August 26, 1998


Mr. Greg Brown
Cavalier Homes, Inc.
Highway 41 North and Cavalier Road
Addison, AL 35540

                           Re:      Retention and Severance Agreement


Dear Mr. Brown:

     Cavalier Homes, Inc., a Delaware corporation (the "Company"), considers the
establishment  and maintenance of a sound and vital senior management team to be
essential to protecting  and enhancing the best interests of the Company and its
stockholders. In this connection, the Company recognizes that the possibility of
a change in control may exist in the future, and that such possibility,  and the
uncertainty and questions which it may raise among management, may result in the
departure or distraction of management personnel to the detriment of the Company
and its  stockholders.  Accordingly,  the Board of Directors of the Company (the
"Board") has determined that appropriate  steps should be taken to reinforce and
encourage  the continued  attention  and  dedication of members of the Company's
senior  management,   including  yourself,  to  their  assigned  duties  without
distraction in the face of the potentially disturbing circumstances arising from
the  possibility  of a change  in  control  of the  Company.  The Board has also
determined  that   appropriate   steps  should  be  taken  to  encourage  senior
management's participation, in the event of a proposed change of control, in the
successful  completion of the change of control  transaction  while  maintaining
their focus on business performance and strategy execution.

     In order to  induce  you to  remain in the  employ  of the  Company  and in
consideration of your agreeing to remain in the employ of the Company subject to
the terms and conditions set forth below,  this letter  agreement sets forth the
benefits  which the  Company  agrees  will be  provided to you in the event your
employment  with the Company is terminated  subsequent to a change in control of
the  Company  (as  defined  in  Section 2 of this  letter  agreement)  under the
circumstances described below.

     1. Company's Right to Terminate.  You acknowledge  that this Agreement does
not operate as an  employment  contract  nor  establish  any right of  continued
employment  with the Company and that the Company may terminate your  employment
at any time,  subject  to  providing  the  benefits  hereinafter  specified,  if
applicable, in accordance with the terms hereof.



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Mr. Greg Brown
August 26, 1998
Page 7
---------------------------


     2. Change in Control.  No benefits shall be payable  hereunder unless there
shall have been a change in control of the Company,  as set forth below and such
change of  control  occurs  prior to the  termination  of your  employment.  For
purposes  of this  Agreement,  a "change in control of the  Company"  means with
respect to the Company, if subsequent to the date of this Agreement:

        (a)    Any  person, entity or "group" (within   the  meaning   of  Rules
13d-1  through  13d-6 of the  Securities  Exchange Act of 1934,  as amended (the
"Exchange  Act")) (other than any  subsidiary or affiliate as of the date hereof
of the Company or any employee  benefit plan of the Company) (i) has acquired or
agreed to  acquire  beneficial  ownership  of 20% or more of the  voting  and/or
economic  interest in the capital stock of the Company,  or (ii) has obtained or
agreed to obtain the power (whether or not exercised) to elect a majority of the
board of directors of the Company; or

        (b)    A majority of the board of directors of the Company shall consist
at such time of individuals  other than (x) members of the board of directors on
the date  hereof and (y) other  members of such  board of  directors  nominated,
recommended,  elected, or approved to succeed or become a director by a majority
of such members referred to in clause (x) or a nominating  committee  elected or
appointed by such members  referred to in clause (x) or by members so nominated,
recommended,  elected or approved (such  directors  described in clauses (x) and
(y) above being hereinafter sometimes referred to as "Continuing Directors"); or

        (c)    The approval by the stockholders  of the  Company of (i) a merger
or  consolidation  of the Company,  statutory share  exchange,  or other similar
transaction with another corporation, partnership, or other entity or enterprise
in which  either the  Company is not the  surviving  or  continuing  corporation
(other than such a  transaction  that is solely for the purpose of changing  the
domicile  of the  Company)  or shares of common  stock of the  Company are to be
converted into or exchanged for cash,  securities other than common stock of the
Company,  or other property,  (ii) a sale or disposition of all or substantially
all of the assets of the Company, or (iii) the dissolution of the Company; or

        (d)    Any transaction or event relating to the Company  occurs which is
(or which would be if the Company  had a class of equity  securities  registered
under Section 12 of the Exchange  Act) required to be described  pursuant to the
requirements  of Item 6(e) of Schedule 14A of Regulation 14A  promulgated  under
the Exchange Act.



