporation, Brigadier
Homes of North  Carolina,  Inc., a North  Carolina  corporation,  Mansion Homes,
Inc.,  a  North  Carolina   corporation,   Homestead  Homes,   Inc.,  a  Georgia
corporation, and Cavalier Acceptance Corporation, an Alabama

<PAGE>



                                                                                

corporation,  and  the  entities  that  become  Participating  Subsidiaries  and
Participating  Partnerships  after Closing,  and "Borrowers"  means all of them,
collectively.

                  "Borrowing  Base"  means,  at any time,  with  respect  to the
Revolving  Loan,  the amount  computed  on the  Compliance  Certificate  for the
Revolving Loan most recently delivered to, and accepted by, Lender in accordance
with the Agreement and equal to the aggregate of:

                  (A)      Eighty percent(80%)of Eligible Accounts of Borrowers;
plus

                  (B) Fifty percent (50%) of Eligible Inventory.

                  "Cash Flow" means, as to any Person, the aggregate of: (A) net
income after taxes (or the net  deficit,  as  applicable)  plus (B) amounts that
have been deducted for (i) amortization of intangible assets,  (ii) depreciation
and depletion, and (iii) deferred taxes and expenses; all as shown by the income
statement of such Person,  calculated  in  accordance  with  Generally  Accepted
Accounting Principles.

                  "Cavalier Acceptance" means   Cavalier Acceptance Corporation,
an Alabama corporation. 

                  "Cavalier Homes" means Cavalier   Homes,   Inc., a    Delaware
corporation.

                  "Charge-Off  Ratio" means the sum of the total  dollar  amount
charged as a loan loss against the Loan Loss Reserve  during the current  fiscal
year of Cavalier Acceptance,  divided by the then-outstanding  principal balance
of Cavalier Acceptance's loan portfolio.

                  "Closing"  means the time and place of  actual  execution  and
delivery of the Agreement,  the Revolving Note, the Warehouse Note and the other
Loan Documents which are to be executed at closing.

                  "Closing   Certificate"   means   a   certificate,   in   form
satisfactory to Lender, dated as of the date of Closing, and signed on behalf of
each Borrower by the president or a vice president of such Borrower.

                  "Collateral"  means the property and rights, and any proceeds,
in whatever form, thereof,  described   in   Sections   5.1, 5.2, and 5.3 of the
Agreement and in the Security Documents.

                  "Commitment Fee" means (i) with respect to the Revolving Loan,
the  annual  fee,  due and  payable  and fully  earned at Closing  and  annually
thereafter upon renewal (if applicable),  equal to $10,000 and (ii) with respect
to the $8,000,000  Loan, the fee, due and payable at Closing,  equal to $36,000,
of which  $20,000  shall be fully  earned and  nonrefundable  at Closing and the
remainder  of  which may  be refundable  in accordance  with  Section 3.9 of the
Agreement.

                  "Compliance   Certificate"  means  (i)  with  respect  to  the
Revolving  Loan a  certificate  in  the  form  of  Exhibit  C to the  Agreement,
certified by the president or chief  financial  officer of Cavalier  Homes to be
correct,  which is  delivered  by  Cavalier  Homes on  behalf of  Borrowers  and
accepted by Lender  pursuant to  Section  4.1(I),  Section   4.2(A)  or  Section
7.1(C)(3)of  the  Agreement  and (ii) with  respect to the  $8,000,000  Loan,  a
certificate  in the  form of  Exhibit  C-1 to the  Agreement,  certified  by the
president or chief financial officer of Cavalier Acceptance to be correct, which
is delivered by Cavalier  Acceptance and accepted by Lender  pursuant to Section
8.1(B) of the Agreement.
                  "Consolidated"  refers to the consolidation of the accounts of
a Person and its  Consolidated  Entities  on a balance  sheet and  statement  of
income and retained  earnings in accordance with Generally  Accepted  Accounting
Principles.

                  "Consolidated   Entity"   means  any  Person   the   financial
statements of which are appropriately consolidated with the financial statements
of  Cavalier  Homes  under   Generally   Accepted   Accounting   Principles  and
"Consolidated Entities" means all of them, collectively.

                  "Contracts Borrowing Base" means, at any time, with respect to
the $8,000,000 Loan, eighty percent (80%) of the aggregate outstanding principal
balances of the Eligible Contracts,  as set forth and computed on the Compliance
Certificate for the $8,000,000 Loan most recently delivered to, and accepted by,
Lender in accordance with the Agreement.

