U. S. SECURITIES AND EXCHANGE COMMISSION
                               Washington, D. C. 20549
                                       FORM 10-K
(Mark One)
[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR l5(d) OF
         THE SECURITIES EXCHANGE ACT OF 1934
         For the fiscal year ended December 31, 1998
         OR
[        ] TRANSITION  REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 For the  transition  period from  ____________  to
         ____________

                           Commission file number 1-9792
                              CAVALIER HOMES, INC.
              (Exact name of Registrant as specified in Its Charter)

               Delaware                                   63-0949734
  (State or other jurisdiction of                        (I.R.S. Employer
   incorporation or organization)                      Identification Number)

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

    Registrant's telephone number, including area code: (256) 747-0044
       Securities registered pursuant to Section 12(b) of the Act:

                                               Name of
                                            Each Exchange
Title of Each class                     on Which Registered
----------------------------         ------------------------
Common Stock, par value $.10         New York Stock Exchange

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

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

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

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant,  computed by reference to the closing price of such stock on the New
York Stock Exchange as of March 22, 1999, was $152,298,431.

    Indicate   the  number of  shares  outstanding  of each of the  Registrant's
               classes of common stock, as of March 22, 1999.
                                 17,974,137

                           Common, $0.10 par value

                     Documents Incorporated by Reference
   Part III of this report  incorporates  by reference  certain  portions of the
   Registrant's  Proxy  Statement for its Annual Meeting of  Stockholders  to be
   held May 19, 1999.
                                       1
<PAGE>
              
                             CAVALIER HOMES, INC.
                         ANNUAL REPORT ON FORM 10-K
                    FOR THE YEAR ENDED DECEMBER 31, 1998

                                  PART I

ITEM 1.       BUSINESS

General
Cavalier  Homes,  Inc.  (the  "Company"),  incorporated  in 1984,  is a Delaware
corporation with its executive  offices located at Highway 41 North and Cavalier
Road, Addison, Alabama 35540. Effective December 31, 1997, the Company completed
a merger (the  "Merger") involving  Belmont Homes, Inc. ("Belmont"), pursuant to
which the Company  issued  7,555,121  shares of its common stock in exchange for
Belmont's  common  stock and Belmont  became a wholly  owned  subsidiary  of the
Company.   The  Merger  was  accounted  for  as  a  pooling  of  interests  and,
accordingly,  the Company's  financial  statements have been restated to include
the financial position,  results of operations and cash flows of Belmont for all
periods  presented.  The  information  herein is presented on a combined  basis.
Unless  otherwise  indicated  by the context,  references  in this report to the
"Company" or to "Cavalier" include the Company,  its subsidiaries,  divisions of
these subsidiaries and their respective predecessors, if any.

Cavalier is a vertically  integrated  manufactured housing company,  serving all
phases of the home  buying  transaction  from design and  manufacturing  to home
financing and insurance. The Company has chosen to build its distribution system
around  exclusive  independent  dealers,  which the  Company  believes  gives it
virtually the same  efficiencies and market presence that captive retail centers
provide to other  companies.  At December 31, 1998,  Cavalier had a total of 237
dealer locations  participating in its Exclusive Dealer Program,  including five
Company-owned  retail  locations.  In  addition,  the Company  markets its homes
through  approximately  1,000  non-exclusive independent  dealer locations in 30
states.

The Company  designs and  manufactures a wide range of high quality homes with a
focus on serving the low- to  medium-priced  manufactured  housing market in the
South Central and South  Atlantic  regions of the United  States.  The Company's
homes are sold under 68 brand names,  are normally  fully  furnished,  including
appliances,  and are  comprised of one or more floor  sections.  At December 31,
1998,  the Company  operated 23 home  manufacturing  facilities,  one plant that
manufactures  laminated  wall  board,  and a material  and  supply  distribution
location.  Cavalier also participates in joint ventures with other  manufactured
housing  companies for lumber  distribution  and the manufacture of roof trusses
and cabinet doors.

Through its financial services segment,  the Company purchases qualifying retail
installment  sales contracts for  manufactured  homes sold through its exclusive
dealer network and sells various  commissioned  insurance  products to exclusive
dealers and their retail customers.  During 1998, the business focus of Cavalier
Acceptance Corporation,  the Company's finance subsidiary ("CAC"),  changed from
building,  holding and servicing a portfolio of loans to  purchasing  loans from
its  dealers  that are  subsequently  resold to  another  financial  institution
without CAC retaining the servicing function.

In October 1998,  the Board of Directors  increased the Company's  cash dividend
amount 33% to an indicated annual rate of $0.16 per share.

Revenue,  operating profit,  identifiable assets and other financial data of the
Company's  industry  segments  for the three years ended  December  31, 1998 are
contained in Note 10 of Notes to Consolidated Financial Statements in Part II.

Home Manufacturing Operations
At December 31, 1998, the Company, through six wholly owned subsidiaries,  owned
or leased  twenty-three  manufacturing  facilities  engaged in the production of
manufactured  homes.  See "Item 2.  Properties".  The  management of each of the
Company's home manufacturing  units typically consists of a president or general
manager, a production manager, a general sales manager, a controller,  a service
manager,  a purchasing  manager and a quality control  manager.  These mid-level
management  personnel manage the Company's home  manufacturing  operations,  and
typically  participate  in an  incentive  compensation  system  based upon their
respective operation's profitability.

The Company has experienced  significant growth in manufacturing capacity during
the past  seven  years,  expanding  from four  manufactured  housing  production
facilities in 1992 to twenty-three  facilities at the end of 1998. The Company's
facilities  normally  operate on a  single-shift,  five-day  week basis with the
approximate annual capacity to produce 48,000 floors.

                                       2
<PAGE>



The  following  table sets forth certain sales  information  for 1998,  1997 and
1996:

<TABLE>
<CAPTION>

                                           For the Year Ended December 31,
                            ----------------------------------------------------------------------
<S>                         <C>                      <C>                       <C> 
                                   1998                      1997                      1996
                            -------------------      --------------------      -------------------
Number of homes sold:

   Single-section homes        12,430      51%          13,576       58%          16,738      65%
   Multi-section homes         11,957      49%          10,026       42%           8,914      35%
                            ----------  -------      ----------   -------      ----------  -------

      Total homes              24,387     100%          23,602      100%          25,652     100%
                            ==========  =======      ==========   =======      ==========  =======

Number of floors sold          36,517                   33,646                    34,581
                            ==========               ==========                ==========
</TABLE>


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

The principal raw materials purchased by the Company are steel, lumber, plywood,
sheetrock, aluminum, galvanized pipe, insulating materials,  electrical supplies
and plastics.  The Company purchases axles,  wheels,  tires, kitchen appliances,
laminated wallboard, roof trusses, plumbing fixtures,  furniture,  carpet, vinyl
floor  covering,  windows  and  decorator  accessories.  Currently,  the Company
maintains  approximately  two to three weeks'  inventory of raw  materials.  The
Company is not  dependent on any single  source of supply and believes  that the
materials and parts necessary for the construction and assembly of its homes are
generally  available  from other  sources.  However,  the  Company is  currently
experiencing  tightened supply from its traditional  vendors of certain types of
raw materials,  including sheetrock and insulation,  required for the production
of its  manufactured  homes.  The Company is attempting to obtain these products
from other  vendors and to  purchase  substitute  products,  which may result in
higher than normal costs. The possibility  exists that the Company may be unable
to recover these  additional  costs  through  price  increases or that these and
substitute  products may become scarce or unavailable.  The Company is uncertain
at this time as to the extent and duration of these  developments and as to what
effect these factors may have on the Company's future sales and earnings.*

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

Because the cost of transporting a manufactured home is significant,  there is a
limit to the distance  between a  manufacturing  facility and the dealers it can
service. The Company believes that the location of its manufacturing  facilities
in multiple states allows it to serve more dealers in more markets.  The Company
generally arranges,  at the dealer's expense, for the transportation of finished
homes to dealers  using  independent  trucking  companies.  One of the Company's
subsidiaries  employs  drivers  who own their own trucks to  deliver  its homes.
Dealers or other independent  installers are responsible for placing the home on
site, making utility  connections and providing and installing certain accessory
items and appurtenances, such as decks, carports and foundations.

Products
The Company's homes include both  single-section and multi-section  models, with
the  substantial  majority of such  products  being "HUD Code  Homes"  which are
manufactured  homes that meet the  specifications  of the National  Manufactured
Home  Construction  and Safety Act of 1974, as amended,  and administered by the
U.S. Department of Housing and Urban Development  ("HUD").  Single-section homes
are 14 to 16 feet wide,  vary in length from 40 to 84 feet and  contain  between
656 and 1,280 square feet. The multi-section models consist of two or more floor
sections that are joined at the home site, vary in length from 36 to 82 feet and
contain between 792 and 3,016 square feet.

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

--------
* See Safe Harbor Statement on page 53.

                                       3
<PAGE>

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

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

Independent Dealer Network, Sales and Marketing
As of December 31, 1998,  the Company had, under its Exclusive  Dealer  Program,
237  participating  dealer  locations  selling only the Company's  homes,  which
included five Company-owned retail locations.  In addition,  the Company markets
its homes through approximately 1,000 independent dealer locations in 30 states.

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

        For the Year Ended December 31,            1998     1997    1996
------------------------------------------------  ------   ------  ------

Number of exclusive dealers                         237      132      115

Percentage of manufactured home sales               40%      30%      27%

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

Approximately 89% of the Company's sales in 1998 were to dealers operating sales
centers in the  Company's  core states as follows:  Texas - 14%,  Alabama - 14%,
Georgia  - 10%,  North  Carolina  - 9%,  Arkansas  - 8%,  South  Carolina  - 8%,
Mississippi - 7%, Louisiana - 7%, Oklahoma - 5%, Tennessee - 4% and
Missouri - 3%. 

The Company has written agreements with most of its independent  dealers.  These
agreements  generally may be  terminated  at any time by either  party,  with or
without  cause,  after a short  notice  period.  The  Company  does not have any
control  over  the  operations  of,  or  financial  interests  in,  any  of  its
independent  dealers,  including any of its independent  exclusive dealers.  The
Company  is not  dependent  on any single  dealer,  and in 1998,  the  Company's
largest dealer accounted for approximately 3.2% of sales.

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

The industry has recently been  experiencing  a trend of increasing  competition
for independent dealers, and many manufacturers,  which had previously not owned
their own retail sales centers, have begun purchasing independent dealers and/or
establishing  their own retail  outlets.  While the focus will continue to be on
exclusive independent dealers, the Company has begun the process of diversifying
its channels of  distribution  with  Company-owned  retail  locations.  Cavalier
purchased its first three retail  locations in 1998,  and opened two other sites
during the year. The Company  intends to open and acquire other locations in the
future at a conservative  pace,  and also plans to offer a franchise  program in
1999.*

--------
* See Safe Harbor Statement on page 53.

                                       4
<PAGE>

Each of the  Company's  manufacturing  units  typically  employs a general sales
manager and its own respective  sales  representatives  who are compensated on a
commission  basis. The plant-level  sales  representatives  are charged with the
day-to-day  servicing  of  the  needs  of  the  Company's  independent  dealers,
including its exclusive  dealers.  The Company markets its homes through product
promotions, participation in regional manufactured housing shows, advertisements
in local media and trade  publications.  As of December  31,  1998,  the Company
maintained a sales force of 88 full-time salesmen and 11 full-time general sales
managers.

Retail Financing Activities

A significant  factor affecting sales of manufactured  homes is the availability
and terms of  financing.  CAC  purchases  qualifying  retail  installment  sales
contracts for  manufactured  homes sold through the Company's  exclusive  dealer
network.

CAC seeks to provide  competitive  financing terms to customers of the Company's
exclusive dealers. CAC currently offers various conventional loan programs which
require a down-payment  ranging from 0% to 15% of the purchase  price,  in cash,
trade-in value of a previously-owned manufactured home and/or appraised value of
equity in any real property  pledged as collateral.  Repayment  terms  generally
range  from 84 to 360  months,  depending  upon  the  type of  home  and  amount
financed,  the amount of the down payment and the  customer's  creditworthiness.
CAC's  loans  are  secured  by  a  purchase  money  security   interest  in  the
manufactured home and, in certain instances, a mortgage on real property pledged
as  additional  collateral.  As of December 31, 1998,  all of CAC's  outstanding
loans were  secured.  Loans  purchased by CAC  normally  provide a fixed rate of
interest with equal monthly  payments and are  non-recourse  to the dealer.  The
interest rates  applicable to CAC's loans as of such date generally  ranged from
8% to 13%, and the approximate  weighted average annual percentage interest rate
was 10.9%. Currently, CAC operates in most of the 23 states in which the
 Company has independent exclusive dealers.

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

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

The Company  maintains a reserve for estimated credit losses on installment sale
contracts  owned by CAC to provide  for  future  losses  based on the  Company's
historical  loss   experience,   current   economic   conditions  and  portfolio
performance. Amounts credited to the reserve were $1.0, $1.3 and $0.8 million in
1998,  1997 and 1996,  respectively.  Additionally,  as a result of defaults and
repossessions  the reserve was charged $1.6, $1.0 and $0.4 million in 1998, 1997
and 1996,  respectively.  The reserve for credit losses at December 31, 1998 was
$0.8 million as compared to $1.3 million at December 31, 1997,  and $0.9 million
at December 31, 1996.

In 1998, 1997 and 1996, CAC repossessed 77, 92 and 41 homes,  respectively.  The
Company's  inventory of repossessed  homes was 30 homes at December 31, 1998, as
compared to 50 homes at December 31, 1997, and 6 homes at December 31, 1996. The
Company's net losses  resulting from  repossessions  on CAC purchased loans as a
percentage of the average  principal amount of such loans outstanding for fiscal
1998, 1997 and 1996 was 5.95%,  2.24% and 1.40%,  respectively.

At  December  31, 1998 and  December  31,  1997,  delinquencies  expressed  as a
percentage of the total number of  installment  sale  contracts  which CAC owned
were as follows:

<TABLE>
<CAPTION>

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

          1998                  986               1.62%           0.41%         0.10%        2.13%

          1997                1,712               1.46%           0.93%         0.12%        2.51%

</TABLE>

At  December  31, 1998 and  December  31,  1997,  delinquencies  expressed  as a
percentage  of the total  outstanding  principal  balance  of  installment  sale
contracts which CAC owned were as follows:

<TABLE>
<CAPTION>

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

          1998            $ 26,117,000            1.89%           0.58%         0.19%        2.66%

          1997            $ 49,146,000            1.59%           0.95%         0.05%        2.59%

</TABLE>


                                       5
<PAGE>


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

Certain operating data relating to CAC are set forth in the following table:

<TABLE>
<CAPTION>

                                                              December 31,
                                            --------------------------------------------------
<S>                                         <C>               <C>               <C>    
                                                 1998              1997             1996
                                            ---------------   ---------------   --------------
Total loans receivable                      $   26,117,000    $   49,146,000    $  36,425,000
Allowance for credit losses                 $      760,000    $    1,272,000    $     941,000
Number of loans outstanding                            986             1,712            1,292
Number of delinquencies                                 21                43               16
Net loss ratio on average
   outstanding principal balance                     5.95%             2.24%            1.40%
Weighted average annual
   percentage rate                                   10.9%             10.9%            10.9%

</TABLE>


During  1998,  the  business  focus of CAC changed  from  building,  holding and
servicing a portfolio  of loans to  purchasing  loans from its dealers  that are
subsequently  resold to another financial  institution without CAC retaining the
servicing  function.  Although  the  level of  CAC's  future  activities  cannot
presently be determined,  the Company  expects to utilize  internally  generated
working  capital  and  amounts  generated  from sales of loans  under the retail
finance agreement  discussed in the following  paragraph to fund the purchase of
retail  installment  sale  contracts  on homes sold by the  Company's  exclusive
dealers and may use borrowings under the Company's revolving, warehouse and term
loan  agreement  with its  primary  lender  (described  below  under the heading
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Liquidity  and Capital  Resources")  to develop a portfolio of such
installment sale contracts.  * The Company believes that its relationships  with
its exclusive dealers will assist the development of this business strategy.*

Since its  inception,  CAC has been  restricted in the amounts of loans it could
purchase based on underwriting standards, as well as the availability of working
capital and funds  borrowed  under its credit line with its primary  lender.  In
February 1998,  CAC entered into an agreement with another lender  providing for
the periodic resale of a portion of CAC's loans that meet established  criteria.
In March 1998,  CAC sold,  under the retail  finance  agreement,  a  substantial
portion of its then existing  portfolio of loans. The effect of this transaction
on net  income  was to reduce  the amount of  financial  services  revenue  from
interest  income on this portion of the  portfolio,  offset by reduced  interest
expense on retired debt and earnings on the remaining proceeds.  Pursuant to the
retail  finance  agreement,  the Company may sell a  substantial  portion of its
existing  installment  loan  portfolio  in fiscal year 1999,  in addition to the
periodic  sale of  installment  contracts  purchased  by CAC in the future.  The
Company  believes the periodic sale of  installment  contracts  under the retail
finance  agreement  will  reduce  requirements  for  both  working  capital  and
borrowings,  increase the Company's liquidity,  reduce the Company's exposure to
interest rate fluctuations and enhance the ability of CAC to increase its volume
of loan purchases.  * There can be no assurance,  however, that additional sales
will be made under this  agreement,  or that CAC and the Company will be able to
realize the expected benefits from such agreement.

Retail Insurance Activities
Through its  wholly-owned  insurance  agencies,  the Company sells  commissioned
insurance  products  to retail  purchasers  of the  Company's  homes,  including
physical damage and extended home warranties.  The Company also sells commercial
lines of insurance products, including general liability and property insurance,
to the Company's exclusive dealers and others.

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

--------
* See Safe Harbor Statement on page 53.



