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, 1999
         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 32 Wilson Boulevard,
       Addison, Alabama                                           35540
  (Address of principal executive offices)                       Zip Code

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

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 20, 2000, was $39,930,897.

      Indicate the number of shares outstanding of each of the Registrant's
                 classes of common stock, as of March 20, 2000.
                                   17,767,528

                             Common, $0.10 par value
                       Documents Incorporated by Reference
    PartIII of this report incorporates by reference certain portions of the
 Registrant's Proxy Statement for its Annual Meeting of Stockholders to be held
                                  May 16, 2000.


                                        1
<PAGE>

                              CAVALIER HOMES, INC.
                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1999

                                     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 32 Wilson
Boulevard,  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 1997  consolidated  financial  statements  have been
restated  to include the results of  operations  and cash flows of Belmont.  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  engaged  in  the  production,  sale,  financing  and  insuring  of
manufactured  homes.  The  Company has chosen to build its  distribution  system
around exclusive  independent dealers,  which the Company believes gives it many
of the same efficiencies and market presence that captive retail centers provide
to other  companies.  At December 31,  1999,  Cavalier had a total of 290 dealer
locations  participating  in its Exclusive  Dealer  Program,  including  sixteen
Company-owned  retail  locations.  In  addition,  the Company  markets its homes
through  approximately  800  non-exclusive  independent  dealer  locations in 28
states.

The  Company  designs  and  manufactures  a wide  range of homes with a focus on
serving  the low- to  medium-priced  manufactured  housing  market  in the South
Central and South Atlantic regions of the United States. The Company's homes are
sold under 87 brand names, normally include appliances, may be furnished and are
comprised  of one or more floor  sections.  At December  31,  1999,  the Company
operated 19 home manufacturing facilities, one plant that manufactures laminated
wall board, and three material and supply distribution locations.  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 ("CAC"), the Company's finance subsidiary,  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 recourse (provided that the transferred loan was properly  originated by
the dealer and purchased by CAC. CAC does not retain the servicing  function and
does not earn interest income on those resold loans.

Revenue,  operating profit,  identifiable assets and other financial data of the
Company's  industry  segments  for the three years ended  December  31, 1999 are
contained in Note 12 of Notes to Consolidated Financial Statements in Part II.


                                        2
<PAGE>

Home Manufacturing Operations
At December 31, 1999, the Company, through six wholly owned subsidiaries,  owned
or leased nineteen manufacturing facilities (excluding idled facilities) engaged
in the  production  of  manufactured  homes.  Because  of  deteriorating  market
conditions,  Cavalier  idled a  total  of five  home  manufacturing  facilities,
including  three  subsequent  to the end of 1999,  that built  primarily  single
section  homes  to  consolidate  production  into  other  plants.  See  "Item 2.
Properties".  Immediately  following  the end of 1999,  the Company  reorganized
certain of its  operating  subsidiaries,  and merged them into and combined them
with a new operating subsidiary,  Cavalier Enterprises, Inc. ("CEI"), a Delaware
corporation,  (formerly Belmont Homes, Inc. ("Belmont"),  Spirit Homes, Inc. and
Delta Homes,  Inc., both  subsidiaries of Belmont).  Cavalier  Industries,  Inc.
("CII"), a Delaware corporation, was reorganized to include the former Bellcrest
Homes,  Inc. and Adrian Homes,  a division of Bellcrest  Homes,  Inc. The former
operating   subsidiaries   will  continue  their   operations  as  divisions  or
subsidiaries  of CEI and CII,  and are known as Belmont  Homes,  a  division  of
Cavalier  Enterprises,  Inc.,  Delta  Homes,  Inc.,  a  subsidiary  of  Cavalier
Enterprises,  Inc.,  Spirit  Homes,  a division of Cavalier  Enterprises,  Inc.,
Bellcrest  Homes, a division of Cavalier  Industries,  Inc., and Adrian Homes, a
division of Cavalier  Industries,  Inc. 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 nineteen  facilities  (excluding idled  facilities) at the
end of 1999. Because of deteriorating  market  conditions,  Cavalier has idled a
total of five home manufacturing  facilities,  including three subsequent to the
end of 1999, that built primarily single section homes to consolidate production
into other plants.  The Company's  operating  facilities  normally function on a
single-shift,  five-day  week  basis with the  approximate  annual  capacity  to
produce 40,000 floors.

The following  table sets forth certain sales  information  for 1999,  1998, and
1997:

<TABLE>
<CAPTION>
                                         For the Year Ended December 31,
                           -------------------------------------------------------------
                                  1999                 1998                 1997
                           -------------------  -------------------  -------------------
<S>                        <C>         <C>      <C>         <C>      <C>         <C>
Number of homes sold:

   Single-section homes      10,546       47%      12,430      51%      13,576      58%
   Multi-section homes       11,831       53%      11,957      49%      10,026      42%
                           ---------   -------  ----------  -------  ----------  -------

      Total homes            22,377      100%      24,387     100%      23,602     100%
                           =========   =======  ==========  =======  ==========  =======

Number of floors sold        34,294                36,517               33,646
                           =========            ==========           ==========

</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  workstations  where
various components and sub-assemblies are attached. Certain sub-assemblies, such
as plumbing,  cabinets,  ceilings and wall  systems,  are  assembled at off-line
workstations.  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 siding, galvanized roofing materials,  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,
during  1999,  the Company  experienced  tightened  supply from its  traditional
vendors of  certain  types of raw  materials,  including  sheetrock,  lumber and
insulation,  required for the production of its manufactured  homes. The Company
obtained these and similar products from other vendors, which resulted in higher
than normal costs, some of which the Company was unable to recover through price
increases.


                                        3
<PAGE>

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

Because the cost of transporting a manufactured home is significant,  there is a
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.  Dealers  or  other
independent  installers are responsible for placing the home on site,  combining
of multi-section  homes, making utility connections and providing and installing
certain  accessory  items  and  appurtenances,   such  as  decks,  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 800 different models of manufactured  homes
with a variety  of decors  that are  marketed  under 87 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.

Modular homes are homes designed to meet building codes  administered  by states
and local  authorities,  as opposed to the national HUD guidelines.  Five of the
Company's  manufacturing  facilities currently  manufactures 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.


                                        4
<PAGE>

Independent Dealer Network, Sales and Marketing
As of December 31, 1999,  the Company had, under its Exclusive  Dealer  Program,
290  participating  dealer  locations  selling only the Company's  homes,  which
included  sixteen  Company-owned  retail  locations.  In  addition,  the Company
markets its homes through  approximately  800 independent  non-exclusive  dealer
locations in 28 states.

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


For the Year Ended December 31,                           1999    1998   1997
-------------------------------                          ------- ------- ------

Number of independent exclusive dealer locations           274     232    132

Percentage of manufactured home sales                       55%     40%    30%


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 88% of the Company's sales in 1999 were to dealers operating sales
centers in the  Company's  core states as follows:  Texas - 17%,  Alabama - 12%,
Georgia - 9%, North Carolina - 9%, South Carolina - 8%, Arkansas - 8%, Louisiana
- 7%, Mississippi - 7%, Tennessee - 4%, Oklahoma - 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 1999,  the  Company's
largest dealer accounted for approximately 1.9% 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 Company will continue to focus
on exclusive  independent  dealers,  the Company has diversified its channels of
distribution with a few Company-owned retail locations. Cavalier purchased seven
retail  locations in 1999,  and opened four other sites during the year,  ending
the year with a total of sixteen  Company-owned  stores. The Company may open or
acquire other locations in the future at a conservative  pace and may close some
of its existing locations. *

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

--------
* See Safe Harbor Statement on page 31.

                                        5
<PAGE>

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,  1999,  the Company
maintained a sales force of 111  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 20% 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, 1999,  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 loan  portfolio as of such date  generally
ranged from 9% to 14%, and the approximate  weighted  average annual  percentage
interest rate was 11.16%. Currently, CAC operates in most of the states in which
the Company has independent exclusive dealers.

For those retail  customers  who meet CAC's  lending  standards,  CAC strives to
provide  prompt  credit  approvals and funding of loans.  CAC has  established a
standardized credit scoring system to facilitate 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 $2.2, $1.0 and $1.3 million in
1999, 1998, and 1997, respectively. Additionally, as a result of defaults, early
payoffs and repossessions the reserve was charged $1.3, $1.6 and $1.0 million in
1999, 1998, and1997, respectively. The reserve for credit losses at December 31,
1999 was $1.7 million as compared to $0.8 million at December 31, 1998, and $1.3
million at December 31, 1997.

In 1999, 1998 and 1997, CAC repossessed 62, 77 and 92 homes,  respectively.  The
Company's  inventory of repossessed  homes was 28 homes at December 31, 1999, as
compared to 30 homes at December  31,  1998,  and 50 homes at December 31, 1997.
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 1999, 1998 and 1997 was 7.83%, 5.01% and 2.27%, respectively.

At  December  31, 1999 and  December  31,  1998,  delinquencies  expressed  as a
percentage of the total number of  installment  sale  contracts  which CAC owned
were as follows:


                                        6
<PAGE>
<TABLE>
<CAPTION>


                                                        Delinquency Percentage
                                     ----------------------------------------------------------
<S>                 <C>              <C>              <C>               <C>            <C>

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


       1999                290              1.03%           0.00%           0.00%        1.03%

       1998                986              1.62%           0.41%           0.10%        2.13%


</TABLE>

At  December  31, 1999 and  December  31,  1998,  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
                    ----------------  -------------   ---------------  --------------  --------

       1999            $9,450,000           0.90%           0.00%           0.00%        0.90%

       1998           $26,117,000           1.89%           0.58%           0.19%        2.66%
</TABLE>

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,
                                      -------------------------------------------------
                                           1999            1998              1997
                                      --------------- ----------------  ---------------
<S>                                   <C>            <C>              <C>
Total loans receivable                $    9,450,000 $     26,117,000 $     49,146,000
Allowance for credit losses           $    1,656,000 $        760,000 $      1,272,000
Number of loans outstanding                      290              986            1,712
Number of delinquencies                            3               21               43
Net loss ratio on average
   outstanding principal balance               7.83%            5.01%            2.27%
Weighted average annual
   percentage rate                             11.2%            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  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
and without recourse (provided that the transferred loan was properly originated
by the dealer and purchased by CAC).  In March 1998 and in June 1999,  CAC sold,
under the retail  finance  agreement,  a  substantial  portion  of its  existing
portfolio  of loans on those  dates.  The  effect of these  transactions  on net
income was to reduce the amount of  financial  services  revenue  from  interest
income on these portions of the portfolio, offset by reduced interest expense on
debt retired in March 1998 and earnings on the remaining  proceeds.  The Company
may sell a substantial  portion of its remaining  installment  loan portfolio in
fiscal year 2000,  in addition to the  periodic  sale of  installment  contracts

--------
 * See Safe Harbor Statement on page 31. *

                                        7
<PAGE>

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.  Additionally,  personal  line
products are sold to 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.

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
1.9% of sales in 1999,  (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,  1999,  the  Company's  contingent  liability  under  these
repurchase and other similar  recourse  agreements was an amount estimated to be
approximately  $273 million.  The Company has provided an allowance for possible
repurchase  losses of $3.5  million  as of  December  3l,  1999,  based on prior
experience and current market conditions.

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  retail  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.

--------
See Safe Harbor  Statement on page 31.

                                        8
<PAGE>

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, 1999, the Company had  established a reserve
for future  warranty  claims of $13 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,
repair service,  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 business strategy  currently  includes the continued  operation 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,  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 state or local
governing  bodies, 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. *

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

--------
* See Safe Harbor Statement on page 31. *

                                        9
<PAGE>

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
stricter  in recent  years.  Accordingly,  the  Company is unable to predict the
ultimate cost of compliance with environmental laws and enforcement policies.

A variety of federal laws affect the financing of manufactured homes,  including
the financing  activities  conducted by 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

---------
See Safe Harbor  Statement on page 31. *

                                        10
<PAGE>

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.  The sale of insurance
products  by the  Company  is  subject  to  various  state  insurance  laws  and
regulations which govern allowable charges and other insurance practices.