                  "Controlled  Partnership" means a general partnership of which
any Borrower or Subsidiary is a general partner,  or a limited partnership whose
sole general  partner is a Borrower and with respect to which  partnership  such
Borrower  or  Subsidiary  is  entitled  to  receive  not  less  than  50% of the
distributions  of cash made to the partners  thereof,  other than any  preferred
cash distribution arrangement approved by Lender in writing.

                  "Current Assets" and "Current  Liabilities" mean, at any time,
all assets or  liabilities,  respectively,  that, in accordance  with  Generally
Accepted Accounting Principles should be classified as current assets or current
liabilities, respectively, on a balance sheet of a Person.

                  "Debt Service" means, at any time, the sum of (i) all interest
payments  for the prior  twelve (12) months plus (ii)  current  maturities  (due
within the next twelve (12) month period) of Indebtedness.

                  "Default"  and "Event of  Default"  each mean the  occurrence,
with  respect  to any of the  Loans,  of an event  described  in  Section 9.1 of
the Agreement.

                  "Dollars" and "$" each mean United States Dollars.

                  "$8,000,000 Loan" means the aggregate unpaid principal balance
of all Advances made pursuant to Article of the  Agreement,  whether in the form
of the Warehouse Loan or the Term Loan(s).

                  "Eligible  Account"  means,  at  any  time,  an  Account  that
conforms and continues to conform to each and all of the following conditions:

                  (A) The Account  arose from a bona fide outright sale of Goods
by any Borrower or from services  performed by such Borrower and such Goods have
been shipped to the appropriate  Account Debtors or their designees (or the sale
has otherwise  been  consummated)  or the services  have been  performed for the
appropriate Account Debtor;

                  (B)  The  Account  is  based  upon  an  enforceable  order  or
contract,  written or oral, for Goods shipped or held for services performed and
the same were  shipped,  held,  or  performed in  accordance  with such order or
contract;

                  (C) Such Borrower's title to the Account and, except as to the
Account  Debtor,  to any  Goods is  absolute  and is not  subject  to any  prior
assignment, claim, lien, or security interest, except Permitted Liens;

                  (D) The  amount  shown on such  Borrower's  books,  and on any
invoice or statement  delivered to Lender,  is owing to such Borrower,  less any
partial payment that has been made thereon by any Person;

                  (E) The Account  shall be eligible  only to the extent that it
is not subject to any claim of reduction, counterclaim,  set-off, recoupment, or
any claim for credits,  allowances, or adjustments by the Account Debtor because
of return,  inferior,  or damaged Goods or unsatisfactory  services,  or for any
other reason,  except for customer  discounts,  not to exceed five percent (5%),
allowed for prompt payment;

                  (F) The Account  Debtor has not returned or refused to retain,
or  otherwise  notified  such  Borrower  of any dispute  concerning,  or claimed
nonconformity  of,  any of the  Goods or  services  from  the sale of which  the
Account arose;

                  (G) The  Account is due and  payable not more than thirty (30)
days  from  the  date of the  invoice  therefor  and the  invoice  has not  been
re-dated;

                  (H) The  Account is not more than sixty (60) days past due nor
outstanding more than ninety (90) days from the date of the invoice therefor and
the invoice has not been re-dated;

                  (I) The  Account  does not arise out of a  contract  with,  or
order  from,  an Account  Debtor  that,  by its terms,  forbids or makes void or
unenforceable  the assignment by such Borrower to Lender of the Account  arising
with respect thereto;

                  (J) Such Borrower has not received any note, trade acceptance,
draft or other Instrument with respect to, or in payment of, the Account nor any
Chattel Paper with respect to the Goods giving rise to the Account,  unless,  if
any  such  Instrument  or  Chattel  Paper  has  been  received,   such  Borrower
immediately  notifies  Lender and  endorses or assigns and  delivers the same to
Lender;

                  (K) Such  Borrower has not received any notice of the death of
the Account Debtor or a partner thereof; nor of the dissolution,  termination of
existence,  insolvency, business failure, appointment of a receiver for any part
of the property of, assignment for the benefit of creditors by, or the filing of
a petition  in  bankruptcy,  or the  commencement  of any  proceeding  under any
bankruptcy or insolvency laws by or against, the Account Debtor. Upon receipt by
such Borrower of any such notice, it will immediately give Lender written notice
and advice thereof;

                  (L) The Account Debtor is not a Subsidiary or other  Affiliate
of such Borrower;

                  (M) The  Account  does not arise out of a  contract  with,  or
order from, an agency of the United States Government; and

                  (N) Lender has not deemed such Account  ineligible  because of
uncertainty about the  creditworthiness  of the Account Debtor or because Lender
otherwise  reasonably  considers  the  collateral  value thereof to Lender to be
impaired or its ability to realize such value to be insecure.