<PAGE>


     3. Termination  Following Change in Control. If any of the events described
in Section 2 hereof  constituting  a change in control of the Company shall have
occurred,  you shall be  entitled to the  benefits  provided in Section 4 hereof
upon the  subsequent  voluntary or involuntary  termination of your  employment,
whether by you or by the Company,  if such termination  occurs within the period
beginning  on the date that the change of control is  completed  (the "Change of
Control  Date") and ending on the  second  anniversary  of the Change of Control
Date (the "Trigger Period") unless such termination is (i) because of your death
or Retirement,  (ii) by the Company for Cause or (iii) by the Company or you for
Disability  (such  termination  within  such  period,  as limited by clauses (i)
through (iii), being sometimes referred to hereinafter as a "Payment  Trigger").
In the event your employment is terminated within the Trigger Period, whether by
you or the Company,  following the  occurrence of any of the events set forth at
paragraph (c) below,  such  termination of your employment shall be deemed to be
an involuntary  termination of your  employment by the Company and shall entitle
you to the benefits provided in Section 4 hereof.

        (a)    Disability; Retirement.

               (i) "Disability"  shall mean a disability which entitles you to a
          disability  benefit under a disability program sponsored or maintained
          by the Company;  provided,  that if no such program is  applicable  to
          you,  then  "Disability"  shall mean that,  based on medical  evidence
          reasonably  satisfactory to the  Compensation  Committee of the Board,
          you are totally and permanently  unable to engage in any occupation or
          gainful  employment for which you are reasonably suited by background,
          training, education or experience.

               (ii)  Termination by the Company or you of your employment  based
          on  "Retirement"   shall  mean  termination  in  accordance  with  the
          Company's  retirement  policy,  including early retirement,  generally
          applicable to its salaried employees.

        (b)    Cause.  Termination by the Company of your employment for "Cause"
shall mean  termination  based upon on any of the following:

               (i)   dishonesty  or  fraud  by  you  in  connection   with  your
          employment;

               (ii)  appropriation  (or  attempted  appropriation)  by  you of a
          material business opportunity of the Company,  including attempting to
          secure  or  securing  any  personal  profit  in  connection  with  any
          transaction entered into on behalf of the Company;

               (iii) misappropriation by you (or attempted  misappropriation) of
          any of the Company's funds or property;

               (iv) your  conviction  of, or indictment  for (or its  procedural
          equivalent)  or entering  of a guilty plea or plea of no contest  with
          respect to, a felony or any other  criminal  offense  involving  moral
          turpitude (other than traffic offenses); or



<PAGE>


               (v) willful  misconduct by you in the  performance of your duties
          with the  Company,  as  determined  by the good faith  judgment of the
          Compensation Committee of the Board.

For purposes of this paragraph, no act, or failure to act, on your part shall be
considered  "willful"  unless  done,  or omitted to be done,  by you not in good
faith and without any reasonable  belief that your action or omission was in the
best interest of the Company.  Notwithstanding  the foregoing,  you shall not be
deemed to have been  terminated for Cause unless and until there shall have been
delivered to you a copy of a Notice of  Termination  (as defined below) from the
Chief  Executive  Officer of the Company or the  Compensation  Committee  of the
Board,  after reasonable notice to you and an opportunity for you, together with
your counsel, to be heard before the Compensation Committee of the Board (or, if
there be no such committee or such committee delivers the Notice of Termination,
the  Board  of  Directors),  finding  that in the  good  faith  opinion  of such
committee  (or the Board) you were  guilty of conduct set forth above in clauses
(i),  (ii),  (iii),  (iv) or (v) of the first  sentence  of this  paragraph  and
specifying the particulars thereof in detail.