Employees
As of December 31,  1999,  the Company had 4,890  employees,  of whom 4,029 were
engaged in home  manufacturing  and supply  distribution,  122 in sales,  228 in
warranty and service, 373 in general administration, 4 in delivery, 48 in retail
finance and insurance services and 86 in retail locations. At year-end, only one
home  manufacturing  operation's  employees  (106  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:

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 supply and demand;
o        availability of alternative forms of housing;
o        availability of financing; and
o        the level and stability of interest rates.

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.  Between  1992  and  1998,  floor  shipments
increased  each year, as set forth in the table below,  although the growth rate
gradually slowed.

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


                                        11
<PAGE>

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.  * These conditions
significantly  affected the industry in 1999.  According to MHI, floor shipments
declined 4.3% in 1999 from 1998, and the decline  accelerated in the second half
of the year and has  continued  through  January  2000 (the  latest  information
available).   In  addition,   a  number  of  retail   dealers  have  failed  and
repossessions of manufactured  homes have increased.  Some manufactured  housing
wholesale and retail  lenders have also stopped doing  business in the industry,
and some of the remaining lenders have raised their interest rates and tightened
their  credit  standards.  We think more  dealers  may fail,  repossessions  may
continue to increase and more lenders may exit the market in the future. *

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  seems to  signal a return  to the  industry's  traditional  seasonal
patterns.

We cannot predict how long the tightening of competitive and industry conditions
will last,  or what the extent of their impact will be on the future  results of
operations  and  financial  condition of Cavalier.  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 in a down cycle,  which could have a
material  adverse  effect on  Cavalier's  results  of  operations  or  financial
condition.

Limitations on Ability to Pursue Business Strategy  Cavalier's  current business
strategies are to:

o        develop our exclusive and independent dealer network;
o        develop  the  production  and  distribution  of  component   parts  for
         manufactured housing;
o        pursue  implementation of an enterprise-wide  management    information
         system;
o        pursue the financing,  insurance and other  activities of CAC and   the
         financial  services  segment;  and
o        operate a limited number of  Cavalier-owned retail locations.

Downturns in shipments in the manufactured housing industry and a decline in the
demand for  Cavalier's  homes  could have a material  adverse  effect on us. Our
ability  to  execute  our  business  strategy  depends  on a number of  factors,
including the following:

o        general economic and industry conditions;
o        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  and   the   Company's insurance and component parts
         operations to be competitive;
o        the  availability  of capital and  financing;
o        the ability of our  independent dealers and retail locations to compete
         under current industry conditions; and
o        the availability and terms  of wholesale   and  retail financing   from
         lenders in the manufactured housing industry.

--------
 See Safe Harbor Statement on page 31. *

                                        12
<PAGE>

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

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 as well as our own retail
locations.  The availability and cost of such financing is further  dependent on
the  number  of  financial  institutions  participating  in  the  industry,  the
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 and the current adverse trend in the  availability  and
terms of  financing  in the  industry  may have a  material  adverse  effect  on
Cavalier's results of operations or financial condition.

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.  In  addition,  a number of  dealers in the  industry  are
experiencing difficulty in the current market conditions.  While we believe that
our relations with our independent  dealers are generally good, we cannot assure
our  investors  that we will be able to  maintain  these  relations,  that these
dealers will continue to sell our homes,  that these dealers will be successful,
or that we will be able to attract and retain quality independent dealers. *

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 profitability.

--------
See Safe Harbor  Statement on page 31. *

                                        13
<PAGE>

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. *

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  operation  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".  Additionally,  CAC  has
periodically  sold  installment  loan  contracts   throughout  1999  to  another
financial  institution under this agreement.  The Company may sell a substantial
portion of its existing loan portfolio in 2000, in addition to the periodic sale
of loans  purchased by CAC in the future,  under the Retail  Finance  Agreement.
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 this agreement
will remain in effect,  that additional  sales will be made under this agreement
or that CAC or 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  not, we   may
be forced to curtail  our  financial  services  business  and to alter our other
strategies.

Uncertainties in Integrating Business Operations and Achieving Benefits of   the
Belmont  Merger

--------
See Safe Harbor Statement on page 31. *
See Safe Harbor  Statement on page 31. *

                                        14
<PAGE>

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  required  the   consolidation  of  functions  and  the
integration of departments,  systems and procedures,  which present  significant
management challenges and are to some degree still ongoing. Although our primary
purpose in taking  such  actions was 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.

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,   especially  in
competitive   times,   and,   consequently,   may  adversely  impact  Cavalier's
profitability.  Further,  a reduction in the  availability of raw materials also
may affect our ability to meet or maintain production requirements.

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

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
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.

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


                                        15
<PAGE>

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
stricter in recent years.  Accordingly,  we cannot assure investors that we will
not be required to incur response costs, remediation expenses,  fines, penalties
or other  similar  damages,  expenses or  liabilities,  or to incur  operational
shut-downs, business interruptions or similar losses, associated with compliance
with environmental laws and enforcement  policies that either individually or in
the aggregate would have a material  adverse effect on our results of operations
or financial condition.

Warranty Claims
Cavalier is subject to warranty  claims in the ordinary  course of its business.
Although we maintain reserves for such claims, which to date have been adequate,
there can be no assurance  that warranty  expense  levels will remain at current
levels or that such  reserves  will  continue to be adequate.  A large number of
warranty  claims  exceeding  our current  warranty  expense  levels could have a
material adverse effect on Cavalier's results of operations.

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.


                                        16
<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,
1999:
<TABLE>
<S>                                          <C>                                <C>                 <C>
        Location                             Use (Number of Facilities)       Approximate          Owned/
Manufacturing & Distribution                                                 Square Footage        Leased   (a)
     Adrian Homes
           Adrian, Georgia                   Manufacturing facility (1)          90,000             Owned
     Astro Homes
           Shippenville, Pennsylvania        Manufacturing facility (1)         120,000             Owned
     Bellcrest Homes, Inc.
          Millen, Georgia                    Manufacturing facilities (2)       164,000             Owned
     Belmont Homes, Inc.
          Belmont Mississippi                Manufacturing facilities (3)       498,000             Owned
          Clarksdale, Mississippi            Manufacturing facility (1)          91,000             Owned
     BRC Components, Inc.
          Phil Campbell, Alabama             Distribution facility (1)           50,000             Leased
          Salisbury, North Carolina          Distribution facility (1)           60,000             Leased
          Hillsboro, Texas                   Distribution facility (1)           42,500             Owned
     Brigadier Homes of North Carolina
          Nashville, North Carolina          Manufacturing facility (1)         170,000             Owned
     Buccaneer Homes
          Hamiliton, Alabama                 Manufacturing facility (1)         195,000             Owned
          Winfield, Alabama                  Manufacturing facilities (2)       205,000             Leased
     Cavalier Homes of Alabama
          Addison, Alabama                   Manufacturing facilities (4)       545,000             Owned   (b)
     Homestead Homes
          Cordele, Georgia                   Manufacturing facility (1)         110,000             Owned
     Mansion Homes
          Robbins, North Carolina            Manufacturing facility (1)          99,000             Leased
     Quality Housing Supply, LLC
          Hamiliton, Alabama                 Manufacturing facility (1)          50,000             Leased
          Winfield, Alabama                  Distribution facility (1)           48,000             Leased
     Riverchase Homes
          Haleyville, Alabama                Manufacturing facility (1)          78,000             Owned
     Spirit Homes, Inc.
          Conway, Arkansas                   Manufacturing facilities (2)       220,000             Owned
          Bigelow, Arkansas                  Manufacturing facility (1)          80,000             Owned
     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

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
          Decatur, Alabama                   Administrative Office                5,000             Leased
          Haleyville, Alabama                Administrative Office                4,000             Leased
</TABLE>

(a) Certain of  the  facilities  listed as owned are financed  under  industrial
development  bond issues,  including the Adrian,  Buccaneer,  Cavalier  Homes of
Alabama  (2),  and  Riverchase  facilities.  Not  included  in this table is the
Georgia facility for which construction is not complete.

(b) During 1999, the Company purchased two  of  these  manufacturing  facilities
that were previously leased.

In general, the manufacturing  facilities are in good condition and are operated
at capacities  which range from  approximately  28% to 93%,  excluding six idled
facilities  in Addison and Winfield,  Alabama,  Bigelow,  Arkansas,  Belmont and
Clarksdale,  Mississippi,  and Mineral Wells, Texas, and the facility in Adrian,
Georgia, which began production in March 1999.


                                        17
<PAGE>

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
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).  The defendants are BHIA,
Belmont (as a  successor  in interest of BHIA),  BHI,  Inc.,  as a successor  to
Belmont Homes,  Inc., a Mississippi  corporation  ("BHI"),  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 BHI,  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.  Additionally,  the
Plaintiffs claim that the defendants intentionally  depreciated the market value
of the stock of BHIA. 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. The Circuit Court of Madison County,  Alabama, has transferred
the Madison County action to the Circuit Court of Franklin County,  Alabama. The
Circuit Court of Franklin  County has granted  summary  judgment in favor of the
defendants on all counts asserted in the plaintiff's  complaint.  The plaintiffs
have  appealed this  decision,  and the appeal is currently  pending  before the
Alabama Court of Civil Appeals. The outcome of this litigation and its effect on
the Company cannot  presently be determined,  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
Commonwealth of Kentucky  Pendleton Circuit Court granted  defendants' motion to
dismiss  during the second  quarter of 1999.  The  plaintiffs  have appealed the
dismissal,  and the appeal is currently  pending  before the  Kentucky  Court of

--------
See Safe Harbor Statement on page 31. *

                                        18
<PAGE>

Appeals.  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.

                                     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.

<TABLE>
<CAPTION>

                                                 Closing Sales Price
                                        -----------------------------------
                                              High               Low         Dividends
                                        -----------------  ---------------- -------------
<S>                                         <C>                <C>               <C>
Year ended December 31, 1999
     Fourth Quarter                         $ 5  1/8           $ 3  11/16        $ 0.040
     Third Quarter                          $ 6  7/8           $ 3  11/16          0.040
     Second Quarter                         $10                $ 6  13/16          0.040
     First Quarter                          $11  3/8           $ 8  3/4            0.040

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

</TABLE>

As of March 17, 2000, the Company had  approximately  400 shareholders of record
and 5,200  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.

Cavalier  has paid regular  quarterly  dividends  since 1989.  The amount of the
quarterly  dividend was last  increased to $0.04 per share in October 1998.  The
payment of dividends on the  Company's  common stock will be  determined  by the
Board  of  Directors  of the  Company  in  light of  conditions  then  existing,
including  the  earnings  of the  Company and its  subsidiaries,  their  funding
requirements and financial conditions,  certain loan restrictions and applicable
laws and governmental regulations. The Company's present loan agreement contains
restrictive  covenants which,  among other things,  limit the aggregate dividend
payments and purchases of treasury  stock to 50% of the  Company's  consolidated
net  income  for the two  most  recent  fiscal  years.  Given  current  industry
conditions, the Company cannot give assurances that it will pay dividends in the
future in the same manner as it has in the past.