                  Eligible  Accounts shall be valued at the lower of cost or air
market value.  Any Chattel  Paper which is an Eligible  Contract and included in
the Contracts  Borrowing  Base shall be excluded from the definition of Eligible
Account.  In the event of any dispute under the foregoing criteria about whether
an Account is or has ceased to be an Eligible  Account,  the sole  decision  and
discretion of Lender shall control.

                  "Eligible  Contract"  means,  at any time,  Chattel Paper upon
which Lender has a property  perfected  security  interest and that conforms and
continues to conform to each and all of the following conditions:

                  (A) The  representations  contained in Section 6.2 and Section
6.3 of the  Agreement  are true and  correct  in all  respects  with  respect to
the Chattel Paper;

                  (B) The  Chattel  Paper  arose out of the retail sale of a new
home  manufactured  by one of the Borrowers or the sale of a  manufactured  home
repossessed by Cavalier Acceptance;

                  (C) The Chattel  Paper  evidences  the  obligation of a retail
customer to repay  Indebtedness  incurred to purchase a new home manufactured by
one of the Borrowers or the sale of a manufactured  home repossessed by Cavalier
Acceptance;

                  (D) The Chattel  Paper has been duly assigned to, and is owned
by, Cavalier Acceptance;

                  (E) The  Chattel  Paper is not more than ninety (90) days past
due in payment and the Chattel Paper has not been re-dated;

                  (F) The Chattel  Paper  evidences  an amount  financed  not in
excess of $70,000;

                  (G) The portfolio  index score used by Cavalier  Acceptance to
underwrite such Chattel Paper was not less than 70;

                  (H) The Chattel Paper was funded by Cavalier  Acceptance on or
after January 1, 1994; and

                  (I) The Chattel Paper has been reviewed and approved by Lender
in its sole discretion.

                  In the event of any dispute under the foregoing criteria about
whether  Chattel  Paper is or has ceased to be an  Eligible  Contract,  the sole
decision and discretion of Lender shall control.

                  "Eligible  Inventory"  means,  at any time,  Inventory  of any
Borrower  held at the  location  or  locations  specified  on  Exhibit  H to the
Agreement,  which  is not (a)  damaged  or  defective  in any  way,  (b) sold or
segregated for sale, or (c) consigned  Inventory.  Eligible  Inventory  shall be
valued at the  lower of cost or fair  market  value;  provided,  however,  that,
Lender may exclude from the Borrowing  Base all or a  proportionate  part of any
particular  portion of any Borrower's  Inventory which Lender  reasonably  deems
ineligible  because its market  value has declined or because  Lender  otherwise
reasonably  considers the  collateral  value thereof to Lender to be impaired or
its ability to realize such a value to be insecure.

                  "Environmental   Laws"   means   the   federal   Comprehensive
Environmental  Response  Compensation  and  Liability Act of 1980  (CERCLA),  as
amended  (42  U.S.C.   Sections   9601,  et  seq.),   the  Hazardous   Materials
Transportation Act, as amended (49 U.S.C.  Sections 1801, et seq.), the Resource
Conservation  and Recovery Act (RCRA),  as amended (42 U.S.C.  Sections 6901, et
seq.),  the Clean Water Act, as amended (33 U.S.C.  Sections 1251, et seq.), the
Clean Air Act,  as  amended  (42  U.S.C.  Sections  7401,  et  seq.),  the Toxic
Substances  Control  Act, as amended (15 U.S.C.  Sections  2601,  et seq.),  the
Emergency  Planning and  Community  Right-to-Know  Act  (EPCRA),  as amended (42
U.S.C.  Sections  11001,  et seq.),  and the rules and  regulations  adopted and
publications  promulgated pursuant thereto, and the rules and regulations of the
Occupational Safety and Health  Administration (OSHA) pertaining to occupational
exposure  to  asbestos,  as  amended,  and any  other  federal,  state  or local
environmental law, ordinance, rule, or regulation now or hereafter in effect.

