<PAGE>

                                                                      Exhibit 13

                                   THE COMPANY

LIBERTY HOMES, INC. and Subsidiaries design, manufacture and sell a broad line
of single and multi-section manufactured homes to numerous independent dealers
throughout most of the United States. The Company currently operates
manufacturing plants in Syracuse, Indiana; Yoder, Kansas; Dorchester, Wisconsin;
Leola, Pennsylvania; Sheridan, Oregon; Ocala, Florida; Statesville, North
Carolina; Hamilton, Alabama; and Tuscumbia, Alabama. Corporate offices,
including engineering and design facilities, are located in Goshen, Indiana.

                             SELECTED FINANCIAL DATA
                    as of or for the year ending December 31,
                  (Amounts in Thousands Except per Share Data)

<TABLE>
<CAPTION>

                                 1998          1997          1996          1995          1994
                                 ----          ----          ----          ----          ----
<S>                         <C>           <C>           <C>           <C>           <C>        
Net Sales                   $   184,920   $   167,837   $   168,139   $   164,753   $   125,035
Net income                  $     4,562   $     3,034   $     4,553   $     6,356   $     4,824
Net income per share        $      1.15   $       .74   $      1.06   $      1.42   $      1.06

Total assets                $    77,219   $    71,482   $    72,166   $    69,127   $    61,013
Long term obligations              --            --            --            --            --
Cash dividends per share:
  Class A common stock      $       .28   $       .28   $       .28   $       .28   $       .28
  Class B common stock      $       .28   $       .28   $       .28   $       .28   $       .28

</TABLE>

         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                         AND RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES - Cash and cash equivalents and short-term
investments as of December 31, 1998 and 1997 totaled $23,741,000 and
$21,047,000, respectively. Working capital was $31,075,000 at year end 1998 and
$28,163,000 at year end 1997. There was no debt at December 31, 1998 and 1997.
Historically, the Company's financing needs have been met through funds
generated internally.

The Company invested $3,282,000 in capital expenditure programs during 1998. The
most notable program was an expansion of the Yoder, Kansas facility. The
remaining projects were spread throughout the Company's other nine manufacturing
facilities and included improvements to production efficiency and replacement of
existing equipment.

Additionally, the Company continued its efforts to repurchase shares of its
Class A and Class B Common Stock under a program approved by its Board of
Directors in 1994 and amended in 1996 and 1997. At the end of 1998, a total of
604,000 Class A Common Shares and 15,000 Class B Common Shares had been
repurchased and cancelled. The Company plans to continue such repurchases on the
open market or in negotiated transactions at management's discretion.


Liberty Homes, Inc.                   Page 13                 1998 Annual Report

<PAGE>


During 1999, the Company anticipates that cash flow from operations and cash
reserves will be sufficient to meet the requirements for capital expenditures,
working capital, stock repurchases and dividend payments.

RESULTS OF OPERATIONS - Net sales in 1998 were $184,920,000, a $17,083,000 or
10% increase from 1997 net sales of $167,837,000. Net sales in 1997 decreased
slightly by $302,000 from $168,139,000 in 1996. Comparing 1998 to 1997, the
Company experienced a 7% increase in the number of home sections shipped and a
4% increase in homes shipped. The Manufactured Housing Institute's report on
industry statistics for the states in which the Company produces homes shows a
7% increase of home sections shipped and a 5% increase in homes shipped.

The product mix continues to move from single-section homes to multi-section
homes. During 1998, 55% of the homes sold by the Company were homes comprised of
two or more sections. Multi-section shipments were 51% of 1997 home shipments.

Gross profit in 1998, 1997 and 1996 was $25,702,000, $20,246,000 and $21,527,000
respectively. Higher sales volume accounted for the increase in gross profit
during 1998.

Selling, general and administrative expenses have grown as a result of the
Company's increased operations and volume. These expenses amounted to
$19,024,000 in 1998, $16,366,000 in 1997 and $16,016,000 in 1996.

Interest and other income was $1,286,000 in 1998, $1,027,000 in 1997 and
$2,142,000 in 1996. During 1996, the Company sold its idle facilities in Georgia
and Pennsylvania for pre-tax gains totaling $903,000. The remaining amounts are
income from the investment of cash during the year and variances are due to
varying interest rates and the amount of cash available to invest.