--------
See Safe Harbor  Statement on page 31. *

                                        19

<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, 1999, have been derived from the consolidated  financial statements
of the Company.  The Company's audited  financial  statements as of December 31,
1999 and 1998, and for each of the years in the three-year period ended December
31,  1999,  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,
                                         -------------------------------------------------------------------
                                           1999           1998          1997          1996          1995
                                         ----------    -----------   -----------   -----------   -----------
                                                      (in thousands, except per share amounts)
<S>                                  <C>           <C>             <C>          <C>           <C>
Statement of Income Data

Revenue:
     Home manufacturing net sales    $     555,756 $      598,116  $    553,730 $     572,997 $     420,519
     Financial services                      6,107          6,088         5,346         3,333         1,764
     Retail                                 20,914          7,167             -             -             -
     Supply                                  5,023          2,699         2,112           841           271
                                         ----------    -----------   -----------   -----------   -----------

     Total revenue                         587,800        614,070       561,188       577,171       422,554

Cost of sales                              477,527        496,708       464,222       482,204       354,811
Selling, general and administrative        102,754         87,611        72,526        54,120        39,035
Impairment Special charge for idled
  facilities                                 4,002              -             -             -             -
Non-recurring merger and related                                -         7,359             -
  costs                                          -              -             -             -             -
                                         ----------    -----------   -----------   -----------   -----------

Operating profit                             3,517         29,751        17,081        40,847        28,708
Life insurance proceeds                          -              -         1,500         1,750             -
Other income (expense) - net                    36          1,531          (242)        1,589            90
                                         ----------    -----------   -----------   -----------   -----------

Income before taxes                  $       3,553 $       31,282        18,339 $      44,186 $      28,798
                                         ==========    ===========   ===========   ===========   ===========

Net income                           $       2,150 $       18,655 $      10,247 $      27,479 $      17,630
                                         ==========    ===========   ===========   ===========   ===========

Basic net income per share1          $         .12 $          .94 $         .52 $        1.42 $        1.06
                                         ==========    ===========   ===========   ===========   ===========

Diluted net income per share1        $         .12 $          .93 $         .51 $        1.39 $        1.03
                                         ==========    ===========   ===========   ===========   ===========

Cash dividend per share1             $         .16 $          .13 $         .07 $         .06 $         .04
                                         ==========    ===========   ===========   ===========   ===========
Weighted average number of shares
     outstanding1                           18,126         19,905        19,835        19,363        16,630
                                         ==========    ===========   ===========   ===========   ===========
Weighted average number of shares
     outstanding, assuming dilution1        18,204         20,144        20,028        19,799        17,057
                                         ==========    ===========   ===========   ===========   ===========

Other Data

Capital expenditures                 $      24,546 $       14,655 $      10,186 $      16,106 $      13,482
                                         ==========    ===========   ===========   ===========   ===========
</TABLE>
<TABLE>
<CAPTION>

                                                                    December 31,
                                         -------------------------------------------------------------------
                                           1999           1998          1997          1996          1995
                                         ----------    -----------   -----------   -----------   -----------
<S>                                  <C>           <C>            <C>           <C>           <C>
Balance Sheet Data

Working capital                      $      32,652 $       41,707 $      28,484 $      24,746 $      22,157
Total assets                         $     229,574 $      235,952 $     211,554 $     196,387 $     132,694
Long-term debt                       $      10,218 $        3,650 $      15,808 $       6,227 $      11,233
Stockholders' equity                 $     129,391 $      144,911 $     133,551 $     122,652 $      75,119


1  All per share data has been adjusted for all stock splits.

</TABLE>


                                        20
<PAGE>

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

Industry and Company Outlook
Cavalier Homes,  Inc. and its subsidiaries are engaged in the production,  sale,
financing,  and  insuring of  manufactured  housing.  The  manufactured  housing
industry is cyclical and seasonal and is influenced by many of the same economic
and demographic  factors that affect the housing market as a whole.  During most
of the 1990s, the manufactured housing industry experienced  significant growth,
which the Company  attributes  in part to a reduction  in  alternative  housing,
increased  availability of retail financing,  increased consumer  confidence and
continuing  strength in the  national  economy  during  much of that time.  As a
result, the number of retail dealerships,  manufacturing  capacity and wholesale
shipments  expanded  significantly,  which  consequently  created  slower retail
turnover,  higher  retail  inventory  levels and  increased  price  competition.
Inventory  oversupply at the retail level had a significant  impact on wholesale
shipments during 1999. The Manufactured  Housing Institute ("MHI") reported that
floor shipments  declined 4.3% for 1999 as compared to 1998. The rate of decline
in floor shipments accelerated  throughout the year, as MHI reported 12.2% fewer
shipments  in the last six  months of 1999  versus  the same  period in 1998 and
18.2% lower floor  shipments in December  1999  compared to December  1998.  The
industry  has  also  been  impacted  by  the  loss  of  some  lenders  from  the
manufactured  housing retail and wholesale  financing  markets and tightening of
credit  standards  by those  remaining.  In  response  to  deteriorating  market
conditions,  manufacturers  have  closed  or idled  some of their  manufacturing
facilities and retail dealers have closed some locations.

Industry conditions  significantly  impacted Cavalier's financial results during
1999.  The Company is  uncertain  at this time as to the extent and  duration of
these  developments  and as to  what  effect  these  factors  will  have  on the
Company's  future sales and earnings.  * The Company  currently  believes  these
conditions will continue to adversely affect the Company's financial performance
at least  through  the first  half of 2000.  * The  Company  is  experiencing  a
significant  decline in sales in the first  quarter of 2000 as  compared  to the
first quarter of 1999 and expects to incur a substantial loss for the quarter. *
The  Company  also  believes  that,  due  to  these  industry  conditions,   the
possibility  exists for some  additional  retail dealer  failures and additional
loss of wholesale and retail lenders,  which could adversely affect the Company.
* Because of deteriorating market conditions, Cavalier has idled a total of five
home  manufacturing  facilities,  including three subsequent to the end of 1999,
that built primarily  single section homes to consolidate  production into other
plants.  In 1999,  the  Company  recorded  a pre-tax  impairment  charge of $4.0
million ($2.5 million  after tax, or $.14 per diluted  share) to write-down  the
value of assets of the idled plants.  The Company expects to continue to monitor
the need for  further  plant  consolidations,  idlings  and/or  closings  and to
evaluate other potential cost savings options  identified through a company-wide
analysis  designed to mitigate the impact of current  market  conditions.  * The
Company can give no assurance as to which one or more of these options,  if any,
it may ultimately adopt.

--------
See Safe Harbor Statement on page 31. *
                                        21
<PAGE>

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

                                                             For the Year Ended December 31,
                                         ------------------------------------------------------------------------
INCOME STATEMENT DATA                            1999                    1998                    1997
                                         ----------------------   ----------------------  -----------------------
<S>                                    <C>             <C>      <C>          <C>        <C>             <C>
Revenue:
  Home manufacturing net sales         $    555,756             $  598,116              $   553,730
  Financial services                          6,107                  6,088                    5,346
  Retail                                     20,914                  7,167                        -
  Other                                       5,023                  2,699                    2,112
                                         -----------              ---------               ----------

Total revenue                          $    587,800     100.0%  $  614,070       100.0% $   561,188       100.0%
Cost of sales                               477,527      81.2%     496,708        80.9%     464,222        82.7%
                                         -----------   --------   ---------  -----------  ----------    ---------

     Gross profit                      $    110,273      18.8%  $  117,362        19.1% $    96,966        17.3%
                                         ===========   ========   =========  ===========  ==========    =========

Selling, general and administrative    $    102,754      17.5%  $   87,611        14.3% $    72,526        12.9%
Impairment charge for idled facilities $      4,002       0.7%  $        -         0.0% $         -         0.0%
Non-recurring merger and related costs $          -       0.0%  $        -         0.0% $     7,359         1.3%
Operating profit                       $      3,517       0.6%  $   29,751         4.8% $    17,081         3.0%
Other income (expense), net            $         36       0.0%  $    1,531         0.2% $     1,258         0.2%
Net income                             $      2,150       0.4%  $   18,655         3.0% $    10,247         1.8%

OPERATING DATA
Home manufacturing sales:
Floor shipments                              34,294                 36,517                   33,646
Home shipments
  Single section                             10,546      47.1%      12,430        51.0%      13,576        57.5%
  Multi section                              11,831      52.9%      11,957        49.0%      10,026        42.5%
                                         -----------   --------   ---------  -----------  ----------    ---------

Total shipments                              22,377     100.0%      24,387       100.0%      23,602       100.0%

Shipments to company owned stores              (645)     (2.9%)       (164)       (0.7%)          -         0.0%
                                         -----------   --------   ---------  -----------  ----------    ---------

Shipments to independent dealers             21,732      97.1%      24,223        99.3%      23,602       100.0%
                                         ===========   ========   =========  ===========  ==========    =========

Retail sales:
  Single section                                375      58.3%          70        37.2%           -         0.0%
  Multi section                                 268      41.7%         118        62.8%           -         0.0%
                                         -----------   --------   ---------  -----------  ----------    ---------

Total sales                                     643     100.0%         188       100.0%           -         0.0%
                                         ===========   ========   =========  ===========  ==========    =========

Cavalier produced homes sold                    490      76.2%         121        64.4%           -         0.0%
                                         ===========   ========   =========  ===========  ==========    =========

Used homes sold                                 115      17.9%          26        13.8%           -         0.0%
                                         ===========   ========   =========  ===========  ==========    =========


Installment loan purchases             $     47,063             $   27,438              $    18,013
Capital expenditures                   $     24,546             $   14,655              $    10,186
Home manufacturing facilities-operating          19                     23                       22
Independent exclusive dealer locations          274                    232                      132
Company-owned retail locations                   16                      5                        -
</TABLE>

1999 compared to 1998
Revenue
Total revenue for 1999 was $587,800 compared to $614,070 for 1998.

Home  manufacturing  net sales for 1999  compared to 1998  decreased  7%, or $42
million, to $556 million, net of intercompany  eliminations of $17 million. Home
shipments decreased 8.2%, with floor shipments  decreasing by 6.1%. During 1999,
53% of the Company's homes sold were multi-section homes compared to 49% for the
previous year. The expansion of the Company's  multi-section  product base is in
response to increasing  consumer demand for  multi-section  homes as compared to
single  section  homes.  Actual  shipments of homes for 1999 were 22,377  versus
24,387 in 1998.  The Company  attributes  the decrease in sales and shipments to
the  increasingly  competitive  conditions  in  the  industry  described  above.
Approximately 88% of Cavalier's  shipments were to its core market of 11 states,
where the Company's  floor shipments for 1999 declined 6.5% as compared to 1998.
For 1999,  MHI reported an 8.7%  decline in floor  shipments in these 11 states.
Additionally,  the Company's inventory at all retail locations increased,  based


                                        22
<PAGE>

on twelve  month  trailing  sales,  from 151 days a year ago to 165 days at year
end.  The  average  price of homes sold rose to $25,600 in 1999 from  $24,700 in
1998.  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. The Company's
exclusive  dealer  program  expanded by 53  locations  since  December  31,1998,
bringing  the total to 290 at December  31,  1999,  including  16  company-owned
stores. Sales to exclusive dealers represented 55% of total sales in 1999 versus
40% in 1998.

Revenue in 1999 from the financial  services segment  approximated 1998 revenue.
During 1999, Cavalier Acceptance  Corporation ("CAC") purchased installment loan
contracts of $47 million and sold $61 million of installment contracts. In 1998,
CAC purchased  contracts of $27 million and sold installment  contracts totaling
$46 million.  During 1998,  the focus of CAC's  business  changed from building,
holding and servicing a portfolio of loans to purchasing loans from its dealers,
which  are then  resold  to  another  financial  institution,  without  recourse
(provided that the  transferred  loan was properly  originated by the dealer and
purchased by CAC). CAC does not retain the servicing  function and does not earn
the interest income on these resold loans.

Revenue  from the retail  segment was $21 million for 1999,  of which 76% of the
units sold were Cavalier  product.  In 1998,  retail revenue was $7 million,  of
which 64% of the units sold were  Cavalier  product.  At December 31, 1999,  the
Company operated 16 retail locations as compared to 5 at December 31, 1998.

Other revenue consists mainly of revenue from the Company's wholesale supply and
component manufacturing  businesses,  which sell primarily to the Company's home
manufacturing  segment.  Revenue from external  customers  increased  86%, or $2
million,  for 1999  compared  to 1998.  This  increase is due  primarily  to the
addition of a supply company.

Gross Profit
Gross profit is derived by  deducting  cost of sales from total  revenue.  Gross
profit was $110 million, or 18.8% of total revenue, in 1999 versus $117 million,
or  19.1% of total  revenue,  in 1998.  During  1999,  the  Company  experienced
tightened supply from its traditional vendors of certain types of raw materials,
including  sheetrock,  insulation  and lumber,  required for  production  of its
homes.  The Company  obtained  these  products  from other vendors and purchased
substitute  products,  which  resulted in higher than normal  costs.  Due to the
competitive  industry  conditions,  some of these  costs  were  not  recoverable
through price increases.

