<PAGE>

                                 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>
                               1997      1996      1995      1994       1993
                            ---------  --------  --------  --------   -------
<S>                         <C>        <C>       <C>       <C>        <C>
Net Sales                   $ 167,837  $168,139  $164,753  $125,035   $92,623
Net income                  $   3,034  $  4,553  $  6,356  $  4,824   $ 3,265
Net income per share             $.74     $1.06     $1.42     $1.06      $.71

Total assets                  $71,482   $72,166   $69,127   $61,013   $56,043
Long term obligations             --        --        --        --        --
Cash dividends per share:
  Class A common stock           $.28      $.28      $.28      $.28      $.25
  Class B common stock           $.28      $.28      $.28      $.28      $.25
</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, 1997 and 1996 totaled $21,047,000 and
$23,824,000, respectively.  Working capital was $27,621,000 at year end 1997
and $28,172,000 at year end 1996.  There was no debt at December 31, 1997 and
1996. Historically, the Company's financing needs have been met through funds
generated internally.

After building a new production facility in each of the preceding three
years, no new facilities were built with the $2,697,000 of 1997 capital
expenditures. Projects that were funded during 1997 covered new manufacturing
processes, production efficiency improvements, repair or replacement of
existing equipment and expansion of the Company's manufactured housing
community developments. Capital expenditures during 1996 totaled $7,245,000.
The most notable item during 1996 was the construction of a manufacturing
facility in Tuscumbia, Alabama which began production in December of that
year.

Additionally, the Company continued its efforts to repurchase shares of its


                                      16

<PAGE>

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 1997, a total
of 563,000 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.

During 1998, 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 during 1997 were $167,837,000, a $302,000
decrease from 1996 net sales of $168,139,000.  Net sales in 1996 were up
$3,386,000 or 2% from $164,753,000 in 1995.  During 1997, varied results were
experienced throughout the Company and the national market.  The Company as
well as the industry experienced slight declines from 1996 levels.  When
compared to industry production, as reported by the Manufactured Housing
Institute, the Company's year to year production change percentage comparison
was the same as the industry year to year comparison for the aggregate of
those states in which the Company operates.  Individually, the percentage
change compared favorably in four of the states and compared unfavorably in
the other four states in which the Company operates.

Sales from the Company's Pennsylvania operation declined in 1997 along with
sales by the industry as a whole in the markets served by that plant.  The
strong growth which produced much of the Company's 1996 sales increase
continued into 1997 with favorable results in the market served by the
Company's two Alabama plants.  Also, the decline in the Company's Pacific
Northwest market that began in 1996, bottomed out and began improving during
the second half of 1997.

Gross profit in 1997, 1996 and 1995 was $20,246,000, $21,356,000 and
$24,172,000, respectively.  The Company added new plants in Hamilton, Alabama
in January 1995, in Dorchester, Wisconsin in January 1996, and in Tuscumbia,
Alabama in December 1996.  As net sales remained relatively constant in 1997,
1996 and 1995, the Company was unable to spread these additional costs over a
larger sales base.  Therefore, gross profits in 1997 and 1996 declined
$1,110,000 and $2,816,000 respectively.

Selling, general and administrative expenses have grown as a result of the
Company's increased number of facilities.  These expenses amounted to
$16,366,000 in 1997, $15,845,000 in 1996 and $15,183,000 in 1995, or 9.8%,
9.4% and 9.2% of net sales respectively.

Interest and other income was $941,000 in 1997, $2,034,000 in 1996 and
$1,557,000 in 1995.  During 1996, the Company sold its idle facilities in


                                      17

<PAGE>

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 $3,034,000 in 1997 compared to $4,553,000 in
1996, and $6,356,000 in 1995.  While the manufactured housing industry sales
and the Company's sales have remained practically the same in each of these
years, the Company's costs have increased.

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.

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 1998.

The manufactured housing industry is regulated by the U.S. Department of
Housing and Urban Development (HUD).  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.

                                CAPITAL STOCK

The Company's Class A and Class B Common Stock are traded on the NASDAQ
National Market System.  As of March 13, 1998, there were approximately 355
holders of record of the Company's Class A Common Stock and approximately 240
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 1997 and 1996 as reported by
the National Association of Securities Dealers, Inc., as well as cash
dividends declared in each quarter in 1997 and 1996.