                                       6
<PAGE>

The risk of loss under such repurchase  agreements is mitigated by the fact that
(i) sales of the Company's manufactured homes are spread over a relatively large
number of independent  dealers, the largest of which accounted for approximately
3.2% of sales in 1998,  (ii) the  repurchase  obligation  expires on  individual
homes after a reasonable  period of time (generally 12 to 18 months from invoice
date) and also declines  during such period based on  predetermined  amounts and
(iii) the  Company is in many cases able to sell homes  repurchased  from credit
sources in the ordinary course of business without incurring significant losses.
As of  December  31,  1998,  the  Company's  contingent  liability  under  these
repurchase and other similar  recourse  agreements was an amount estimated to be
approximately  $242 million.  The Company has provided an allowance for possible
repurchase  losses of $1.2  million  as of  December  3l,  1998,  based on prior
experience  and  current  market  conditions.  Management  currently  expects no
material loss in excess of the allowance. *

Quality Control, Warranties and Service
The  Company  believes  the quality in  materials  and  workmanship,  continuous
refinement in design and production procedures as well as price and other market
factors,  are important elements in the market acceptance of manufactured homes.
The Company  maintains a quality  control  inspection  program at all production
stages. The Company's manufacturing  facilities and the plans and specifications
of its  manufactured  homes have been  approved by a  HUD-designated  inspection
agency. An independent,  HUD-approved third-party inspector regularly checks the
Company's manufactured homes for compliance during construction.

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

The  Company   employs  a  full-time   service  manager  at  each  of  its  home
manufacturing   units  and  197   full-time   service   personnel   to   provide
administrative and on-site service and to correct  production  deficiencies that
are attributable to the manufacturing  process.  Warranty service  constitutes a
significant  cost to the  Company,  and  management  of the  Company  has placed
emphasis on diagnosing  potential  problem  areas to help minimize  costly field
repairs.  The Company  also has focused on  reducing  response  time to customer
service  requests.  At December 31, 1998, the Company had  established a reserve
for future warranty claims of $12.4 million  relating to homes sold,  based upon
management's  assessment of historical  experience  factors and current industry
trends.

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

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

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

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

--------
* See Safe Harbor Statement on page 53.



                                       7
<PAGE>

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

Certain  components of manufactured  and modular homes are subject to regulation
by the U.S. Consumer Product Safety Commission  ("CPSC"),  which is empowered to
ban the use of  component  materials  believed to be  hazardous to health and to
require  the  repair  of  defective  components.  The  CPSC,  the  Environmental
Protection Agency and other governmental  agencies are evaluating the effects of
formaldehyde.   Regulations  of  the  Federal  Trade   Commission  also  require
disclosure of a manufactured  home's  insulation  specifications.  Manufactured,
modular and site-built homes may be built with compressed  board,  wood paneling
and other products that contain  formaldehyde  resins.  Since February 1985, HUD
has regulated the allowable  concentration  of formaldehyde in certain  products
used in  manufactured  homes  and  required  manufacturers  to  warn  purchasers
concerning  formaldehyde  associated risks. The Company currently uses materials
in its  manufactured  homes that it believes meet HUD standards for formaldehyde
emissions and otherwise comply with HUD regulations in this regard.

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

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

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

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

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

--------
* See Safe Harbor Statement on page 53.



                                       8
<PAGE>

Employees
As of December 31,  1998,  the Company had 5,668  employees,  of whom 4,845 were
engaged in home manufacturing, 112 in sales, 208 in warranty and service, 379 in
general  administration,  39 in  delivery,  51 in retail  finance and  insurance
services and 34 in retail  locations.  At year end, only one home  manufacturing
operation's  employees (100 employees)  were covered by a collective  bargaining
agreement. Management considers its relations with its employees to be good.

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

Uncertainties in Integrating  Business  Operations and Achieving Benefits of the
Belmont  Merger
On   December  31,  1997,  a   wholly   owned  subsidiary  of  Cavalier   merged
with  and  into  Belmont  which  is  also  a producer of  manufactured  housing.
For a more  detailed  description  of Belmont and this  transaction,  you should
review  Cavalier's  Current Reports on Form 8-K dated August 20, 1997,  December
11, 1997 and January 15, 1998 (as amended by Form 8-K/A dated March 16, 1998 and
Form 8-K/A dated March 17, 1998), and Cavalier's  Registration Statement on Form
S-4 filed with the  Commission  on December 2, 1997 (Reg.  No.  333-41319).  The
acquisition  of Belmont will  require the  consolidation  of  functions  and the
integration  of  departments,   systems  and  procedures,   which  will  present
significant  management  challenges.  We cannot make any assurances that we will
successfully  accomplish these actions as rapidly as currently  expected,  if at
all.  Although our primary  purpose in taking such actions is to realize  direct
cost savings and other operating efficiencies,  synergies and benefits, Cavalier
cannot assure  stockholders of the extent to which or whether such cost savings,
efficiencies, synergies or benefits will be achieved.

Cyclical  and  Seasonal  Nature  of  the   Manufactured   Housing  Industry
The  manufactured  housing  industry is highly  cyclical  and  seasonal  and has
experienced wide  fluctuations in aggregate sales in the past,  resulting in the
failure of many manufacturing  concerns.  Many of the same national and regional
economic and demographic  factors that affect the broader housing  industry also
affect the market for manufactured homes. Historically, most sectors of the home
building  industry,  including  the  manufactured  housing  industry,  have been
affected by the following, among other things:

o        changes in general economic conditions;
o        inflation;
o        levels of consumer confidence;
o        employment and income levels;
o        housing demand;
o        availability of alternative forms of housing;
o        availability of financing; and
o        the level and stability of interest rates.



                                       9
<PAGE>

The  Manufactured  Housing  Institute  ("MHI")  reported that from 1983 to 1991,
aggregate  domestic  shipments of manufactured  homes declined 42%. According to
industry  statistics,  after a  ten-year  low in floor  shipments  in 1991,  the
industry  recovered  significantly.  Since 1992,  floor shipments have increased
each year, as set forth in the table to the right,  although the growth rate has
gradually slowed.  Industry floor shipments in 1998 improved over 1997, with the
MHI  reporting  floor  shipments  increased 8% in 1998 over 1997.  Over the past
several years, the manufactured housing industry has also experienced  increases
in both the  number of  retail  dealers  and  manufacturing  capacity,  which we
believe  is  currently  resulting  in  slower  retail  turnover,  higher  dealer
inventories and increased price competition.



--------------------------------------------------------------------------------
Percentage Increase in Floor Shipments
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
1992............................21%
1993............................22%
1994............................23%
1995............................12%
1996............................10%
1997.............................1%
1998.............................8%



                                       10
<PAGE>

Sales in the  manufactured  housing  industry are also seasonal in nature,  with
sales of homes  traditionally being stronger in April through October and weaker
during the first and last part of the calendar year.  While  seasonality did not
significantly  impact Cavalier's  business from 1992 through 1996, when industry
shipments  were  steadily  increasing,  the  recent  tightening  of  competitive
conditions may signal a return to the industry's traditional seasonal patterns.*

We cannot predict how long the recent tightening of competitive  conditions will
last,  or what the  extent of their  impact  will be on the  future  results  of
operations  and  financial  condition of Cavalier.  Furthermore,  because of the
cyclical and seasonal nature of the manufactured housing industry and the recent
increase in competitive  conditions,  Cavalier  cannot assure its investors that
the  manufactured  housing  industry  is not  entering  a change in its cycle or
returning  to  traditional  seasonal  patterns,  either  of which  could  have a
material  adverse  effect on  Cavalier's  results  of  operations  or  financial
condition.

Limitations on Ability to Pursue Growth Strategy
Cavalier's current growth strategies are to:
o        expand the financing and other activities of  CAC;
o        develop its exclusive dealer network;
o        develop the production and distribution of component parts for
         manufactured housing;
o        pursue additional acquisitions, and
o        to a lesser extent, acquire or open Cavalier-owned retail locations.

Since 1991, Cavalier has expanded  manufacturing  capacity to meet the increased
demand for its  manufactured  homes.  Downturns in shipments in the manufactured
housing  industry,  or a decline  in the  demand or in the  growth in demand for
Cavalier's  homes,  could have a material  adverse  effect on us. Our ability to
execute  our growth  strategy  depends  on a number of  factors,  including  the
following:

o        general economic and industry conditions;
o        competition from other companies in the same business as us;
o        our ability to  attract,  retain  or  sell  to  additional  independent
         dealers, especially, exclusive dealers;
o        the  availability  of  semi-skilled workers  in  the areas in which our
         manufacturing facilities are located;
o        the ability of CAC to be competitive;
o        the availability of capital and financing; and
o        the  ability  to find and  consummate  attractive  acquisitions  and to
         successfully  integrate the  operations of the acquired     businesses.

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

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

Our  strategy  currently  includes  the  continued  expansion  of the  financial
services segment of our business.  Accordingly, we may incur additional debt, or
other forms of financing,  in order to continue to fund such growth. We may also
engage in other  transactions,  such as selling or securitizing  portions of our
installment  loan portfolio,  that are designed to facilitate the ability of CAC
to purchase  and/or  originate  an  increased  volume of loans and to reduce our
exposure to interest rate fluctuations and installment loan losses. Cavalier has
entered  into  such a  transaction  pursuant  to the  Retail  Finance  Agreement
discussed above under "Retail Finance  Activities,"  and on March 13, 1998, sold
approximately $25 million of its loans. Additionally,  CAC has periodically sold
installment loan contracts throughout 1998 to another financial institution. The
Company may sell a substantial  portion of its existing  loan  portfolio in 1999
under this agreement in addition to the periodic sale of loans  purchased by CAC
in the future.  Cavalier  believes the periodic  sale of  installment  contracts
under the Retail  Finance  Agreement will reduce  requirements  for both working
capital  and  borrowings,   increase  Cavalier's  liquidity,  reduce  Cavalier's
exposure  to  interest  rate  fluctuations  and  enhance  the  ability of CAC to
increase its volume of loan purchases.  However, we cannot assure investors that
additional  sales  will  indeed be made  under  this  agreement  or that CAC and
Cavalier will be able to realize the expected  benefits from such agreement.  We
also cannot offer any  assurance  that  possible  additional  financing,  or the
aforementioned  transactions  involving our installment loan portfolio,  will be
available on terms acceptable to Cavalier.  If they are not, we may be forced to
curtail the expansion of our financial  services business and to alter our other
strategies.

--------
* See Safe Harbor Statement on page 53.



                                       11
<PAGE>

Limitations on Availability of Consumer and Dealer Financing
Third-party  lenders generally provide consumer  financing for manufactured home
purchases.  Our  sales  depend  in large  part on the  availability  and cost of
financing for  manufactured  home purchasers and dealers.  The  availability and
cost of such financing is further dependent on financial  institutions'  lending
practices,  the strength of the credit markets generally,  governmental policies
and other  conditions,  all of which are beyond our control.  In addition,  most
states classify  manufactured  homes for both legal and tax purposes as personal
property  rather than real estate.  As a result,  financing  for the purchase of
manufactured  homes is  characterized  by  shorter  loan  maturities  and higher
interest  rates,  and in certain  periods such  financing  is more  difficult to
obtain than  conventional home mortgages.  Unfavorable  changes in these factors
may have a  material  adverse  effect on  Cavalier's  results of  operations  or
financial condition.

Potential   Unavailability   and  Increases  in  Prices  of  Raw  Materials
The  availability  and pricing of certain raw  materials,  particularly  lumber,
sheetrock,  particle board and insulation may  significantly  affect  Cavalier's
operating  costs.  Sudden increases in demand for these  construction  materials
caused by natural  disasters  or other  market  forces can greatly  increase the
costs of materials or limit the  availability  of such  materials.  Increases in
costs cannot always be reflected  immediately in prices and,  consequently,  may
adversely  impact  Cavalier's   profitability.   Further,  a  reduction  in  the
availability  of raw  materials  also may affect our ability to meet or maintain
production  requirements.  Currently  Cavalier is experiencing  tightened supply
from its  traditional  vendors  of  certain  types of raw  materials,  including
sheetrock and insulation, required for the production of our manufactured homes.

Contingent Repurchase and Guaranty Obligations
Manufactured  housing  companies  customarily  enter into  repurchase  and other
recourse  agreements  with lending  institutions  which have provided  wholesale
floor plan financing to dealers.  Substantially all of Cavalier's sales are made
to dealers located  primarily in the South Central and South Atlantic regions of
the United States pursuant to repurchase  agreements with lending  institutions.
These  agreements  generally  provide that Cavalier will repurchase our products
from the lending institutions for the balance due them in the event such product
is  repossessed  upon a  dealer's  default.  The risk of loss  under  repurchase
agreements is lessened by the fact that (1) sales of our manufactured  homes are
spread over a relatively large number of independent dealers; (2) the price that
Cavalier is obligated to pay under such repurchase agreements generally declines
over the period of the agreement  and also declines  during such period based on
predetermined  amounts; and (3) in many cases,  Cavalier has been able to resell
homes  repurchased  from  lenders in the  ordinary  course of  business  without
incurring  significant losses.  While we have established a reserve for possible
repurchase  losses,  we cannot assure  investors that we will not incur material
losses in excess of these reserves in the future.

Intense Competition
The production and sale of manufactured homes is a highly competitive  industry,
characterized by low barriers to entry and severe price competition. Competition
is based primarily on the following factors:

o        price;
o        repair service;
o        product features and quality;
o        reputation for service and quality;
o        depth of field inventory;
o        delivery capabilities;
o        warranty repair service;
o        dealer promotions;
o        merchandising; and
o        terms of dealer and retail consumer financing.

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

Reliance on Executive Officers
Cavalier's success depends highly upon the personal efforts and abilities of its
current executive officers. Specifically,  Cavalier relies on the efforts of its
Chairman of the Board,  Barry B.  Donnell,  its  President  and Chief  Executive
Officer, David A. Roberson, and its Vice President,  Chief Financial Officer and
Secretary-Treasurer,  Michael R. Murphy. The loss of the services of one or more
of these individuals could have a material adverse effect upon our business.  We



                                       12
<PAGE>

do not have employment or  non-competition  agreements with any of our executive
officers. Our continued growth,  including the expansion of CAC's business, will
depend upon our ability to attract and retain additional  experienced management
personnel.

Dependence on Independent Dealers
Cavalier depends on independent  dealers for  substantially  all retail sales of
our  manufactured  homes.  Typically  only one dealer within a given market area
distributes  a  particular  product  line of ours.  Our  relationships  with our
dealers are cancelable on short notice by either party. The manufactured housing
industry has recently experienced a trend of increasing  competition for quality
independent  dealers.  Many manufacturers,  which had previously not owned their
own retail sales  centers,  have begun  purchasing  independent  dealers  and/or
establishing their own retail sales centers. While we believe that our relations
with our independent  dealers are generally good, we cannot assure our investors
that we will be able to  maintain  these  relations,  that  these  dealers  will
continue  to sell  our  homes,  or that we will be able to  attract  and  retain
quality independent dealers.

Potential Adverse Effects on Regulation
Cavalier  is  subject  to a  variety  of  federal,  state  and  local  laws  and
regulations  affecting  the  production,  sale  and  financing  of  manufactured
housing. The National Manufactured Home Construction and Safety Standards Act of
1974,  as  amended,  and  regulations  promulgated  under  such act by the U. S.
Department  of  Housing  and Urban  Development  ("HUD"),  impose  comprehensive
national  construction  standards for manufactured homes and preempt conflicting
state and local regulations.  Cavalier's failure to comply with such regulations
could expose us to a wide variety of  sanctions,  including  closing one or more
manufacturing  facilities.  HUD has  promulgated  regulations  with  respect  to
structural design and wind loads and energy conservation.  Cavalier's operations
were not materially affected by the regulations;  however, HUD has these matters
under  continuous  review and we cannot predict what effect (if any)  additional
regulations  promulgated  by HUD would  have on us or the  manufactured  housing
industry as a whole. In addition,  the U. S. Consumer Product Safety  Commission
regulates  certain  components of manufactured  homes.  Cavalier's  manufactured
homes are also  subject to local  zoning and  housing  regulations.  A number of
states  require  manufactured  home  producers  to  post  bonds  to  ensure  the
satisfaction  of  consumer  warranty  claims.  A number of states  have  adopted
procedures  governing the installation of manufactured homes, and both state and
local entities regulate utility  connections.  In addition,  federal,  state and
local authorities regulate the transportation of manufactured homes on highways.

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

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

Cavalier  cannot  assure its  investors  that failure to comply with any laws or
regulations applicable to or affecting Cavalier will not adversely affect us.

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

Litigation
We suggest that you read Item 3., Legal  Proceedings,  below, for description of
certain risk factors associated with litigation.

Volatility of Stock Price
The  Company's  common  stock is  traded on the NYSE.  The  market  price of the
Company's common stock may be subject to significant fluctuations in response to
variations in the Company's  operating  results and other factors  affecting the
Company specifically, the manufactured housing industry generally, and the stock
market generally.


                                       13
<PAGE>

ITEM 2.           PROPERTIES

The following table sets forth the location and  approximate  square footage for
each principal facility of the Company, separated by segment, as of December 31,
1998.

<TABLE>
<CAPTION>
                                                                  Approximate    Owned/
Location                           Use (Number of Facilities)    Square Footage  Leased
Manufacturing & Distribution
<S>  <C>                           <C>                                <C>       <C>

     Belmont Homes, Inc.
          Belmont Mississippi        Manufacturing facilities (3)     354,000     Owned
          Clarksdale, Mississippi    Manufacturing facility (1)        91,000     Owned
     Cavalier Homes of Alabama
          Addison, Alabama           Manufacturing facilities (4)     545,000     Owned   (a)
     Buccaneer Homes
          Hamiliton, Alabama         Manufacturing facility (1)       195,000     Owned
          Winfield, Alabama          Manufacturing facilities (2)     205,000     Leased
     Town & Country Homes
          Fort Worth, Texas          Manufacturing facility (1)       101,000     Owned
          Mineral Wells, Texas       Manufacturing facility (1)        81,000     Leased
          Graham, Texas              Manufacturing facility (1)       103,000     Leased
     Spirit Homes, Inc.
          Conway, Arkansas           Manufacturing facilities (2)     220,000     Owned
          Bigelow, Arkansas          Manufacturing facility (1)        80,000     Owned
     Bellcrest Homes, Inc.
          Millen, Georgia            Manufacturing facilities (2)     164,000     Owned
          Adrian, Georgia            Manufacturing facility (1)        90,000     Owned
     Brigadier Homes of North Carolina
          Nashville, North Carolina  Manufacturing facility (1)       130,000     Owned
     Homestead Homes
          Cordele, Georgia           Manufacturing facility (1)       110,000     Owned
     Mansion Homes
          Robbins, North Carolina    Manufacturing facility (1)        99,000     Leased
     Riverchase Homes
          Haleyville, Alabama        Manufacturing facility (1)        78,000     Owned
     Astro Homes
          Shippenville, Pennsylvania Manufacturing facility (1)       120,000     Owned
     Quality Housing Supply, LLC
          Hamiliton, Alabama         Manufacturing facility (1)        50,000     Leased
          Winfield, Alabama          Distribution facility (1)         48,000     Leased
     BRC Components, Inc.
          Phil Campbell, Alabama     Distribution facility (1)         50,000     Leased

Financial Services
          Hamilton, Alabama          Administrative Office              7,000     Owned
          Haleyville, Alabama        Administrative Office              1,000     Leased
          Greensboro, North Carolina Administrative Office              2,000     Leased

General Corporate & Other
          Addison, Alabama           Administrative Office              8,000     Owned
          Wichita Falls, Texas       Administrative Office              1,000     Leased
          Haleyville, Alabama        Administrative Office              4,000     Leased

(a)  During the first quarter of 1999, the Company purchased two of these
     manufacturing facilities which were previously leased.
</TABLE>

In general, the manufacturing  facilities are in good condition and are operated
at capacities which range from  approximately 52% to 90%, excluding the facility
in Adrian,  Georgia which began  production in March 1999, and the idle facility
in Bigelow, Arkansas.