Selling, General and Administrative
Selling,  general and  administrative  expenses during 1999 were $103 million or
17.5% of total revenue,  versus $88 million or 14.3% in 1998, an increase of $15
million.  Of this  increase,  $1.9  million  is related  to  expanded  sales and
marketing efforts, including PowerHouse promotions,  and recruiting,  set-up and
maintenance of the exclusive dealer network. Additionally,  selling, general and
administrative  expenses increased $2.0 million due to higher costs for employee
benefits,  $0.8  million for  increased  warranty  service  activities  and $3.1
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 (1) costs of $3.4  million
associated with operating new retail locations and the continued  development of
a retail  infrastructure,  (2) costs associated with the expansion of the supply
distribution business of $1.6 million, (3) $2.8 million of costs associated with
repurchased  inventory,  (4) $0.9 million increase in loan loss reserve, and (5)
$0.3  million in costs of opening an  additional  home  manufacturing  facility.
These costs were partially  offset by a reduction in incentive  compensation  of
$4.1 million.

Impairment charge for idled facilities
Because of deteriorating  market conditions,  Cavalier has idled a total of five
home  manufacturing  facilities,  including three subsequent to the end of 1999,
that built primarily  single section homes to consolidate  production into other
plants.  In 1999,  the  Company  recorded  a pre-tax  impairment  charge of $4.0
million ($2.5 million  after tax, or $.14 per diluted  share) to write-down  the
value of assets of the idled plants.


                                        23
<PAGE>

Operating Profit
Operating profit is derived by deducting cost of sales and selling,  general and
administrative  expenses  from total  revenue.  Operating  profit  declined  $26
million to $4 million in 1999 from $30 million in 1998.

Home manufacturing  operating profit declined $18 million,  before  intercompany
eliminations,  due  primarily to lower  sales,  increased  raw material  prices,
increased selling, general and administrative expenses and the impairment charge
for idled facilities.  Financial  services operating profit decreased $2 million
due  principally  to increased  selling,  general and  administrative  expenses,
consisting  primarily of prepayment and repossession costs and payroll costs due
to the addition of area sales  personnel.  The retail  segment's  operating loss
increased $1.5 million due to the operation of start-up  retail  locations,  the
continued development of a retail infrastructure and the competitive  conditions
currently  prevailing  in the industry.  Other  operating  profit  declined $1.8
million,  before intercompany  eliminations,  due mainly to the costs associated
with the start-up of a new supply company.

Other Income (Expense)
Interest expense  increased to $2 million in 1999 from $1 million in 1998 due to
the increase in notes  payable  under retail floor plan  agreements  and amounts
outstanding under Industrial Development Revenue Bond Issues.

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  decrease of $0.7  million in 1999 to $1.7 million from
$2.4 million in 1998 was primarily due to decreased  interest  income earned due
to lower average cash balances during 1999 as compared to 1998.

Net Income
Net income  declined  $17 million to $2 million in 1999 from $19 million in 1998
which the Company attributes to lower sales,  increased raw materials prices and
selling,  general and  administrative  expenses,  the impairment  charge and the
other industry factors  discussed above.  Diluted net income per share was $0.12
in 1999, compared to $0.93 per share in 1998.

1998 compared to 1997
Revenue
Home  manufacturing  net sales for 1998 as compared to 1997  increased by 8%, or
$44 million, net of intercompany  elimination 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 rose to $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.


                                        24
<PAGE>

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
CAC's 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,  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 recourse (provided that the transferred loan was properly  originated by
the dealer and purchased by CAC). CAC does not retain the servicing function and
does not earn interest income on these resold loans.  During 1998, CAC purchased
contracts totaling $27 million as compared to $18 million in 1997.

Revenue  from the retail  segment was $7 million  for 1998,  of which 64% of the
units sold were  Cavalier  product.  The  Company  did not own any retail  sales
centers in 1997. At December 31, 1998, the Company operated 5 retail locations.

Other revenue consists mainly of revenue from the Company's wholesale supply and
component manufacturing  businesses,  which sell primarily to the Company's home
manufacturing  segment.  Revenue from external customers  increased 28%, or $0.6
million,  for 1998  compared  to 1997.  This  increase is due  primarily  to the
addition of a supply company.

Gross Profit
Gross profit is derived by  deducting  cost of sales from total  revenue.  Gross
profit was $117 million,  or 19.1% of total revenue, in 1998 versus $97 million,
or 17.3% of total revenue,  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.

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.


                                        25
<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 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.

Liquidity and Capital Resources
<TABLE>
<CAPTION>

                                                         Balances as of December 31,
                                                      ----------------------------------
(Dollars in thousands)                                   1999         1998       1997
                                                      -----------   --------   ---------
<S>                                                 <C>          <C>         <C>
Cash and cash equivalents                           $     39,635 $   64,243  $   37,276
Certificates of deposit, maturing within one year   $          - $        -  $    4,000
Working capital                                     $     32,652 $   41,707  $   28,484
Current ratio                                           1.4 to 1   1.5 to 1    1.5 to 1
Long-term debt                                      $     10,218 $    3,650  $   15,808
Ratio of long-term debt to equity                        1 to 13    1 to 40      1 to 8
Installment loan portfolio                          $      9,450 $   26,117  $   49,146
</TABLE>

Operating  activities  during 1999 used net cash of $6.5  million.  Inventory at
December  31,  1999,  increased  $11.3  million  from 1998 due  primarily to the
expansion  of the retail  segment from five  company-owned  stores at the end of
1998 to 16 at the end of 1999.

Net cash  totaling  $4.4  million  was paid  during  the  first  half of 1999 in
connection with acquisitions of seven retail  locations,  an insurance agency, a
premium finance company and a supply company.

The Company's 1999 capital expenditures were $24.5 million, as compared to $14.7
million in 1998.  Capital  expenditures  during 1999 included  normal  property,
plant and equipment  additions and replacements and the continued  expansion and
modernization   of   certain   of  the   Company's   manufacturing   facilities.
Additionally,  during January 1999, the Company  purchased,  for a total of $3.4
million, two Alabama  manufacturing  facilities that were previously leased, and
renovated a Georgia  manufacturing  facility at a cost of $1.7  million that was
placed in operation at the end of the first quarter.  Approximately $3.5 million
of the cost of implementing a new enterprise-wide  management information system
has been capitalized in 1999. Due to current market conditions,  construction of
an  additional   manufacturing  facility  in  Georgia,  for  which  the  Company
capitalized $2.4 million in early 1999, has been temporarily slowed. In addition
to the periodic resale of loans, the Company's finance subsidiary, CAC, sold $16
million of its existing  installment  contracts  portfolio to another  financial
institution.

The 1999  increase in long-term  debt of $6.6  million is  primarily  due to the
assumption  of an  industrial  development  revenue  bond in the  amount of $0.8
million related to the Alabama  facilities  acquired and proceeds from two other
industrial  development bonds of $7.0 million for the Georgia facilities.  Notes
payable  increased  $11.4  million  due to the  increase  in retail  floor  plan
financing  as a result  of the  acquisition  or  opening  of  additional  retail
locations.

The Company  purchased  1,779,000 shares of treasury stock during 1999 for $15.7
million.  The Company has authorization to acquire up to 1.4 million  additional
shares under the program.

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


                                        26
<PAGE>

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 placed in operation in the first quarter of 1999. The Company  initiated
a stock  repurchase  program  during  the latter  part of 1998 of which  852,600
shares were purchased during 1998 for approximately $8 million.

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, 1999 and December 31, 1998.

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
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.  The Company has
obtained appropriate waiver letters to the extent it was in violation of certain
covenants at December 31, 1999.

On February 29, 2000, the Company received a commitment from its primary bank to
extend its Credit Facility through April 2002. The renewal  increases the amount
available  under the  revolving  line of credit to $35 million (an increase from
$10  million),  provided  that  the  aggregate  amounts  outstanding  under  the
revolving  note and  term  loans  do not  exceed  $35  million,  eliminates  the
warehouse feature of the Credit Facility and provides for the ability to convert
the amount advanced under the revolving line to a term loan. Interest is payable
under the terms of the  renewal  at the  bank's  prime  rate less  0.5%,  or, if
elected  by the  Company,  the  90-day  LIBOR  Rate  plus  2.0%.  The  principal
modifications  to the financial  covenants  under the  commitment  letter are as
follows:  (i) the net working capital  requirement  increased from at least $3.5
million to at least $15 million,  (ii) a minimum  current ratio  requirement  of
1.17 to 1was  added,  (iii) the sum of  consolidated  tangible  net  worth  plus
treasury  stock  purchases  must be at least $90  million  and (iv) the ratio of
consolidated  cash flow to debt  service of not less than 1.5 to 1was amended to
not less than 1.75 to 1. Other terms and restrictive covenants are substantially
similar to the expiring agreement.


                                        27
<PAGE>

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
and without recourse (provided that the transferred loan was properly originated
by the dealer and purchased by CAC).  In March 1998 and in June 1999,  CAC sold,
under the retail  finance  agreement,  a  substantial  portion  of its  existing
portfolio  of loans on those  dates.  The  effect of these  transactions  on net
income was to reduce the amount of  financial  services  revenue  from  interest
income on these portions of the portfolio, offset by reduced interest expense on
debt retired in March 1998 and earnings on the remaining  proceeds.  The Company
may sell a substantial  portion of its remaining  installment  loan portfolio in
fiscal year 2000,  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  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  business plans
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 or  otherwise  alter its current
business plans and operating 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,  in  1999,  the  Company
experienced  tightened supply of certain types of raw materials,  which resulted
in some higher costs that were not recoverable  through price  increases.  For a
further  discussion of this matter,  see "1999 Compared to 1998 - 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,as amended, is required to be adopted for years
beginning after June 15, 2000. The Company is currently  evaluating SFAS 133 and
has not yet  determined  its  impact  on the  Company's  consolidated  financial
statements.

Year 2000 Compliance
By October  1999,  the Company  implemented  what it  considered  to be critical
modifications to its computer systems and software products,  identified through
its assessment of Year 2000 issues. Cost incurred to complete the assessment and

--------
See Safe Harbor Statement on page 31.

                                        28
<PAGE>

implementation  of Year 2000  issues  was $0.9  million,  which was  within  the
reported  estimated  range of $0.8  million and $1.2  million as an expense,  in
addition to  approximately  $0.2  million of capital  expenditures.  No critical
problems  associated  with the Year 2000 issue have been  encountered  and minor
issues have been corrected as discovered without  significant  disruption to the
Company's  processes and without  implementation  of the  Company's  contingency
plan.

The  Company's  Year 2000  program  included  testing each  computer  system and
microprocessor  in  use,  identifying   significant  third  parties'  Year  2000
compliance,  converting  Company  systems  to Year 2000  compliant  versions  of
software products and equipment and developing a contingency plan.

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  $3.1  million  at  December  31,  1999.  Due to the
long-term nature of the benefit  liabilities that these assets fund, the Company
currently  considers its exposure to market risk to be low. The Company does not
believe  that a decline in market value of these  investments  would 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 $9.5 million, which
may be sold  during  2000.  The  Company's  portfolio  consists  of  fixed  rate
contracts  with  interest  rates  generally  ranging  from  9.0% to 14.0% and an
average original term of 269 months at December 31, 1999. 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,
1999.

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.  Since these  borrowings are floating rate debt, an increase in
short-term  interest rates would adversely affect interest expense.  The Company
may  retire  this  debt  if  interest  rates  were  to  increase  significantly.
Additionally, the Company has five Industrial Development Revenue Bond issues at
fixed  interest  rates.  The  estimated  fair  value of  outstanding  borrowings
approximated carrying value at December 31, 1999. 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, 1999.


                                        29
<PAGE>

<TABLE>
<CAPTION>

                                                        Assumed Annual Principal Cash Flows
                                    -----------------------------------------------------------------------------
<S>                                 <C>          <C>        <C>       <C>       <C>       <C>         <C>        <C>
(dollars in thousands)                 2000         2001       2002      2003      2004    Thereafter    Total   Fair value
Installment loan portfolio          $    143     $   160    $   178   $   199   $   223   $   8,547   $  9,450   $  8,402
(weighted average interest rate - 11.16%)
                                                         Expected Principal Maturity Dates
                                    -----------------------------------------------------------------------------
                                       2000         2001       2002      2003      2004    Thereafter    Total   Fair value
Notes payable and long-term debt    $ 16,681 a   $ 1,167    $ 1,215   $ 1,254   $ 1,461   $   5,121   $ 26,899   $ 26,899
(weighted average interest rate - 7.08%)


a  Amount payable in 2000 includes $1,119 of current portion of long-term debt and $15,562 of notes payable under retail
   floor plan agreements.