                  "ERISA" means the federal Employee  Retirement Income Security
Act of 1974,  as amended  and in effect from time to time,  and the  regulations
promulgated  by  the  Department  of  Labor  or  the  Pension  Benefit  Guaranty
Corporation thereunder.

                  "ERISA Affiliate" means any trade or business,  whether or not
incorporated, that with Borrower is a member of a group that would be treated as
a single  employer  for  purposes  of  Section  414(b),  (c),  (m) or (o) of the
Internal Revenue Code of 1986, as amended.

                  "Financial  Statements" means the Consolidated  balance sheets
of Cavalier  Homes and the  Consolidated  Entities as of December 31, 1992,  and
Consolidated  statements  of income  and  retained  earnings  and Cash  Flows of
Cavalier  Homes and the  Consolidated  Entities for the years or months ended on
such  dates all as  furnished  to Lender,  and shall also mean any such  balance
sheets and statements as may hereafter be furnished by any Borrower to Lender.

                  "Five Year Treasury"  means the weekly average yield on United
States treasury securities adjusted to a constant maturity of five (5) years, as
released each Monday by the Federal Reserve Board in Release H.15. The Five Year
Treasury on February 17, 1994 was 5.36%.

                  "Fixed  Assets"  means,  at any time,  all assets  (other than
Current Assets) that should,  in accordance with Generally  Accepted  Accounting
Principles be classified as assets on a balance sheet of any Borrower.

                  "Generally  Accepted  Accounting  Principles"  and "GAAP" each
mean generally accepted  principles of accounting in effect from time to time in
the United States  applied in a manner  consistent  with those used in preparing
such  financial  statements  as have  theretofore  been  furnished  to Lender by
Borrowers.

                  "Guaranty  Agreement"  means  the  guaranty  of  payment  duly
authorized and executed by Cavalier Homes at Closing and in form satisfactory to
Lender,  as such Guaranty  Agreement may be hereafter  amended or  supplemented.
Such Guaranty  Agreement  shall  unconditionally  guarantee the repayment of the
$8,000,000 Loan made by Lender to Cavalier Acceptance.

                  "Hazardous  Materials" means any asbestos,  urea  formaldehyde
foam  insulation,   flammable  explosives,   radioactive  materials,   hazardous
materials,  hazardous  wastes,  hazardous  or toxic  substances,  or  related or
unrelated  substances or materials defined,  regulated,  controlled,  limited or
prohibited in any Environmental Laws.

                  "Indebtedness"   means,  as  to  any  Person,   all  items  of
indebtedness,  obligation or liability, whether matured or unmatured, liquidated
or unliquidated,  direct or contingent, joint or several, including, but without
limitation:

                  (A) All indebtedness  guaranteed,  directly or indirectly,  in
any manner,  or endorsed  (other than for  collection or deposit in the ordinary
course of business) or discounted with recourse;

                  (B)  All  indebtedness  in  effect  guaranteed,   directly  or
indirectly, through agreements, contingent or otherwise:

                           (1)      to purchase such indebtedness; or

                           (2)      to  purchase,  sell or lease  (as  lessee or
                                    lessor)  property,  products,  materials  or
                                    supplies or to  purchase  or sell  services,
                                    primarily  for the purpose of  enabling  the
                                    debtor to make payment of such  indebtedness
                                    or to assure  the owner of the  indebtedness
                                    against loss; or

                           (3)      to supply funds to or in any other    manner
                                    invest in the debtor;

                  (C) All  indebtedness  secured  by (or for which the holder of
such  indebtedness has a right,  contingent or otherwise,  to be secured by) any
mortgage,  deed of trust,  pledge,  lien,  security  interest or other charge or
encumbrance upon property owned or acquired subject thereto,  whether or not the
liabilities secured thereby have been assumed; and

                  (D) All  indebtedness  incurred  as the  lessee  of  Goods  or
services  under leases that, in accordance  with Generally  Accepted  Accounting
Principles, should not be reflected on the lessee's balance sheet.