ITEM 3.           LEGAL PROCEEDINGS

The Company and its subsidiaries  are engaged in various legal  proceedings that
are incidental to and arise in the course of its business.  Certain of the cases
filed  against  the  Company  and its  subsidiaries  and  companies  engaged  in
businesses  similar to it allege,  among other  things,  breach of contract  and
warranty,  product  liability,  personal  injury and  fraudulent,  deceptive  or
collusive  practices in connection with their  businesses.  These kinds of suits
are typical of suits that have been filed in recent  years,  and they  sometimes
seek  certification  as  class  actions,  the  imposition  of large  amounts  of



                                       14
<PAGE>

compensatory and punitive damages and trials by jury. The outcome of many of the
cases in which the  Company is  involved  or may in the future  become  involved
cannot be predicted with any degree of reliability, and the potential exists for
unanticipated  material adverse judgments against the Company and its respective
subsidiaries.

In  addition,   Belmont  has  been  sued  by  three  former   shareholders  (the
"Plaintiffs") of Belmont Homes,  Inc., an Alabama  corporation  which originally
owned the initial Belmont manufacturing  facility ("BHIA"), in the Circuit Court
of Madison County,  Alabama (Case Number CV 97-2297) against BHIA, Belmont (as a
successor in interest of BHIA), certain other corporate entities  (collectively,
the "Other  Corporations"),  the Estate of Jerold Kennedy (the former  President
and Chief Executive  Officer of Belmont),  J. M. Page, and certain other unnamed
and unidentified individual officers,  employees,  agents and directors of BHIA,
Belmont  and the  Other  Corporations,  alleging  breach  of  fiduciary  duties,
misrepresentation,  deceit,  suppression  and civil  conspiracy.  The Plaintiffs
state  that they  owned a  majority  of the stock in BHIA and sold such stock in
February of 1989. In addition to certain other allegations, the Plaintiffs claim
that  Mr.  Kennedy,   along  with  others  who  allegedly  conspired  with  him,
misrepresented  and omitted certain facts to them regarding his attempts to hire
a production manager,  that Belmont later hired the production manager, and that
the  Plaintiffs  would not have sold their stock in BHIA in the absence of these
alleged  misrepresentations  and omissions.  In their complaint,  the Plaintiffs
request an  unspecified  amount of  compensatory  and  punitive  damages  and/or
equitable  relief,  including a  constructive  trust.  The Company is aware that
these same plaintiffs have also filed a separate claim against the Estate of Mr.
Kennedy in the probate court of Franklin  County,  Alabama (Case Number 97-051),
alleging essentially the same facts and seeking substantial compensatory damages
and  punitive  damages  and a  constructive  trust over the stock in the various
Belmont entities owned by Mr. Kennedy`s  estate.  In May 1998, the Circuit Court
of Madison  County,  Alabama,  upon motion of the  defendants,  transferred  the
Madison County action to the Circuit Court of Franklin County,  Alabama, and the
plaintiffs  subsequently  appealed  this  decision  to  transfer  to the Alabama
Supreme Court. The Company believes that the Plaintiffs'  claims against Belmont
are without merit and intends to vigorously  contest such claims. The outcome of
this  litigation and its effect on the Company  cannot  presently be determined,
however,  and the possibility exists for an adverse resolution of the litigation
which  could have a material  adverse  effect on the results of  operations  and
financial  condition  of the  Company in the  quarter and year in which any such
adverse resolution occurs.*

In September  1998,  the Company and certain of its  subsidiaries,  along with a
number  of other  manufactured  housing  producers,  the  Manufacturing  Housing
Institute,  and the Manufactured Housing Association for Regulatory Reform, were
named as  defendants  in a lawsuit  purporting  to be  brought  on behalf of all
Kentucky  residents who own manufactured  homes produced by the defendants.  The
complaint was filed in the  Commonwealth  of Kentucky  Pendleton  Circuit Court,
Case No.  98-CI-00143,  and  alleges  that the  defendants  engaged in  wrongful
conduct and fraudulent  misrepresentation and concealment, and that manufactured
housing units are unsafe  and/or  dangerous  for  residential  use because their
design  allegedly  makes them more  susceptible  to fire.  The  plaintiffs  seek
compensatory  and punitive  damages,  a  requirement  to retrofit  manufacturing
housing units with sprinkler systems,  and other equitable and legal relief. The
Plaintiffs  seek to bring the lawsuit as a class  action,  but the court has not
yet ruled as to whether class action status is proper.  The Company believes the
claims are without merit and intends to vigorously  defend the case. The outcome
of this litigation and its effect on the Company cannot presently be determined,
however,  and the possibility exists for an adverse resolution of the litigation
which  could have a material  adverse  effect on the results of  operations  and
financial condition of the Company. *


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

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

-------
* See Safe Harbor Statement on page 53.



                                       15
<PAGE>

                                     PART II

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

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


                                           Closing Sales Price
                                     ------------------------------
                                          High            Low       Dividends
                                     ---------------  ------------- -----------
Year ended December 31, 1998
     Fourth Quarter                   $   11  3/8      $   7  7/8    $   0.040
     Third Quarter                    $   13           $   9  1/16       0.030
     Second Quarter                   $   12  11/16    $   10  7/8       0.030
     First Quarter                    $   11  13/16    $    9  5/8       0.030

Year ended December 31, 1997
     Fourth Quarter                   $   10  7/8      $   9  1/4    $   0.018
     Third Quarter                    $   11  1/2      $   9  1/2        0.019
     Second Quarter                   $   11  7/8      $   9  3/8        0.019
     First Quarter                    $   12  1/4      $   9  3/4        0.018


As of March 22, 1999, the Company had  approximately  450 shareholders of record
and 5,900  beneficial  holders of its common stock,  based upon  information  in
securities position listings by registered clearing agencies upon request of the
Company's transfer agent.

The Company intends to continue to pay regular quarterly  dividends.  * However,
the payment of dividends on the  Company's  common  stock is  determined  by the
Board  of  Directors  of the  Company  in  light of  conditions  then  existing,
including  the  earnings  of the  Company and its  subsidiaries,  their  funding
requirements and financial conditions,  certain loan restrictions and applicable
laws and governmental regulations. The Company's present loan agreement contains
restrictive  covenants which,  among other things,  limit the aggregate dividend
payments and purchases of treasury  stock to 50% of the  Company's  consolidated
net income for the two most recent fiscal years.

--------
* See Safe Harbor Statement on page 53.

<PAGE>

ITEM 6.           SELECTED CONSOLIDATED FINANCIAL DATA

The following  table sets forth selected  consolidated  financial data regarding
the Company for the periods indicated. The statement of income data, the balance
sheet  data,  and other data of the  Company  for each of the five  years  ended
December 31, 1998, have been derived from the consolidated  financial statements
of the Company.  The Company's audited  financial  statements as of December 31,
1998 and 1997, and for each of the years in the three-year period ended December
31,  1998,  including  the notes  thereto and the  related  report of Deloitte &
Touche LLP,  independent  auditors,  are included  elsewhere in this report. The
selected  consolidated  financial  data should be read in  conjunction  with the
Consolidated  Financial  Statements  (including the Notes thereto) and the other
financial information contained elsewhere in this report, and with the Company's
consolidated  financial  statements  and  the  notes  thereto  appearing  in the
Company's previously filed Annual Reports on Form 10-K.

<TABLE>
<CAPTION>

                                                                Year Ended December 31,
                                         ----------------------------------------------------------------------
<S>                                      <C>            <C>           <C>            <C>            <C>    
                                             1998           1997          1996           1995           1994
                                         -----------    -----------   ------------   -----------    -----------
                                                        (in thousands, except per share amounts)
Statement of Income Data

Revenue:
     Home manufacturing net sales        $  598,116     $  553,730    $   572,997    $  420,519     $  312,268
     Financial services                       6,088          5,346          3,333         1,764            703
     Other                                    9,866          2,112            841           271              -
                                         -----------    -----------    -----------   -----------    -----------

     Total revenue                          614,070        561,188        577,171       422,554        312,971

Cost of sales                               496,708        464,222        482,204       354,811        265,943
Selling, general and administrative          87,611         72,526         54,120        39,035         28,109
Non-recurring merger and related
  costs                                           -          7,359              -             -              -
                                         -----------    -----------    -----------   -----------    -----------

Operating profit                             29,751         17,081         40,847        28,708         18,919
Life insurance proceeds                           -          1,500          1,750             -              -
Other income (expense) - net                  1,531           (242)         1,589            90           (612)
                                         -----------    -----------    -----------   -----------    -----------

Income before taxes                      $   31,282     $   18,339     $   44,186    $   28,798     $   18,307
                                         ===========    ===========    ===========   ===========    ===========

Net income                               $   18,655     $   10,247     $   27,479    $   17,630     $   11,458
                                         ===========    ===========    ===========   ===========    ===========

Basic net income per share1              $      .94     $      .52     $     1.42    $     1.06     $      .83
                                         ===========    ===========    ===========   ===========    ===========

Diluted net income per share1            $      .93     $      .51     $     1.39    $     1.03     $      .82
                                         ===========    ===========    ===========   ===========    ===========

Cash dividend per share1                 $      .13     $      .07     $      .06    $      .04     $      .02
                                         ===========    ===========    ===========   ===========    ===========
Weighted average number of shares
     outstanding1                            19,905         19,835         19,363        16,630         13,824
                                         ===========    ===========    ===========   ===========    ===========
Weighted average number of shares
     outstanding, assuming dilution1         20,144         20,028         19,799        17,057         14,036
                                         ===========    ===========    ===========   ===========    ===========

Other Data

Capital expenditures                     $   14,655     $   10,186     $   16,106    $   13,482     $    7,665
                                         ===========    ===========    ===========   ===========    ===========

                                                                             December 31,
                                         ----------------------------------------------------------------------
                                            1998           1997          1996           1995           1994
                                         -----------    -----------    -----------   -----------    -----------
Balance Sheet Data

Working capital                          $   41,707     $   28,484     $   24,746    $   22,157     $   18,095
Total assets                             $  235,952     $  211,554     $  196,387    $  132,694     $   86,859
Long-term debt                           $    3,650     $   15,808     $    6,227    $   11,233     $   13,057
Stockholders' equity                     $  144,911     $  133,551     $  122,652    $   75,119     $   41,767


</TABLE>


1 As adjusted for all stock splits.



                                       16
<PAGE>


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

Industry Outlook
The Company's business is cyclical and seasonal and is influenced by many of the
same  economic and  demographic  factors  which  affect the housing  market as a
whole.  The  manufactured  housing industry  experienced  significant  growth in
shipments  from 1992 through 1996.  Since 1992,  floor  shipments have increased
each year,  although the growth rate  gradually  slowed to 1% in 1997.  Industry
floor  shipments  in 1998  improved  over 1997,  with the  Manufactured  Housing
Institute  reporting  floor  shipments  increased  7.8% in 1998 over  1997.  The
Company attributes this growth to a reduction in alternative housing,  increased
availability of retail financing,  increased consumer  confidence and continuing
strength in the national economy. As a result, the manufactured housing industry
has, over the past several years, also experienced  increases in both the number
of retail  dealers  and  manufacturing  capacity.  The  Company  believes  these
increases  are  currently  resulting in slower  retail  turnover,  higher dealer
inventories and increased price competition. Multi-section shipments continue to
grow as a percentage  of overall  shipments  and  represented  61.3% of industry
shipments in 1998 versus 57.9% in 1997.  A  single-section  home is comprised of
one floor, while a multi-section home is comprised of two or more floors.

Results of Operations
The following table summarizes  certain  financial and operating data including,
as applicable, the percentage of total revenue:
<TABLE>

<CAPTION>


                                                             For the Year Ended December 31,

                                          ----------------------------------------------------------------------
(Dollars in thousands)                             1998                    1997                  1996
                                           ----------------------- ---------------------- ----------------------
<S>                                          <C>            <C>     <C>            <C>     <C>            <C>

Home manufacturing net sales                 $  598,116             $  553,730             $  572,997
Financial services                                6,088                  5,346                  3,333
Other                                             9,866                  2,112                    841
                                             ----------             ----------             ---------- 

     Total revenue                                $  614,070     100.0%  $  561,188     100.0%  $  577,171     100.0%
                                             ==========             ==========             ========== 

Total revenue                                $  614,070     100.0%  $  561,188     100.0%  $  577,171     100.0%
Cost of sales                                   496,708      80.9%     464,222      82.7%     482,204      83.5%
                                             ----------    -------  ----------    -------  ----------    -------

     Gross profit                            $  117,362      19.1%  $   96,966      17.3%  $   94,967      16.5%
                                             ==========    =======  ==========    =======  ==========    =======

Selling, general and administrative          $   87,611      14.3%  $   72,526      12.9%  $  54,120       9.4%
Non-recurring merger and related costs       $        -       0.0%  $    7,359       1.3%  $       -       0.0%
Operating profit                             $   29,751       4.8%  $   17,081       3.0%  $  40,847       7.1%
Other income                                 $    1,531       0.2%  $    1,258       0.2%  $   3,339       0.6%
Net income                                   $   18,655       3.0%  $   10,247       1.8%  $  27,479       4.8%

Installment loan purchases                   $   27,438             $   18,013             $  19,932
Capital expenditures                         $   14,655             $   10,186             $  16,106
Home shipments                                   24,387                 23,602                25,652
Floor shipments                                  36,517                 33,646                34,581
Independent exclusive dealer locations              232                    132                   115
Company-owned retail locations                        5                      -                     -
Home manufacturing facilities                        23                     22                    24
</TABLE>

1998 compared  to 1997
Revenue
Home   manufacturing  net   sales  for  1998  as   compared   to  1997 increased
by  9%,  or  $50  million,  to  a  record  $603  million,  before elimination of
intercompany transactions of $5 million, with home shipments increasing by 3.3%.
During 1998, 49% of the Company's homes sold were  multi-section  homes compared
to 42% for the previous year. As the sale of  multi-section  homes  continued to
increase,  the  number of floors  sold in 1998  increased  8.5% from  1997.  The
expansion  of  the  Company's  multi-section  product  base  is in  response  to
increasing  consumer demand for multi-section  homes. At year end, the exclusive
dealer  distribution  system  had  grown  to  237  exclusive  dealer  locations,
including  five  Company-owned  retail  locations.  Sales to  exclusive  dealers
represented  40% of  total  1998  sales  compared  to 30% in 1997.  The  Company
attributes  the  strong  growth  in  its  Exclusive  Dealer  Program  to  dealer
acceptance of the program's  benefits and the introduction of the program to the
Belmont  group of dealers.  Actual  shipments  of homes  during 1998 were 24,387
versus 23,602 in 1997.  The average  price of homes sold roseto  $24,700 in 1998
from $23,500 in 1997.  The increase in the average  selling  price was primarily
due to price increases  instituted by the Company  associated with rising prices
in raw materials and an increase in the shipment of multi-section homes.

Revenue from the financial  services  segment  increased $0.7 million in 1998 as
compared to 1997 primarily due to a gain on the sale of a significant portion of
Cavalier Acceptance Corporation's (CAC)loan portfolio in 1998 and the subsequent
periodic resale of loans. In 1998, the effect of the portfolio sale on financial
services  revenue was a reduction  in interest  income  earned of $1.4  million,



                                       17
<PAGE>


offset by the gain on sale of loans of $2 million.  During  1998,  the  business
focus of CAC changed from  building,  holding and servicing a portfolio of loans
to  purchasing  loans from its dealers that are  subsequently  resold to another
financial institution without CAC retaining the servicing function. During 1998,
CAC purchased contracts totaling $27 million as compared to $18 million in 1997.

Other revenue  consists mainly of revenue from wholesale  supply  businesses and
Company-owned  retail sales locations.  The supply businesses sell mainly to the
home  manufacturing  segment,  whereas the Company-owned  retail sales locations
purchase  mainly from the home  manufacturing  segment.  Revenue  from  external
customers  increased $8 million in 1998 over 1997 due  primarily to retail sales
of $7 million.

Gross Profit
Gross profit is derived by  deducting  cost of sales from total  revenue.  Gross
profit was $117  million,  or 19.1%,  in 1998 versus $97 million,  or 17.3%,  in
1997. The Company  believes an increase in total revenue and cost savings due to
increased  purchasing  and other  efficiencies  after  the  Belmont  merger  are
responsible for a significant portion of this increase.  Currently,  the Company
is experiencing  tightened supply from its traditional  vendors of certain types
of  raw  materials,  including  sheetrock  and  insulation,   required  for  the
production of its manufactured  homes. The Company is attempting to obtain these
products  from other  vendors and to  purchase  substitute  products,  which may
result in higher than normal costs. The possibility  exists that the Company may
be unable to recover these  additional  costs  through  price  increases or that
these and substitute products may become scarce or unavailable.  *The Company is
uncertain at this time as to the extent and duration of these  developments  and
as to what effect  these  factors  may have on the  Company's  future  sales and
earnings.

