<PAGE>   1
                                    FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   (MARK ONE)
            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                    For the fiscal year ended January 2, 1998
                                       OR
          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

             For the transition period from __________ to __________

                         Commission File Number: 0-21204

                           SOUTHERN ENERGY HOMES, INC.
             (Exact name of registrant as specified in its charter)

           Delaware                                         63-1083246
  (State or other jurisdiction of                           (I.R.S. Employer
  incorporation or organization)                            Identification No.)

  Highway 41 North, P.O. Box 390, Addison, Alabama           35540
  (Address of principal executive offices)                  (Zip Code)

       Registrant's telephone number, including area code: (205) 747-8589

        Securities to be registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
   Title of each class                                        Name of each exchange on which registered
   -------------------                                        -----------------------------------------
<S>                                                           <C>
             N/A
</TABLE>

        Securities to be registered pursuant to Section 12(g) of the Act:

                         Common Stock, par value $.0001
                                 Title of class

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                 Yes [X] No [ ]

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

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of such stock on the
Nasdaq Stock Market as of March 17, 1998, was $185,908,369.75. The number of
shares of common stock outstanding at that date was 15,573,476 shares, $.0001
par value.

Documents Incorporated By Reference

<TABLE>
<CAPTION>
                                                                                        Part     Item
                                                                                        ----     ----
<S>                                                                                     <C>      <C>
1.  Southern Energy Homes, Inc. Definitive Proxy Statement with respect to its
     May 20, 1998 Annual Meeting of Stockholders                                        III      10,11,12,13
</TABLE>
<PAGE>   2
                                     PART I

                           SOUTHERN ENERGY HOMES, INC.

ITEM  1.  BUSINESS

GENERAL
         Southern Energy Homes, Inc. (the "Company") is engaged in the
production and retail sale of manufactured homes and the retail financing of
manufactured homes. The Company produces manufactured homes sold primarily in
the southeastern and southcentral United States. The Company operates nine home
manufacturing facilities (seven in Alabama, one in Texas, and one in North
Carolina) to produce homes sold in 23 states. The Company's homes are currently
marketed under five brand names by 435 independent dealers at 814 independent
dealer locations and 21 company-owned retail centers.

         The Company manufactures high quality homes, designed as primary
residences ready for immediate occupancy. The homes, most of which are
customized at the Company's factories to the home buyer's specifications, are
constructed by the Company in one or more sections which are transported by its
own or independent trucking companies to dealer locations.

         The Company historically focused on the middle to higher priced range
of the manufactured housing market, but in 1993 expanded its product line to
include lower priced homes. The Company's homes range in size from 653 to 2,417
square feet and sell at retail prices ranging from $14,900 to $108,000,
excluding land.

         The Company believes that its willingness to customize floor plans and
design features to match home buyer preferences is the principal factor which
differentiates it from most of its competitors.

         Through its finance subsidiary and, more recently, through a finance
joint venture, the Company also provides home buyers with a source of financing
for homes sold by the Company.

MANUFACTURED HOMES
         The Company produces a variety of single- and multi-section homes under
six brand names. The Company's homes are manufactured in sections, which
individually are transported to their destination. The finished homes may
consist of one or more sections. Multi-section products are joined at their
destination by the dealer or its contractor. The Company initially concentrated
on the medium to higher priced segments of the manufactured housing market. Over
the past several years, the Company has broadened its product line with lower
priced homes that sell at retail for less than $25,000. The six divisions of the
Company at which its homes were manufactured in 1997 and certain characteristics
of the homes are as follows:

<TABLE>
<CAPTION>
                                                                                     Retail
         Division                   Type                           Square Feet       Price Range
         ---------------------------------------------------------------------------------------------
<S>                                 <C>                            <C>               <C>
         Southern Energy            Multi-section                  1,312-2,417       $33,800-$108,000
         Southern Life/style        Single- and multi-section        858-2,296        23,200-  63,000
         Southern Homes             Single- and multi-section        653-1,968        14,880-  35,400
         Southern Energy Homes
          of Texas                  Single- and multi-section      1,088-2,128        26,600-  54,600
         Southern Energy Homes
          of North Carolina         Single- and multi-section        765-2,075        21,500-  61,200
         Southern Energy Homes
          of Pennsylvania*          Single- and multi-section        924-2,016        29,900-  55,000
</TABLE>

         *The company closed this facility in October 1997.