        (c)    Constructive Termination. Your employment will be deemed  to have
been  involuntarily  terminated  by the  Company  upon the  termination  of your
employment, whether by you or by the Company, following the occurrence of any of
the following without your prior written consent (any such event being sometimes
referred to hereinafter as your "Constructive Termination"):

               (i)  subsequent  to a  change  in  control  of the  Company,  any
          reduction in your title,  duties,  responsibilities  or authority with
          the  Company  immediately  prior to the change in  control,  except in
          connection   with  the  termination  of  your  employment  for  Cause,
          Disability,  Retirement or as a result of your death or voluntarily by
          you; or

               (ii)  subsequent  to a  change  in  control  of  the  Company,  a
          reduction by the Company in your base salary as in effect  immediately
          prior to the change in control; or



<PAGE>


               (iii) subsequent to a change in control of the Company, a failure
          by the Company to continue any bonus plans in which you are  presently
          entitled to  participate as the same may be modified from time to time
          prior to (but not in  anticipation  of) such change in control,  or as
          the same may be  modified  following  such change in control as may be
          required  by or  desirable  for the  Company due to changes to (x) the
          Internal Revenue Code of 1986, as amended (the "Code"), (y) applicable
          accounting  rules or principles or (z) applicable laws or regulations,
          including,  without  limitation,  the Employee  Retirement  Income and
          Security Act of 1974, as amended,  (the "Bonus Plans") or a failure by
          the Company to continue you as a participant  in the Bonus Plans on at
          least the same basis as you are  participating  in accordance with the
          Bonus Plans immediately prior to the change in control; or

               (iv)  subsequent  to a change  in  control  of the  Company,  the
          failure  by  the   Company  to  continue  in  effect  any  benefit  or
          compensation  plan, life insurance plan,  health-and-accident  plan or
          disability plan in which you are  participating  immediately  prior to
          the change in  control of the  Company  (or plans  providing  you with
          substantially  similar  benefits),  the  taking  of any  action by the
          Company which would materially  adversely affect your participation in
          or materially  reduce your benefits under any of such plans or deprive
          you of any material fringe benefit enjoyed by you immediately prior to
          the change in  control,  or the  failure by the Company to provide you
          with the number of paid  vacation  days to which you are then entitled
          in accordance  with the  Company's  normal  vacation  policy in effect
          immediately prior to the change in control; or

               (v) subsequent to a change in control of the Company, the failure
          by the Company to obtain the assumption of or the agreement to perform
          this Agreement by any successor as  contemplated  in Section 7 hereof;
          or

               (vi)  subsequent to a change in control of the Company,  a change
          in the location of your employment  greater than fifty (50) miles from
          your office location immediately prior to the change in control; or

               (vii)  subsequent  to a change in  control  of the  Company,  any
          purported  termination  of  your  employment  which  is  not  effected
          pursuant to a Notice of  Termination  satisfying the  requirements  of
          paragraph (d) below (and, if applicable, paragraph (b) above); or



<PAGE>


               (viii)  subsequent to a change in control of the Company,  (A) at
          the  direction  or with the  concurrence  of  members  of the Board or
          management of the Company who became such members following the change
          in control, a material business strategic plan,  direction,  policy or
          program of the Company is altered in a material manner  (hereinafter a
          "Policy  Change"),  and  (B) if the  individual  who  was  serving  as
          President  and Chief  Executive  Officer of the Company at the time of
          the change in control is  continuing to serve in such  capacity,  said
          officer  disagrees  with  such  Policy  Change  in  a  written  notice
          delivered to the Board within  thirty (30) days of his becoming  aware
          of such Policy  Change,  and (C) you  disagree in good faith with such
          Policy  Change and believe in good faith that such Policy  Change will
          have a  material  adverse  effect  on the  Company  and so  state in a
          written notice  delivered to the Board within  forty-five (45) days of
          your becoming  aware (or  forty-five  (45) days after you,  exercising
          reasonable diligence, should have become aware) of such Policy Change,
          and (D) the Policy  Change is not reversed  within thirty (30) days of
          the date on which your  written  notice is received by the Board,  and
          (E) you terminate your employment with the Company as a result of such
          disagreement.