Selling, General and Administrative
Selling,  general and administrative  expenses during 1998 were $88 million,  or
14.3% of total revenue,  compared to $73 million,  or 12.9% of total revenue, in
1997,  an increase of $15 million as compared to 1997.  Of this  increase,  $4.5
million  is  related  to  broadened  sales  and  marketing  efforts,   including
recruiting,  set-up and  maintenance of the exclusive  dealer  network,  and the
continued development of a retail infrastructure. Additionally, selling, general
and  administrative  expenses  increased  $1.4  million due to higher  costs for
employee benefits, primarily health insurance, $1 million for increased warranty
service  activities  and $0.7 million for the  start-up  costs  associated  with
implementing an enterprise-wide  management  information  system.  Other factors
contributing to the increase in selling, general and administrative expenses are
the costs  associated  with  retail  acquisitions,  opening an  additional  home
manufacturing facility and the expansion of the supply distribution business.

Operating Profit
Operating profit is derived by deducting cost of sales and selling,  general and
administrative  expenses  from total  revenue.  Operating  profit  improved  $13
million to $30  million in 1998 from $17  million  in 1997.  Home  manufacturing
operating  profit  improved  $2.5  million  due to an increase in sales and cost
savings  associated with increased  purchasing and other  efficiencies after the
Belmont merger. Financial services operating profit improved $0.2 million due to
a gain on the sale of a significant  portion of CAC's loan portfolio,  offset by
reduced  interest  income on the portion of the  portfolio  sold.  Additionally,
operating  profit  improved due to the absence of a $7.4  million  non-recurring
merger charge in 1997.

Other Income (Expense)
Interest expense decreased in 1998 from 1997 due to the March 1998 retirement of
the financial  services debt which was paid with the proceeds from the sale of a
portion of CAC's loan portfolio, as well as the payoff in September 1997 of debt
that had been used to support the 1996  Bellcrest  acquisition,  offset by floor
plan interest in 1998 incurred in connection with the Company-owned retail sales
locations.

Other,  net, is primarily  comprised of interest income  (unrelated to financial
services),  gains or losses on sales of assets,  equity  earnings in investments
accounted for on the equity basis of  accounting  and  applicable  allocation of
minority interest.  The increase of $1.1 million in 1998 as compared to 1997 was
primarily  due to increased  interest  income on earnings from the cash proceeds
from the sale of a portion of CAC's loan portfolio.

Net Income
Net income  improved $8.5 million to $18.7 million in 1998 from $10.2 million in
1997 due primarily to an increase in total revenue,  the cost savings associated
with increased  purchasing and other  efficiencies  after the Belmont merger and
the absence of the non-recurring merger charge of $6.5 million net of taxes.

--------
* See Safe Harbor Statement on page 53.



                                       18
<PAGE>


1997 compared to 1996
Revenue
Home  manufacturing  net sales for 1997 as compared to 1996  decreased by 3%, or
$19  million,   with  home  shipments   declining  by  8%.  However,   sales  of
multi-section homes increased during the year, resulting in only a 3% decline in
the number of floors  sold.  The Company  believes  the decline in net sales was
primarily  attributable  to increased  competition in the  manufactured  housing
industry  related  t  an  increase  in  manufacturing  capacity,  higher  dealer
inventories and slower retail  inventory  turnover.  Net sales for 1997 included
approximately  $51 million from  Bellcrest,  which was acquired in October 1996.
Shipments  of homes during 1997 were 23,602  compared to 25,652 in 1996.  During
1997,  the average price of homes sold rose to $23,500  versus  $22,300 in 1996.
The increase in the average  selling price was primarily due to price  increases
established  by the Company in response to rising prices in raw materials and an
increase in the shipment of multi-section  homes. During 1997, the percentage of
multi-section homes sold was 42%, up from 35% of total homes sold in 1996.

Revenue  from the  financial  services  segment  increased $2 million in 1997 as
compared  to 1996 due  primarily  to an increase  in the loan  portfolio  to $49
million at year-end 1997 from $36 million at the end of 1996.  During 1997,  CAC
purchased contracts totaling $18 million as compared to $20 million in 1996.

Other revenue  consists  primarily of revenue from wholesale  supply  businesses
which sell  mainly to the home  manufacturing  segment.  Revenue  from  external
customers  increased $1 million in 1997 over 1996 due  primarily to the start-up
of a new supply company in 1997.

Gross Profit
Gross profit is derived by  deducting  cost of sales from total  revenue.  Gross
profit was $97 million, or 17.3%, in 1997 versus $95 million, or 16.5%, in 1996.
Gross  profit  for  1997  was  negatively   impacted  by  a  reduction  in  home
manufacturing  net  sales  and $0.8  million  charged  to  warranty  expense  in
connection  with  conforming  Belmont's  contractual  warranty  arrangements  to
Cavalier's.

Selling, General and Administrative
Selling,  general and administrative  expenses during 1997 were $73 million,  or
12.9% of total revenue,  compared to $54 million,  or 9.4% of total revenue,  in
1996. During 1997,  selling,  general and administrative  expenses increased $19
million  as  compared  to 1996 due  primarily  to the  costs  related  to new or
expanded  manufacturing  facilities of $9.1 million,  a $1.9 million increase in
selling and administrative salaries and commissions,  a $1.1 million increase in
CAC's  administrative  costs  consistent with its growth and expenses related to
the Company's expanded marketing programs of $0.9 million, partially offset by a
reduction in executive incentive compensation of $1.5 million. Additionally, the
Company charged to selling,  general and administrative  expense $0.3 million in
connection with conforming Belmont's contractual repurchase  arrangements to its
own.

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

Operating Profit
Operating  profit is derived by deducting  cost of sales,  selling,  general and
administrative  expenses  and merger  and  related  costs  from  total  revenue.
Operating  profit declined $23.8 million from 1996 to 1997.  Home  manufacturing
operating profit declined $17.4 million  primarily due to the reduction in sales
and  the  increase  in  costs  associated  with  new or  expanded  manufacturing
facilities of $9.1 million.  Financial  services  operating profit improved $0.8
million  primarily  due to the  increase  in its loan  portfolio.  Additionally,
operating  profit  declined due to the  non-recurring  merger and related  costs
associated with the Belmont merger of $7.4 million.

Other Income (Expense)
Interest  expense  for 1997  increased  by $0.6  million as compared to 1996 due
primarily to additional  borrowings to support the purchase of Bellcrest,  which
debt  was  paid  in full  in  September  1997,  interest  on two new  industrial
development  bond  issues,  as well as the  additional  borrowings  incurred  to
support the level of purchases of retail installment sales contracts by CAC.

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



                                       19
<PAGE>


Other,  net, is primarily  comprised of interest income  (unrelated to financial
services),  gains or losses on sales of assets,  equity  earnings in investments
accounted for on the equity basis of  accounting  and  applicable  allocation of
minority  interest.  The decline of $1.2 million in 1997 as compared to 1996 was
primarily due to a $0.3 million loss on property  disposals  recorded in 1997 in
connection  with the closing of a leased  facility and a $0.4 million decline in
equity earnings.

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

Liquidity and Capital Resources
<TABLE>
<CAPTION>

                                                            Balances as of December 31,
                                                         --------------------------------
(Dollars in thousands)                                      1998         1997       1996
                                                         ----------   ----------  ---------
<S>                                                    <C>          <C>          <C>    

Cash and cash equivalents                              $   64,243   $   37,276   $   29,751
Certificates of deposit, maturing within one year      $    -       $    4,000   $     -   
Working capital                                        $   41,707   $   28,484   $   24,746
Current ratio                                            1.5 to 1     1.5 to 1     1.4 to 1
Long-term debt                                         $    3,650   $   15,808   $    6,227
Ratio of long-term debt to equity                         1 to 40      1 to 8       1 to 20
Installment loan portfolio                             $   26,117   $   49,146   $   36,425
</TABLE>

As of December 31, 1998, the Company had working capital of $42 million compared
to $28 million at the end of 1997, an increase of $14 million. The 1998 increase
in working  capital and the  decreases in long-term  debt and the debt to equity
ratio were due to the sale of a portion of CAC's installment loan portfolio,  of
which a portion of the proceeds were used to retire approximately $14 million in
debt and approximately $13 million was invested in short-term assets.  Operating
activities  provided  cash  of  $37  million  in  1998.  The  Company's  capital
expenditures were approximately $15 million in 1998. Capital expenditures during
1998 included normal property,  plant and equipment  additions and replacements,
the  continued   expansion  and   modernization  of  certain  of  the  Company's
manufacturing  facilities,  as well  as the  purchase  of a Texas  manufacturing
facility that was  previously  leased,  land adjacent to a North  Carolina and a
Georgia  manufacturing  facility,  and an additional  manufacturing  facility in
Georgia to be placed in operation in 1999. During the first quarter of 1999, the
Company  purchased,  for a total  of $3.4  million,  two  Alabama  manufacturing
facilities  that were  previously  leased.  The Company  also  initiated a stock
repurchase  program during the latter part of 1998 of 2,000,000 shares, of which
852,600 shares had been  repurchased at December 31, 1998 for  approximately  $8
million. The Company completed this repurchase during the first quarter of 1999,
and the Board of  Directors  has  authorized  the  repurchase  of an  additional
2,000,000 shares.  During the first of quarter of 1999,  through March 23, 1999,
the Company purchased 1,459,000 shares for $14 million.

As of December 31, 1997, the Company had working capital of $28 million compared
to $25 million at the end of 1996,  an increase of $3 million.  The 1997 working
capital increase of $3 million was due primarily to net long-term  borrowings of
$3 million,  $2 million in proceeds from the sale of common  stock,  installment
loan collections of $5 million and net cash provided by operating  activities of
$23 million for the year, reduced by $10 million in capital expenditures and $18
million in installment loan purchases. Capital expenditures during 1997 included
normal  property,  plant  and  equipment  additions  and  replacements  and  the
acquisition of a home manufacturing facility in Texas.

The Company entered into a credit  agreement with its primary lender in February
1994 and later  amended  it in March 1996 and June  1998.  The  credit  facility
presently  consists  of  a  $35  million  revolving,   warehouse  and  term-loan
agreement.  The  credit  facility  contains  a  revolving  line of credit  which
provides for  borrowings  (including  letters of credit) of up to 80% and 50% of
the  Company's  eligible  (as  defined)  accounts  receivable  and  inventories,
respectively,  up to a maximum of $10  million.  Interest  is payable  under the
revolving  line of credit at the  bank's  prime  rate,  or,  if  elected  by the
Company, the 90-day LIBOR Rate plus 2.5%. The warehouse and term-loan agreements
contained  in the credit  facility  provide for  borrowings  of up to 80% of the
Company's eligible (as defined) installment sales contracts,  up to a maximum of
$25 million. Interest on the term notes is fixed for a period of five years from
issuance  at a rate  based on the weekly  average  yield on  five-year  treasury
securities  averaged  over the preceding 13 weeks,  plus 1.95%,  with a floating
rate for the remaining two years (subject to certain limits) equal to the bank's
prime rate plus 0.75%. The warehouse  component of the credit facility  provides
for  borrowings of up to $25 million with  interest  payable at the bank's prime
rate, or, if elected by the Company,  the 90-day LIBOR Rate plus 2.5%.  However,
in no event may the  aggregate  outstanding  borrowings  under the warehouse and
term-loan  agreement exceed $25 million.  Under the credit facility,  no amounts
were  outstanding  at December 31, 1998,  and $12.7 million was  outstanding  at
December 31, 1997.

The credit facility contains certain  restrictive  covenants which limit,  among
other things,  the Company's ability to (i) make dividend payments and purchases
of treasury stock in an aggregate  amount which exceeds 50% of consolidated  net



                                       20
<PAGE>


income for the two most  recent  years,  (ii)  mortgage or pledge  assets  which
exceed,  in the  aggregate,  $1 million,  (iii) incur  additional  indebtedness,
including lease obligations,  which exceed in the aggregate $10 million and (iv)
make  capital  expenditures  in excess of $14 million.  In addition,  the credit
facility contains certain financial  covenants requiring the Company to maintain
on a consolidated  basis certain defined levels of net working capital (at least
$3.5  million),  tangible net worth (which must increase at least $2 million per
year,  subject to a carryover for increases in excess of $2 million in the prior
year), debt to equity ratio (not to exceed 2 to 1) and cash flow to debt service
ratio (not less than 1.5 to 1). The credit  facility also requires CAC to comply
with certain specified restrictions and financial covenants.

Since its  inception,  CAC has been  restricted in the amounts of loans it could
purchase based on underwriting standards, as well as the availability of working
capital and funds  borrowed  under its credit line with its primary  lender.  In
February 1998,  CAC entered into an agreement with another lender  providing for
the periodic resale of a portion of CAC's loans that meet established  criteria.
In March 1998,  CAC sold,  under the retail  finance  agreement,  a  substantial
portion of its then existing  portfolio of loans. The effect of this transaction
on net  income  was to reduce  the amount of  financial  services  revenue  from
interest  income on this portion of the  portfolio,  offset by reduced  interest
expense on retired debt and earnings on the remaining proceeds.  Pursuant to the
retail  finance  agreement,  the Company may sell a  substantial  portion of its
existing  installment  loan  portfolio  in fiscal year 1999,  in addition to the
periodic sale of  installment  contracts  purchased by CAC in the future.  * The
Company  believes the periodic sale of  installment  contracts  under the retail
finance  agreement  will  reduce  requirements  for  both  working  capital  and
borrowings,  increase the Company's liquidity,  reduce the Company's exposure to
interest rate fluctuations and enhance the ability of CAC to increase its volume
of loan purchases.*  There can be no assurance,  however,  that additional sales
will be made under this  agreement,  or that CAC and the Company will be able to
realize the expected benefits from such agreement. *

The Company's  growth  strategy  currently  includes the continued  expansion of
financial  services,  component supply  operations,  and its independent  dealer
network,  the pursuit of additional  acquisitions  and, to a lesser extent,  the
acquisition or opening of Company-owned retail locations.  The Company currently
believes  existing cash and funds available under the credit facility,  together
with  cash  provided  by  operations,  will be  adequate  to fund the  Company's
operations and plans for the next twelve months. In order to provide  additional
funds  for  continued  pursuit  of  the  Company's  growth  strategies  and  for
operations,  the  Company  may incur,  from time to time,  additional  short and
long-term bank indebtedness or other forms of financing and may issue, in public
or private  transactions,  its equity and debt securities,  the availability and
terms of which will depend upon market and other  conditions.  * The Company may
engage in other transactions, such as selling or securitizing all or portions of
its installment  loan portfolio,  that are designed to facilitate the ability of
the  Company  to  originate  an  increased  volume of loans  and to  reduce  the
Company's  exposure to interest  rate  fluctuations  and has entered into such a
transaction  pursuant  to the retail  finance  agreement,  as further  described
above. * There can be no assurance that such possible additional  financing,  or
the aforementioned  potential  transactions  involving the Company's installment
loan  portfolio,  will be available on terms  acceptable  to the Company.  It is
possible  that a future lack of  financing  or a  prolonged downturn in industry
conditions  could  cause the  Company  to curtail  the  expansion  of  financial
services or otherwise alter its growth strategies. *

Impact of Inflation
The Company  generally  has been able to increase  its selling  prices to offset
increased costs, including the costs of raw materials. Sudden increases in costs
as well as price competition,  however, can affect the ability of the Company to
increase  its selling  prices.  As  discussed  above,  the Company  currently is
experiencing  tightened supply of certain types of raw materials.  For a further
discussion  of this  matter,  see "1998  Compared to 1997 - Gross  Profit."  The
Company  believes that the  relatively  moderate rate of inflation over the past
several  years has not had a significant  impact on its sales or  profitability,
but can give no assurance that this trend will continue in the future. *

Impact of Accounting Statements
In June 1998, the FASB issued SFAS 133,  Accounting  for Derivative  Instruments
and Hedging  Activities.  SFAS 133 is required to be adopted for years beginning
after June 15, 1999.  The Company is currently  evaluating  SFAS 133 and has not
yet determined its impact on the Company's consolidated financial statements.

Year 2000 Compliance
Many of the Company's  computer  systems and software  products,  as well as the
systems and products of third  parties  doing  business  with the  Company,  are
subject to  the "Year  2000"  issue, which is the  inability  of a  computer  to
correctly   process  dates  after  December  31,  1999.   This  inability  could
potentially   cause  affected   computers  to  shut  down or  perform  incorrect
calculations,   ultimately   resulting  in  a  system  failure,   disruption  of
operations,  and the  inability to engage in normal  business  activities.  This
issue also affects products or system which contain embedded computer chips with
date sensitive  programming such as security  systems,  telephone  equipment and
office  equipment.  As a result,  many companies'  software and computer systems
need to be upgraded or replaced in order to address the Year 2000 issue.

--------
* See Safe Harbor Statement on page 53.


                                       21
<PAGE>

The Company has implemented a program to evaluate and  address   the   risks and
problems associated with the   Year  2000 issue.  This program   identifies four
stages as follows:
1)       The preliminary assessment of each computer system and   microprocessor
         the Company  utilizes for Year 2000  compliance  is  complete,  and the
         testing of these  systems  and  microprocessors  is  approximately  75%
         complete. As a result of this assessment,  the Company believes most of
         the significant  systems and  microprocessors it utilizes are currently
         Year  2000  compliant  or will be with the  installation  of  available
         upgrades,  except for an accounting system used by two of the Company's
         subsidiaries. *
2)       The  identification  of Year 2000 compliance by significant or critical
         third parties has been completed,  and the scheduled completion date to
         replace all non-compliant third parties is October 1999.
3)       The completion of any Company system  conversions and verification that
         all  Company  systems  are  Year  2000  compliant  are  expected  to be
         completed by December 1999. *
4)       The development of a contingency plan is the last phase and is expected
         to be  completed by October  1999.  The Company  currently  expects its
         contingency plan to include installation of certain Year 2000 compliant
         software,  currently  in use at  most  of its  operations,  for the two
         subsidiaries with non-compliant accounting software. *

The  costs  incurred  to date to  address  the  Year  2000  issue  have not been
material;  however, the Company expects to incur between $800,000 and $1,200,000
as an expense,  in addition to approximately  $200,000 of capital  expenditures,
during 1999 in order to complete the assessment and implementation,  and to fund
such cost  from  operations.  * This  anticipated  cost is required  to  replace
non-compliant  microprocessors and to purchase and implement accounting software
for two of the Company's  subsidiaries.  These activities are being performed in
conjunction  with a  larger  multi-year  migration  from the  Company's  current
systems to an  enterprise-wide  management  information  system.  This  estimate
assumes that third  parties have  correctly  assessed  and  communicated  to the
Company the status of their Year 2000  compliance,  and that  material Year 2000
compliance  issues with respect to third parties who have not communicated  with
the Company  will not arise in the future.  * Because of this  reliance  and the
subjective nature of the Year 2000 compliance issue, the actual costs to address
and  resolve  any  non-compliance   issues  may  differ  materially  from  those
anticipated.