                  "Initial  Participating  Subsidiaries"  means all of  Cavalier
Homes of Alabama, Inc., an Alabama corporation, Cavalier Homes of Texas, Inc., a
Texas  corporation,  Star Industries,  Inc., a Delaware  corporation,  Buccaneer
Homes  of  Alabama,  Inc.,  an  Alabama  corporation,  Brigadier  Homes of North
Carolina,  Inc., a North Carolina  corporation,  Mansion Homes,  Inc., a Georgia
corporation,   Homestead  Homes,  Inc.,  a  Georgia  corporation,  and  Cavalier
Acceptance Corporation, an Alabama corporation, collectively.

                  "Insurance Policy" means that certain life insurance policy in
the amount of $2,000,000 naming Jerry F. Wilson as insured, which is assigned to
Lender as  additional  security for the  Obligations  in the  Assignment of Life
Insurance.

                  "Law" and "Laws" each mean all  ordinances,  statutes,  rules,
regulations, orders, injunctions,  judgments, writs or decrees of any government
or  political  subdivision  or agency  thereof,  or any court or similar  entity
established by any thereof.

                  "Lender" means First Commercial Bank, an Alabama state banking
corporation.

                  "Letter  of Credit  Borrowings"  means the  maximum  aggregate
amount  that Lender  could be required to pay under any drafts that  conceivably
could be drawn under all Letters of Credit  outstanding  on such date,  but does
not include drafts that have been drawn and paid.

                  "Letter of Credit  Obligations" means (a) the Letter of Credit
Borrowings  and (b) the  reimbursement  obligations  and  other  obligations  of
Borrowers  under this  Agreement  with  respect to  drawings  made on Letters of
Credit  (including  any  obligations  owing under the  application  or agreement
relating to any such Letter of Credit), including all principal,  interest, fees
and other charges relating thereto.

                  "Letter  of  Credit"  means  each  letter of credit  issued by
Lender  pursuant to Section 2.9 of the Agreement,  and "Letters of Credit" means
all of them, collectively.

                  "Liabilities" means all Indebtedness and all other items that,
in  accordance  with  Generally  Accepted  Accounting   Principles,   should  be
classified as liabilities on a balance sheet of a Person.

                  "Loan Documents" means the Agreement,  the Revolving Note, the
Warehouse Note, and each Term Note, the applications for Letters of Credit,  the
Assumption Agreements, the Subrogation and Contribution Agreements, the Security
Documents  and all other  agreements,  instruments  and  documents  executed  or
delivered  at any time in  connection  with the  Obligations,  or to evidence or
secure any of the Obligations,  all as may be amended or supplemented  from time
to time.

                  "Loan  Loss  Reserve"  means an  allowance  of  reserve  funds
established and maintained by Cavalier Acceptance,  through charges made against
operating  income,  to be used for the purpose of absorbing losses from Cavalier
Acceptance's loan portfolio.

                  "Loans"  means  the  Revolving  Loan and the  $8,000,000  Loan
(including the Warehouse Loan and all Term Loan(s) thereunder), collectively.

                  "Loan  Termination  Date"  means,  (i)  with  respect  to  the
Revolving Loan, the earliest of (A) March 31, 1995 or (B) upon demand by Lender;
(ii) with respect to the Warehouse  Loan,  the earliest of (A) February 28, 1995
or (B) the date to which the maturity of the Warehouse  Note may be  accelerated
pursuant to Section  9.2 of the  Agreement;  and (iii) with  respect to any Term
Loan,  the earlier of (A) the maturity date of the  applicable  Term Note or (B)
the date to which the maturity of the  applicable  Term Note may be  accelerated
pursuant to Section 9.2 of the Agreement.

                  "Long-Term  Liabilities"  means  Liabilities  less the portion
thereof that constitutes Current Liabilities.

                  "Net Working  Capital" means, at any time, the amount by which
Current Assets exceed Current Liabilities.

                  "Net Worth" means, at any time, Stockholders' Equity, less the
sum of:

                  (A)      Any surplus resulting from  any   write-up  of assets
subsequent to the date of Closing;

                  (B) Any amount at which  shares of capital  stock of  Borrower
appear as an asset on Borrower's balance sheet; and

                  (C) Loans and advances to stockholders, directors, officers or
employees, of Borrower or any Affiliate.

                  "Notes" means the Revolving Note, the Warehouse Note and   the
Term Note(s), collectively.