                                      18

<PAGE>

<TABLE>
<CAPTION>
                                    Price per Share ($)
                                    -------------------              Cash Dividends
                                 1997                 1996              per Share
                                 ----                 ----              ---------
                            High      Low         High     Low      1997         1996
                            ----      ---         ----     ---      ----         ----
<S>                        <C>       <C>         <C>      <C>       <C>          <C>
First Quarter:
  Class A Common           12 3/4     9 3/4      12 1/2   10 3/4    $.07         $.07
  Class B Common           13 3/16   11 3/4      11 3/4   10 1/2    $.07         $.07
Second Quarter:
  Class A Common           10 3/4     9 1/8      15       11        $.07         $.07
  Class B Common           10 1/2    10          13 3/4   10 3/4    $.07         $.07
Third Quarter:
  Class A Common           10 1/4     9          13 3/4   12        $.07         $.07
  Class B Common           10 3/4     9 1/2      12 3/4   12 1/2    $.07         $.07
Fourth Quarter:
  Class A Common           10 1/2     8 1/8      13 5/8   12 1/4    $.07         $.07
  Class B Common           10         9          12 1/2   12 1/2    $.07         $.07
</TABLE>


                                      19


<PAGE>

March 17, 1998

To Our Shareholders:

During 1997, Liberty Homes, Inc. generated net sales of $167,837,000.  This
amount represents a small decrease of $302,000 from the prior year.  Sales
declines in the New England and Mid-Atlantic area were experienced by the
Company's Pennsylvania Division and the industry.  The Oregon Division and
its Pacific Northwest market continued to decline into 1997, but reversed
course before year end.  During the same time, the two Alabama Divisions
continued with significant sales increases.

Net income for 1997 declined to $3,034,000 from $4,553,000 in 1996.  The
Company has aggressively expanded its production capacity by completing a new
manufacturing facility at the end of each of the three preceding years.
While these increased costs and level sales have caused income to slip, the
Company is now in good position to expand its marketing efforts with the
support of an updated and expanded manufacturing base.

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

pkm


                                      20

<PAGE>

CONSOLIDATED BALANCE SHEET
December 31, 1997 and 1996 (Amounts in Thousands)

<TABLE>
<CAPTION>

ASSETS

                                                   1997           1996
                                                   ----           ----
             <S>                                <C>            <C>
             CURRENT ASSETS:

               Cash and cash equivalents        $15,797        $11,174

               Short term investments             5,250         12,650

               Receivables                        8,303          8,540

               Refundable income taxes              --             142

               Inventories                       11,982         10,211

               Deferred tax asset                 2,206          2,054

               Prepayments and other              1,450          1,192
                                                -------        -------
                 Total current assets            44,988         45,963
                                                -------        -------

             PROPERTY, PLANT AND EQUIPMENT:

               Land                               1,280          1,195

               Buildings and improvements        24,921         23,359

               Machinery and equipment           18,463         17,413
                                                -------        -------
                                                 44,664         41,967

               Less accumulated depreciation     18,170         15,764
                                                -------        -------
                                                 26,494         26,203
                                                -------        -------
                                                $71,482        $72,166
                                                -------        -------
                                                -------        -------
</TABLE>

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


                                      21

<PAGE>

LIBERTY HOMES, INC.

<TABLE>
<CAPTION>

LIABILITIES
                                                   1997           1996
                                                   ----           ----
<S>                                              <C>            <C>
             CURRENT LIABILITIES:

               Accounts payable                  $ 2,340        $ 3,357

               Dividends payable                     279            295

               Income taxes payable                  170             31

               Accrued compensation
                & payroll taxes                    2,276          2,098

               Other accrued liabilities          12,302         12,010
                                                 -------        -------
                 Total current liabilities        17,367         17,791
                                                 -------        -------
             DEFERRED INCOME TAXES                 2,154          1,952
                                                 -------        -------
             CONTINGENT LIABILITIES



SHAREHOLDERS' EQUITY
             CAPITAL STOCK:
               Class A, $1 par value,
                Authorized - 7,500,000 shares
                Issued and outstanding -
                2,262,000 in 1997 and
                2,477,000 in 1996                  2,262          2,477

               Class B, $1 par value,
                convertible to Class A,
                authorized - 3,500,000 shares
                Issued and outstanding -
                1,731,000 in  1997 and
                1,746,000 in 1996                  1,731          1,746

             OTHER CAPITAL                            83             83

             RETAINED EARNINGS                    47,885         48,117
                                                 -------        -------
                                                  51,961         52,423
                                                 -------        -------
                                                 $71,482        $72,166
                                                 -------        -------
                                                 -------        -------
</TABLE>


                                      22

<PAGE>

CONSOLIDATED STATEMENT OF INCOME
For the Years Ended December 31, 1997, 1996 and 1995
(Amounts in Thousands, Except per Share Data)

<TABLE>
<CAPTION>
                                      1997            1996         1995
                                      ----            ----         ----
<S>                                 <C>             <C>          <C>
Net sales                           $167,837        $168,139     $164,753
Cost of sales                        147,591         146,783      140,581
                                    --------        --------     --------

  Gross profit                        20,246          21,356       24,172
Selling, general and
  administrative expenses             16,366          15,845       15,183
                                    --------        --------     --------