</TABLE>


                                        30
<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,  financing  and other  strategies  of
Cavalier.  You can identify these statements by the fact that they do not relate
strictly to historical or current facts.  They generally 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        the cyclical and seasonal nature of the  manufactured  housing industry
         and the economy  generally;
o        limitations in Cavalier's  ability to pursue its business strategy;
o        changes  in  demographic  trends,  consumer preferences and  Cavalier's
         business  strategy;
o        changes  and  volatility  in  interest  rates  and  the availability of
         capital and consumer and dealer financing;
o        the   ability  to  attract  and  retain  quality  independent  dealers,
         executive officers and other personnel;
o        competition;
o        contingent repurchase and guaranty obligations;
o        uncertainties regarding Cavalier's retail financing activities;
o        integrating   the   business  operations  and  achieving  the  benefits
         of the  Belmont  merger  and other acquisitions;
o        the potential unavailability and price increases for raw materials;
o        the potential unavailability of manufactured housing sites;
o        regulatory constraints;
o        the potential for additional warranty claims;
o        litigation; and
o        potential volatility in our stock price.

Any or all of our forward-looking  statements in this report, in the 1999 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.



                                        31
<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,  1999 and 1998.  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       Third      Second        First
                                 Quarter      Quarter    Quarter      Quarter     Total
                              ----------------------------------------------------------
<S>                             <C>         <C>         <C>         <C>         <C>
1999
Revenue:
        Home manufacturing      $ 113,104   $ 126,083   $ 158,086   $ 158,483   $ 555,756
        Financial services          1,156       1,470       2,026       1,455       6,107
        Retail                      5,684       6,748       6,004       2,478      20,914
        Other                       1,246       1,534       1,243       1,000       5,023

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

        Total revenue             121,190     135,835     167,359     163,416     587,800

Gross profit                       21,686      24,748      31,235      32,604     110,273
Net income                         (3,550)     (1,621)      2,820       4,501       2,150
Basic net income per share   a      (0.20)      (0.09)        .16         .24         .12
Diluted net income per share a      (0.20)      (0.09)        .16         .24         .12

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
        Retail               b      2,552       2,761       1,854           -       7,167
        Other                b        845       1,074         470         310       2,699

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

        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


   a    The sum of quarterly amounts may not equal the annual amounts due to rounding.
   b    Certain amounts from the prior periods have been reclassified to conform to the 1999 presentation.

</TABLE>


                                        32
<PAGE>

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

             Index to Consolidated Financial Statements and Schedule

Independent Auditor's Report                                                   4

Consolidated Balance Sheets                                                    5

Consolidated Statements of Income                                              7

Consolidated Statements of Stockholders' Equity                                8

Consolidated Statements of Cash Flows                                         39

Notes to Consolidated Financial Statements                                    40

Schedule -

         II - Valuation and Qualifying Accounts                               55



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


                                        33
<PAGE>

INDEPENDENT AUDITORS' REPORT


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

We have audited the accompanying  consolidated balance sheets of Cavalier Homes,
Inc.  and  subsidiaries  as of  December  31,  1999 and  1998,  and the  related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three  years in the period  ended  December  31,  1999.  Our audits  also
included the  financial  schedule  listed in the index of 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 the financial  statement schedule based on our audits.
The 1997 consolidated financial statements 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  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 provide a reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material   respects,   the  financial  position  of  Cavalier  Homes,  Inc.  and
subsidiaries at December 31, 1999 and 1998, and the results of their  operations
and their cash flows for each of the three  years in the period  ended  December
31, 1999 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 29, 2000


                                        34
<PAGE>


CAVALIER HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------

<TABLE>
<S>                                                                                      <C>          <C>
                                                                                              1999         1998
ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                                              $  39,635    $  64,243
  Accounts receivable, less allowance for losses of
    $3,464 (1999) and $1,201 (1998)                                                          6,692        7,678
  Notes and installment contracts receivable - current                                         939        1,577
  Inventories                                                                               50,120       38,803
  Deferred income taxes                                                                     15,166        9,413
  Other current assets                                                                       3,109        4,077
                                                                                         ----------   ----------
        Total current assets                                                               115,661      125,791
                                                                                         ----------   ----------
PROPERTY, PLANT AND EQUIPMENT:
  Land                                                                                       5,999        5,414
  Buildings and improvements                                                                52,182       41,991
  Machinery and equipment                                                                   49,118       38,707
                                                                                         ----------   ----------
                                                                                           107,299       86,112
  Less accumulated depreciation and amortization                                            32,804       24,690
                                                                                         ----------   ----------
        Total property, plant and equipment, net                                            74,495       61,422
                                                                                         ----------   ----------
INSTALLMENT CONTRACTS RECEIVABLE, less
  allowance for credit losses of $1,656 (1999) and
  $760 (1998)                                                                                7,651       24,512
                                                                                         ----------   ----------
GOODWILL, less accumulated amortization
   of $5,432 (1999) and $4,154 (1998)                                                       22,684       19,945
                                                                                         ----------   ----------
OTHER ASSETS                                                                                 9,083        4,282
                                                                                         ----------   ----------
TOTAL                                                                                    $ 229,574    $ 235,952
                                                                                         ==========   ==========


                                        35
</TABLE>
<PAGE>

CAVALIER HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<S>                                                                                      <C>          <C>
                                                                                              1999         1998
LIABILITIES AND STOCKHOLDERS' EQUITY


CURRENT LIABILITIES:
  Current portion of long-term debt                                                      $   1,119    $     405
  Notes payable under retail floor plan agreements                                          15,562        4,163
  Accounts payable                                                                          12,303       17,776
  Amounts payable under dealer incentive programs                                           25,442       25,559
  Accrued compensation and related withholdings                                              5,312        7,154
  Estimated warranties                                                                      13,000       12,400
  Other accrued expenses                                                                    10,271       16,627
                                                                                         ----------   ----------
        Total current liabilities                                                           83,009       84,084
                                                                                         ----------   ----------
DEFERRED INCOME TAXES                                                                        1,459          390
                                                                                         ----------   ----------
LONG-TERM DEBT                                                                              10,218        3,650
                                                                                         ----------   ----------
OTHER LONG-TERM LIABILITIES                                                                  5,497        2,917
                                                                                         ----------   ----------
COMMITMENTS AND CONTINGENCIES (Note 11)

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,
    18,271,433 (1999) and 20,282,782 (1998) shares issued                                    1,827        2,028
  Additional paid-in capital                                                                55,181       60,760
  Retained earnings                                                                         75,593       90,400
  Treasury stock, at cost; 480,100 (1999) and 852,600 (1998) shares                         (3,210)      (8,277)
                                                                                         -----------   ----------
           Total stockholders' equity                                                      129,391      144,911
                                                                                         -----------   ----------
TOTAL                                                                                    $ 229,574    $ 235,952
                                                                                         ===========  ===========

See notes to consolidated financial statements.
</TABLE>


                                        36
<PAGE>


CAVALIER HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
--------------------------------------------------------------------------------
<TABLE>
<S>                                                                                     <C>          <C>          <C>

                                                                                              1999         1998         1997


REVENUE                                                                                 $  587,800   $  614,070   $  561,188
                                                                                        -----------  -----------  -----------
COST OF SALES                                                                              477,527      496,708      464,222

SELLING, GENERAL AND ADMINISTRATIVE                                                        102,754       87,611       72,526

IMPAIRMENT CHARGE FOR IDLED FACILITIES                                                       4,002

MERGER AND RELATED COSTS                                                                       -              -        7,359
                                                                                        -----------  -----------  -----------
                                                                                           584,283      584,319      544,107
                                                                                        -----------  -----------  -----------
OPERATING PROFIT                                                                             3,517       29,751       17,081
                                                                                        -----------  -----------  -----------
OTHER INCOME (EXPENSE):
  Interest expense                                                                          (1,643)        (820)      (1,511)
  Life insurance proceeds                                                                                              1,500
  Other, net                                                                                 1,679        2,351        1,269
                                                                                        -----------  -----------  -----------
                                                                                                36        1,531        1,258
                                                                                        -----------  -----------  -----------
INCOME BEFORE INCOME TAXES                                                                   3,553       31,282       18,339

INCOME TAXES                                                                                 1,403       12,627        8,092
                                                                                        -----------  -----------  -----------
NET INCOME                                                                              $    2,150   $   18,655   $   10,247
                                                                                        ===========  ===========  ===========
BASIC NET INCOME PER SHARE                                                              $     0.12   $     0.94   $     0.52
                                                                                        ===========  ===========  ===========
DILUTED NET INCOME PER SHARE                                                            $     0.12   $     0.93   $     0.51
                                                                                        ===========  ===========  ===========
WEIGHTED AVERAGE SHARES
  OUTSTANDING                                                                           18,125,763   19,904,746   19,834,942
                                                                                        ===========  ===========  ===========
WEIGHTED AVERAGE SHARES OUTSTANDING,
   ASSUMING DILUTION                                                                    18,204,030   20,143,795   20,028,181
                                                                                        ===========  ===========  ===========

See notes to consolidated financial statements.

</TABLE>


                                        37
<PAGE>
CAVALIER HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(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, 1997                               $ 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 (852,600 shares)                                                           (8,277)          (8,277)
  Net income                                                 -               -           18,655              -           18,655
                                                       --------      ----------        ---------      ---------        ---------
BALANCE, DECEMBER 31, 1998                               2,028          60,760           90,400         (8,277)         144,911
  Stock options exercised                                    4             280                                              284
  Income tax benefit attributable to exercise of
    stock options                                                           28                                               28
  Sale of common stock under Employee Stock
    Purchase Plan                                           10             481                                              491
  Sale of common stock under Dividend
    Reinvestment Plan                                                       14                                               14
  Accrued compensation                                                     114                                              114
  Cash dividends paid ($.16 per share)                                                   (2,926)                         (2,926)
  Purchase of treasury stock (1,779,000 shares)                                                        (15,675)         (15,675)
  Retirement of treasury stock (2,151,500 shares)         (215)         (6,496)         (14,031)        20,742                -
  Net income                                                 -               -            2,150              -            2,150
                                                       --------       ---------        ---------      ---------       ----------
BALANCE, DECEMBER 31, 1999                             $ 1,827        $ 55,181         $ 75,593       $ (3,210)       $ 129,391
                                                       ========       =========        =========      =========       ==========

See notes to consolidated financial statements.
</TABLE>


                                        38
<PAGE>
CAVALIER HOMES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<S>                                                                                  <C>            <C>            <C>

                                                                                         1999            1998           1997
OPERATING ACTIVITIES:
  Net income                                                                         $  2,150       $  18,655      $  10,247
  Adjustments to reconcile net income to net cash provided by
    (used in) operating activities:
      Depreciation and amortization                                                    10,250           8,365          7,492
      Provision (recovery) for credit losses and repurchase commitments                 3,159            (486)           669
      Gain on sale of installment contracts                                            (2,257)         (2,048)
      Loss on sale of property, plant and equipment                                        85              49            340
      Impairment charge for idled facilities                                            4,002
      Other, net                                                                            2             267            211
      Changes in assets and liabilities provided (used) cash,
        net of effects of acquisitions:
          Accounts receivable                                                          (1,277)            787           2,574
          Inventories                                                                  (5,376)         (6,248)           (488)
          Accounts payable                                                             (6,929)          6,313          (3,310)
          Other assets and liabilities                                                (10,329)         11,704           5,513
                                                                                     ----------     ----------     -----------
           Net cash provided by (used in) operating activities                         (6,520)         37,358          23,248
                                                                                     ----------     ----------     -----------
INVESTING ACTIVITIES:
  Net cash paid in connection with acquisitions                                        (4,439)        (2,358)            (871)
  Proceeds from sale of property, plant and equipment                                     437            282              122
  Capital expenditures                                                                (24,546)       (14,655)         (10,186)
  Purchases of certificates of deposit                                                                (6,044)          (8,000)
  Maturities of certificates of deposit                                                               10,044           12,243
  Proceeds from sale or maturity of marketable securities                                                               1,097
  Net change in notes and installment contracts                                       (44,943)       (23,119)         (13,547)
  Proceeds from sale of installment contracts                                          62,815         47,852
  Other investing activities                                                           (1,686)        (1,085)             133
                                                                                     ----------     ---------      -----------
           Net cash provided by (used in) investing activities                        (12,362)        10,917          (19,009)
                                                                                     ----------     ---------       ----------
FINANCING ACTIVITIES:
  Net borrowings on notes payable                                                       4,824          1,307
  Proceeds from long-term borrowings                                                    7,807                          25,263
  Payments on long-term debt                                                             (545)       (15,024)         (22,457)
  Net proceeds from sales of common stock                                                 505          3,113            2,100
  Proceeds from exercise of stock options                                                 284            157                7
  Cash dividends paid                                                                  (2,926)        (2,584)          (1,470)
  Purchase of treasury stock                                                          (15,675)        (8,277)
  Other financing activities                                                                -              -             (157)
                                                                                     ----------     ---------        ----------
           Net cash provided by (used in) financing activities                         (5,726)       (21,308)           3,286
                                                                                     ----------     ---------        ----------
NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                                                         (24,608)        26,967            7,525

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                           64,243         37,276           29,751
                                                                                     ----------     ---------        ----------
CASH AND CASH EQUIVALENTS, END OF YEAR                                               $ 39,635       $ 64,243         $ 37,276
                                                                                     ==========     =========        ==========
See notes to consolidated financial statements.
</TABLE>


                                        39
<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 12 for information  related to
      the Company's business segments.