The Company had net income of $4,562,000 in 1998 compared to $3,034,000 in 1997
and $4,553,000 in 1996. The net income for 1998 increased over 1997 for several
reasons. As mentioned above, increased unit volume provided greater revenue.
This along with the ability of the Company to spread manufacturing overhead over
a higher volume led to improved profits. Although, interest rates fell, higher
cash balances resulted in higher interest income which also increased net
income.

OUTLOOK AND RISK FACTORS - The Company believes consumer housing needs and
favorable retail financing for its homes has had a positive impact on the
Company. It should be noted, however, sales backlogs are traditionally short,
and dealer inventories do not fluctuate substantially. Order activity at the
Company is indicative of the day to day retail sales activity of its products.
Any changes affecting retail customer demand, such as cost, availability of
favorable credit and unemployment, have an immediate effect on the Company's
operations.

Liberty Homes, Inc.                   Page 14                 1998 Annual Report

<PAGE>


In a practice common to the industry, the Company participates in dealer
financing programs which require it to repurchase homes which remain unsold and
in dealer inventory for a period of up to one year after delivery to the dealer,
if the dealer defaults on its financing obligations. Repurchased units are
resold, although some discounting may be necessary and some loss may occur.
Prior year losses on such repurchases have not been material nor are they
expected to be during 1999.

The U.S. Department of Housing and Urban Development (HUD) regulates the
manufactured housing industry. HUD has in the past issued regulations which
affected the content and therefore cost of manufactured homes. Such increases in
cost can have an adverse effect on the industry and the Company. However, the
Company is unable to quantify the direct impact on the Company's sales. The
likelihood of future regulatory activity by HUD is unknown and consequently
there can be no assessment of potential future adverse effects of new HUD
regulations if such regulations do occur.

YEAR 2000 - Liberty Homes employs several electronic data processing (EDP)
systems for administrative and reporting purposes. In 1995, the Company began a
process to analyze the need to enhance its systems to accommodate planned growth
of the Company and to meet additional management information needs. As the
Company determined the systems it wished to enhance, it also discovered the need
to ensure all of its systems were able to handle year 2000 dates. This Year 2000
(Y2K) compliance issue then became a part of the Company's EDP enhancement
program. In March of 1996, the Company contracted for an overall upgrade of its
EDP system which, among many things would provide Y2K compliance for a
substantial portion of its EDP systems. This project is well on the way to
completion.

Additionally, the Company has tested and upgraded all of its information and
communication systems hardware for Y2K compliance, installed software updates
containing Y2K compliance code and initiated projects to bring internally
developed systems into Y2K compliance. Overall, the Company plans to be done
with all of its Y2K compliance efforts by July 1, 1999. Because of the positive
results of its remediation efforts to date, the Company does not have a
contingency plan, nor does it intend to create one at this time.

The Company's manufacturing processes do not utilize systems that are materially
reliant on Y2K compliance. Therefore, the Company's ability to generate product
will not be adversely affected by any Y2K issues.

The Company sells its product to numerous independent dealers, none of which
account for a material portion of the Company's sales. The Company believes the
risk of Y2K noncompliance associated with its dealer group is not significant.

The Company's operations rely on a variety of suppliers, wholesale and retail
finance sources, transportation companies and utilities. The Company is not
aware of any material 


Liberty Homes, Inc.                   Page 15                 1998 Annual Report

<PAGE>

compliance problems with these vendors, however, it will continue to monitor the
sufficiency of this group's Y2K compliance efforts. Liberty Homes believes the
sole failure of any vendor would not have a material adverse effect on the
Company's business.

The total cost to date and expected future cost for Y2K remediation is not
material. Internally generated funds are the source of funding these compliance
costs.

The Company believes that its Y2K compliance efforts will significantly reduce
the risk of any material adverse business interruptions caused by noncompliance.
However, this statement should not be considered a guarantee of such a reduction
in risk.