  Operating income                     3,880           5,511        8,989
Interest and other income                941           2,034        1,557
                                    --------        --------     --------

  Income before income taxes           4,821           7,545       10,546

Income tax expense                     1,787           2,992        4,190
                                    --------        --------     --------

  Net income                        $  3,034        $  4,553     $  6,356
                                    --------        --------     --------
                                    --------        --------     --------

Net income per outstanding
  common share                          $.74           $1.06        $1.42
                                    --------        --------     --------
                                    --------        --------     --------
</TABLE>

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
(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, 1995           $2,736     $1,795       $83     $42,688   $47,302
  Repurchase & Cancellation            38        (38)                             --
    of Class A Shares                (153)                          (1,343)   (1,496)
  Net income for the year                                            6,356     6,356
  Cash dividends-$.28 per share                                     (1,244)   (1,244)
                                  -------    -------   -------    --------   -------
Balance, December 31, 1995          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
                                  -------    -------   -------    --------   -------
                                  -------    -------   -------    --------   -------
</TABLE>

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


                                      23
<PAGE>

CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1997, 1996 and 1995
(Amounts in Thousands)

<TABLE>
<CAPTION>
                                                      1997      1996     1995
                                                    -------   -------   -------
<S>                                                 <C>       <C>       <C>
Cash flows from operating activities:
     Net income                                     $ 3,034   $ 4,553   $ 6,356
                                                    -------   -------   -------
     Adjustments to reconcile net income to net
       cash provided by operating activities:
     Depreciation                                     2,406     2,181     1,578
     Deferred income taxes                               50      (541)     (815)
     Gain on sale of property, plant & equipment         --      (882)     --

     Changes in assets and liabilities:
      Receivables                                       237    (1,212)     (572)
      Inventories                                    (1,771)      407    (1,257)
      Prepayments and other                            (258)     (183)     (269)
      Accounts payable                               (1,017)      784      (494)
      Accrued liabilities                               454     1,283     4,766
      Accrued income taxes                              281      (347)    1,224
                                                    -------   -------   -------

        Total adjustments                               382     1,490     4,161
                                                    -------   -------   -------

     Net cash provided by
      operating activities                            3,416     6,043    10,517
                                                    -------   -------   -------

Cash flows from (used) in investing activities:
     Additions to property, plant & equipment        (2,697)   (7,245)   (9,464)
     Disposal of short term investments               7,400     2,950     3,875
     Disposal of property, plant & equipment             --     2,217       --
                                                    -------   -------   -------
     Net cash provided by (used in)
      investing activities                            4,703    (2,078)   (5,589)
                                                    -------   -------   -------

Cash flows used in financing activities:
     Cash dividends paid                             (1,133)   (1,196)   (1,244)
     Retirement of common stock                      (2,363)   (1,852)   (1,496)
                                                    -------   -------   -------
     Net cash used in financing activities           (3,496)   (3,048)   (2,740)
                                                    -------   -------   -------

Net increase in cash and
     cash equivalents                                 4,623       917     2,188
Cash and cash equivalents, beginning of year         11,174    10,257     8,069
                                                    -------   -------   -------

Cash and cash equivalents, end of year              $15,797   $11,174   $10,257
                                                    -------   -------   -------
                                                    -------   -------   -------

Supplemental disclosures of cash flow
      information - cash paid during
      the year for income taxes                     $ 1,503   $ 3,879   $ 3,793
                                                    -------   -------   -------
                                                    -------   -------   -------
</TABLE>

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


                                      24

<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 Arcadian Financial Services, Inc., which ceased
operations in 1996 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. The minority interests of Waverlee Homes, Inc. and Gipper
Development Company, LLC are immaterial.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include highly liquid investments which are readily
convertible to known amounts of cash and have original maturities within
three months from date of purchase.  These investments are carried at cost
which approximates market value.

SHORT-TERM INVESTMENTS

At December 31, 1997 and 1996, 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
three financial institutions at December 31, 1997.

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


                                      25

<PAGE>

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.

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.  The Company will adopt FAS 128 in fiscal 1998 and does not
expect its adoption will result in reporting materially different EPS amounts
than those reported under current accounting pronouncements.

DELIVERY COSTS

Revenues and expenses related to delivery of the Company's products are
included in selling, general and administrative expenses 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.

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 at December 31,


                                      26

<PAGE>

1997, 1996 and 1995 was 4,085,000 shares, 4,300,000 shares, and 4,467,000
shares, respectively.  The Board of Directors have 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, 1997, 563,000 shares of Class A Common Stock and 15,000 shares of Class B
Common Stock had been repurchased and canceled under this program.