                  "Obligations" means the obligations, whether joint or several,
of Borrowers:

                  (A) To pay the  principal  of and  interest  on the  Revolving
Note,  the Warehouse  Note,  and the Term Note(s) in  accordance  with the terms
thereof and to satisfy, pay and perform the Letter of Credit Obligations and all
other liabilities to Lender,  whether under the Agreement or otherwise,  whether
now existing or hereafter incurred, matured or unmatured,  direct or contingent,
joint or several, including any extensions,  modifications, and renewals thereof
and substitutions therefor;

                  (B) To repay to Lender all amounts  advanced  by Lender  under
the Agreement or under any of the Security Documents,  or otherwise on behalf of
any Borrower, including, without limitation,  advances for principal or interest
payments to prior secured parties, mortgagees, or lienors, or for taxes, levies,
insurance  rent,  repairs to or maintenance or storage of any of the Collateral;
and

                  (C) To  reimburse  Lender,  on  demand,  for  all of  Lender's
expenses and costs,  including the reasonable  fees and expenses of its counsel,
in connection with the preparation, administration,  amendment, modification, or
enforcement  of  the  Agreement  and  the  documents  required  or  contemplated
hereunder,  including,  without limitation, any proceeding brought or threatened
to  enforce  payment  of any of the  obligations  referred  to in the  foregoing
paragraphs (A) and (B);  provided,  however,  that the obligation of Borrower to
reimburse  Lender  for the  legal  fees and  expenses  incurred  in the  initial
preparation of these documents shall be limited to $5,000.

                  "Participant" means any bank, financial institution, Affiliate
of Lender,  or other entity which  purchases an interest in the Revolving  Note,
the Warehouse Note or any Term Note from Lender at any time.

                  "Participating  Partnership" means any Controlled  Partnership
that hereafter  executes and delivers to the Lender an Assumption  Agreement,  a
Security Agreement and all other documents necessary to assume joint and several
liability as to the  Obligations  arising with respect to the Revolving  Loan or
any  agreement  or  instrument  executed  by  such  Controlled   Partnership  in
connection  therewith  (to the  extent of its  Partnership  Liabilities)  and to
include all of its Accounts, Inventory and other Collateral in the Collateral.

                  "Participating Subsidiary" means (a) the Initial Participating
Subsidiaries and (b) any other  Subsidiary that hereafter  executes and delivers
to the  Lender an  Assumption  Agreement,  a  Security  Agreement  and all other
documents  necessary to assume joint and several liability as to the Obligations
arising  with  respect to the  Revolving  Loan or any  agreement  or  instrument
executed by such  Subsidiary  in  connection  therewith  (in the maximum  amount
provided for in such  Assumption  Agreement) and to include all of its Accounts,
Inventory and other Collateral in the Collateral.

"Partnership Liability" means, with respect to a Participating Partnership, that
part, if any, of an Advance (together with interest thereon and fees, prepayment
premiums and other charges  properly  attributable  thereto) that is received by
and used by or for the benefit of such Participating  Partnership,  as certified
to Lender by Cavalier Homes, under Section 4.2, in   connection   with  Cavalier
Homes'  request  for such  Advance,  and  "Partnership  Liabilities"  means  the
aggregate  amount of all such parts of Advances that are received by and used by
or for the benefit of such Participating Partnership.
                  "Pension  Plan" means any employee  pension  benefit  plan, as
defined in Section 3(2) of ERISA that is subject to Section 302 of ERISA.

                  "Permitted Liens" means:

                  (A) Liens for taxes, assessments, or similar charges, incurred
in the ordinary course of business that are not yet due and payable;

                  (B)  Pledges  or  deposits  made  in the  ordinary  course  of
business to secure payment of workmen's  compensation,  or to participate in any
fund in connection with workmen's compensation,  unemployment insurance, old-age
pensions or other social security programs;

                  (C) Liens of mechanics, materialmen,  warehousemen,  carriers,
or other like liens,  securing  obligations  incurred in the ordinary  course of
business that are not yet due and payable;

                  (D) Good faith pledges or deposits made in the ordinary course
of business to secure  performance of bids,  tenders,  contracts (other than for
the repayment of borrowed  money) or leases,  not in excess of ten percent (10%)
of the aggregate amount due thereunder,  or to secure statutory obligations,  or
surety,  appeal,  indemnity,  performance or other similar bonds required in the
ordinary course of business;

                  (E) Encumbrances  consisting of zoning restrictions,  easement
or other  restrictions  on the use of real  property,  none of which  materially
impairs the use of such property by Borrower or any  Consolidated  Entity in the
operation of its business, and none of which is violated in any material respect
by existing or proposed structures or land use;