The  Company  could  be  affected  if the Year  2000  issue  affects  suppliers'
abilities to provide raw  materials  needed in the  manufacturing  process.  The
Company is also  dependent on third parties or government  agencies to 1) supply
sufficient  electrical power,  utilities,  transportation  and other services to
sustain the  manufacturing  process and CAC's  operations,  2) process,  pay and
maintain  records  of certain  employee  benefits,  3) supply  funds in a timely
fashion for its  dealers and retail  customers  to purchase  homes,  and 4) fund
sales of  portions  of CAC's loan  portfolio.  Any  failure on the part of these
third parties could have a material  adverse  effect on the business  operations
and financial performance of the Company. *

If the  Company's  efforts to resolve  the Year 2000 issue are not  adequate  or
implemented in a timely manner, the Company could experience a disruption in its
normal  business  activities.  *  Management  of the Company  believes  the most
reasonably  likely worst case scenario  would be the delay in  collections  from
third party  financing  agents which could  result in  liquidity  issues for the
Company,  as well as the  delay of  financial  reporting  due to any  accounting
processes which may need to be performed manually until all Year 2000 issues are
resolved.  *  However,  the  potential  consequences  of the Year 2000 issue are
inherently uncertain, and consequently, no assurance can be given that this will
be the reasonably likely worst case scenario.

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

The  Company  is  exposed  to  market  risk  related  to  investments  held in a
non-qualified trust used to fund benefits under its deferred  compensation plan.
These  investments  totaled  $1.4  million  at  December  31,  1998.  Due to the
long-term  nature  of the  benefit  liabilities  that  these  assets  fund,  the
Company's  exposure  to market  risk is low. A decline in market  value of these
investments  would not  result in a material  near term  funding of the trust or
exposure to the benefit liabilities funded.

The Company purchases retail  installment  contracts from its exclusive dealers,
at fixed interest rates, in the ordinary  course of business,  and  periodically
resells certain of these loans to a financial institution under the terms of the
retail finance  agreement  discussed  above.  The periodic resale of installment
contracts reduces the Company's exposure to interest rate  fluctuations,  as the
majority of  contracts  are held for a short period of time.  Additionally,  the
Company has installment  loans  receivable in its portfolio of $25 million which
may be sold  during  1999.  The  Company's  portfolio  consists  of  fixed  rate
contracts  with  interest  rates  generally  ranging  from  8.0% to 13.0% and an
average original term of 216 months at December 31, 1998. The Company  estimated
the fair value of its installment  contracts  receivable  using  discounted cash
flows and  interest  rates  offered by CAC on similar  contracts at December 31,
1998.

--------
* See Safe Harbor Statement on page 53.



                                       22
<PAGE>

The  Company  has notes  payable  under  retail  floor  plan  agreements  and an
Industrial  Development  Revenue  Bond  issue  that are  exposed  to  changes in
interest rates.  Although these  borrowings are floating rate debt, the interest
rate risk posed by these borrowings  currently is low because the amount of debt
has historically been small in relation to annual cash flow. The Company has the
ability to retire  this debt if interest  rates were to increase  significantly.
Additionally,  the Company has two Industrial Development Revenue Bond issues at
fixed  interest  rates.  The  estimated  fair  value of  outstanding  borrowings
approximated carrying value at December 31, 1998. The Company estimated the fair
value of its debt instruments using rates at which the Company believes it could
have obtained similar  borrowings at that time. The Company also has the ability
to incur debt under its credit  facility  which  provides  for  interest  at the
bank's prime rate for the revolving  and  warehouse  line of credit and at fixed
rates for a certain period of time for the term notes.  The table below provides
information  about the  Company's  financial  instruments  that are sensitive to
changes in interest rates at December 31, 1998.

<TABLE>

<CAPTION>

                                                            Assumed Annual Principal Cash Flows
                                        ----------------------------------------------------------------------------
<S>                                        <C>          <C>      <C>        <C>        <C>       <C>           <C>     <C>

(dollars in thousands)                        1999       2000      2001       2002       2003    Thereafter    Total   Fair value
Installment loan portfolio                 $   862      $ 961    $1,071     $1,194     $1,331       $20,698  $26,117    $ 26,211
(weighted average interest rate - 10.93%)
                                                             Expected Principal Maturity Dates
                                        ----------------------------------------------------------------------------
                                              1999       2000      2001       2002       2003    Thereafter    Total   Fair value
Notes payable and long-term debt           $ 4,568      $ 429    $  457     $  480     $  499       $ 1,785  $ 8,218     $ 8,218
(weighted average interest rate - 7.44%)
</TABLE>



                                       23
<PAGE>

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Selected Quarterly Financial Data (Unaudited)

The table below sets forth certain  unaudited  quarterly  financial data for the
two years ended  December  31,  1998 and 1997.  The  Company  believes  that the
following quarterly financial data includes all adjustments necessary for a fair
presentation,  in accordance with generally accepted accounting principles.  The
following  quarterly financial data should be read in conjunction with the other
financial  information contained elsewhere in this report. The operating results
for any interim period are not necessarily  indicative of results for a complete
year or for any future period.

<TABLE>
<CAPTION>

                                       Fourth Quarter     Third Quarter    Second Quarter   First Quarter     Total
                                       ----------------------------------------------------------------------------------
                                                          (in thousands, except per share amounts)
<S>                                     <C>               <C>              <C>              <C>             <C>    
1998
Revenue:
         Home manufacturing             $    158,457      $    152,542     $    164,274     $    122,843    $    598,116
         Financial services                    1,526             1,121            1,015            2,426           6,088
         Other                                 3,397             3,835            2,324              310           9,866

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

         Total revenue                       163,380           157,498          167,613          125,579         614,070

Gross profit                                  32,444            30,634           31,460           22,824         117,362
Net income                                     5,324             5,220            5,069            3,042          18,655
Basic net income per share          a            .27               .26              .25              .15             .94
Diluted net income per share        a            .27               .26              .25              .15             .93


1997
Revenue:
         Home manufacturing             $    132,297      $    137,744     $    158,015     $    125,674    $    553,730
         Financial services                    1,526             1,382            1,296            1,142           5,346
         Other                                   786               532              396              398           2,112

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

         Total revenue                       134,609           139,658          159,707          127,214         561,188

Gross profit                                  23,681            24,214           27,273           21,798          96,966
Net income                                    (4,165)b           3,639            6,880  c         3,893          10,247  b,c
Basic net income per share          a           (.21)b             .18              .35  c           .20             .52  b,c
Diluted net income per share        a           (.21)b             .18              .34  c           .19             .51  b,c

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


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



                                       24
<PAGE>

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

             Index to Consolidated Financial Statements and Schedule

Independent Auditor's Report                      26

Consolidated Balance Sheets                       27

Consolidated Statements of Income                 29

Consolidated Statements of Stockholders' Equity   30

Consolidated Statements of Cash Flows             31

Notes to Consolidated Financial Statements        32

Schedule -
          II - Valuation and Qualifying Accounts  47



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



                                       25
<PAGE>


INDEPENDENT AUDITORS' REPORT

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

We have audited the  consolidated  balance  sheets of Cavalier  Homes,  Inc. and
subsidiaries  as of  December  31, 1998 and 1997,  and the related  consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period  ended  December  31,  1998.  Our audits also  included  the
financial  statement  schedule  listed  in the  index at Item 8.  The  financial
statements  and  financial  statement  schedule  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial  statements and financial  statement schedule based on our audits. The
consolidated   financial   statements  and  financial  statement  schedule  give
retroactive  effect to the merger of the Company and Belmont Homes,  Inc., which
has been  accounted  for as a pooling of interests as described in Note 2 to the
consolidated  financial statements.  We did not audit the consolidated financial
statements of Belmont Homes,  Inc. for the year ended  December 31, 1996,  which
statements reflect total revenues of $227,817,000. Those statements were audited
by other  auditors  whose  report has been  furnished  to us,  and our  opinion,
insofar as it relates to the amounts included for Belmont Homes,  Inc. for 1996,
is based solely on the report of such other auditors.

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

In our opinion,  based on our audits and the report of the other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material   respects,   the  financial  position  of  Cavalier  Homes,  Inc.  and
subsidiaries at December 31, 1998 and 1997, and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 1998 in conformity with generally accepted accounting  principles.  Also, in
our opinion,  such financial statement schedule,  when considered in relation to
the basic consolidated  financial statements taken as a whole,  presents fairly,
in all material respects, the information set forth therein.



/s/ Deloitte & Touche LLP
-------------------------
Birmingham, Alabama
February 19, 1999




                                       26
<PAGE>


CAVALIER HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<S>                                                                  <C>           <C> 

                                                                         1998          1997
ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                          $  64,243     $  37,276
  Certificates of deposit, maturing within one year                                    4,000
  Accounts receivable, less allowance for losses of
    $1,201 (1998) and $1,175 (1997)                                      7,678         8,449
  Notes and installment contracts receivable - current                   1,577         1,561
  Inventories                                                           38,803        29,697
  Deferred income taxes                                                  9,413         7,240
  Other current assets                                                   4,077         1,292
                                                                     ---------     ---------
        Total current assets                                           125,791        89,515
                                                                     ---------     ---------
PROPERTY, PLANT AND EQUIPMENT:
  Land                                                                   5,414         2,159
  Buildings and improvements                                            41,991        36,741
  Machinery and equipment                                               38,707        32,483
                                                                     ---------     ---------
                                                                        86,112        71,383
  Less accumulated depreciation and amortization                        24,690        17,949
                                                                     ---------     ---------
        Total property, plant and equipment, net                        61,422        53,434
                                                                     ---------     ---------
INSTALLMENT CONTRACTS RECEIVABLE, less
  allowance for credit losses of $760 (1998) and
  $1,272 (1997)                                                         24,512        46,614
                                                                     ---------     ---------
GOODWILL, less accumulated amortization
   of $4,154 (1998) and $3,102 (1997)                                   19,945        19,551
                                                                     ---------     ---------
OTHER ASSETS                                                             4,282         2,440
                                                                     ---------     ---------
TOTAL                                                                $ 235,952     $ 211,554
                                                                     =========     =========
</TABLE>



                                       27
<PAGE>


CAVALIER HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<S>                                                                  <C>           <C>    

                                                                         1998          1997
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Current portion of long-term debt                                  $     405     $   3,271
  Notes payable under retail floor plan agreements                       4,163
  Accounts payable                                                      15,944         9,575
  Amounts payable under dealer incentive programs                       18,752        14,614
  Accrued compensation and related withholdings                          7,154         4,294
  Estimated warranties                                                  12,400        11,700
  Accrued merger and related costs                                                     5,178
  Other accrued expenses                                                25,266        12,399
                                                                     ---------     ---------
           Total current liabilities                                    84,084        61,031
                                                                     ---------     ---------
DEFERRED INCOME TAXES                                                      390           297
                                                                     ---------     ---------
LONG-TERM DEBT                                                           3,650        15,808
                                                                     ---------     ---------
OTHER LONG-TERM LIABILITIES                                              2,917           867
                                                                     ---------     ---------
COMMITMENTS AND CONTINGENCIES (Note 9)

STOCKHOLDERS' EQUITY:
  Series A Junior Participating  Preferred Stock, $.01 par value; 200,000 shares
    authorized, none issued
  Preferred stock, $.01 par value; 300,000 shares authorized,
    none issued
  Common stock, $.10 par value; 50,000,000 shares authorized,
    20,282,782 (1998) and 19,941,357 (1997) shares issued                2,028         1,994
  Additional paid-in capital                                            60,760        57,228
  Retained earnings                                                     90,400        74,329
  Treasury stock, at cost; 852,600 shares                               (8,277)
                                                                     ----------    ----------
           Total stockholders' equity                                  144,911       133,551
                                                                     ----------    ----------
TOTAL                                                                $ 235,952     $ 211,554
                                                                     ==========    ==========

See notes to consolidated financial statements.

</TABLE>



                                       28
<PAGE>


CAVALIER HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<S>                                                                <C>            <C>            <C>   

                                                                         1998           1997           1996

REVENUES                                                           $   614,070    $   561,188    $   577,171
                                                                   ------------   ------------   ------------
COST OF SALES                                                          496,708        464,222        482,204

SELLING, GENERAL AND ADMINISTRATIVE                                     87,611         72,526         54,120

MERGER AND RELATED COSTS                                                                7,359
                                                                   ------------   ------------   ------------
                                                                       584,319        544,107        536,324
                                                                   ------------   ------------   ------------
OPERATING PROFIT                                                        29,751         17,081         40,847
                                                                   ------------   ------------   ------------
OTHER INCOME (EXPENSE):
  Interest expense                                                        (820)        (1,511)          (845)
  Life insurance proceeds                                                               1,500          1,750
  Other, net                                                             2,351          1,269          2,434
                                                                   ------------   ------------   ------------
                                                                         1,531          1,258          3,339
                                                                   ------------   ------------   ------------
INCOME BEFORE INCOME TAXES                                              31,282         18,339         44,186

INCOME TAXES                                                            12,627          8,092         16,707 
                                                                   ------------   ------------   ------------
NET INCOME                                                         $    18,655    $    10,247    $    27,479
                                                                   ============   ============   ============
BASIC NET INCOME PER SHARE                                         $      0.94    $      0.52    $      1.42
                                                                   ============   ============   ============
DILUTED NET INCOME PER SHARE                                       $      0.93    $      0.51    $      1.39
                                                                   ============   ============   ============
WEIGHTED AVERAGE SHARES
  OUTSTANDING                                                       19,904,746     19,834,942     19,362,944
                                                                   ============   ============   ============
WEIGHTED AVERAGE SHARES OUTSTANDING,                                       
   ASSUMING DILUTION                                                20,143,795     20,028,181     19,799,492
                                                                   ============   ============   ============

See notes to consolidated financial statements.
</TABLE>




                                       29
<PAGE>


CAVALIER HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<S>                                                     <C>         <C>          <C>          <C>          <C>
                                                                     Additional
                                                          Common      Paid-in     Retained      Treasury
                                                          Stock       Capital     Earnings       Stock        Total

BALANCE, JANUARY 1, 1996                                $  1,830    $  34,013    $   39,276                $  75,119
  Sale of common stock to public                              64       11,661                                 11,725
  Stock options exercised                                     73        4,419                                  4,492
  Income tax benefit attributable to exercise of
    stock options                                                       3,692                                  3,692
  Sale of common stock under Employee Stock
    Purchase Plan                                              2          238                                    240
  Common stock issued in connection with
    acquisitions                                               5          887                                    892
  Accrued compensation                                                    216                                    216
  Cash dividends paid ($.06 per share)                                              (1,203)                   (1,203)
  Net income                                                                        27,479                    27,479
                                                       ----------   ----------   ----------                ----------
BALANCE, DECEMBER 31, 1996                                 1,974       55,126       65,552                   122,652
  Stock options exercised                                                   7                                      7
  Sale of common stock under Employee Stock
    Purchase Plan                                              5          425                                    430
  Sale of common stock under Dividend
    Reinvestment Plan                                         17        1,653                                  1,670
  Accrued compensation                                                    172                                    172
  Cash dividends paid ($.07 per share)                                              (1,470)                   (1,470)
  Retirement of common stock                                  (2)        (155)                                  (157)
  Net income                                                                        10,247                    10,247
                                                       ----------   ----------   ----------                ----------
BALANCE, DECEMBER 31, 1997                                 1,994       57,228       74,329                   133,551
  Stock options exercised                                      4          153                                    157
  Income tax benefit attributable to exercise of
    stock options                                                          90                                     90
  Sale of common stock under Employee Stock
    Purchase Plan                                              5          504                                    509
  Sale of common stock under Dividend
    Reinvestment Plan                                         25        2,579                                  2,604
  Accrued compensation                                                    206                                    206
  Cash dividends paid ($.13 per share)                                              (2,584)                   (2,584)
  Purchase of treasury stock                                                                  $ (8,277)       (8,277)
  Net income                                                                        18,655                    18,655
                                                       ----------   ----------   ----------   ----------   ----------
BALANCE, DECEMBER 31, 1998                             $   2,028    $  60,760    $  90,400    $ (8,277)    $ 144,911
                                                       ==========   ==========   ==========   ==========   ==========

See notes to consolidated financial statements.
</TABLE>




                                       30
<PAGE>


CAVALIER HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<S>                                                                   <C>           <C>           <C>    
                                                                         1998          1997          1996
OPERATING ACTIVITIES:
  Net income                                                          $ 18,655      $ 10,247      $ 27,479
  Adjustments to reconcile net income to net cash provided by
    operating activities:
    Depreciation and amortization                                        8,365         7,492         5,760
    Provision for credit losses and repurchase commitments                (486)          669           389
    Gain on sale of installment contracts                               (2,048)
    (Gain) loss on sale of property, plant and equipment                    49           340          (144)
    Other, net                                                             267           211           (93)
    Changes in assets and  liabilities  provided  (used) cash,
     net of effects of acquisitions:
      Accounts receivable                                                  787         2,574          (672)
      Inventories                                                       (6,248)         (488)       (8,021)
      Accounts payable                                                   6,313        (3,310)         (146)
      Amounts payable under dealer incentive programs                    4,138           761         4,508
      Accrued compensation and related withholdings                      2,860        (1,743)        1,188
      Estimated warranties                                                 700         1,134         1,744
      Other assets and liabilities                                       4,006         5,361         1,695
                                                                      ---------     ---------     ---------
           Net cash provided by operating activities                    37,358        23,248        33,687
                                                                      ---------     ---------     ---------
INVESTING ACTIVITIES:
  Net cash paid in connection with acquisitions                         (2,358)         (871)       (8,515)
  Proceeds from sale of property, plant and equipment                      282           122           228
  Capital expenditures                                                 (14,655)      (10,186)      (16,106)
  Purchases of certificates of deposit                                  (6,044)       (8,000)      (16,114)
  Maturities of certificates of deposit                                 10,044        12,243        14,588
  Proceeds from sale or maturity of marketable securities                              1,097         2,479
  Net change in notes and installment contracts                        (23,119)      (13,547)      (17,216)
  Proceeds from sale of installment contracts                           47,852
  Other investing activities                                            (1,085)          133           616
                                                                      ---------     ---------     ---------
           Net cash provided by (used in) investing activities          10,917       (19,009)      (40,040)
                                                                      ---------     ---------     ---------
FINANCING ACTIVITIES:
  Net borrowings on notes payable                                        1,307
  Proceeds from long-term borrowings                                                  25,263         9,650
  Payments on long-term debt                                           (15,024)      (22,457)      (12,610)
  Net proceeds from sales of common stock                                3,113         2,100        11,965
  Proceeds from exercise of stock options                                  157             7         4,492
  Cash dividends paid                                                   (2,584)      (1,470)        (1,203)
  Purchase of treasury stock                                            (8,277)
  Other financing activities                                                           (157)           750
                                                                      ---------     ---------     ---------
           Net cash provided by (used in) financing activities         (21,308)        3,286        13,044
                                                                      ---------     ---------     ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS                               26,967         7,525         6,691
                                                                      ---------     ---------     ---------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                            37,276        29,751        23,060
                                                                      ---------     ---------     ---------
CASH AND CASH EQUIVALENTS, END OF YEAR                                $ 64,243      $ 37,276      $ 29,751
                                                                      =========     =========     ========= 

See notes to consolidated financial statements.
</TABLE>




                                       31
<PAGE>


CAVALIER HOMES, INC. AND SUBSIDIARIES

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


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Principles  of  Consolidation  -  The  consolidated  financial  statements
      include the  accounts of Cavalier  Homes,  Inc. and its  wholly-owned  and
      majority-owned subsidiaries  (collectively,  the "Company"). The Company's
      minority  ownership  interests in various joint ventures are accounted for
      using  the  equity  method  and  are  included  in  other  assets  in  the
      accompanying  consolidated balance sheets.  Intercompany transactions have
      been eliminated in consolidation.  See Note 10 for information  related to
      the Company's business segments.