4. INCOME TAXES:

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

<TABLE>
<CAPTION>
(Amounts in Thousands)
                                             1997        1996       1995
                                           ------      ------     -------
<S>                                        <C>         <C>        <C>
Deferred tax asset                         $2,206      $2,054     $1,841
Deferred tax (liability)                   (2,154)     (1,952)    (2,280)
                                           ------      ------     -------
Net deferred tax asset (liability)         $   52      $  102     $ (439)
                                           ------      ------     -------
                                           ------      ------     -------
</TABLE>

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

<TABLE>
<CAPTION>
                                             1997        1996       1995
                                           ------      ------     ------
<S>                                        <C>         <C>        <C>
Nondeductible accruals & reserves          $2,152      $1,998     $1,781
Accelerated tax depreciation               (2,100)     (1,896)    (2,220)
                                           ------      ------     ------
                                           $   52      $  102     $ (439)
                                           ------      ------     ------
                                           ------      ------     ------
</TABLE>

The components of income tax expense are as follows:

<TABLE>
<CAPTION>
(Amounts in Thousands)
                                            1997        1996       1995
                                          -------     -------     ------
<S>                                       <C>         <C>         <C>
Current:
   Federal                                $ 1,687     $ 2,915     $4,068
   State                                       50         618        937
Deferred:
   Federal                                     39        (454)      (664)
   State                                       11         (87)      (142)
   Change in valuation allowance               --          --         (9)
                                          -------     -------     ------
                                           $1,787     $ 2,992     $4,190
                                          -------     -------     ------
                                          -------     -------     ------
</TABLE>

Income tax expense results in effective tax rates of 37.1 percent in 1997;
39.6 percent in 1996; and 39.7 percent in 1995; and reconciles with the
statutory United States federal income tax rate in 1997, 1996 and 1995, of 34
percent, as follows:

<TABLE>
<CAPTION>
                                                                   Percent of Income
                                            Income Tax Expense    Before Income Taxes
                                            ------------------    -------------------
                                            1997   1996    1995    1997  1996   1995
                                            ----   ----    ----    ----  ----   ----
<S>                                        <C>     <C>    <C>      <C>   <C>    <C>
Income taxes at statutory
   federal rate                            $1,639  $2,565 $3,586   34.0  34.0   34.0
State income taxes, net of
   federal tax effect                         117     351    519    2.4   4.6    4.9
Other                                          31      76     85     .7   1.0     .8
                                           ------  ------ ------   ----  ----   ----
                                           $1,787  $2,992 $4,190   37.1  39.6   39.7
                                           ------  ------ ------   ----  ----   ----
                                           ------  ------ ------   ----  ----   ----
</TABLE>


                                      27

<PAGE>

The state income tax rates for 1997 were lower than historical rates due to
tax credits booked in 1997.

5. CONTINGENT LIABILITIES:

REPURCHASE OBLIGATIONS

The Company is contingently liable as of December 31, 1997 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, 1997 for which it has
received or expects notification of repurchase.  The Company's repurchase
losses for 1997, 1996  and 1995 were not material.  The Company believes any
additional losses incurred under outstanding repurchase agreements in excess
of the accrual established as of December 31, 1997, will not have a
significant impact on the financial condition of the Company.

OTHER CONTINGENCIES

Letters of Credit totaling $3,325,000 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.

6. 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, 1997, 1996 and 1995 was $222,000, $227,000, and $248,000,
respectively.

7. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):

The Company's results of operations in 1997 and 1996 by quarter, are as
follows (Amounts in Thousands except per share data):

<TABLE>
<CAPTION>
                                           Quarter Ended               Year
                             --------------------------------------    Ended
                             Mar. 31   June 30   Sept. 30   Dec. 31   Dec. 31
                             -------   -------   --------   ------- ---------
<S>                          <C>       <C>       <C>        <C>     <C>
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 share            $.06      $.26       $.13      $.29      $.74


                                      28

<PAGE>

1996:
Net sales                    $38,146   $45,673    $45,403   $38,917  $168,139
Gross profit                   4,946     6,075      5,803     4,532    21,356
Net Income                       890     1,607      1,364       692     4,553
Net income per share            $.20      $.37       $.32      $.17     $1.06
</TABLE>


During 1996, the Company sold its idle Georgia facility for a net after tax
gain of $345,000 or $.08 per share in the second quarter and sold its idle
Pennsylvania facility for a net after tax gain of $206,000 or $.05 per share
in the fourth quarter.


                                      29

<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, 1997 and 1996 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, 1997.
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, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.


                                       Crowe Chizek and Company LLP


Elkhart, Indiana
February 9, 1998


                                      30

<PAGE>

                             BOARD OF DIRECTORS

<TABLE>
<CAPTION>
NAME                          PRINCIPAL OCCUPATION AND EMPLOYER
<S>                           <C>
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
</TABLE>

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
     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.


                                      31