FORWARD LOOKING INFORMATION - The discussion above contains forward looking
statements regarding industry and company outlooks and risk factors. All such
forward looking statements are subject to a number of material factors. These
factors include, without limitation, the availability of financing credit at
both the wholesale and retail level, the availability of a competent workforce,
the regulation of the industry at the federal, state and local levels and the
condition of the economy and its effect on consumer confidence.

                                  CAPITAL STOCK

The Company's Class A and Class B Common Stock are traded on the NASDAQ National
Market System. As of March 2, 1999, there were approximately 322 holders of
record of the Company's Class A Common Stock and approximately 224 holders of
record of the Company's Class B Common Stock. The following table shows the high
and low closing price per share for the Company's Class A and Class B Common
Stock for each of the quarters in 1998 and 1997 as reported by the National
Association of Securities Dealers, Inc., as well as cash dividends declared in
each quarter in 1998 and 1997.

<TABLE>
<CAPTION>

                                              Price Per Share ($)                          Cash Dividends
                                             ---------------------
                                        1998                        1997                      Per Share
                                        ----                        ----                      ---------
                                High           Low          High          Low           1998           1997
                                ----           ---          ----          ---           ----           ----
<S>                             <C>           <C>           <C>          <C>            <C>            <C>

First Quarter:
    Class A Common              10-3/4          9           12-3/4         9-3/4         $.07          $.07
    Class B Common              11             10           13-3/16       11-3/4         $.07          $.07
Second Quarter:
    Class A Common              11-3/4          9-5/8       10-3/4         9-1/8         $.07          $.07
    Class B Common              11-3/8         11           10-1/2        10             $.07          $.07
Third Quarter:
    Class A Common              15-1/4          9-3/8       10-1/4         9             $.07          $.07
    Class B Common              15             10-1/4       10-3/4         9-1/2         $.07          $.07
Fourth Quarter:
    Class A Common              11-15/16       10-5/8       10-1/2         8-1/8         $.07          $.07
    Class B Common              12             10-1/2       10             9             $.07          $.07

</TABLE>

Liberty Homes, Inc.                   Page 16                 1998 Annual Report

<PAGE>



March 17, 1999



To Our Shareholders:

During 1998, Liberty Homes, Inc. generated net sales of $ 184,920,000. This
amount represents an increase of $17,083,000 from the prior year. The Company's
success in the markets it serves parallels the 1998 experience of the whole
industry. Net income for 1998 increased to $4,562,000 from $3,034,000 in 1997.
The Company aggressively expanded its production capacity by completing a new
manufacturing facility at the end of each of 1994, 1995 and 1996. This expansion
has provided the manufacturing base and market alignment to allow in part our
improved performance in 1998.

We realize our success is the result of many factors and we want to take this
opportunity to thank our shareholders, employees and suppliers for their efforts
and continuing support.

Very truly yours,

LIBERTY HOMES, INC.



Edward J. Hussey
President


Liberty Homes, Inc.                   Page 17                 1998 Annual Report

<PAGE>


CONSOLIDATED BALANCE SHEET
December 31, 1998 and 1997 (Amounts in Thousands)

ASSETS

<TABLE>
<CAPTION>

                                      1998      1997
                                      ----      ----
<S>                                 <C>       <C>    

CURRENT ASSETS:

    Cash and cash equivalents       $18,441   $15,797

    Short term investments            5,300     5,250

    Receivables                       9,107     8,303

    Inventories                      13,171    11,982

    Deferred tax asset                2,500     2,206

    Prepayments and other             1,609     1,450
                                    -------   -------

      Total current assets           50,128    44,988
                                    -------   -------


PROPERTY, PLANT AND EQUIPMENT:

    Land                              1,524     1,280

    Buildings and improvements       26,662    24,921

    Machinery and equipment          19,760    18,463
                                    -------   -------

                                     47,946    44,664

    Less accumulated depreciation    20,855    18,170
                                    -------   -------

                                     27,091    26,494
                                    -------   -------

                                    $77,219   $71,482
                                    -------   -------
                                    -------   -------

</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.



Liberty Homes, Inc.                   Page 18                 1998 Annual Report

<PAGE>


LIBERTY HOMES, INC.