         For the fiscal year ended January 2, 1998, the net revenues contributed
by each of the Company's six home manufacturing divisions were as follows:
Southern Energy - $52 million; Southern Life/Style - $60 million; Southern Homes
- $88 million; Southern Energy Homes of Texas - $31 million; Southern Energy
Homes of North Carolina - $18 million; and Southern Energy Homes of Pennsylvania
- $3 million (closed in 1997).

         The Company currently operates four component supply divisions. Classic
Panel Designs supplies laminated and other interior wall panels. Wind-Mar Supply
provides windows, doors and countertops. Trimmasters produces wood moulding and
trim finishing. Unique Dinettes produces kitchen and dining furniture. These
divisions sell products both to our manufactured housing divisions and to
third-party customers. For the fiscal year period ended January 2, 1998, .5% of
the Company's net revenues were attributable to sales of these ancillary
products to third-parties.

                                       2
<PAGE>   3
         The Company's product development and engineering personnel design
homes in consultation with divisional management, sales representatives and
dealers. They also evaluate new materials and construction techniques in a
continuous program of product development and enhancement. With the use of
computer aided design technology, the Company has developed engineering systems
which permit customization of homes to meet the individual needs of prospective
buyers. These systems allow the Company to make modifications such as increasing
the length of a living room, moving a partition, changing the size and location
of a window or installing custom cabinets without significant impact upon
manufacturing productivity.

         Each home contains two to five bedrooms, a living room, dining room,
kitchen and one to three bathrooms, and features a heating system, a stove and
oven, refrigerator, carpeting and draperies. The Company has traditionally
focused on designing manufactured homes with features that make them comparable
to site-built homes, including stone fireplaces and vaulted ceilings, thus
broadening the base of potential customers. In addition to offering the consumer
optional features such as dishwashers, oak cabinets and furniture packages as
well as a wide range of colors, moldings and finishes, the Company generally
permits extensive customization of floor plan designs to meet specific customer
preferences.

RETAIL FINANCING
         Home buyers normally secure financing from third-party lenders such as
banks or independent finance companies. While the Company believes that consumer
financing has generally become more available in the manufactured housing
industry in recent years, the availability and cost of financing is important to
the Company's sales. In order to provide home buyers with an additional source
of financing, the Company's wholly owned subsidiary, Wenco Finance, Inc. ("Wenco
Finance") originated and serviced during the period January 1996 through
February 1997 consumer loans for homes manufactured by the Company. In February
1997, the Company formed a joint venture with 21st Century Mortgage Corporation
("21st Century"). The joint venture, Wenco 21, continues to offer, through 21st
Century, consumer financing for homes manufactured by the Company as well as for
other homes sold through its retail centers and independent dealers. With
marketing support and assistance from the Company and Wenco 21, 21st Century
originates and services consumer loans and assigns to Wenco 21 the net
collections from those loans after deducting service fees and costs, credit loss
reserves, and principal and interest payments due to third party investors or
lenders. Wenco 21 is obligated to indemnify 21st Century against losses incurred
in connection with the loans, other than losses incurred as a result of
negligence by 21st Century. In light of the shift in consumer finance activities
to Wenco 21, Wenco Finance suspended its loan origination activities and engaged
21st Century to service its existing loan portfolio. At January 2, 1998, Wenco
Finance had $9.8 million of installment contract receivables outstanding as
compared with $26.5 million at January 3, 1997. The Company expects that 21st
Century and Wenco 21, which is currently in a start-up phase of operation, will
market the new consumer loan program through the Company's retail centers and
independent dealer network. There can be no assurance that 21st Century and
Wenco 21 will be able to provide significant levels of financing for home
buyers, or that such financing activities will not adversely impact the
Company's profitability.