        (d)    Notice of Termination. Any purported termination by the   Company
pursuant to your Disability or Retirement, as defined in paragraph (a) above, or
for Cause,  as defined  in  paragraph  (b)  above,  or by you  pursuant  to your
Disability  or  Retirement,  as defined in paragraph  (a) above or by you or the
Company based on an event of Constructive  Termination,  as defined in paragraph
(c) above,  shall be  communicated by written Notice of Termination to the other
party hereto.  For purposes of this Agreement,  a "Notice of Termination"  shall
mean a notice which shall  indicate the specific  termination  provision in this
Agreement  relied  upon and shall set forth in  reasonable  detail the facts and
circumstances  claimed to  provide a basis for  termination  of your  employment
under the provision so indicated.

        (e)    Date of Termination. "Date of Termination" shall mean (A  if your
employment  is  terminated  for  Disability,  thirty  (30) days after  Notice of
Termination  is  given  (provided  that  you  shall  not  have  returned  to the
performance  of your  duties on a  full-time  basis  during such thirty (30) day
period), (B) if you employment is terminated due to your death, the date of your
death, (C) if your employment is terminated pursuant to paragraph (b) above, the
date  specified  in the  Notice  of  Termination,  (D)  if  your  employment  is
terminated for Retirement, the date specified in the Notice of Termination,  and
(E) if your  employment is terminated for any other reason,  the date on which a
Notice of Termination  is given;  provided that if within thirty (30) days after
any  Notice  of  Termination  is  given  the  party  receiving  such  Notice  of
Termination  notifies  the other  party  that a dispute  exists  concerning  the
termination,  the Date of Termination  shall be the date on which the dispute is
finally  determined,  either by mutual written agreement of the parties, or by a
final judgment,  order or decree of a court of competent  jurisdiction (the time
for appeal  therefrom  having  expired  and no appeal  having  been  perfected);
provided  further,  however,  that if such  disputed  termination  constitutes a
Payment  Trigger,  the Trigger  Period shall not run pending  resolution  of the
dispute  but  shall  recommence  upon  the  date  that the  dispute  is  finally
determined (as set forth in the preceding proviso).

     4. Certain Benefits Upon Termination. (a) If, after a change in control  of
the Company shall have occurred,  as defined in Section 2 above, your employment
with the Company  shall be  terminated  (including a  Constructive  Termination)
within  the  Trigger  Period  by  the  Company  or you  other  than  for  Cause,
Disability,  Retirement or death, and other than by your voluntarily terminating
your  employment  with the  Company,  then you shall be entitled to the benefits
provided below:



<PAGE>


          (i) the Company shall pay to you within thirty (30) days following the
     Date of  Termination  in a lump sum cash  payment  your  full  base  salary
     through the Date of Termination at the rate in effect at the time Notice of
     Termination is given plus (A) credit for any vacation earned but not taken,
     (B) the amount,  if any, of any bonus for a past fiscal year which has been
     earned but not yet been paid to you,  (C) the amount,  if any, of any bonus
     for the current year to be paid as a percentage of Company or business unit
     profit based on the Company's or business  unit's results  through the most
     recent fiscal quarter as of the Date of Termination without pro-ration, and
     (D) a pro-rated payment,  based on the Company's or business unit's results
     as of the Date of Termination, of any other bonus due under any other Bonus
     Plans;

          (ii)  in lieu  of any  further  salary  payments  to you  for  periods
     subsequent to the Date of  Termination,  the Company shall pay as severance
     pay to you within thirty (30) days following the Date of Termination a lump
     sum cash  amount  equal to two (2) times the sum of (A) the  amount of your
     annual  base salary at the  highest  rate in effect  during the twelve (12)
     months immediately  preceding the Date of Termination,  and (B) the average
     annual  bonus  received  by  you  with  respect  to  the  three  (3)  years
     immediately  preceding  the Date of  Termination,  or  during  your term of
     employment,  if you have been employed less than three years at the Date of
     Termination; and

          (iii) the Company  shall  maintain in full force and effect,  for your
     continued  benefit until the earlier of (A) two (2) years after the Date of
     Termination  or (B) you obtain  substantially  the same coverage from a new
     employer, all life insurance,  medical, health and accident, and disability
     plans,  programs or  arrangements in which you were entitled to participate
     immediately prior to the Date of Termination,  provided that your continued
     participation  is possible  under the general terms and  provisions of such
     plans and programs.  In the event that your  participation in any such plan
     or program is barred,  the Company shall use reasonable  efforts to arrange
     to provide you with benefits  substantially  similar to those which you are
     entitled to receive under such plans and programs.