                  (F)      Liens in favor of Lender;

                  (G) Existing  liens set forth or described on Exhibit F to the
 Agreement;

                  (H) Purchase  money security  interests  granted to secure not
more than the purchase  price of assets,  the purchase of which does not violate
the Agreement or any instrument or document contemplated under the Agreement;

                  (I) Non-purchase money security interests in the real property
of any Borrower or Consolidated Entity granted to secure aggregate  Indebtedness
not to exceed $1,000,000; and

                  (J) The following,  if the validity or amount thereof is being
contested in good faith by appropriate and lawful  proceedings,  so long as levy
and  execution  thereon  have been stayed and  continue to be stayed and they do
not, in the aggregate,  materially detract from the value of the property of any
Borrower or any Consolidated  Entity or materially impair the use thereof in the
operation of its business:

                           (1)      Claims or liens for taxes,  assessments   or
charges due and payable and subject to interest or penalty;  

                           (2)      Claims,  liens and encumbrances  upon,   and
defects of title to, real or personal  property,  including  any  attachment  of
personal or real  property or other legal  process  prior to  adjudication  of a
dispute on the merits;

                           (3)      Claims or liens of mechanics,   materialmen,
warehousemen,  carriers,  or other like liens; and

                           (4)      Adverse judgments on appeal.

                  "Person"  means  any  individual,  corporation,   partnership,
association,  joint-stock company,  trust,  unincorporated  organization,  joint
venture, court or government or political subdivision or agency thereof, and any
other legal entity.

                  "Pledge  Agreement"  means  each  of  the  assignments  of the
Pledged Stock as Collateral,  duly  authorized  and executed by Cavalier  Homes,
Star Industries,  Inc., or Cavalier Acceptance, as applicable, at Closing and in
form  satisfactory  to Lender,  as each such Pledge  Agreement  may be hereafter
amended  or   supplemented,   and  "Pledge   Agreements"   means  all  of  them,
collectively.

                  "Pledged Stock" has the meaning given to   such  term in   the
Pledge Agreement.

                  "Prime   Rate"  means  the  rate  of   interest   periodically
designated by Lender as its Prime Rate.  The Prime Rate is not  necessarily  the
lowest  interest  rate  charged  by  Lender.  The Prime  Rate on the date of the
Agreement is 6%.

                  "Records"  means  correspondence,   memoranda,  tapes,  discs,
microfilm,  microfiche,  papers,  books  and  other  documents,  or  transcribed
information of any type, whether expressed in ordinary or machine language,  and
all filing cabinets, computer hardware, and other containers in which any of the
foregoing is stored, maintained or updated.

                  "Regulation U" means Regulation U of the Board of Governors of
the Federal  Reserve  System as now or from time to time hereafter in effect and
shall include any successor or other  regulation or official  interpretation  of
said Board of  Governors  relating to the  extension  of credit by banks for the
purpose of  purchasing or carrying  margin stocks  applicable to member banks of
the Federal Reserve System.

                  "Revolving Loan" means the aggregate unpaid principal  balance
from time to time of all Advances made pursuant to Article of the Agreement.

                  "Revolving Loan Commitment"  means the Lender's  commitment to
lend to Borrowers up to the sum of  $5,000,000 in principal  amount  outstanding
from time to time  pursuant  to Article of the  Agreement,  and  subject to, the
terms of the Agreement.

                  "Revolving   Note"  means  the   promissory   note,   in  form
satisfactory  to Lender,  dated as of the date of the  Agreement  and payable on
demand,  but if no demand is made,  on March 31, 1995,  made by each Borrower to
evidence  such  Borrower's  joint and several  obligation to repay the Revolving
Loan and the interest  thereon,  and includes any amendment to such note and any
promissory note given in extension or renewal of, or in  substitution  for, such
note.

                  "Revolving Rate" means the rate defined in  Section 2.5(A)  of
the Agreement.

                  "Security   Documents"  means  the  Pledge   Agreements,   the
Assignment of Life Insurance, the Guaranty Agreement, and any documents required
or contemplated  under Article of the Agreement,  whether  delivered at or after
the Closing, together with any other documents or agreements, now or hereinafter
in  effect,  which  secure  (A)  the  payment  of any of the  Loans  or (B)  the
performance of the Obligations of any Borrower thereunder.