HOME MANUFACTURING OPERATIONS
         The Company's homes are currently manufactured by five operating
divisions using assembly line techniques at nine facilities, four of which are
located in Addison, Alabama, two of which are located in Double Springs,
Alabama, one of which is located in Lynn, Alabama, one of which is located in
Fort Worth, Texas, and one of which is located in Albemarle, North Carolina.

         The Company's facilities operate on a one shift per day, five days per
week basis. The Company believes that these facilities have the capacity to
produce a total of approximately 430 floor sections per week with minimal labor
additions. The Company plans to continue to operate, like most of its
competitors, on a single shift per day basis. During the fiscal year ended
January 2, 1998, the Company produced an average of 275 floor sections per week.
This represented a 13% decrease in floor section production from an average of
315 floor sections per week in the fiscal year ended January 3, 1997. In the
fiscal year ended December 29, 1995, the Company produced an average of 268
floor sections per week. The following table sets forth the total floor sections
and homes sold as well as the number of home manufacturing facilities operated
by the Company for the periods indicated:

<TABLE>
<CAPTION>
                                                            Year Ended
                                   December 29,             January 3,              January 2,
                                       1995                      1997                   1998
                                   ------------             ----------              ----------
<S>                                <C>                     <C>                     <C>
Homes                                 9,079                   10,940                  9,165
Floor sections                       13,942                   16,697                 14,288
Home manufacturing
  facilities(1)                          10                       10                      9
</TABLE>

(1) Production commenced at the Company's eleventh home manufacturing facility
in February 1997, the Company closed one of its Lynn, Alabama facilities in
April 1997 and closed its Pennsylvania facility in September 1997.

                                       3
<PAGE>   4
         Each division operates as a separate strategic unit that is directed by
a general manager and has its own sales force. The general manager, production
managers and supervisory personnel of each division have an incentive
compensation system which is directly tied to the operating profit of the
division. In addition, production personnel of each division have a productivity
incentive compensation system. The Company believes that these compensation
systems help to focus efforts on curtailing waste and inefficiencies in the
production process and represent a divergence from standard industry practices,
which are typically designed to reward personnel on production volume criteria.

         The extent of customization of the home performed by the Company varies
to a significant degree with the price of the home. In the higher price range of
the market, the home buyer is often less sensitive to the price increase that is
associated with significant design modifications that might be desired. However,
the Company's experience in producing a customized home on a cost-effective
basis has allowed the Company to offer customized homes in all price ranges.

         The principal materials used in the production of the Company's homes
include steel, aluminum, wood products, gypsum wallboard, fiberglass,
insulation, carpet, vinyl floor covering, fasteners and hardware items,
appliances, electrical items, windows and doors. These materials and components
are readily available and are purchased by the Company from numerous sources. No
supplier accounted for more than 2.6% of the Company's purchases during each of
the past two fiscal years. The Company believes that the size of its purchases
allows it to obtain favorable volume discounts. The Company's expenses can be
significantly affected by the availability and pricing of raw materials. Sudden
increases in demand for construction materials can greatly increase the costs of
materials. While such increases in costs can not always be reflected immediately
in the Company's prices, the Company in the past has been able to pass along a
significant portion of cost increases in its current prices.

         Because the cost of transporting a manufactured home is significant,
substantially all of the Company's homes are sold to dealers within a 600 miles
radius of a manufacturing facility. The Company arranges, at the dealer's
expense, for the transportation of finished homes to dealer locations using its
own trucking subsidiary, MH Transport, Inc., and independent trucking companies.
The Company is using MH Transport to transport a majority of its homes.
Customary sales terms are cash-on-delivery or guaranteed payment from a floor
plan financing source. Dealers or other independent installers are responsible
for placing the home on site, making utility hook-ups and providing and
installing certain trim items.

         Substantially all production is initiated against specific orders, and
the Company does not maintain any significant inventory of unsold completed
homes. The Company's backlog of orders for manufactured homes as of March 1,
1998 was $3.2 million as compared with $3.0 million at March 1, 1997. Dealer
orders are subject to cancellation prior to commencement of production for a
variety of reasons, and the Company does not consider its order backlog to be
firm orders.