        (b)    If, after a change in control of the Company shall have occurred,
as defined in Section 2 above, you shall  voluntarily  terminate your employment
with the Company within the Trigger Period other than for Disability, Retirement
or death or in connection  with an event of Constructive  Termination,  then you
shall be entitled to the benefits set forth below:

          (i) the Company shall pay to you within thirty (30) days following the
     Date of  Termination  in a lump sum cash  payment  your  full  base  salary
     through the Date of Termination at the rate in effect at the time Notice of
     Termination is given plus (A) credit for any vacation earned but not taken,
     (B) the amount,  if any, of any bonus for a past fiscal year which has been
     earned but not yet been paid to you,  (C) the amount,  if any, of any bonus
     for the current year to be paid as a percentage of Company or business unit
     profit based on the Company's or business  unit's results  through the most
     recent fiscal quarter as of the Date of Termination without pro-ration, and
     (D) a pro-rated payment,  based on the Company's or business unit's results
     as of the Date of Termination, of any other bonus due under any other Bonus
     Plans;




<PAGE>


          (ii)  in lieu  of any  further  salary  payments  to you  for  periods
     subsequent to the Date of  Termination,  the Company shall pay as severance
     pay to you within thirty (30) days following the Date of Termination a lump
     sum cash  amount  equal to the sum of (A) the  amount of your  annual  base
     salary  at the  highest  rate in  effect  during  the  twelve  (12)  months
     immediately  preceding the Date of Termination,  and (B) the average annual
     bonus  received  by you with  respect  to the three  (3) years  immediately
     preceding the Date of  Termination,  or during your term of employment,  if
     you have been  employed  less than three years at the Date of  Termination;
     and

          (iii) the Company  shall  maintain in full force and effect,  for your
     continued  benefit  until the earlier of (A) the first  anniversary  of the
     Date of Termination or (B) you obtain  substantially the same coverage from
     a new employer,  all life  insurance,  medical,  health and  accident,  and
     disability  plans,  programs or  arrangements in which you were entitled to
     participate  immediately  prior to the Date of  Termination,  provided that
     your  continued  participation  is  possible  under the  general  terms and
     provisions of such plans and programs. In the event that your participation
     in any such plan or program is barred,  the  Company  shall use  reasonable
     efforts to arrange to provide you with  benefits  substantially  similar to
     those which you are entitled to receive under such plans and programs.

        (c)    You shall not be required to mitigate the amount of any   payment
provided for in this Section 4 by seeking other  employment  or  otherwise,  nor
shall the amount of any payment provided for in this Section 4 be reduced by any
compensation earned by you as the result of employment by another employer after
the Date of  Termination,  or  otherwise.  In the  event  that  you  voluntarily
terminate  your   employment   with  the  Company  and  are  paid  the  benefits
contemplated by paragraph (b) of this Section 4 and, at any time within five (5)
years  following the receipt of such payment,  you are reemployed by the Company
or any subsidiary  thereof in a position  where your duties or  responsibilities
with the Company or such subsidiary are commensurate with those of your position
with  the  Company  immediately  prior  to  the  original  termination  of  your
employment  which  gave rise to the  Company's  payment of  benefits  under this
Section 4, you shall, on the date of such reemployment, be obligated to repay to
the Company, in cash, an amount equal to the benefit paid to you under paragraph
(b) of this  Section 4, plus any amounts  paid to you under  Section 5 hereof in
connection  with the payments to you pursuant to paragraph (b) of this Section 4
(and not previously repaid by you pursuant to the terms of Section 5).