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

      Accounting   Estimates  -  The  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 4 and 6.

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

      Inventories  -  Inventories  are  stated at the  lower of cost  (first-in,
      first-out method) or market.

      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 $337,  $388 and $270 in 1999, 1998
      and 1997,  respectively,  for construction of plant  facilities,  and paid
      $3.4 million in 1999 to exercise purchase options on two previously leased
      facilities,   to  companies  among  whose  owners  are  certain  officers,
      directors or stockholders of the Company.

      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.


                                        40
<PAGE>

      Impairment of Long-Lived Assets - The Company evaluates the recoverability
      of long-lived  assets primarily using forecasted  undiscounted cash flows,
      supplemented if necessary by an independent appraisal of fair value.

      Revenue  Recognition - Sales of manufactured homes to independent  dealers
      are  recorded as of the date the home is shipped to the dealer.  All sales
      are final and without  recourse  except for the  contingency  described in
      Note 11. 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  (prior to February 1,
      1999),  product liability and general liability  insurance coverages (with
      the exception of two subsidiaries, 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   and  recorded  when
      sufficiently  reliable  data is  available.  During  1999,  the  Company's
      workmen's compensation coverage was converted to a fully insured policy.

      Net Income 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):

 <TABLE>
<S>                                                   <C>        <C>       <C>
                                                          1999       1998      1997

      Weighted average shares outstanding               18,126     19,905    19,835

      Dilutive effect of stock options and warrants         78        239       193
                                                      --------   --------  --------
      Weighted average shares outstanding,
        assuming dilution                               18,204     20,144    20,028
                                                      ========   ========  ========
</TABLE>


      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  (in  thousands of shares) were 2,602,
      642, and 1,399 for 1999, 1998, and 1997, respectively.

      Recent  Accounting  Pronouncement  - In June 1998,  Statement of Financial
      Accounting  Standards ("SFAS") 133, Accounting for Derivative  Instruments
      and Hedging Activities was issued. As amended,  SFAS 133 is required to be
      adopted for years  beginning after June 15, 2000. The Company is currently
      evaluating SFAS 133 and has not yet determined its impact on the Company's
      consolidated financial statements.


                                        41
<PAGE>

      Reclassifications  -  Certain  amounts  from the prior  periods  have been
      reclassified to conform to the 1999 presentation.

2.    BUSINESS COMBINATION AND ACQUISITIONS
      The Company  acquired  various  retail  lots  during 1999 and 1998.  These
      acquisitions  were  accounted  for as purchases  with the excess  purchase
      price over net assets acquired recorded as goodwill.  Collectively,  these
      acquisitions were not material to the consolidated financial statements.

      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 1997 financial
      statements  were  restated to include the results of  operations  and cash
      flows of Belmont.

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


                                              1997
       Revenues:
         Cavalier                        $ 336,343
         Belmont                           224,845
                                         ---------
       Combined                          $ 561,188
                                         =========
       Net income:
         Cavalier                        $  10,428
         Belmont                             5,688
                                         ---------
       Combined                          $  16,116
                                         =========

      Certain   amounts  from  Belmont's   prior   financial   statements   were
      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.

3.    IMPAIRMENT CHARGE FOR IDLED FACILITIES

      During  1999,  because of  deteriorating  market  conditions,  the Company
      recorded a noncash  impairment  charge of $4.0 million in connection  with
      the idling of five home manufacturing plants to consolidate  manufacturing
      into  other  plants.  The  write-down  to  estimated  fair value was based
      primarily on independent appraisals of fair value.


                                        42
4.    INSTALLMENT CONTRACTS RECEIVABLE


      CAC finances  retail sales through the purchase of  installment  contracts
      from a portion  of the  Company's  exclusive  dealers,  at fixed  interest
      rates,  in the  ordinary  course of  business,  and  periodically  resells
      certain  of the  loans to a  financial  institution  under  the terms of a
      retail  finance  agreement.  Standard loan programs  require  minimum down
      payments, ranging from 0% to 20% 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 9% to 14% and from 8.0% to 13.0% at December  31,
      1999 and 1998,  respectively.  The average  original term of the portfolio
      was  approximately  269 and 216  months  at  December  31,  1999 and 1998,
      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 $60,558 and
      $45,804 contracts  receivable and realized a gain of $2,257 and $2,048 for
      the years ended December 31, 1999 and 1998, respectively.

      At December 31,  1999,  estimated  principal  payments  under  installment
      contracts receivable are as follows:



                    Year Ending
                   December 31,
                       2000                                  $   143
                       2001                                      160
                       2002                                      178
                       2003                                      199
                       2004                                      223
                    Thereafter                                 8,547
                                                             -------
                       Total                                 $ 9,450
                                                             =======

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


                                              1999         1998        1997

      Balance, beginning of year           $   760      $ 1,272     $   941
      Provision for losses                   2,192        1,042       1,329
      Charge-offs, net                      (1,296)      (1,554)       (998)
                                           --------     --------    --------
      Balance, end of year                 $ 1,656      $   760     $ 1,272
                                           ========     ========    ========

      At December 31, 1999 and 1998,  the  estimated  fair value of  installment
      contracts  receivable  was $8,402 and  $26,211,  respectively.  These fair
      values were  estimated  using  discounted  cash flows and  interest  rates
      offered by CAC on similar contracts at that time.

5.    INVENTORIES

      Inventories consisted of the following:


                                        43
<PAGE>

                                         1999           1998

      Raw materials                   $ 27,363       $ 26,224
      Work-in-process                    3,513          3,697
      Finished goods                    19,244          8,882
                                      ---------      ---------
      Total                           $ 50,120       $ 38,803
                                      =========      =========

      During  1999,  1998,  and 1997,  the Company  purchased  raw  materials of
      approximately  $20,166,  $12,413  and  $10,592,  respectively,  from joint
      ventures in which the Company owns a minority  interest and from a company
      in which a stockholder and director of the Company is also a stockholder.

6.    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  (8.50% and
      7.75% at December 31, 1999 and 1998,  respectively)  or, if elected by the
      Company,  the 90-day LIBOR rate plus 2.5% (8.50% and 7.57% at December 31,
      1999 and  1998,  respectively).  No  amounts  were  outstanding  under the
      revolving line of credit at December 31, 1999 and 1998.

      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. No amounts were outstanding under
      the warehouse and term-loan portion of the Credit Facility at December 31,
      1999 and 1998.

      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.  At December 31,
      1999,  the  Company  was  in  violation  of  certain  covenants;  however,
      appropriate  waiver  letters have been obtained  from the lender.  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.

      On February 29, 2000, the Company  received a commitment  from its primary
      bank to extend  its  Credit  Facility  through  April  2002.  The  renewal
      increases  the  amount  available  under the  revolving  line of credit to
      $35,000 (an  increase  from  $10,000),  provided  that  aggregate  amounts
      outstanding under the revolving note and term loans do not exceed $35,000,
      eliminates the warehouse feature of the Credit Facility, provides for more
      favorable  interest rates, and modifies certain financial  covenants to be
      more restrictive.

      The Company has $15,562 and $4,163 of notes  payable  under  retail  floor
      plan agreements at December 31, 1999 and 1998, respectively. The notes are
      collateralized by certain inventories and bear interest at the prime rate.


                                        44
<PAGE>

      The Company  has  amounts  outstanding  under six  Industrial  Development
      Revenue  Bond issues  ("Bonds") of $11,337 and $4,052 at December 31, 1999
      and 1998, respectively.  Four of the bond issues bear interest at variable
      rates  ranging from 4.0% to 5.4% and mature at various dates through April
      2009. One of the bond issues is payable in equal monthly  installments and
      bears  interest at 75% of the prime rate and  matures in 2005.  One of the
      bond issues is payable in equal quarterly principal payments with interest
      payable at 6.75% and  matures  in 2004.  The bonds are  collateralized  by
      certain plant facilities.  At December 31, 1999,  restricted bond proceeds
      of $1,725 were not disbursed  and are reflected as a non-current  asset in
      the consolidated balance sheets.


                                        45
<PAGE>

      At December 31, 1999,  principal repayment  requirements on long-term debt
      are as follows:

              Year Ending
                December 31,

                    2000                                 $  1,119
                    2001                                    1,167
                    2002                                    1,215
                    2003                                    1,254
                    2004                                    1,461
                    Thereafter                              5,121
                                                         ---------
                    Total                                  11,337
                    Less current portion                    1,119
                                                         ---------
                    Long-term debt                       $ 10,218
                                                         =========


      The estimated fair value of outstanding  borrowings  approximated carrying
      value at December 31, 1999 and 1998. 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, 1999, 1998 and
      1997 was $1,480, $776 and $1,445, respectively.

7.    STOCKHOLDERS' EQUITY

      The  Company  has  adopted a  Stockholder  Rights  Plan with the terms and
      conditions of the plan set forth in a Rights  Agreement  dated October 23,
      1996 between the Company and its Rights Agent.  Pursuant to the plan,  the
      Board of  Directors  of the  Company  declared a dividend of one Right (as
      defined  in  the  Rights  Agreement)  for  each  share  of  the  Company's
      outstanding  common stock to  stockholders  of record on November 6, 1996.
      One Right is also associated with each share of the Company's  outstanding
      common  stock  issued  after  November  6, 1996,  until the Rights  become
      exercisable, are redeemed or expire. The Rights, when exercisable, entitle
      the  holder to  purchase  a unit 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  under
      certain circumstances.

      Pursuant to a common stock  repurchase  program  approved by the Company's
      Board of Directors,  a total of 2.6 million shares has been purchased at a
      cost of approximately  $24 million.  At December 31, 1999, the Company may
      acquire up to 1.4 million additional shares under the program.

8.    INCENTIVE PLANS

      Dealership Stock Option Plan -

o          Effective December 31, 1999, the Company cancelled its
           Dealership Stock Option Plan (the "Dealer Plan") to
           eligible independent dealerships.  The Dealer Plan allowed



                                        46
<PAGE>

           for 562,500 options to be issued at a price equal to the
           fair market value on the date of grant, and these options
           were earned based on the amount of contracts funded through
           CAC during the year.  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, through
           January 1, 2001, 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.

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 of a stock option to a trust 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, 1999, the Company had recorded plan
           investments of $3,133 and a deferred compensation liability
           of $3,557.

      Compensation expense recorded in connection with these plans for the years
      ended December 31, 1999 and 1998 was not material.