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

      Accounting   Estimates  -  The  preparation  of  financial  statements  in
      conformity  with  generally  accepted   accounting   principles   requires
      management  to make  estimates  and  assumptions  that  affect the amounts
      reported in the  financial  statements  and notes.  Actual  results  could
      differ from those estimates.

      Fair Value of Financial  Instruments - The carrying value of the Company's
      cash  equivalents,  accounts  receivable,  accounts  payable  and  accrued
      expenses  approximates  fair value because of the  short-term  maturity of
      those instruments. Additional information concerning the fair value of
      other financial instruments is disclosed in Notes 3 and 4.

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

      Inventories  -  Inventories  consist  primarily of raw  materials  and are
      stated at the lower of cost (first-in, first-out method) or market. During
      1998, 1997, and 1996, the Company purchased raw materials of approximately
      $11,413, $10,573 and $11,645, respectively, from a joint venture.

      Property, Plant and Equipment - Property, plant and equipment is stated at
      cost and  depreciated  primarily  over the  estimated  useful lives of the
      related assets using the straight-line method. Maintenance and repairs are
      expensed as incurred.  The Company paid or accrued  $388,  $270 and $73 in
      1998, 1997 and 1996, respectively, for construction of plant facilities to
      a company in which a  stockholder  and  director  of the Company is also a
      stockholder.

      Goodwill - Goodwill  represents  the excess of the purchase price over the
      fair  value of the net assets  acquired  and is being  amortized  over the
      expected periods to be benefited,  15 to 25 years, using the straight-line
      method.  The Company evaluates the  recoverability  of goodwill  primarily
      using forecasted undiscounted cash flows,  supplemented if necessary by an
      independent appraisal of fair value.



                                       32
<PAGE>


      Revenue  Recognition - Sales of manufactured homes to independent  dealers
      are  recorded as of the date the home is shipped to the  dealer,  with the
      exception  of a  subsidiary  which  employs  drivers to deliver its homes;
      accordingly, sales are recorded upon delivery (at which time title passes)
      by this  subsidiary.  All sales are final and without  recourse except for
      the contingency  described in Note 9. For Company-owned  retail locations,
      revenue is  recorded  upon  transfer  of title to the retail  home  buyer.
      Interest income on installment  contracts  receivable is recognized  using
      the interest method.

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

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

      Insurance - The Company's  workmen's  compensation,  product liability and
      general liability  insurance coverages (with the exception of a subsidiary
      whose  insurance is provided  under fully  insured  policies) are provided
      under incurred  loss,  retrospectively  rated premium  plans.  Under these
      plans,  the Company  incurs  insurance  expense  based upon various  rates
      applied  to  current  payroll costs and sales.  Annually,  such  insurance
      expense is adjusted by the carrier for loss experience  factors subject to
      minimum and maximum premium  calculations.  Refunds or additional premiums
      are estimated when  sufficiently  reliable data is available in accordance
      with the consensus  reached in Emerging Issues Task Force Issue No. 93-14,
      Accounting for Multiple-Year  Retrospectively Rated Insurance Contracts by
      Insurance Enterprises and Other Enterprises.

      Net  Income  Per  Share  -  In  accordance  with  Statement  of  Financial
      Accounting Standards ("SFAS") 128, Earnings per Share, the Company reports
      two separate  net income per share  numbers, basic and  diluted.  Both are
      computed by dividing net income by the weighted average shares outstanding
      (basic) or weighted average shares outstanding assuming dilution (diluted)
      as detailed below (in thousands of shares):

                                                     1998      1997      1996   

      Weighted average shares outstanding           19,905    19,835    19,363  

      Dilutive effect of stock options and warrants    239       193       436  
                                                   --------  --------  -------- 
      Weighted average shares outstanding,
       assuming dilution                            20,144    20,028    19,799  
                                                   ========  ========  ======== 

      During 1996,  the  Company's  Board of Directors  declared a 3 for 2 stock
      split in January  and a 5 for 4 stock  split in  October.  All  applicable
      share and per share data have been  restated  to give  effect to all stock
      splits.  Options and  warrants  that could  potentially  dilute  basic net
      income per share in the future  were not  included in the  computation  of
      diluted   net  income  per  share   because  to  do  so  would  have  been
      antidilutive.  Antidilutive options and warrants were 641,796,  1,398,595,
      and 209,057 for 1998, 1997, and 1996, respectively.



                                       33
<PAGE>


      Recent Accounting  Pronouncements - In June 1997, the Financial Accounting
      Standards Board (FASB) issued SFAS 130,  Reporting  Comprehensive  Income.
      This statement is now effective, but has no impact on the Company. In June
      1998,  FASB issued SFAS 133,  Accounting  for Derivative  Instruments  and
      Hedging Activities. SFAS 133 is required to be adopted for years beginning
      after June 15, 1999. The Company is currently  evaluating SFAS 133 and has
      not yet  determined  its impact on the  Company's  consolidated  financial
      statements.

      Reclassifications  -  Certain  amounts  from the prior  periods  have been
      reclassified to conform to the 1998 presentation.

2.    BUSINESS COMBINATION AND ACQUISITION

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

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

                                                            1997          1996
      Revenues:
       Cavalier                                         $ 336,343     $ 349,354 
       Belmont                                            224,845       227,817 
                                                        ---------     --------- 
      Combined                                          $ 561,188     $ 577,171 
                                                        =========     ========= 
      Net income:
       Cavalier                                         $  10,428     $  15,366 
       Belmont                                              5,688        12,113 
                                                        ---------     --------- 
      Combined                                          $  16,116     $  27,479 
                                                        =========     ========= 



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

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

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



                                       34
<PAGE>


      Under the terms of the Bellcrest Stock Purchase Agreement, the Company was
      required to pay the former Bellcrest shareholders additional consideration
      in an amount not to exceed $3,500 in the aggregate in the event  Bellcrest
      attained  certain  stated  levels of earnings  before income taxes for the
      three-month  period  ended  December  31,  1996 and for each of the  years
      ending  December 31, 1997 and 1998.  During 1997, the Company paid $1,000,
      the amount  earned and accrued for 1996,  to the former  shareholders.  In
      connection  with the merger  described  above,  the Company  also paid the
      remaining $2,500 to the former shareholders.

      In  connection  with the  merger,  warrants  issued to a former  Bellcrest
      shareholder in connection with the acquisition of Bellcrest were converted
      to warrants to  purchase  60,000  shares of  Cavalier  common  stock.  The
      warrants,  which expire in October  2001,  are  exercisable  at $18.34 per
      share  and  their  fair  value  at the  issue  date  was  estimated  to be
      negligible.  None of these warrants have been exercised as of December 31,
      1998.

3.    INSTALLMENT CONTRACTS RECEIVABLE

      CAC finances  retail sales through the purchase of  installment  contracts
      from a portion of the Company's exclusive dealers.  Standard loan programs
      require  minimum  down  payments,  ranging  from 0% to 15% of the purchase
      price  of  the   home,   on  all  installment   contracts   based  on  the
      creditworthiness of the borrower.  In addition,  CAC requires the borrower
      to maintain  adequate  insurance  on the home  throughout  the life of the
      contract.   Contracts  are  secured  by  the  home  which  is  subject  to
      repossession by CAC upon default by the borrower.

      CAC's  portfolio  consists of fixed rate  contracts  with  interest  rates
      generally  ranging  from 8.0% to 13.0% and from 9.25% to 14.0% at December
      31,  1998  and  1997,  respectively.  The  average  original  term  of the
      portfolio  was  approximately  216 and 217 months at December 31, 1998 and
      1997,  respectively.  During 1998,  CAC entered into an agreement to sell,
      without  recourse   (provided  that  the  transferred  loan  was  properly
      originated by the dealer and purchased by CAC), contracts in its portfolio
      that meet  specified  credit  criteria.  Under  this  agreement,  CAC sold
      $45,804 contracts receivable and realized a gain of $2,048.

      At December 31,  1998,  estimated  principal  payments  under  installment
      contracts receivable are as follows:


                            1999                                       $    862 
                            2000                                            961 
                            2001                                          1,071 
                            2002                                          1,194 
                            2003                                          1,331 
                         Thereafter                                      20,698 
                                                                       -------- 
                           Total                                       $ 26,117 
                                                                       ======== 







                                       35
<PAGE>


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

                                                   1998        1997        1996 

       Balance, beginning of year               $ 1,272     $   941      $  551 
       Provision for losses                       1,042       1,329         778 
       Charge-offs, net                          (1,554)       (998)       (388)
                                                --------    --------     -------
       Balance, end of year                     $   760     $ 1,272      $  941 
                                                ========    ========     =======

      At December 31, 1998 and 1997,  the  estimated  fair value of  installment
      contracts  receivable  was $26,211 and $50,103,  respectively.  These fair
      values  were  estimated  using  discounted  cash flows and  interest rates
      offered by CAC on similar contracts at that time.

4.    CREDIT ARRANGEMENTS

      The Company has a $35,000  revolving,  warehouse and  term-loan  agreement
      (the  "Credit  Facility")  with its primary  bank,  whose  president  is a
      director of the Company.  The Credit Facility contains a revolving line of
      credit which provides for borrowings  (including  letters of credit) of up
      to  80%  and  50%  of  the  Company's  eligible  accounts  receivable  and
      inventories, respectively, up to a maximum of $10,000. Interest is payable
      under the  revolving  line of credit at the bank's  prime rate  (7.75% and
      8.50% at December 31, 1998 and 1997,  respectively)  or, if elected by the
      Company,  the 90-day LIBOR rate plus 2.5% (7.57% at December 31, 1998). No
      amounts were  outstanding  under the revolving  line of credit at December
      31, 1998 or 1997.

      The  warehouse and term-loan  agreement  contained in the Credit  Facility
      provide for borrowings of up to 80% of the Company's eligible  installment
      sale  contracts,  up to a maximum of  $25,000.  Interest  on term notes is
      fixed for a period of five  years  from  issuance  at a rate  based on the
      weekly average yield on five-year  treasury  securities  averaged over the
      preceding 13 weeks,  plus 1.95%, and floats for the remaining two years at
      a rate  (subject to certain  limits)  equal to the bank's  prime rate plus
      .75%.  The  warehouse  component  of  the  Credit  Facility  provides  for
      borrowings of up to $25,000 with interest payable at the bank's prime rate
      or, if elected by the Company,  the 90-day LIBOR rate plus 2.5%.  However,
      in no event may the aggregate  outstanding  borrowings under the warehouse
      and term-loan  agreement  exceed $25,000.  Amounts  outstanding  under the
      warehouse  and  term-loan  portion  of the Credit  Facility  were $-0- and
      $12,744 at December 31, 1998 and December 31, 1997, respectively.

      The Credit Facility contains certain restrictive and financial  covenants,
      which,  among other things,  limit the aggregate of dividend  payments and
      purchases of treasury stock to 50% of consolidated  net income for the two
      most recent years,  restrict the Company's ability to pledge assets, incur
      additional  indebtedness  and make capital  expenditures,  and require the
      Company to maintain certain defined financial ratios.  Amounts outstanding
      under the Credit  Facility  are  secured by the  accounts  receivable  and
      inventories of the Company, loans purchased and originated by CAC, and the
      capital stock of certain of the Company's consolidated  subsidiaries.  The
      bank's commitment under the Credit Facility will expire in April 2000.

      The Company has other lines of credit with banks  totaling  $2,000,  which
      expire in July, 1999.  Amounts  outstanding under these facilities totaled
      $-0- and $1,000 at  December  31,  1998 and 1997,  respectively.  Interest
      rates  under  these  lines  range from prime to prime plus 2%. The Company
      also



                                       36
<PAGE>

      has $4,163 of notes payable under retail floor plan agreements.  The notes
      are  collateralized by inventories of $3,775 and bear interest at prime at
      December 31, 1998.

      The Company has amounts  outstanding  under three  Industrial  Development
      Revenue  Bond issues  ("Bonds")  of $4,052 and $4,442 at December 31, 1998
      and 1997,  respectively.  Two of the bond issues bear interest at variable
      rates  ranging  from 4.0% to 5.4% and  mature  at  various  dates  through
      November  2007.  One of the  bond  issues  is  payable  in  equal  monthly
      installments  and bears  interest at 75% of the prime rate.  The bonds are
      collateralized by certain plant facilities.

      During  1998,  the Company  repaid a  term-loan  with a balance of $887 at
      December 31, 1997. This loan accrued  interest at 7.95% and was payable in
      equal monthly installments.

      At December 31, 1998,  principal repayment  requirements on long-term debt
      are as follows:

                Year Ending
                December 31,

                    1999                                                 $   405
                    2000                                                     429
                    2001                                                     457
                    2002                                                     480
                    2003                                                     499
                  Thereafter                                               1,785
                                                                         -------
                                                                           4,055
                    Total                                                
              Less current portion                                           405
                                                                         -------
                  Long-term debt                                         $ 3,650
                                                                         =======

      The estimated fair value of outstanding  borrowings  approximated carrying
      value at December 31, 1998 and 1997. These estimates were determined using
      rates  at which  the  Company  believes  it could  have  obtained  similar
      borrowings at that time.

      Cash paid for interest  during the years ended December 31, 1998, 1997 and
      1996 was $776, $1,445 and $910, respectively.

5.    STOCKHOLDERS' EQUITY

      The  Company  has  adopted  a  Stockholder  Rights  Plan.  The  terms  and
      conditions of the plan are set forth in a Rights  Agreement  dated October
      23, 1996 between the Company and its Rights  Agent.  Pursuant to the plan,
      the Board of Directors of the Company declared a dividend of one Right (as
      defined  in  the  Rights  Agreement)  for  each  share  of  the  Company's
      outstanding  common stock to  stockholders  of record on November 6, 1996.
      The  Rights,  when  exercisable,  entitle the holder to purchase a unit of
      0.80 one-hundredth share of Series A Junior Participating Preferred Stock,
      par value $.01, at a purchase  price of $80 per unit.  Upon certain events
      relating to the acquisition of, or right to acquire,  beneficial ownership
      of 20% or more of the Company's outstanding common stock by a third party,
      or a change in control of the  Company,  the Rights  entitle the holder to
      acquire, after the Rights are no longer redeemable by the Company,  shares
      of common stock of the Company  (or, in certain  cases,  securities  of an
      acquiring person) for each Right held at a significant discount.The Rights
      will expire on November 6, 2006, unless redeemed earlier by the Company at
      $.01 per Right



                                       37
<PAGE>


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

      In January  1996,  Belmont  completed a public  offering of  approximately
      640,000 shares of common stock. The net proceeds of approximately  $11,725
      were used to retire debt and for working capital.

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

                                                                          1996  

       Net income, as adjusted                                        $   27,526
                                                                      ==========
       Diluted net income per share                                   $     1.39
                                                                      ==========
       Weighted average shares outstanding, assuming dilution         19,868,292
                                                                      ==========


6.    INCENTIVE PLANS

      Dealership Stock Option Plan -

o        During 1998, the  Company  amended  the Dealership  Stock  Option  Plan
         (the "Dealer Plan") to  revise  the criteria for earning stock options.
         The  Plan   allows  for  562,500   options to be  issued  to   eligible
         independent   dealerships at a price  equal to the fair market value on
         the date of grant.  These   options   are   earned  based on the amount
         of contracts   funded  through CAC.  Options granted under the Plan are
         immediately exercisable and  expire  three  years  from the grant date.
         Since these options  have been granted to persons other than employees,
         the  Company adopted the recognition and measurement provisions of SFAS
         123, Accounting for Stock-Based Compensation.

      Employee and Director Plans:

o        The Company has a Key   Employee Stock Incentive Plan (the "1996 Plan")
         which provides for  the  granting  of  both incentive and non-qualified
         stock  options.  Additionally,   the   1996  Plan  provides   for stock
         appreciation rights and awards of both restricted stock and performance
         shares.  Options are granted   at  prices  and  terms determined by the
         compensation committee   of the Board of Directors.  The 1996 Plan also
         provides  for  an additional number of common shares to be reserved for
         issuance each   January 1  equal   to 1.5%  of the number of the common
         shares outstanding on that date.  Options  granted  under the 1996 Plan
         are generally exercisable six  months after  the grant  date and expire
         ten years from the date of grant.

o        The Company also has a  Non-employee  Director Plan under which 625,000
         shares  of the  Company's  common  stock  were  reserved  for  grant to
         non-employee  directors at fair market value on the date of such grant.
         Options  are  granted  upon  the   director's   initial   election  and
         automatically on an annual basis thereafter.  Options granted under the
         plan are  generally  exercisable  six  months  after the grant date and
         expire ten years from the date of grant.