     5. Tax Gross-Up.



<PAGE>


        (a)    If you  become  entitled  to  any  payments  or  benefits whether
pursuant  to the terms of this  Agreement  or any  other  plan,  arrangement  or
agreement  with the  Company,  any person  whose  actions  result in a change in
control or any  person  affiliated  with the  Company  or such  persons  (in the
aggregate, "Payments" or singularly, "Payment") which are subject to taxes under
Section  4999 (or any  successor  provision  thereto)  of the Code (the  "Excise
Tax"), the Company shall pay to you an additional  amount  ("Gross-Up  Payment")
such that the net amount  retained by you, after deduction of (A) any Excise Tax
on Payments, (B) any federal, state and local income tax and Excise Tax upon the
payment provided for by this Section, and (C) any interest and penalties imposed
because the Excise Tax is not paid during the period  beginning with the earlier
of the date (i) the IRS issues a notice  stating  that an Excise Tax is due with
respect to a Payment,  (ii) you deliver to the Company an opinion of tax counsel
selected by you and  reasonably  acceptable to the Company that all or a portion
of the  Payment is subject to the  Excise Tax and  setting  forth the  estimated
amount of the Excise Tax on the Payment,  and (iii) the Company  delivers to you
an opinion of tax counsel  selected by the Company and reasonably  acceptable to
you that all or a portion  of the  payment  is  subject  to the  Excise  Tax and
setting forth the estimated amount of the Excise Tax on the Payment (the "Excise
Tax  Imposition  Date") and ending ten (10) days after the Excise Tax Imposition
Date,  shall be equal  to the full  amount  of the  Payments.  For  purposes  of
determining  the  amount  of the  Gross-Up  Payment,  you shall be deemed to pay
federal income taxes at the highest  marginal rate of federal income taxation in
the  calendar  year in which the  Gross-Up  Payment  is to be made and state and
local  income taxes at the highest  marginal  rates of taxation in the state and
locality of your  residence on the date the Gross-Up  Payment is to be made, net
of the maximum  reduction in federal  income taxes which could be obtained  from
deduction of such state and local taxes.

        (b)    The Gross-Up Payment for any Payment made shall be paid to    you
within ten (10) days after the Excise Tax  Imposition  Date,  unless the Company
undertakes to indemnify you as provided in Section 5 (c).

        (c)    In  lieu  of  paying the Gross-Up  Payment  for any  Payment, the
Company may elect to undertake,  at its sole expense, the defense and settlement
of  any  assessment  by  the  IRS of the  Excise  Tax  on  any  Payment.  In the
alternative,  the  Company  may elect to pay the  Gross-Up  Payment  and seek to
recover  the Excise  Tax by  pursuing  a claim for a refund.  If the  Company so
elects to undertake the defense or  settlement  of any  assessment by the IRS of
the Excise Tax on any Payment or the  recovery of the Excise Tax through a claim
for refund,  the Company shall protect,  defend,  indemnify and hold you forever
harmless  from and against the Excise Tax on such Payment and payments  pursuant
to this  Section 5(c) and any  federal,  state and local income tax  (determined
pursuant to the last sentence of Section  5(a)) upon  payments  pursuant to this
Section 5(c) and any and all liabilities,  demands,  claims,  actions, causes of
action,  assessments,  losses, costs, damages or expenses,  including attorneys'
and  accountants'  fees in  connection  with any  thereof,  and any interest and
penalties  sustained by you as a result of or arising out of or by virtue of the
Company's  undertaking.  You shall  cooperate  with the  Company  as  reasonably
requested by the Company in the conduct of such  defense,  settlement  or refund
claim.