                                  LIABILITIES

<TABLE>
<CAPTION>

                                                                       1998       1997
                                                                       ----       ----
<S>                                                                  <C>       <C>    

     CURRENT LIABILITIES:

         Accounts payable                                            $ 2,699   $ 2,340

         Dividends payable                                               277       279

         Income taxes payable                                          1,136       170

         Accrued compensation & payroll taxes                          2,897     2,276

         Other accrued liabilities                                    12,044    11,760
                                                                     -------   -------

         Total current liabilities                                    19,053    16,825
                                                                     -------   -------

                             DEFERRED INCOME TAXES                     2,270     2,154
                                                                     -------   -------

                    MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES       969       542
                                                                     -------   -------

      CONTINGENT LIABILITIES

SHAREHOLDERS' EQUITY
     CAPITAL STOCK:
         Class A, $1 par value, Authorized - 7,500,000 shares
          Issued and outstanding -
          2,224,000 in 1998 and 2,262,000 in 1997                      2,224     2,262

         Class B, $1 par value, convertible
          to Class A, authorized - 3,500,000 shares
          Issued and outstanding -
          1,728,000 in 1998 and 1,731,000 in 1997                      1,728     1,731

                                    OTHER CAPITAL                         83        83

                                  RETAINED EARNINGS                   50,892    47,885
                                                                     -------   -------

                                                                      54,927    51,961
                                                                     -------   -------

                                                                     $77,219   $71,482
                                                                     -------   -------
                                                                     -------   -------
</TABLE>


Liberty Homes, Inc.                   Page 19                 1998 Annual Report

<PAGE>


CONSOLIDATED STATEMENT OF INCOME 
For the Years Ended December 31, 1998, 1997 and 1996 
(Amounts in Thousands, Except per Share Data)

<TABLE>
<CAPTION>

                                                              1998           1997           1996
                                                              ----           ----           ----

<S>                                                        <C>            <C>            <C>      
Net sales                                                  $ 184,920      $ 167,837      $ 168,139
Cost of sales                                                159,218        147,591        146,612
                                                           ---------      ---------      ---------

      Gross profit                                            25,702         20,246         21,527
Selling, general and
  administrative expenses                                     19,024         16,366         16,016
                                                           ---------      ---------      ---------

      Operating income                                         6,678          3,880          5,511
Interest and other income                                      1,286          1,027          2,142
                                                           ---------      ---------      ---------

      Income before minority interest and income taxes         7,964          4,907          7,653
Minority interest                                               (384)           (86)          (108)
Income tax expense                                            (3,018)        (1,787)        (2,992)
                                                           ---------      ---------      ---------

      Net income                                           $   4,562      $   3,034      $   4,553
                                                           ---------      ---------      ---------
                                                           ---------      ---------      ---------


Net income per outstanding common share
      Class A - basic                                      $    1.15      $    0.74      $    1.06
      Class A - fully diluted                                   1.15           0.74           1.06
      Class B - basic                                           1.15           0.74           1.06
      Class B - fully diluted                                   1.15           0.74           1.06

</TABLE>



CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996 
(Amounts in Thousands)


<TABLE>
<CAPTION>
                                           CLASS A       CLASS B
                                           COMMON        COMMON        OTHER         RETAINED
                                           STOCK         STOCK         CAPITAL       EARNINGS       TOTAL
                                           --------      --------      --------      --------      --------

<S>                                        <C>           <C>           <C>           <C>           <C>     
Balance, January 1, 1996                   $  2,621      $  1,757      $     83      $ 46,457      $ 50,918
    Conversion from Class B to Class A           11           (11)
    Repurchase and cancellation
      of Class A Shares                        (155)                                   (1,697)       (1,852)
    Net income for the year                                                             4,553         4,553
    Cash dividends-$.28 per share                                                      (1,196)       (1,196)
                                           --------      --------      --------      --------      --------
Balance December 31, 1996                     2,477         1,746            83        48,117        52,423
    Repurchase and cancellation
      of Class A & Class B Shares              (215)          (15)                     (2,133)       (2,363)
    Net income for the year                   3,034         3,034
    Cash dividends-$.28 per share                                                      (1,133)       (1,133)
                                           --------      --------      --------      --------      --------
Balance December 31, 1997                     2,262         1,731            83        47,885        51,961
    Conversion from Class B to A                  3            (3)
    Repurchase and cancellation
      of Class A Shares                         (41)                                     (445)         (486)
    Net income for the year                   4,562         4,562
    Cash dividends-$.28 per share                                                      (1,110)       (1,110)
                                           --------      --------      --------      --------      --------
                                           --------      --------      --------      --------      --------
Balance December 31, 1998                  $  2,224      $  1,728      $     83      $ 50,892      $ 54,927
                                           --------      --------      --------      --------      --------
                                           --------      --------      --------      --------      --------

</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.