                  "Stockholders'  Equity"  means,  at any  time,  the sum of the
following  accounts less treasury  stock carried at cost) set forth in a balance
sheet of Borrower  (or,  if the  Borrower  in  question  is  Cavalier  Homes,  a
Consolidated balance sheet of the Consolidated Entities), prepared in accordance
with Generally Accepted Accounting Principles consistently applied:

                  (A)      The par or stated value of all  outstanding   capital
stock;

                  (B)      Capital surplus; and

                  (C) Retained earnings.

                  "Subrogation   and   Contribution    Agreement"   means   each
Subrogation and  Contribution  Agreement duly authorized and executed at Closing
by each Borrower or duly  authorized and executed  thereafter by each Subsidiary
and  Controlled   Partnership   that  becomes  a  Participating   Subsidiary  or
Participating  Partnership thereafter and substantially in the form of Exhibit D
to the Agreement,  as each such  Subrogation and  Contribution  Agreement may be
hereafter  or  thereafter   supplemented  or  amended,   and   "Subrogation  and
Contribution Agreements" means all of them, collectively.

                  "Subsidiary"  means any  corporation  of which more than fifty
percent  (50%)  of the  outstanding  voting  securities  shall,  at the  time of
determination,   be  owned   directly,   or  indirectly   through  one  or  more
intermediaries, by any Borrower.

                  "Tangible Net Worth" means, at any time, Stockholders'  Equity
less the sum of:

                  (A)  Any  surplus   resulting  from  any  write-up  of  assets
subsequent to the date of the latest  Financial  Statements  delivered to Lender
prior to Closing;

                  (B) Goodwill,  including any amounts,  however designated on a
balance sheet of any  Borrower,  representing  the excess of the purchase  price
paid for assets or stock acquired over the value  assigned  thereto on the books
of any Borrower;

                  (C)      Patents, trademarks, trade names and copyrights;

                  (D) Any  amount  at  which  shares  of  capital  stock  of any
Borrower appear as an asset on any Borrower's balance sheet;

                  (E) Loans and advance to stockholders,  directors, officers or
employees;

                  (F)      Deferred expenses; and

                  (G) Any other  amount in respect  of an  intangible  that,  in
accordance with Generally Accepted Accounting  Principles,  should be classified
as an asset on a balance sheet of any Borrower.

                  "Term  Loan"  and "Term  Loans"  means  the  unpaid  principal
balance from time to time on that portion of the $8,000,000  Loan which has been
converted to term loan(s) pursuant to requirements of the Agreement.

                  "Term Note" means the promissory note of Cavalier  Acceptance,
substantially  in the  form  of  Exhibit  A to  the  Agreement,  evidencing  its
obligation to repay a Term Loan, and includes any amendment to such note and any
promissory note given in extension or renewal of, or in  substitution  for, such
note,  and "Term Notes"  means,  collectively,  all of the Term Notes so made by
Cavalier Acceptance.

                  "Term Rate" means the  rate   defined in Section 3.6(B) of the
Agreement.

                  "UCC-1" means each financing statement to be filed pursuant to
the  Uniform  Commercial  Code,  as  enacted  in any  state in which  any of the
Collateral is located, in order to perfect Lender's lien on the Collateral.

                  "Usage Fee" means   the fee  due to Lender pursuant to Section
2.10 hereof.

                  "Warehouse Loan" means the aggregate unpaid principal  balance
from time to time of the short-term portion of the $8,000,000 Loan.

                  "Warehouse  and  Term  Loan  Commitment"  means  the  Lender's
commitment  to lend  to  Cavalier  Acceptance  up to the  sum of  $8,000,000  in
principal  amount  outstanding  from time to time  pursuant  to  Article  of the
Agreement, and subject to, the terms of the Agreement.

                  "Warehouse   Note"  means  the  promissory  note  of  Cavalier
Acceptance,  in  form  satisfactory  to  Lender,  dated  as of the  date  of the
Agreement  and  payable on January 31,  1995,  made by  Cavalier  Acceptance  to
evidence  Cavalier  Acceptance's  obligation to repay the Warehouse Loan and the
interest  thereon,  and includes any  amendment to such note and any  promissory
note given in extension or renewal of, or in substitution for, such notes.

                  "Warehouse Rate" means the rate defined   in  Section 3.6(A)
of the  Agreement.