<PAGE>


         (d)   If the Excise Tax is determined to be less than the amount  taken
into account in determining the Gross-Up  Payment paid pursuant to Section 5(a),
you shall  repay to the  Company  within  ten (10) days  after the time that the
amount of such reduction in Excise Tax is finally  determined the portion of the
Gross-Up  Payment  attributable to such reduction plus interest on the amount of
such  repayment at the rate  provided in Section  1274(b)(2)(B)  of the Code for
debt instruments with a maturity after issuance equal to the period beginning on
the date the  Gross-Up  Payment  was made and  ending  on the date of  repayment
required by this  sentence,  or in the case of a refund,  plus  interest paid on
such  refund.  If the Excise Tax is  determined  to exceed the amount taken into
account in determining  the Gross-Up  Payment paid pursuant to Section 5(a) (the
"Excise Tax Deficit"),  the Company within ten (10) days after the time that the
amount of the Excise Tax Deficit is finally  determined shall make an additional
payment to you in an amount  equal to (i) the Excise Tax  Deficit,  plus (ii) an
amount equal to any interest  and  penalties  payable to the IRS with respect to
the Excise Tax Deficit,  plus (iii) any federal,  state and local income tax and
Excise Tax  (determined  pursuant  to the last  sentence  of Section  5(a)) upon
payments made pursuant to this sentence.

     6. Term of Agreement.  This Agreement  shall become  effective on the  date
hereof  and,  subject  to the first  sentence  of the second  paragraph  of this
Section 6, shall continue in effect until the earliest of the following:

          (i) a Date of  Termination  in  accordance  with Section 3(e) or other
     termination of your  employment  with the Company shall have occurred prior
     to a change in control of the Company; or

          (ii) if a Payment  Trigger shall have occurred during the term of this
     Agreement,  the performance by the Company of all its obligations,  and the
     satisfaction by the Company of all its obligations and  liabilities,  under
     this Agreement;

          (iii) the date that is the fifth (5th) anniversary of the date of this
     Agreement;  provided,  however,  that if a change in control of the Company
     occurs prior to such fifth (5th) anniversary,  the Company's  obligation to
     you under this Agreement due to such change in control shall not lapse upon
     the fifth (5th)  anniversary,  but shall continue  through the final day of
     the  Trigger  Period  that begins with such change in control if such final
     day of the Trigger Period is later than such fifth (5th) anniversary.

                  Any change in control of the Company during the term  of  this
Agreement that for any reason ceases to constitute a change in control or is not
followed by a Payment  Trigger shall not effect a  termination  or lapse of this
Agreement,  and, in such event,  this  Agreement  shall continue to apply to the
event of any subsequent  change in control of the Company occurring prior to the
end of the term of this  Agreement.  Any  transfer of your  employment  from the
Company  to a  subsidiary,  from  a  subsidiary  to the  Company,  or  from  one
subsidiary to another  subsidiary  shall not  constitute a  termination  of your
employment for purposes of this Agreement.





<PAGE>


     7. Successors; Binding Agreement.

        (a)    The  Company  will  require  any  successor  (whether  direct  or
indirect,   by  purchase,   merger,   consolidation  or  otherwise)  to  all  or
substantially all of the business and/or assets of the Company,  by agreement in
form and substance satisfactory to you, to expressly assume and agree to perform
this  Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place.  Failure of the
Company  to  obtain  such  agreement  prior  to the  effectiveness  of any  such
succession shall be a breach of this Agreement and shall, if such failure occurs
subsequent  to a  change  in  control  of the  Company,  constitute  an event of
Constructive  Termination  and entitle you to  compensation  from the Company in
accordance with Section 4 hereof,  except that for purposes of implementing  the
foregoing,  the date on which any such  succession  becomes  effective  shall be
deemed the Date of Termination. As used in this Agreement,  "Company" shall mean
the Company as  hereinbefore  defined and any  successor to its business  and/or
assets as aforesaid  which  executes and delivers the agreement  provided for in
this Section 7 or which otherwise  becomes bound by all the terms and provisions
of this Agreement by operation of law.

        (b)    This Agreement shall inure to the benefit of and be   enforceable
by  your   personal  or  legal   representatives,   executors,   administrators,
successors, heirs, distributees,  devisees and legatees. If you should die while
any amount would still be payable to you hereunder if you had continued to live,
all such amounts,  unless otherwise provided herein, shall be paid in accordance
with the terms of this Agreement to your devisee,  legatee or other designee or,
if there be no such designee, to your estate.