Liberty Homes, Inc.                   Page 20                 1998 Annual Report

<PAGE>


CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
(Amounts in Thousands)

<TABLE>
<CAPTION>

                                                               1998          1997          1996
                                                               ----          ----          ----
<S>                                                          <C>           <C>           <C>     

Cash flows from operating activities:
      Net income                                             $  4,562      $  3,034      $  4,553
                                                             --------      --------      --------
      Adjustments to reconcile net income to net
        cash provided by operating activities:
      Depreciation                                              2,685         2,406         2,181
      Deferred income taxes                                      (178)           50          (541)
      Gain on sale of property, plant & equipment                --            --            (882)
      Minority interest                                           384            86           108

       Changes in assets and liabilities:
           Receivables                                           (804)          237        (1,212)
           Inventories                                         (1,189)       (1,771)          407
           Prepayments and other                                 (159)         (258)         (183)
           Accounts payable                                       359        (1,017)          784
           Accrued liabilities                                    903           122         1,175
           Accrued income taxes                                   966           281          (347)
                                                             --------      --------      --------

             Total adjustments                                  2,967           136         1,490
                                                             --------      --------      --------

        Net cash provided by operating activities               7,529         3,170         6,043
                                                             --------      --------      --------

Cash flows from (used) in investing activities:
      Additions to property, plant & equipment                 (3,282)       (2,697)       (7,245)
      Disposal of (investment in) short term investments          (50)        7,400         2,950
      Disposal of property, plant & equipment                    --            --           2,217
                                                             --------      --------      --------
      Net cash provided by (used in)
       investing activities                                    (3,332)        4,703        (2,078)
                                                             --------      --------      --------

Cash flows used in financing activities:
      Cash dividends paid                                      (1,110)       (1,133)       (1,196)
      Minority interest contributed capital                        43           246          --
      Retirement of common stock                                 (486)       (2,363)       (1,852)
                                                             --------      --------      --------
      Net cash used in financing activities                    (1,553)       (3,250)       (3,048)
                                                             --------      --------      --------

Net increase in cash and cash equivalents                       2,644         4,623           917
Cash and cash equivalents, beginning of year                   15,797        11,174        10,257
                                                             --------      --------      --------

Cash and cash equivalents, end of year                       $ 18,441      $ 15,797      $ 11,174
                                                             --------      --------      --------
                                                             --------      --------      --------


Supplemental disclosures of cash flow
         information - cash paid during
         the year for income taxes                           $  2,301      $  1,503      $  3,879
                                                             --------      --------      --------
                                                             --------      --------      --------
</TABLE>



Liberty Homes, Inc.                   Page 21                 1998 Annual Report

<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries Statesville Housing Center, Inc. and Irish Homes,
Inc., and its majority owned subsidiaries, Waverlee Homes, Inc., and Gipper
Development Company, LLC. Upon consolidation, all intercompany accounts,
transactions and profits have been eliminated.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform with current
presentation.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include highly liquid investments which are converted
to known amounts of cash on a daily basis. These investments are carried at cost
which approximates market value.

SHORT-TERM INVESTMENTS

At December 31, 1998 and 1997, short term investments consisted primarily of
certificates of deposit with original maturities of 90 days to 12 months and
readily convertible to cash. These investments are carried at cost which
approximate fair market value. The Company intends to hold the certificates of
deposit until maturity. The Company's investments were maintained in two
financial institutions at December 31, 1998.