      On January  17,  1997,  substantially  all  employee  stock  options  then
      exerciseable  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



                                        47
<PAGE>

      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 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:

                                             1999          1998           1997

      Net income:
        As reported                        $ 2,150       $ 18,655        $10,247
        Pro forma                          $ 1,029       $ 16,506        $ 8,661

      Basic net income per share:
        As reported                        $  0.12       $   0.94        $  0.52
        Pro forma                          $  0.06       $   0.83        $  0.44

      Diluted net income per share:
        As reported                        $  0.12       $   0.93        $  0.51
        Pro forma                          $  0.06       $   0.82        $  0.43

      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:


                                            1999         1998         1997

      Dividend yield                        1.90%        1.56 %       1.13 %
      Expected volatility                  40.10%       40.49 %      43.94 %
      Risk free interest rate               5.27%        5.52 %       6.12 %
      Expected lives                        9.0 years    5.0 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
      $28 (1999),  $90 (1998),  and $-0- (1997),  represent a noncash  financing
      transaction for purposes of the consolidated statements of cash flows.


                                        48
      Information   regarding  all  of  the  Company's  stock  option  plans  is
      summarized below:

<TABLE>
<CAPTION>

                                                                                                  Weighted
                                                                              Weighted            Average
                                                                               Average           Fair Value
                                                           Shares           Exercise Price      At Grant Date

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

      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
        Granted at fair value                              448,266                8.96             $ 3.48
        Exercised                                          (38,500)               7.37
        Cancelled                                         (174,357)              12.34
                                                         ----------
      Outstanding at December 31, 1999                   2,795,403             $ 10.20
                                                         ==========            =======
      Options exercisable at December 31, 1999           2,762,803             $ 10.17
                                                         ==========            =======
      Options exercisable at December 31, 1998           2,438,434             $ 10.42
                                                         ==========            =======
      Options exercisable at December 31, 1997           1,536,986             $ 10.37
                                                         ==========            =======
</TABLE>



      Stock  options  available  for future  grants at  December  31,  1999 were
      704,565 under all of the Company's various stock option plans.


      The  following  table  summarizes  information  concerning  stock  options
      outstanding at December 31, 1999:

<TABLE>
<CAPTION>


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

        $0.55 - $5.50                   273,477          7.71      $  4.17           273,477       $   4.17
        $6.00 - $9.66                   367,586         17.67         8.73           367,586           8.73
        $9.75 - $10.88                1,644,815          9.14        10.38         1,644,815          10.38
       $11.00 - $16.60                  509,525          8.58        13.93           476,925          13.98
                                      ----------                                   ----------
        $0.55 - $16.60                2,795,403         10.02      $ 10.20         2,762,803        $ 10.17
                                      ==========        ======     ========        ==========       ========

</TABLE>


                                        49
<PAGE>

9.    INCOME TAXES

      Provision for income taxes consist of:


                              1999           1998           1997
Current:
  Federal                  $ 5,337       $ 12,469        $ 9,574
  State                        750          2,238            921
                           --------      ---------       --------
                             6,087         14,707         10,495
                           --------      ---------       --------
Deferred:
  Federal                   (4,140)        (1,337)        (2,368)
  State                       (544)          (743)           (35)
                           --------      ---------       ---------
                            (4,684)        (2,080)        (2,403)
                           --------      ---------       ---------
     Total                 $ 1,403       $ 12,627        $ 8,092
                           ========      =========       =========

      Total income tax expense for 1999,  1998,  and 1997 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>

                                                               1999           1998          1997

      Income tax at expected federal income tax rate         $ 1,143       $ 10,948      $ 6,419
      State income taxes, net of federal tax effect              125          1,100          651
      Non-taxable life insurance proceeds                                         -         (525)
      Non-deductible operating expenses                          262            295          387
      State jobs tax credits                                     (38)          (126)         (40)
      Non-deductible merger related expenses                                      -        1,085
      Other                                                      (89)           410          115
                                                             --------      ---------     --------
                                                             $ 1,403       $ 12,627      $ 8,092
                                                             ========      =========     ========
</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, 1999 and 1998 were as follows:
<TABLE>
       <S>                                                      <C>            <C>
                                                                   1999       1998

                                                                  Assets (Liabilities)
       Current differences:

       Warranty expense                                         $  4,460       $ 4,051

       Inventory capitalization                                      732           561

       Allowance for losses on receivables                         2,483           718

       Accrued expenses                                            4,974         4,059

       Asset valuation                                             1,850

       Other                                                         667            24
                                                                ---------      --------
                                                                $ 15,166       $ 9,413
                                                                =========      ========
</TABLE>


                                        50
<PAGE>
<TABLE>
<S>                                                             <C>        <C>
                                                                   1999       1998
                                                                  Assets (Liabilities)
       Noncurrent differences:
        Depreciation and basis differential of acquired assets  $ (2,384)  $ (2,061)
        Goodwill                                                    (289)      (569)
        Merger related expenses                                      684      1,007
        Other                                                        530      1,233
                                                                ---------  ---------
                                                                $ (1,459)  $   (390)
                                                                =========  =========

</TABLE>


      Cash paid for income taxes for the years ended December 31, 1999, 1998 and
      1997 was $11,835, $12,250 and $10,632, respectively.

10.   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 $100,  with an
      aggregate  limit of losses in any one year  based on the number of covered
      employees.   Incurred  claims  identified  under  the  Company's  incident
      reporting  system  and  incurred  but not  reported  claims  are funded or
      accrued based on 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 $8,022,  $5,517 and
      $4,693 for years ended December 31, 1999, 1998 and 1997, 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
      $1,071,  $623 and $545 for the years ended  December  31,  1999,  1998 and
      1997, respectively.

11.   COMMITMENTS AND CONTINGENCIES

      Operating Leases:

      Two of the Company's  manufacturing  facilities  are leased under separate
      operating  lease  agreements (the "Related  Leases") with  partnerships or
      companies   among  whose  owners  are  certain   officers,   directors  or
      stockholders of the Company.  The Related Leases require monthly  payments
      ranging  from $6 to $13 and provide for lease terms  ending from July 2000
      to April 2004 as well as renewal option  periods.  The Related Leases also
      contain  purchase  options whereby the Company can purchase the respective
      manufacturing  facility  for $850 and $1,125 at any time  during the lease
      terms.

      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 $1,191,  $1,353 and
      $1,418 for the years ended December 31, 1999, 1998 and 1997, respectively,
      including  rents paid to related  parties of $354 (1999),  $865 (1998) and
      $817 (1997).


                                        51
<PAGE>

      Future minimum rents payable under  operating  leases that have initial or
      remaining  noncancelable lease terms in excess of one year at December 31,
      1999 are as follows:

                      Year Ending
                      December 31,

                          2000                                     $   891
                          2001                                         661
                          2002                                         585
                          2003                                         404
                          2004                                         183
                          Thereafter                                   154
                                                                   --------
                          Total                                    $ 2,878
                                                                   ========
      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 $273,000
            at December 31, 1999.  The Company has an allowance for   losses  of
            $3,464 (1999) and $1,201 (1998) based on prior experience and market
            conditions.

      b.    Under the  insurance  plans  described  in Note 1, the  Company  was
            contingently  liable at December  31, 1999 for future  retrospective
            premium adjustments up to a maximum of approximately  $14,456 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  guaranteed
            certain debt for companies 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 $3,985. At December 31,
            1999, $9,121 was outstanding under the various guarantees,  of which
            the Company had guaranteed $3,076.


                                        52
<PAGE>

12.   SEGMENT INFORMATION

      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  segment is comprised of company  owned
      retail lots that derive  their  revenues  from home sales to  individuals.
      Included in the "other"  category  are  component  manufacturers  who sell
      their  products  to the  manufacturing  segment of the  Company as well as
      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.


                                        53
<PAGE>

<TABLE>
<S>                                            <C>         <C>         <C>
                                                   1999        1998        1997
      Gross revenue:
        Home manufacturing                     $ 573,129   $ 603,369   $ 553,730
        Financial services                         6,107       6,088       5,346
        Retail                                    20,914       7,167
        Other                                     40,315      36,699      22,688
                                               ----------  ----------   ---------
         Gross revenue                           640,465     653,323     581,764
                                               ==========  ==========   =========
      Intersegment revenue:
        Home manufacturing                        17,373       5,253
        Financial services
        Retail
        Other                                     35,292      34,000      20,576
                                               ----------  ----------  ----------
         Intersegment revenue                     52,665      39,253      20,576
                                               ==========  ==========  ==========
      Revenue from external customers:
        Home manufacturing                       555,756     598,116     553,730
        Financial services                         6,107       6,088       5,346
        Retail                                    20,914       7,167
        Other                                      5,023       2,699       2,112
                                               ----------  ----------  ----------
         Total revenue                         $ 587,800   $ 614,070   $ 561,188
                                               ==========  ==========  ==========
      Operating profit (loss):
        Home manufacturing                     $   7,866   $  26,193   $  23,742
        Financial services                          (219)      2,215       2,015
        Retail                                    (1,935)       (427)
        Other                                        466       2,314         598
        Elimination                                 (744)       (826)        (77)
                                               ----------  ----------  ----------
        Segment operating profit                   5,434      29,469      26,278
        General corporate                         (1,917)        282      (9,197)
                                               ----------  ----------  ----------
         Operating profit                      $   3,517   $  29,751   $  17,081
                                               ==========  ==========  ==========
      Depreciation and amortization:
        Home manufacturing                     $   8,215   $   7,305   $   6,686
        Financial services                           359         209         208
        Retail                                       544         146
        Other                                        463         385         337
                                               ----------  ----------  ----------
        Segment depreciation and amortization      9,581       8,045       7,231
        General corporate                            669         320         261
                                               ----------  ----------  ----------
         Total depreciation and amortization   $  10,250   $   8,365   $   7,492
                                               ==========  ==========  ==========
      Capital expenditures:
        Home manufacturing                     $  17,486   $  13,173   $   8,370
        Financial services                           167         181         265
        Retail                                       986         601
        Other                                      1,208         384          89
                                               ----------  ----------  ----------
        Segment capital expenditures              19,847      14,339       8,724
        General corporate                          4,699         316       1,462
                                               ----------  ----------  ----------
         Total capital expenditures            $  24,546    $  14,655  $  10,186
                                               ==========  ==========  ==========
</TABLE>


                                        54
<PAGE>

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

                                            1999             1998             1997

      Identifiable assets:
       Home manufacturing                $ 155,947        $ 156,219        $ 142,998
       Financial services                   17,254           28,424           52,020
       Retail                               23,614            7,665
       Other                                13,988           11,683            7,509
       Elimination                         (32,752)          (9,548)         (17,142)
                                         ----------       ----------       ----------
       Segment assets                      178,051          194,443          185,385
       General corporate                    51,523           41,509           26,169
                                         ----------       ----------       ----------
        Total assets                     $ 229,574        $ 235,952        $ 211,554
                                         ==========       ==========       ==========
</TABLE>

      The Financial  services  segment's  operating profit includes net interest
      income  of  $1,968,  $2,987,  and  $3,283  and  gains  from  the  sale  of
      installment  contracts  of  $2,257,  $2,048  and $-0- for the years  ended
      December 31, 1999, 1998, and 1997, respectively.

      Identifiable  assets for the General  corporate  category  include $1,604,
      $1,447,  and $1,264 of investment  in equity method  investees at December
      31, 1999, 1998 and 1997, respectively.  General corporate operating income
      includes equity in the net income of investees accounted for by the equity
      method of $397, $250, and $296 for the years ended December 31, 1999, 1998
      and 1997, respectively.