                                       38
<PAGE>



o        The Company has an Employee  Stock  Purchase  Plan under which  625,000
         shares  of the  Company's  common  stock  may  be  issued  to  eligible
         employees  at a price equal to the lesser of 85% of the market price of
         the  stock  as of the  first  or last day of the  payment  periods  (as
         defined).  Employees may elect to have a portion of their  compensation
         withheld,  subject to certain limits,  to purchase the Company's common
         stock.

o        The Company has a Deferred   Compensation   and   Flexible  Option Plan
         (the "Deferred Plan")   which   provides   for deferral of a portion of
         certain   key   employees'   earnings   plus a Company match.  Upon the
         occurrence of a distributable event, the  employee   will   receive the
         greater of cash at a   fixed   annual return or shares of the Company's
         common stock credited to his  account valued at fair market value.  The
         Company   funds    benefits   under   the   Deferred  Plan through cash
         contributions and  through the issuance to a trust of a stock option at
         the time of deferral at an exercise price equal to fair market value on
         the date   of  the grant.  Under the Deferred Plan, there   are 500,000
         shares of Company common stock available for issuance.  At December 31,
         1998, the Company   had   recorded   plan   investments of $1,406 and a
         deferred compensation liability of $1,630.

      Compensation expense recorded in connection with these plans for the years
      ended December 31, 1998 and 1997 was not material.

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

      During  1998,  the  Company  revised  the  Dividend  Reinvestment  Plan to
      increase the shares  available  under the Plan to 500,000 and to eliminate
      the optional cash payment  feature of the Plan.  Participants  in the Plan
      may  purchase   additional   shares  of  the  Company's  common  stock  by
      reinvesting  the cash  dividends  on all, or part,  of their  shares.  The
      purchase  price of the  stock  will be the  higher  of 95% of  the average
      daily high and low sale prices of the  Company's  common stock on the four
      trading days including and preceding the  Investment  Date (as defined) or
      95% of the average high and low sales prices on the Investment Date.

      The Company applied Accounting Principles Board Opinion 25, Accounting for
      Stock Issued to Employees,  and related  interpretations in accounting for
      its employee and director plans. Accordingly,  no compensation expense has
      been  recognized  for these plans except where the exercise price was less
      than the fair  value on the date of  grant.  Had  compensation  cost  been
      determined based



                                       39
<PAGE>


      on the  fair  value  at the  grant  date  for  awards  under  these  plans
      consistent with the methodology  prescribed  under SFAS 123, the Company's
      net  income  and net  income  per share  would  approximate  the pro forma
      amounts below:

                                                  1998         1997        1996 

       Net income:
        As reported                            $ 18,655     $ 10,247    $ 27,479
        Pro forma                              $ 16,506      $ 8,661    $ 24,888

       Basic net income per share:
        As reported                              $ 0.94       $ 0.52      $ 1.42
        Pro forma                                $ 0.83       $ 0.44      $ 1.29

       Diluted net income per share:
        As reported                              $ 0.93       $ 0.51      $ 1.39
        Pro forma                                $ 0.82       $ 0.43      $ 1.26

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

                                                1998         1997         1996  

       Dividend yield                           1.56 %       1.13 %       0.66 %
       Expected volatility                     40.49 %      43.94 %      41.25 %
       Risk free interest rate                  5.52 %       6.12 %       5.99 %
       Expected lives                        5.0 years    3.0 years    3.0 years

      The effects of applying SFAS 123 in this pro forma  disclosure  may not be
      indicative of future  amounts,  and additional  awards in future years are
      anticipated.

      With respect to options exercised,  the income tax benefits resulting from
      compensation  expense  allowable  under federal income tax  regulations in
      excess of the expense reflected in the Company's financial statements have
      been credited to additional paid-in-capital. These benefits, which totaled
      $90 (1998), $-0- (1997), and $3,692 (1996),  represent a noncash financing
      transaction for purposes of the consolidated statements of cash flows.





                                       40
<PAGE>


     Information regarding all of the Company's stock option plans is summarized
     below:
<TABLE>
        <S>                                                       <C>             <C>                <C>    

                                                                                                       Weighted
                                                                                   Weighted             Average
                                                                                    Average            Fair Value
                                                                    Shares        Exercise Price     At Grant Date
        Outstanding at December 31, 1995                           1,193,457         $  4.51
         Granted:
           Price = Fair Value                                      1,640,833           14.42            $ 4.73
           Price < Fair Value                                         28,833           13.70              3.75
         Exercised                                                  (912,083)           4.92
         Cancelled                                                  (489,431)          15.90
                                                                  -----------       
        Outstanding at December 31, 1996                           1,461,609         $ 11.76
         Granted at Fair Value                                       858,425           10.61            $ 3.52
         Exercised                                                    (1,000)           4.27
         Cancelled                                                  (564,420)          13.75
                                                                  -----------       
        Outstanding at December 31, 1997                           1,754,614         $ 10.56
         Granted at Fair Value                                       890,393           10.26            $ 3.50
         Exercised                                                   (35,267)           4.45
         Cancelled                                                   (49,746)          11.39
                                                                  -----------
        Outstanding at December 31, 1998                           2,559,994         $ 10.52
                                                                  ===========       =========
        Options exercisable as of December 31, 1998                2,438,434         $ 10.42
                                                                  ===========       ========= 
        Options exercisable as of December 31, 1997                1,536,986         $ 10.37
                                                                  ===========       =========
        Options exercisable as of December 31, 1996                  649,947         $ 10.17
                                                                  ===========       =========
</TABLE>

      Stock  options  available  for future  grants at  December  31,  1998 were
      1,152,864 under all of the Company's various stock option plans.

      The  following  table  summarizes  information  concerning  stock  options
      outstanding at December 31, 1998:
<TABLE>

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

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

            $0.55 - $10.00           465,294         9.30        $  6.42        450,294       $  6.38
               $10.19                602,983         9.06        $ 10.19        602,983       $ 10.19
            $10.22 - $10.63          876,824         8.10        $ 10.57        876,824       $ 10.57
            $10.88 - $16.60          614,893         7.89        $ 13.88        508,333       $ 13.99
                                  ----------                                 -----------   
            $0.55 - $16.60         2,559,994         8.49        $ 10.52      2,438,434       $ 10.42
                                  ==========       =======       ========    ==========       ========
</TABLE>




                                       41
<PAGE>



7.    INCOME TAXES

      Provision for income taxes consist of:

                                                1998         1997        1996
       Current:
        Federal                              $ 12,469      $ 9,574     $ 15,456 
        State                                   2,238          921        2,258 
                                             ---------    ---------    ---------
                                               14,707       10,495       17,714 
                                             ---------    ---------    ---------
       Deferred:
        Federal                                (1,337)      (2,368)        (712)
        State                                    (743)         (35)        (295)
                                             ---------    ---------    ---------
                                               (2,080)      (2,403)      (1,007)
                                             ---------    ---------    ---------
         Total                               $ 12,627     $  8,092     $ 16,707 
                                             =========    =========    =========

      Total income tax expense for 1998,  1997,  and 1996 is different  from the
      amount that would be computed by applying the expected  federal income tax
      rate of 35% to income before income taxes. The reasons for this difference
      are as follows:
<TABLE>
      <S>                                                            <C>          <C>          <C>    

                                                                        1998        1997        1996

      Income tax at expected federal income tax rate                 $ 10,948     $  6,419     $ 15,465
      State income taxes, net of federal tax effect                     1,100          651        1,810
      Non-taxable life insurance proceeds                                             (525)        (655)
      Non-deductible operating expenses                                   295          387          107
      State jobs tax credits                                             (126)         (40)        (471)
      Non-deductible merger related expenses                                         1,085
      Other                                                               410          115          451
                                                                     ---------    ---------    ---------
                                                                     $ 12,627     $  8,092     $ 16,707
                                                                     =========    =========    =========
</TABLE>

      Deferred tax assets and  liabilities  are based on the expected future tax
      consequences  of temporary  differences  between the book and tax bases of
      assets  and   liabilities.   The  approximate  tax  effects  of  temporary
      differences at December 31, 1998 and 1997 were as follows:


                                                              1998        1997
                                                           ---------------------
                                                            Assets (Liabilities)
                                                           ---------------------
      Current differences:
       Warranty expense                                    $  4,051    $  4,058 
       Inventory capitalization                                 561         512 
       Allowance for losses on receivables                      718         939 
       Accrued expenses                                       4,059       1,132 
       Other                                                     24         599 
                                                           ---------   ---------
                                                           $ 9,413    $   7,240 
                                                           =========   =========


                                       42
<PAGE>


                                                              1998        1997  
                                                           ---------------------
                                                            Assets (Liabilities)
                                                           ---------------------
      Noncurrent differences:
       Depreciation and basis differential 
         of acquired assets                                $ (2,061)   $ (1,796)
       Goodwill                                                (569)       (726)
       Merger related expenses                                1,007       1,331 
       Other                                                  1,233         894 
                                                           ---------   ---------
                                                           $   (390)   $   (297)
                                                           =========   =========

      Cash paid for income taxes for the years ended December 31, 1998, 1997 and
      1996 was $12,250, $10,632 and $12,387, respectively.

8.    EMPLOYEE BENEFIT PLANS

      The Company has self-funded  group medical plans which are administered by
      third party  administrators.  The Plans have reinsurance coverage limiting
      liability  for any  individual  employee loss to a maximum of $75, with an
      aggregate  limit of losses in any one year based on the  number of covered
      employees.   Incurred  claims  identified  under  the  Company's  incident
      reporting  system  and  incurred  but not  reported  claims  are funded or
      accrued based on estimates that incorporate the Company's past experience,
      as well as  other  considerations  such as the  nature  of each  claim  or
      incident, relevant trend factors and advice from consulting actuaries. The
      Company has  established  self insurance trust funds for payment of claims
      and makes deposits to the trust funds in amounts  determined by consulting
      actuaries.  The cost of these plans to the Company was $5,517,  $4,693 and
      $2,893 for years ended December 31, 1998, 1997 and 1996, respectively.

      The  Company  sponsors  employee  401(k)  retirement  plans  covering  all
      employees who meet participation requirements.  Employee contributions are
      limited to a  percentage  of  compensation  as  defined in the Plans.  The
      amount  of  the  Company's  matching   contribution  is  discretionary  as
      determined by the Board of Directors.  Company  contributions  amounted to
      $623,  $545 and $420 for the years ended December 31, 1998, 1997 and 1996,
      respectively.

9.    COMMITMENTS AND CONTINGENCIES

      Operating Leases:

      Five of the Company's  manufacturing  facilities are leased under separate
      operating  lease  agreements (the "Related  Leases") with  partnerships or
      companies whose owners are certain officers,  directors or stockholders of
      the Company.  The Related Leases require monthly  payments ranging from $6
      to $22 and provide for lease terms  ending from April 1999 to July 2001 as
      well as renewal option periods.  The Related Leases also contain  purchase
      options  whereby the Company can  purchase  the  respective  manufacturing
      facility  for amounts  ranging  from $850 to $1,900 at any time during the
      lease  terms.  Two  purchase  options  were  exercised in January 1999 for
      $1,500 and  $1,900.  The  remaining  purchase  options  range from $850 to
      $1,125.

      Additionally,  the Company is  obligated  under  various  operating  lease
      agreements with varying monthly payments and expiration dates through June
      2017.  Total rent expense under  operating  leases was $1,353,  $1,418 and
      $1,242 for the years ended December 31, 1998, 1997 and 1996, respectively,
      including  rents paid to related  parties of $865 (1998),  $817 (1997) and
      $765 (1996).



                                       43
<PAGE>


      Future minimum rents payable under  operating  leases that have initial or
      remaining  non-cancelable lease terms in excess of one year as of December
      31, 1998 are as follows:

                 Year Ending
                 December 31,

                    1999                                                 $   592
                    2000                                                     448
                    2001                                                     356
                    2002                                                     296
                    2003                                                     156
                 Thereafter                                                  322
                                                                         -------
                   Total                                                 $ 2,170
                                                                         =======


      Contingent Liabilities and Other:

      a.    The Company is    contingently   liable  under  terms  of repurchase
            agreements with financial institutions providing inventory financing
            for retailers of   its   products.  These   arrangements, which  are
            customary in the industry, provide  for  the  repurchase of products
            sold to retailers in the   event  of  default   on  payments  by the
            retailer.  The risk of   loss under  these agreements is spread over
            numerous retailers.  The price   the   Company   is obligated to pay
            generally declines over the   period of the agreement and is further
            reduced   by  the  resale value of repurchased homes.  The estimated
            potential obligations under such agreements approximated $242,000 at
            December 31, 1998.  The Company   has   an   allowance for losses of
            $1,201 (1998) and $1,175 (1997) based on prior experience and market
            conditions.  Management expects no material  loss in   excess of the
            allowance.

      b.    Under the  insurance  plans  described  in Note 1, the  Company  was
            contingently  liable at December  31, 1998 for future  retrospective
            premium  adjustments up to a maximum of approximately  $7,531 in the
            event that additional losses are reported related to prior years.

      c.    The Company   is   engaged  in   various  legal proceedings that are
            incidental to and arise in the course of its business.    Certain of
            the cases filed against the  Company and other companies engaged  in
            businesses similar to the Company allege, among other things, breach
            of contract and warranty, product   liability,  personal  injury and
            fraudulent,   deceptive   or collusive  practices in connection with
            their businesses.  These  kinds  of suits are typical of suits  that
            have   been   filed   in   recent  years,  and   they sometimes seek
            certification as class actions, the imposition of large   amounts of
            compensatory   and   punitive   damages  and trials by jury.  In the
            opinion  of management, the ultimate liability, if any, with respect
            to the proceedings in which the Company is currently involved is not
            presently expected to have a material adverse effect on the Company.
            However, the potential exists   for   unanticipated material adverse
            judgments against the Company.

      d.    The  Company  and certain of its equity  partners  have  jointly and
            severally  guaranteed  revolving  notes  for three  companies  and a
            letter of credit for one company in which the Company  owns  various
            equity interests.  The guarantees are limited to various percentages
            of the  outstanding  debt up to a maximum  guaranty  of  $1,980.  At
            December  31,  1998,   $3,901  was  outstanding  under  the  various
            guarantees, of which the Company had guaranteed $925.



                                       44
<PAGE>



10.   SEGMENT INFORMATION

      On December  31, 1998,  the Company  adopted  SFAS 131,  Disclosure  about
      Segments of an Enterprise and Related  Information.  SFAS 131  established
      standards for reporting  information  about  segments in annual  financial
      statements  and requires  selected  information  about segments in interim
      financial  reports issued to stockholders.  It also established  standards
      for related disclosures about products and services, and geographic areas.
      Segments are defined as components of an enterprise  about which  separate
      financial  information  is available  that is  evaluated  regularly by the
      chief operating  decision-maker in deciding how to allocate  resources and
      in assessing performance.

      Under this  standard,  the  Company's  reportable  segments are  organized
      around products and services.  Through its home manufacturing segment, the
      Company's 11  divisions,  which are  aggregated  for  reporting  purposes,
      design and  manufacture  homes  which are sold in the  United  States to a
      network of dealers which includes Company owned retail locations.  Through
      its financial services segment, the Company offers retail installment sale
      financing  and related  insurance  products  for  manufactured  homes sold
      through the Company's  exclusive dealer network and  Company-owned  retail
      locations.   The  Company's   retail   locations  and  various   component
      manufacturers,  which  include  investments  accounted  for by the  equity
      method,  are  aggregated  in  a  category  described  as  "other".  Retail
      locations  derive their revenue from home sales to individuals,  while the
      component   manufacturers'   customers   are   the   Company   and   other
      manufacturers.  The  accounting  policies of the  segments are the same as
      those described in the summary of significant  accounting  policies except
      that  intercompany  profits,  transactions  and  balances  have  not  been
      eliminated.  The Company's  determination of segment operating profit does
      not reflect other income (expenses) or income taxes.
<TABLE>
<S>                                                                 <C>            <C>           <C>    

                                                                        1998           1997          1996

Gross revenues:
  Home manufacturing                                                $ 603,369      $ 553,730     $ 572,997
  Financial services                                                    6,088          5,346         3,333
  Other                                                                43,866         22,688        14,576
                                                                    ---------      ---------     ---------
    Gross revenue                                                     653,323        581,764       590,906
                                                                    ---------      ---------     ---------
Intersegment revenues:
  Home manufacturing                                                    5,253
  Financial services
  Other                                                                34,000        20,576         13,735
                                                                    ---------      --------      ---------
  Intersegment revenues                                                39,253        20,576         13,735
                                                                    ---------      --------      ---------
Revenues from external customers:
  Home manufacturing                                                  598,116       553,730        572,997
  Financial services                                                    6,088         5,346          3,333
  Other                                                                 9,866         2,112            841
                                                                    ---------      --------      ---------
    Total revenues                                                  $ 614,070     $ 561,188      $ 577,171
                                                                    =========     =========      =========
</TABLE>



                                       45
<PAGE>

<TABLE>

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

                                                                        1998           1997           1996

Operating profit:
  Home manufacturing                                                $  26,193      $  23,742      $  41,101
  Financial services                                                    2,215          2,015          1,236
  Other                                                                 1,887            598            156
  Elimination                                                            (826)           (77)           119
                                                                    ----------     ----------     ----------
  Segment operating profit                                             29,469         26,278         42,612
  General corporate                                                       282         (9,197)        (1,765)
                                                                    ----------     ----------     ----------
  Operating profit                                                  $  29,751      $  17,081      $  40,847
                                                                    ==========     ==========     ==========
Depreciation and amortization:
  Home manufacturing                                                $   7,305      $   6,686      $   5,224
  Financial services                                                      209            208            150
  Other                                                                   531            337            160
                                                                    ----------     ----------     ----------
  Segment depreciation and amortization                                 8,045          7,231          5,534
  General corporate                                                       320            261            226
                                                                    ----------     ----------     ----------
    Total depreciation and amortization                             $   8,365      $   7,492      $   5,760
                                                                    ==========     ==========     ==========
Capital expenditures:
  Home manufacturing                                                $  13,173      $   8,370      $  13,349
  Financial services                                                      181            265            196
  Other                                                                   985             89          2,320
                                                                    ----------     ----------     ----------
  Segment capital expenditures                                         14,339          8,724         15,865
  General corporate                                                       316          1,462            241
                                                                    ----------     ----------     ----------
    Total capital expenditures                                      $  14,655      $  10,186      $  16,106
                                                                    ==========     ==========     ==========
Identifiable assets:
  Home manufacturing                                                $ 151,389      $ 139,454      $ 153,237
  Financial services                                                   28,406         41,050         26,283
  Other                                                                18,988          7,509          7,954
  Elimination                                                          (1,753)          (421)           (77)
                                                                    ----------     ----------     ----------
  Segment assets                                                      197,030        187,592        187,397
  General corporate                                                    38,922         23,962          8,990
                                                                    ----------     ----------     ----------
    Total assets                                                    $ 235,952      $ 211,554      $ 196,387
                                                                    ==========     ==========     ==========
</TABLE>

      The financial  services  segment's  operating profit includes net interest
      income of $2,987,  $3,283,  and $2,232 for the years  ended  December  31,
      1998, 1997, and 1996, respectively, and gains from the sale of installment
      contracts  of  $2,048  at  December  31,  1998.  There  were no  sales  of
      installment contracts during the years ended December 31, 1997 and 1996.