INVENTORIES

Inventories, consisting principally of raw materials, are stated at the lower of
cost or market, with cost determined on a first-in, first-out basis.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is recorded at cost. Depreciation is taken over
the estimated useful life of the asset and is provided principally on the
straight-line method. When assets are retired or disposed, the related cost and
accumulated depreciation is removed from the accounts and any resulting gain or
loss is included in operations. Operations are charged with all maintenance,
repairs and rearrangement expenses, while betterments and renewals which
increase the productive capacity of assets are capitalized and depreciated.

PRODUCT WARRANTY COSTS

Estimated warranty obligations are provided at the time of sale.

INCOME TAXES

The Company accounts for income taxes using the asset and liability method.
Under this method, deferred income taxes are recognized for the tax consequences
of temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of ending assets and liabilities. The effect on deferred taxes of
a change in tax rates is recognized in income in the period that includes the
enactment date.

Liberty Homes, Inc.                   Page 22                 1998 Annual Report

<PAGE>


EARNINGS PER SHARE

In February 1997, the Financial Accounting Standards Board (the "Board") adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS
128"), which establishes standards for computing and presenting earnings per
share ("EPS") by replacing the presentation of primary EPS with a presentation
of basic EPS. In addition, FAS 128 requires dual presentation of basic and
diluted EPS on the face of the income statement and requires a reconciliation of
the numerator and denominator of the diluted EPS calculation.

REVENUE RECOGNITION

Revenue is recognized when title is transferred upon shipment.

DELIVERY COSTS

Revenues and expenses related to delivery of the Company's products are included
in cost of sales in the statement of operations.

2.       NATURE OF BUSINESS, RISKS AND UNCERTAINTIES:

The Company designs, manufactures and sells at wholesale a broad line of single
and multi-section manufactured homes to numerous independent dealers in the
United States who utilize floorplan financing arrangements with lending
institutions. Continued availability of credit to these dealers is a vital part
of the Company's business.

The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain assets, liabilities, revenues and expenses. Such estimates
primarily relate to unsettled transactions and events as of the date of the
financial statements. Accordingly, upon settlement, actual amounts may differ
from estimated amounts. The most notable assumptions included in the financial
statements involve product warranty costs, potential repurchase obligations on
dealer floorplan financing arrangements and reserves set for the Company's
self-funded workers' compensation insurance program and group medical benefit
plan. The Company maintains excess loss coverage on the workers' compensation
and medical benefit programs through various insurance contracts.

3.       CAPITAL STOCK:

The shares of Class A Common Stock have no voting rights and are not
convertible; the shares of Class B Common Stock have voting rights of one vote
per share and are convertible into Class A Common Stock on a one for one basis.
The Class A Shares may carry a preferential dividend rate. However, in no event
will the dividend rate be less than the Class B shares. The weighted average of
all shares outstanding in 1998, 1997 and 1996 was 3,972,000 shares, 4,085,000
shares and 4,300,000 shares, respectively. The Board of Directors has approved a
stock repurchase program authorizing the Company to repurchase up to 800,000
outstanding shares of its Class A and Class B Common Shares on the open market
or in negotiated transactions at management's discretion. At December 31, 1998,
604,000 shares of Class A Common Stock and 15,000 shares of Class B Common Stock
had been repurchased and canceled under this program.

Liberty Homes, Inc.                   Page 23                 1998 Annual Report

<PAGE>



4.       INCOME TAXES:

The deferred taxes in the accompanying balance sheet includes the following
amounts of deferred tax assets and liabilities:

<TABLE>
<CAPTION>

(Amounts in Thousands)         1998         1997         1996
                               ----         ----         ----
<S>                          <C>          <C>          <C>    
Deferred tax asset           $ 2,500      $ 2,206      $ 2,054
Deferred tax (liability)     $(2,270)     $(2,154)     $(1,952)
                             -------      -------      ------- 
Net deferred tax asset       $   230      $    52      $   102
                             -------      -------      -------
                             -------      -------      -------
</TABLE>

The tax effects of principal temporary differences and carry forwards are shown
in the following table:

<TABLE>
<CAPTION>

                                                          1998         1997          1996
                                                          ----         ----          ----
<S>                                                      <C>          <C>          <C>    
Nondeductible accruals & reserves                        $ 2,435      $ 2,152      $ 1,998
Accelerated tax depreciation                             $(2,205)     $(2,100)     $(1,896)
                                                         -------      -------      ------- 
                                                         $   230      $    52      $   102
                                                         -------      -------      -------
                                                         -------      -------      -------
</TABLE>