                                        55
<PAGE>

                      CAVALIER HOMES INC. AND SUBSIDIARIES
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
              For the Years Ended December 31, 1999, 1998 and 1997
                             (Dollars in Thousands)


<TABLE>
<CAPTION>

(Dollars in Thousands)
                                                        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
                                        ------------   ------------  -------------  -------------  ------------  -------------
<S>                                   <C>              <C>           <C>            <C>            <C>           <C>
Allowance for losses on Accounts
   Receivable:
       Year Ended December 31, 1999   $       1,201                         3,215                         (952)$        3,464
                                        ============   ============  =============  =============  ============  =============

       Year Ended December 31, 1998   $       1,175                           407                         (381)$        1,201
                                        ============   ============  =============  =============  ============  =============

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

Allowance for credit losses:
       Year Ended December 31, 1999   $         760                         2,192                       (1,296)$        1,656
                                        ============   ============  =============  =============  ============  =============

       Year Ended December 31, 1998   $       1,272                         1,042                       (1,554)$          760
                                        ============   ============  =============  =============  ============  =============

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

Accumulated amortization of goodwill:
       Year Ended December 31, 1999   $       4,154                         1,278                              $        5,432
                                        ============   ============  =============  =============  ============  =============

       Year Ended December 31, 1998   $       3,102                         1,052                              $        4,154
                                        ============   ============  =============  =============  ============  =============

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

Accumulated amortization of non-compete
   agreement:
       Year Ended December 31, 1999   $         353                           100                              $          453
                                        ============   ============  =============  =============  ============  =============

       Year Ended December 31, 1998   $         277                            76                              $          353
                                        ============   ============  =============  =============  ============  =============

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

Warranty reserve:
       Year Ended December 31, 1999   $      12,400                        33,653                      (33,053)$       13,000
                                        ============   ============  =============  =============  ============  =============

       Year Ended December 31, 1998   $      11,700                        27,771                      (27,071)$       12,400
                                        ============   ============  =============  =============  ============  =============

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

</TABLE>


                                        56
<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 16, 2000,
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 16, 2000, 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 16,
2000, 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 16, 2000,
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:
<TABLE>
<S>                                                                                     <C>

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

         Independent Auditors' Report                                                            34
         Consolidated Balance Sheets as of December 31, 1999 and 1998                            35
         Consolidated Statements of Income for the years ended December 31, 1999,                37
                           1998 and 1997
         Consolidated Statements of Stockholders' Equity for the years ended                     38
                           December 31, 1999, 1998 and 1997
         Consolidated Statements of Cash Flows for the years ended December 31,                  39
                           1999, 1998 and 1997
         Notes to Consolidated Financial Statements                                              40
</TABLE>


                                        57
<PAGE>

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

         No.       Schedule Description                                                 Form 10-K Page
         ---    ---------------------------------                                       ---------------
         II     Valuation and Qualifying Accounts                                                55
</TABLE>

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

(3)               Articles of Incorporation and By-laws.

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

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

*                 (c)      The Amended and Restated  By-laws  of  the   Company,
filed as Exhibit  3(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.


                                        58
<PAGE>

                  (b)      Lease   Agreement   dated  April  1,  1999,   between
Development  Authority of Johnson  County,  Georgia and  Bellcrest  Homes,  Inc.
regarding the lease of the manufacturing facility located in Adrian, Georgia.

*                 (c)      Lease Agreement with Option to Purchase between  John
H. Beard and Alexander P. Beard,  Trustees under the Will of Bryce Parker Beard,
and BRC  Components,  Inc.  dated March 4, 1999,  filed as Exhibit  10(b) to the
Company's Quarterly Report on Form 10-Q for the quarter ended July 2, 1999.

*                 (d)      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).

*                 (e)      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.

*                 (f)      Lease Agreement  between the  Industrial  Development
Board of the Town of Addison and Jerry F. Wilson, Robert Lowell Burdick and John
W Lowe,  dated as of June 1,  1984,  filed  as  Exhibit  10(j) to the  Company's
Registration Statement on Form S-1, Registration No. 33-3525, dated February 21,
1986.

                  (g)      Assignment and Assumption Agreement by and among  the
Estate  of  Jerry  F.  Wilson,  Robert  Lowell  Burdick,  John W Lowe,  Cavalier
Manufacturing,  Inc. and Cavalier Real Estate Co., Inc., dated January 13, 1999,
regarding the lease of the manufacturing facility located in Addison, Alabama.

                  (h)      Lease Agreement  between the Industrial   Development
Board of the Town of  Addison  and the  Winston  County  Industrial  Development
Association,  dated  as  of  February  1,  1994,  regarding  the  lease  of  the
manufacturing facility located in Addison, Alabama.

*                 (i)      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.

<PAGE>
                  (j)      Lease Agreement dated April 1, 1999, between    Crisp
County-Cordele  Industrial  Development Authority and Cavalier Industries,  Inc.
regarding the lease of the manufacturing facility located in Cordele, Georgia.

*                 (k)      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.

*                 (l)      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.

*                 (m)      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).

*                 (n)      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.

*                 (o)      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.

*                 (p)      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.

                  (q)      Lease Agreement dated June 1, 1997,   between  Graham
Industrial  Association,  Inc. and Cavalier  Manufacturing,  Inc.  regarding the
lease of the manufacturing facility located in Graham, Texas.

                  (r)      Lease Agreement dated   November 1,   1997,   between
Greenstar,   L.L.C.   and  The  Colonial  Group,   regarding  the  lease  of  an
administrative facility in Greensboro, North Carolina.

                  (s)      Addendum to Lease Agreement  dated  January 18, 1999,
between  Greenstar,  L.L.C.  and The Colonial  Group,  regarding the lease of an
administrative facility in Greensboro, North Carolina.

                  (t)      Assignment and Assumption Agreement dated April   29,
1999, between The Colonial Group and Cavalier Homes, Inc. regarding the lease of
the administrative facility in Greensboro, North Carolina.

*                 (u)      Revolving,  Warehouse and Term Loan  Agreement  among
the Company and First  Commercial Bank dated February 17, 1994, filed as Exhibit
10(u) to the Company's  Annual  Report on Form 10-K for the year ended  December
31, 1998.

*                 (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 quarter ended June 26, 1998.

<PAGE>

*                 (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 quarter ended June 26, 1998.

                  (z)      Commitment Letter and Addendum among Cavalier  Homes,
Inc., Cavalier Acceptance  Corporation and First Commercial Bank, dated February
29, 2000.
*                 (aa)     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. 10-K for the year ended December
31, 1998.


                                        60
<PAGE>

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

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

*                 (dd)     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.

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

*                 (ff)     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.

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

                  (hh)     Release   of   Guarantor   and  Amendment to Guaranty
Agreements  among First Commercial Bank,  Patriot Homes,  Inc.,  Cavalier Homes,
Inc.,  Southern Energy Homes, Inc. and Lee Roy Jordan,  dated as of December 31,
1999.

*                 (ii)     Guaranty   Agreement   between SouthTrust  Bank   and
Cavalier Homes, Inc. dated as of July 27, 1998, relating to guaranty of payments
by Woodperfect,  Ltd., filed as Exhibit 10(b) to the Company's  Quarterly Report
on Form 10-Q for the quarter ended October 1, 1999.

<PAGE>


*                 (jj)     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.

*                 (kk)     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 quarter
ended March 27, 1998.

*                 (ll)     Manufactured  Home Loan Purchase  Agreement dated  as
of June 30, 1999, by and between Cavalier Acceptance  Corporation and Green Tree
Financial  Corporation and certain of its affiliates,  filed as Exhibit 10(a) to
the Company's Quarterly Report on Form 10-Q for the quarter ended July 2, 1999.

*        **       (mm)     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.


                                        61
<PAGE>

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

* **              (oo)     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.

* **              (pp)     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.

* **              (qq)     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.

*        **       (rr)     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.

* **              (ss)     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.

* **              (tt)     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.

* **              (uu)     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.

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

*        **       (ww)     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.

* **              (xx)     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.

* **              (yy)     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.

*                 (zz)     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.


                                        62
<PAGE>

*                 (aaa)    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.

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

*        **       (ccc)    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.

*        **       (ddd)    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.

*        **       (eee)    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.

*                 (fff)    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.

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

*                 (hhh)    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 quarter ended June 26, 1998.

* **              (iii)    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  quarter  ended
September 25, 1998.

* **              (jjj)    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
quarter ended  September  25, 1998 and filed as 10(ggg) to the Company's  Annual
Report on Form 10-K for the year ended  December  31, 1998 in order to correct a
typographical error.

* **              (kkk)   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 quarter
ended September 25, 1998.

 *                (lll)    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.

*                 (mmm)    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.

*                 (nnn)    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.


                                        63
<PAGE>

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

(11)              Statement re Computation of Per Share Earnings.

(21)              Subsidiaries of the Registrant.

(23)              Consent of Deloitte & Touche LLP.

(27)              Financial Data Schedule
-----------------------------------------
*        Incorporated by reference herein.
**       Management contract or compensatory plan or arrangement.

         (b)      Reports on Form 8-K.
                  None.


                                        64
<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, 2000


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.
<TABLE>
<S>                                             <C>                                         <C>

Signature                                       Title                                       Date

/s/ DAVID A. ROBERSON                           Director and Principal Executive            March 30, 2000
------------------------------------
                                                Officer

/s/ MICHAEL R. MURPHY                           Director and Principal Financial and        March 30, 2000
---------------------------
                                                Accounting Officer

/s/ BARRY DONNELL                               Chairman of the Board and Director          March 30, 2000
---------------------------


/s/ THOMAS A. BROUGHTON, III                    Director                                    March 30, 2000
------------------------------------


/s/ JOHN W LOWE                                 Director                                    March 30, 2000
 --------------------------


/s/ LEE ROY JORDAN                              Director                                    March 30, 2000
------------------------------------


/s/ GERALD W. MOORE                             Director                                    March 30, 2000
------------------------------------


/s/ A. DOUGLAS JUMPER, SR.                      Director                                    March 30, 2000
---------------------------


/s/ MIKE KENNEDY                                Director                                    March 30, 2000
---------------------------
</TABLE>


<PAGE>

                                      INDEX

Exhibit
Number

(10)     Material Contracts
         (b) Lease   Agreement   dated  April  1,  1999,   between   Development
             Authority of Johnson  County,  Georgia and  Bellcrest  Homes,  Inc.
             regarding   the   lease  of the  manufacturing facility located  in
             Adrian, Georgia.

         (g) Assignment and Assumption   Agreement  by and among the Estate   of
             Jerry F. Wilson, Robert   Lowell  Burdick,   John W Lowe,  Cavalier
             Manufacturing, Inc. and Cavalier  Real  Estate   Co., Inc.,   dated
             January 13, 1999, regarding the lease of the manufacturing facility
             located in Addison, Alabama.

         (h) Lease  Agreement  between the Industrial  Development  Board of the
             Town of  Addison  and the  Winston  County  Industrial  Development
             Association,  dated as of February 1, 1994,  regarding the lease of
             the manufacturing facility located in Addison, Alabama.

         (j) Lease Agreement dated April 1, 1999, between Crisp   County-Cordele
             Industrial Development Authority  and   Cavalier   Industries, Inc.
             regarding the lease of the  manufacturing   facility   located   in
             Cordele, Georgia.

         (q) Lease Agreement   dated June 1,   1997,   between Graham Industrial
             Association, Inc.  and   Cavalier Manufacturing, Inc. regarding the
             lease of the manufacturing facility located in Graham, Texas.

         (v) Lease Agreement dated November 1, 1997, between Greenstar,   L.L.C.
             and The Colonial Group, regarding the lease of an    administrative
             facility in Greensboro, North Carolina.

         (s) Addendum  to  Lease  Agreement  dated  January  18,  1999,  between
             Greenstar, L.L.C. and The Colonial Group, regarding the lease of an
             administrative facility in Greensboro, North Carolina.

         (x) Assignment and Assumption Agreement dated April 29, 1999,   between
             The Colonial Group and Cavalier Homes, Inc. regarding  the lease of
             the administrative facility in Greensboro, North Carolina.

         (z) Commitment Letter and Addendum among Cavalier Homes, Inc., Cavalier
             Acceptance Corporation and First Commercial Bank,    dated February
             29, 2000.

         (hh)Release of Guarantor and Amendment to Guaranty   Agreements   among
             First Commercial Bank, Patriot Homes, Inc., Cavalier   Homes, Inc.,
             Southern Energy Homes, Inc.   and   Lee   Roy Jordan, dated   as of
             December 31, 1999.

(11)         Statement Re Computation of Per Share Earnings

(21)         Subsidiaries of the Registrant

(23)         Consent of Deloitte & Touche LLP

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