      Identifiable  assets for the "other" category include $1,447,  $1,264, and
      $1,105 of investment  in equity method  investees as of December 31, 1998,
      1997 and 1996,  respectively.  "Other" segment  operating  income includes
      equity in the net income of investees  accounted  for by the equity method
      of $250,  $296, and $533 for the years ended  December 31, 1998,  1997 and
      1996, respectively.







                                        * * * * *


                                       46
<PAGE>


                      CAVALIER HOMES, INC. AND SUBSIDIARIES

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
              For the Years Ended December 31, 1998, 1997 and 1996
                             (Dollars in Thousands)

<TABLE>
<S>                                           <C>             <C>            <C>           <C>          <C>           <C>
                                                               Increases      Additions
                                                Balance at    Attributable   Charged to     Charged                    Balance at
                                               Beginning of        to         Costs and     to Other                     End of
                                                 Period       Acquisitions     Expenses     Accounts     Deductions      Period
                                              -------------   -------------  ------------  ----------   -----------   -----------
Allowance for losses on Accounts
   Receivable:
       Year Ended December 31, 1998           $      1,175                            26                              $    1,201
                                              =============   =============  ============  ==========   ===========   ===========

       Year Ended December 31, 1997           $        837                           527                      (189)   $    1,175
                                              =============   =============  ============  ==========   ===========   ===========

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

Allowance for credit losses:
       Year Ended December 31, 1998           $      1,272                          (512)                             $      760
                                              =============   =============  ============  ==========   ===========   ===========

       Year Ended December 31, 1997           $        941                         1,329                      (998)   $    1,272
                                              =============   =============  ============  ==========   ===========   ===========

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

Accumulated amortization of goodwill:
       Year Ended December 31, 1998           $      3,102                         1,052                              $    4,154
                                              =============   =============  ============  ==========   ===========   ===========

       Year Ended December 31, 1997           $      1,947                         1,068          87                  $    3,102
                                              =============   =============  ============  ==========   ===========   ===========

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

Accumulated amortization of non-compete
           agreement:
       Year Ended December 31, 1998           $        277                            76                              $      353
                                              =============   =============  ============  ==========   ===========   ===========

       Year Ended December 31, 1997           $        221                            56                              $      277
                                              =============   =============  ============  ==========   ===========   ===========

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

Warranty reserve:
       Year Ended December 31, 1998           $     11,700                           700                              $   12,400
                                              =============   =============  ============  ==========   ===========   ===========

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

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





                                       47
<PAGE>

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

None.

                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

For a description  of the directors and executive  officers of the Company,  see
"Election of Directors,"  "Executive  Officers and Principal  Stockholders," and
"Section 16(a) Beneficial Ownership Reporting Compliance" of the Company's Proxy
Statement  for the Annual  Meeting of  Stockholders  to be held on May 19, 1999,
which are incorporated herein by reference.

ITEM 11.          EXECUTIVE COMPENSATION

For a description  of the  Company's  executive  compensation,  see "Election of
Directors,"   "Executive  Officers  and  Principal   Stockholders,"   "Executive
Compensation" (other than the "Report of the Compensation Committee on Executive
Compensation" and the "Performance Graph"),  "Compensation  Committee Interlocks
and   Insider   Participation,"   and   ''Certain   Relationships   and  Related
Transactions"  of the  Company's  Proxy  Statement  for the  Annual  Meeting  of
Stockholders  to be held on May 19,  1999,  which  are  incorporated  herein  by
reference.

ITEM 12.          SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

For a description of the security ownership of management and certain beneficial
owners,  see "Executive  Officers and Principal  Stockholders"  of the Company's
Proxy  Statement for the Annual  Meeting of  Stockholders  to be held on May 19,
1999, which are incorporated herein by reference.

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

For a  description  of certain  relationships  and related  transactions  of the
Company, see "Compensation  Committee Interlocks and Insider Participation," and
"Certain   Relationships  and  Related  Transactions"  of  the  Company's  Proxy
Statement  for the Annual  Meeting of  Stockholders  to be held on May 19, 1999,
which are incorporated herein by reference.

                                     PART IV

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

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

   Financial Statement Description                            Form 10-K Page No.

    Independent Auditors' Report                                              26
    Consolidated Balance Sheets as of December 31, 1998 and 1997              27
    Consolidated Statements of Income for the years ended December 31, 1998,  29
            1997 and 1996
    Consolidated Statements of Stockholders' Equity for the years ended       30
            December 31, 1998, 1997 and 1996
    Consolidated Statements of Cash Flows for the years ended December 31,    31
            1998, 1997 and 1996
    Notes to Consolidated Financial Statements                                32

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

No.     Schedule Description                                  Form 10-K Page No.

II     Valuation and Qualifying Accounts                                      47


<PAGE>

        3. The exhibits required to be filed with this report are listed below.
The Company  will  furnish  upon  request  any  of  the exhibits listed upon the
receipt  of  $15.00  per  exhibit,  plus $.50 per page, to cover the cost to the
Company of providing the exhibit.

(3)               Articles of Incorporation and By-laws.

                  (a)      Composite  Amended and Restated Certificate of
Incorporation of the Company.

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

*                 (c)      The Amended  and  Restated  By-laws  of the  Company,
filed  as  Exhibit  3(d)  to the Company's  Quarterly  Report on  Form  10-Q for
the quarter  ended  June  27, 1997,  and the amendments thereto filed as Exhibit
3(e) to  the  Company's  Quarterly   Report on Form 10-Q for the  quarter  ended
September 26, 1997 and as Exhibit 3(c) to the Company's Quarterly Report on Form
10-Q for the quarter ended September 25, 1998.

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

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

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

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

 (10)    Material contracts

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

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

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

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

*        **       (e)      Cavalier Homes, Inc. Executive Incentive Compensation
Plan, filed as an Appendix to the Company's  definitive Proxy  Statement for the
Annual Meeting of Stockholders held May 15, 1996.

*        **       (f)      Amendment to Cavalier Homes, Inc. Executive Incentive
Compensation  Plan,  filed as Exhibit 10(ii) to the Company's  Quarterly  Report
on Form 10-Q for the quarter ended March 28, 1997.

*        **       (g)      Cavalier Homes, Inc.  Employee Stock  Purchase  Plan,
filed as an  Appendix to the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders held May 15, 1996.

*        **       (h)      Cavalier  Homes,  Inc. Key Employee  Stock  Incentive
Plan,  filed as an Appendix to the Company's definitive Proxy  Statement for the
Annual Meeting of Stockholders held May 15, 1996.

<PAGE>

*        **       (i)      Amendment to Cavalier Homes,  Inc. Key Employee Stock
Incentive Plan, filed as Exhibit 10(i) to the Company's Quarterly Report on Form
10-Q for the quarter ended March 28, 1997.

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

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

         **       (l)      Amendment  to   Cavalier  Homes,  Inc.  Key  Employee
Stock  Incentive  Plan,  effective October 20, 1998.

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

*        **       (n)      Amendment   to   Cavalier  Homes,  Inc.  Amended  and
Restated  Nonemployee  Directors  Plan filed  as Exhibit  10(i) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.

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

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

*                 (q)      Cavalier   Homes,   Inc.   Amended    and    Restated
Dealership  Stock  Option Plan filed as Appendix A to the Company's Registration
Statement on Form S-3, Amendment No. 2, Registration No. 33-62487,  dated
June 18, 1998.

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

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

*                 (t)      Holdback   agreement   between  Cavalier Homes,  Inc.
and Raymond A. Peltcs,  dated October 28, 1994,  filed as  Exhibit  2(b)  to the
Company's  Quarterly  Report on Form 10-Q for  the quarter  ended  September 30,
1994.

                  (u)      Revolving, Warehouse  and Term Loan  Agreement  among
the Company and First  Commercial Bank dated February 17, 1994.

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

*                 (w)      Second  Amendment to  the   Revolving  Warehouse  and
Term Loan  Agreement  among  Cavalier Homes,  Inc. and  First  Commercial  Bank,
dated June 1, 1998,  filed as Exhibit 10(b) to  the  Company's  Quarterly Report
on Form 10-Q for the period ended June 26, 1998.

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

*                 (y)      Assumption  Agreement among Cavalier Homes,  Inc. and
First  Commercial  Bank,  dated  June  1,  1998,  filed  as Exhibit 10(c) to the
Company's Quarterly Report on Form 10-Q for the period ended June 26, 1998.

                  (z)      Cavalier  Homes,  Inc.   1993  Amended  and  Restated
Nonqualified Stock Option Plan.

*        **       (aa)     Cavalier  Homes, Inc. 1988 Nonqualified  Stock Option
Plan, as amended,  filed as Exhibit 10(a) to the Company's Annual Report on Form
10-K for the year ended December 31, 1993.

<PAGE>

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

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

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

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

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

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

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

*                 (ii)     Lease  Agreement  dated  March 1,  1995,  between the
Industrial Development Board of the City of Haleyville,  Alabama and Wheel House
Properties, Inc., as assigned to and assumed by Star Industries, Inc. on January
11,  1996,  and as further  assigned to and assumed  by Cavalier  Manufacturing,
Inc. in December  1996, filed  as  Exhibit 10(bb) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996.

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

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

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

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

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

                  (oo)     Guaranty  Agreement  between  First  Commercial  Bank
and Cavalier  Homes,  Inc.,  dated December 18,  1998, relating to guaranty of
payments by Lamraft, LP.

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

<PAGE>

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

*        **       (rr)     Belmont   Homes,  Inc.  1994  Incentive  Stock  Plan,
filed as an Exhibit to  the  Belmont Homes, Inc.  Registration Statement on Form
S-1, Registration No. 33-87868.

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

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

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

*                 (vv)     Form of  Indemnification  Agreement  between  Belmont
Homes,  Inc. and the Directors  and Executive  Officers of Belmont Homes,  Inc.,
filed as Exhibit 10.2 to Belmont Homes,  Inc.  Current  Report on Form 8-K filed
on September 8, 1997.

*                 (ww)     Agreement  dated  March  10,  1998,  by  and  between
Cavalier Acceptance Corporation  and Green Tree Financial Servicing Corporation,
filed as Exhibit 10(xx) to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.

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

*                 (yy)     Commercial  Sub-Lease and Agreement  between  Perfect
Panels,  Inc. and Quality Housing Supply,  Inc.,  dated July 1, 1996,  filed  as
Exhibit  10(zz) to the  Company's  Annual Report on Form 10-K for the year ended
December 31, 1997.

*                 (zz)     Amended and Restated Finance Agreement among Cavalier
Manufacturing,  Inc.,   Cavalier   Acceptance  Corporation and  certain  related
entities and Green Tree Financial Corp.  and certain related  entities, filed as
Exhibit 10(a) to the Company's  Quarterly  Report on  Form  10-Q for  the period
ended March  27, 1998.

*                 (aaa)    Lease   Agreement  with  Option  to  Purchase   dated
November  29,  1995  between  Winfield Industrial Properties,  Inc. and Superior
Door Company, Inc., predecessor to Quality Housing Supply, LLC, filed as Exhibit
10(b) to the Company's Quarterly Report on  Form 10-Q for the period ended March
27, 1998.

*                 (bbb)    Split   dollar   Agreement  dated  May 15,  1998,  by
and  between  the Company and  Jerry F. Wilson,  Jr.  as  Trustee  of the  David
Allen   Roberson  Family  Trust,  filed  as   Exhibit  10(a) to   the  Company's
Quarterly Report on  Form 10-Q for the period ended June 26, 1998. 

*                 (ccc)    Cavalier  Homes,  Inc.  Deferred  Compensation  Plan,
effective  April  1, 1998, filed as Exhibit  10(d)  to  the  Company's Quarterly
Report on Form 10-Q for the period ended June 26, 1998.

*                 (ddd)    Cavalier  Homes,  Inc.  Flexible  Option  Plan  filed
as   Exhibit   4(e) to  the  Company's   Registration   Statement  on  Form S-8,
Registration No. 333-57743, dated June 28, 1998.

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

*                 (fff)    Retention   and  Severance  Agreement,  dated  August
26, 1998,  by and between  Cavalier Homes,  Inc. and Barry B. Donnell,  filed as
Exhibit 10(b) to the Company's  Quarterly  Report  on  Form 10-Q for  the period
ended September 25, 1998.

                  (ggg)    Retention   and  Severance  Agreement,  dated  August
26, 1998, by and between Cavalier Homes, Inc. and David A. Roberson,  originally
filed as Exhibit 10(c) to  the Company's  Quarterly  Report on Form 10-Q for the
period ended  September 25, 1998,  but filed as an exhibit to this Annual Report
on Form 10-K in order to correct a typographical error.
<PAGE>

*                 (hhh)    Retention  and   Severance  Agreement,  dated  August
26, 1998,  by  and between  Cavalier Homes,  Inc. and Michael  R. Murphy,  filed
as Exhibit 10(d) to the Company's  Quarterly  Report on Form 10-Q for the period
ended September 25, 1998.

(11)              Statement re Computation of Per Share Earnings.

(21)              Subsidiaries of the Registrant.

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

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

(27)              Financial Data Schedule

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

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

         (b)      Reports on Form 8-K.

                  None.

<PAGE>

               CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

o        integrating   the   business  operations  and  achieving  the  benefits
            of the  Belmont  merger  and  other acquisitions;
o        the cyclical and  seasonal nature  of the manufactured housing industry
            and the economy generally;
o        litigation;
o        competition;
o        regulatory constraints;
o        changes  and  volatility  in  interest  rates and the  availability  of
             capital  and  consumer  and dealer financing;
o        changes in demographic trends, consumer preferences and Cavalier's
             business strategy;
o        the   ability  to  attract  and  retain  quality  independent  dealers,
             executive officers and other personnel;
o        the potential unavailability and price increases for raw materials;
o        contingent repurchase and guaranty obligations; and
o        unanticipated delays or difficulties in implementing our Year 2000
              plans.

Any or all of our forward-looking  statements in this report, in the 1998 Annual
Report to Stockholders  and in any other public  statements we make may turn out
to be wrong. These statements may be affected by inaccurate assumptions we might
make or by known or unknown risks and  uncertainties.  Many factors listed above
will  be   important   in   determining   future   results.   Consequently,   no
forward-looking  statement can be  guaranteed.  Actual  future  results may vary
materially.

We undertake no obligation to publicly  update any  forward-looking  statements,
whether as a result of new  information,  future  events or  otherwise.  You are
advised, however, to consult any further disclosures we make on related subjects
in our future filings with the  Securities and Exchange  Commission or in any of
our press  releases.  Also note that,  under the heading Risk  Factors,  we have
provided a discussion of factors that we think could cause our actual results to
differ  materially from expected and historical  results.  Other factors besides
those listed could also adversely affect  Cavalier.  This discussion is provided
as permitted by the Private Securities Litigation Reform Act of 1995.

<PAGE>

SIGNATURES


Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


                              CAVALIER HOMES, INC.
                              --------------------  
                                   Registrant

                           By:/s/ DAVID A. ROBERSON
                              --------------------
                                  Its President

                              Date: March 30, 1999


Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

Signature                                   Title                          Date

/s/ DAVID A. ROBERSON         Director and Principal Executive    March 30, 1999
---------------------                      Officer

/s/ MICHAEL R. MURPHY         Director and Principal Financial    March 30, 1999
---------------------              and Accounting Officer

/s/ BARRY DONNELL           Chairman of the Board and Director    March 30, 1999
-----------------

/s/ THOMAS A. BROUGHTON, III        Director                      March 30, 1999
----------------------------

/s/ JOHN W LOWE                     Director                      March 30, 1999
---------------

/s/ LEE ROY JORDAN                  Director                      March 30, 1999
------------------

/s/ GERALD R. MOORE                 Director                      March 30, 1999
-------------------

/s/ A. DOUGLAS JUMPER, SR.          Director                      March 30, 1999
--------------------------

/s/ MIKE KENNEDY                    Director                      March 30, 1999
----------------
<PAGE>

                                    INDEX

Exhibit
Number

(3)(a)   Composite  Amended and Restated Certificate of Incorporation
                     of the Company.

(10)     Material Contracts

                  (l)      Amendment  to  Cavalier  Homes,  Inc.  Key   Employee
                           Stock  Incentive  Plan,  effective October  20, 1998.

                  (u)      Revolving,  Warehouse  and Term Loan  Agreement among
                           the Company and First  Commercial Bank dated February
                           17, 1994.

                  (z)      Cavalier   Homes,   Inc.   1993  Amended and Restated
                           Nonqualified Stock Option Plan.

                  (oo)     Guaranty  Agreement  between  First  Commercial  Bank
                           and Cavalier  Homes,  Inc.,  dated December 18, 1998,
                           relating to guaranty of payments by Lamraft, LP.

                  (ggg)    Retention   and  Severance  Agreement,  dated  August
                           26, 1998,  by and between  Cavalier Homes,  Inc.  and
                           David A. Roberson, originally  filed as Exhibit 10(c)
                           to the Company s Quarterly  Report  on  Form 10-Q for
                           the period ended  September 25, 1998, but filed as an
                           exhibit to this Annual  Report on Form 10-K  in order
                           to correct a typographical error.

(11)     Statement Re Computation of Per Share Earnings

(21)     Subsidiaries of the Registrant

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

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

(27)     Financial Data Schedule (Filed as an EDGAR exhibit only)

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