     8. Notice. For  the  purposes  of  this Agreement, notices  and  all  other
communications  provided for in this Agreement  shall be in writing and shall be
deemed to have been duly given when delivered  personally or mailed by certified
or registered mail, return receipt requested,  postage prepaid, addressed to the
respective  addresses  set forth on the first page of this  Agreement,  provided
that all  notices to the  Company  shall be  directed  to the  attention  of the
President of the Company with a copy to the Secretary of the Company, or to such
other  address  as either  party may have  furnished  to the other in writing in
accordance herewith,  except that notice of change of address shall be effective
only upon receipt.



<PAGE>


     9. Miscellaneous. No provisions of this Agreement may be modified,   waived
or  discharged  unless such  waiver,  modification  or discharge is agreed to in
writing  signed by you and such  officer  as may be  authorized  by the Board of
Directors  of the  Company.  No waiver by either party hereto at any time of any
breach by the other  party  hereto of, or  compliance  with,  any  condition  or
provision of this  Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreements or  representations,  oral or otherwise,
express or implied,  with respect to the subject matter hereof have been made by
either  party which are not  expressly  set forth in this  Agreement;  provided,
however, that this Agreement shall not supersede or in any way limit the rights,
duties or  obligations  you may have under any other written  agreement with the
Company.  The validity,  interpretation,  construction  and  performance of this
Agreement  shall be governed by the laws of the State of Alabama  without regard
to principles regarding conflicts of laws.

     10.Counterparts.  This   Agreement  may  be   executed  in  one  or    more
counterparts,  each of which shall be deemed to be an original  but all of which
together will constitute one and the same instrument.

     11.Enforcement;  Expenses. The   provisions  of  this  Agreement  shall  be
regarded as  divisible,  and if any of said  provisions  or any part thereof are
declared  invalid or  unenforceable  by a court of competent  jurisdiction,  the
validity and  enforceability of the remainder of such provisions or parts hereof
and the applicability  thereof shall not be affected thereby.  The Company shall
pay all fees,  costs and expenses  (including,  without  limitation,  reasonable
attorneys'  fees and the costs of  investigating  any potential  claim) (herein,
collectively,  "Costs")  incurred by you in connection  with any dispute arising
under or relating to this Agreement or any action(s) or proceeding(s) to enforce
your  rights  under  this  Agreement,  should  you  prevail  in such  action  or
proceeding,  and, in addition to paying your Costs, the Company shall pay to you
(i)  interest on such Costs and on the  aggregate  amount of the benefits due to
you under Section 4 above (said benefits being referred to in this Section 11 as
the "Termination Benefits") from your Date of Termination to the date such Costs
and  Termination  Benefits  are paid to you at an annual rate equal to the prime
lending rate charged by First  Commercial  Bank,  or the successor  thereto,  in
effect on the Date of Termination,  and (ii) liquidated and agreed  compensatory
damages  in an amount  equal to  twenty-five  percent  (25%) of the  Termination
Benefits.

     12.Jurisdiction; Service of Process. Any action  or proceeding seeking   to
enforce any provision  of, or based on any right arising out of, this  Agreement
may be brought  against  either party only in the courts of the state and county
in which you are employed by the Company and each of the parties consents to the
jurisdiction  of such courts (and of the  appropriate  appellate  courts) in any
such  action or  proceeding  and waives  any  objection  to venue laid  therein.
Process in any action or proceeding referred to in the preceding sentence may be
served on either party anywhere in the world.


<PAGE>



         If this letter correctly sets forth our agreement on the subject matter
hereof,  kindly sign and return to the Company the enclosed  copy of this letter
which will then constitute our agreement on this subject.

                                        CAVALIER HOMES, INC.


                                        /s/ DAVID A. ROBERSON
                                       -----------------------------------------
                                       Its President and Chief Executive Officer


AGREED TO THIS    26th    DAY OF     August    , 1998.
               ---------         --------------


/s/ GREG BROWN
-------------------------------
    Greg Brown