The components of income tax expense are as follows:

<TABLE>
<CAPTION>

     (Amounts in Thousands)     1998          1997        1996
                                ----          ----        ----
     <S>                       <C>          <C>         <C>    
     Current:
          Federal              $ 2,795      $ 1,687     $ 2,915
          State                    401           50         618
     Deferred:
          Federal                 (148)          39        (454)
          State                    (30)          11         (87)
                               -------      -------     -------
                               $ 3,018      $ 1,787     $ 2,992
                               -------      -------     -------
                               -------      -------     -------
</TABLE>

Income tax expense results in effective tax rates of 37.9 percent in 1998, 36.4
percent in 1997 and 39.1 percent in 1996; and reconciles with the statutory
United States federal income tax rate in 1998, 1997 and 1996, of 34 percent, as
follows:

<TABLE>
<CAPTION>

                                                             % OF INCOME BEFORE MINORITY INTEREST
                                    INCOME TAX EXPENSE                  AND INCOME TAXES
                                    ------------------                  ----------------
                                1998        1997      1996           1998     1997     1996
                                ----        ----      ----           ----     ----     ----
<S>                            <C>        <C>        <C>            <C>      <C>      <C> 
Income taxes at statutory                                       
     federal rate              $2,708     $1,668     $2,602           34.0     34.0     34.0
                                                                
State income taxes, net of                                      
     federal tax effect           245        119        351            3.1      2.4      4.6
                                                                
Other                              65       --           39            0.8     --        0.5
                               ------     ------     ------         ------   ------   ------
                               $3,018     $1,787     $2,992           37.9     36.4     39.1
                               ------     ------     ------         ------   ------   ------
                               ------     ------     ------         ------   ------   ------
</TABLE>
                                                                
The state income tax rates for 1997 were lower than historical rates due to tax
credits recognized in 1997.



Liberty Homes, Inc.                   Page 24                 1998 Annual Report

<PAGE>


5.       OTHER ACCRUED LIABILITIES:

Other accrued liabilities at December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>

     (Amounts in Thousands)                   1998               1997
                                              ----               ----
     <S>                                   <C>                <C>    
     Dealer Rebates                        $ 6,219            $ 6,601
     Product Warranty                        1,764              1,360
     Insurance                               1,828              2,218
     Other                                   2,233              1,581
                                           -------            -------
                                           $12,044            $11,760
                                           -------            -------
                                           -------            -------
</TABLE>

6.       CONTINGENT LIABILITIES:

REPURCHASE OBLIGATIONS

The Company is contingently liable as of December 31, 1998 under terms of
repurchase agreements with various financial institutions which provide for the
repurchase of its homes sold to dealers under floor plan financing arrangements
upon dealer default. The Company's exposure to loss under such agreements is
reduced by the resale of the repurchased home. The Company has provided for
losses on homes as of December 31, 1998 for which it has received or expects
notification of repurchase. The Company's repurchase losses for 1998, 1997 and
1996 were not material. The Company believes any additional losses incurred
under outstanding repurchase agreements in excess of the accrual established as
of December 31, 1998, will not have a significant impact on the financial
condition of the Company.

OTHER CONTINGENCIES

Letters of Credit totaling $2,325,000 have been issued in conjunction with the
Company's self-funded workers' compensation program.

The Company is party to various legal proceedings from the normal course of
operations. The Company has provided for anticipated losses resulting from the
litigation. In management's opinion, the Company has adequate legal defenses and
does not believe these suits will materially affect the Company's operations or
financial position.

7.       RETIREMENT PLAN:

The Company has a 401(k) retirement plan which covers substantially all
employees. The Company has agreed to match a portion of the employee
contributions made to the plan. The expense for this plan for the year ended
December 31, 1998, 1997 and 1996 was $239,000, $222,000 and $227,000,
respectively.


Liberty Homes, Inc.                   Page 25                 1998 Annual Report


<PAGE>


8.       QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The Company's results of operations in 1998 and 1997 by quarter are as follows:
(Amounts in Thousands except per share data):

<TABLE>
<CAPTION>

                                                                       Quarter Ended                        Year
                                                                                                            Ended
                                              Mar 31          Jun 30          Sep 30         Dec 31         Dec 31
                                              ------          ------          ------         ------        -------
<S>                                         <C>             <C>             <C>            <C>             <C>     

1998:
Net sales                                   $ 42,886        $ 46,320        $ 48,897       $ 46,817        $184,920
Gross profit                                   5,340           6,816           6,433          7,113          25,702
Net Income                                       580           1,326           1,062          1,594           4,562
Net Income per Class A Share
     Basic                                      0.14            0.34            0.27           0.40     
     Fully Diluted                              0.14            0.34            0.27           0.40            1.15
Net Income per Class B Share
     Basic                                      0.14            0.34            0.27           0.40     
     Fully Diluted                              0.14            0.34            0.27           0.40            1.15

1997:
Net sales                                   $ 35,131        $ 46,188        $ 43,861       $ 42,657        $167,837
Gross profit                                   3,807           5,807           4,800          5,832          20,246
Net income                                       244           1,068             534          1,188           3,034
Net Income per Class A Share
     Basic                                      0.06            0.26            0.13           0.29            0.74
     Fully Diluted                              0.06            0.26            0.13           0.29            0.74
Net Income per Class B Share
     Basic                                      0.06            0.26            0.13           0.29            0.74
     Fully Diluted                              0.06            0.26            0.13           0.29            0.74
</TABLE>


Liberty Homes, Inc.                   Page 28                 1998 Annual Report


<PAGE>



                         REPORT OF INDEPENDENT AUDITORS


Board of Directors and Shareholders
Liberty Homes, Inc.
Goshen, Indiana

We have audited the accompanying consolidated balance sheets of Liberty Homes,
Inc. and Subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Liberty Homes, Inc.
and Subsidiaries as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.


                                          Crowe, Chizek and Company LLP


Elkhart, Indiana
February 17, 1999



Liberty Homes, Inc.                   Page 27                 1998 Annual Report

<PAGE>


                               BOARD OF DIRECTORS

NAME                            PRINCIPAL OCCUPATION AND EMPLOYER


Edward J. Hussey           Chairman of the Board and President of Liberty Homes,
                           Inc.

Edward Joseph Hussey       Vice President, Secretary and Assistant Treasurer of
                           Liberty Homes, Inc. and Shareholder in the law firm
                           of Hodges & Davis PC, Merrillville, Indiana

Michael F. Hussey          Vice President - Finance and Assistant Secretary of
                           Liberty Homes, Inc.

David M. Huffine           President of I.M. Homes, Inc., Rocky Ford, Colorado

Mitchell Day               President of Day Equipment Corporation, Goshen,
                           Indiana


OFFICERS
         Edward J. Hussey, President
         Edward Joseph Hussey, Vice President and Secretary
         Michael F. Hussey, Vice President - Finance and Assistant Secretary
         Marc A. Dosmann, Vice President and Chief Financial Officer
         Bruce A. McMillan, Vice President - Sales
         Ron Atkins, Vice President - Purchasing
         Nader Tomasbi, Vice President - Engineering and Design
         Ralph D. Ray, Treasurer
         Brian L. Christner, Controller
         Dorothy L. Peterson, Assistant Treasurer

REGISTRAR & TRANSFER AGENT
         Harris Bank, Shareholder Services
         Chicago, Illinois
         (312) 461-3309

AUDITORS
         Crowe, Chizek and Company LLP
         Elkhart, Indiana

LEGAL COUNSEL
         Hodges & Davis PC
         Merrillville, Indiana

         Barnes & Thornburg
         Fort Wayne, Indiana

ANNUAL REPORT ON FORM 10-K

         The Liberty Homes, Inc. Annual Report on Form 10-K filed with the
Securities and Exchange Commission is available to shareholders at no charge
upon written request to Liberty Homes, Inc., PO Box 35, Goshen, Indiana
46527-0035, Attention: Marc A. Dosmann.

Liberty Homes, Inc.                   Page 28                 1998 Annual Report