SALES NETWORK
         At January 2, 1998, the Company sold manufactured homes through
approximately 435 independent dealers at approximately 814 independent dealer
locations and through 20 company-owned retail centers in 23 states principally
in the southeastern and southcentral United States. The Company believes that
the quality of its independent dealer network has been important to the
Company's performance.

         Each of the Company's five home manufacturing divisions maintains a
separate sales force. At January 2, 1998, a total of 52 salespersons maintained
personal contact with the Company's independent dealers. The Company markets its
homes through product promotions tailored to specific dealer needs. In addition,
the Company advertises in local media and participates in regional manufactured
housing shows.

         The Company believes the close working relationship between its
division management and the independent dealers they service has been an
important factor in the Company's growth. In order to promote dealer loyalty and
to enable dealers to penetrate retail markets, only one independent dealer
within a given local market may distribute homes manufactured by a division of
the Company. The Company does not have formal marketing agreements with its
independent dealers and substantially all of the Company's independent dealers
also sell homes of other manufacturers. The Company believes its relations with
its independent dealers are good and the Company has experienced relatively low
turnover in its established independent dealers in the past three years. In
fiscal 1997, the Company's largest dealer accounted for 2.5% of net revenues and
the ten largest dealers accounted for 18.0% of net revenues. In the fiscal year
ended January 3, 1997, the Company's largest dealer accounted for 5.4% of net
revenues, and the Company's ten largest dealers accounted for 25.7% of net
revenues. In the fiscal year ended December 29, 1995, the Company's largest
dealer accounted for 5.0% of net revenues and the Company's ten largest dealers
accounted for 24.0% of net revenues.

         The Company began its retail operations in November 1996 by acquiring a
group of retail companies doing business in Alabama and Mississippi. In December
1997, the Company expanded its retail operations by acquiring another retail
company with seven locations in South Carolina. At January 2, 1998, the Company
had 20 retail sales centers; 11 in Alabama, seven in South

                                       4
<PAGE>   5
Carolina, and two in Mississippi. Subsequent to January 2, 1998, the Company
opened an additional sales center in Georgia. Each of the 21 sales centers
maintains a separate sales force.

         Buyers of manufactured homes typically shop at a number of locations
prior to purchasing a home. The Company believes that it provides most of its
dealers with a marketing advantage because of the dealer's ability to represent
that the Company's homes can be customized to meet the individual preferences of
the customer.

         The manufactured housing market is highly cyclical and seasonal and is
affected by the same economic factors which impact the broader housing market.
Historically, most sectors of the homebuilding industry have been affected by,
among other things, changes in general economic conditions, levels of consumer
confidence, employment and income, housing demand, availability of financing and
interest rate levels.

WARRANTY, QUALITY CONTROL AND SERVICE
         The Company adheres to strict quality standards and continuously
refines its production procedures. In addition, in accordance with the
construction codes promulgated by the Department of Housing and Urban
Development ("HUD"), an independent HUD-approved, third-party inspector inspects
each of the Company's manufactured homes for compliance during construction at
the Company's manufacturing facilities. See "-Regulation."

         The Company provides the initial home buyer with a HUD-mandated,
one-year limited warranty against manufacturing defects in the home's
construction. In addition, there are often direct warranties that are provided
by the manufacturer of components and appliances.

         The Company has experienced quality assurance personnel at each of its
manufacturing facilities to provide on-site service to dealers and home buyers.
In order to respond more quickly to customer service requests and to maintain a
high level of customer satisfaction as the Company continues to grow, the
Company has increased its customer service staff. Enhanced quality assurance
systems are expected to contribute to the value and appeal of the Company's
homes and, over the long term, to reduce consumer warranty claims.

INDEPENDENT DEALER FINANCING
         Substantially all of the Company's independent dealers finance their
purchases through "floor plan" arrangements under which 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. In connection with a floor plan
arrangement, the financial institution which provides the independent dealer
financing 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 independent dealer, to repurchase the homes at the Company's
original invoice price plus certain administrative and shipping expenses. At
January 2, 1998, the Company's contingent repurchase liability under floor plan
financing arrangements through independent dealers was approximately $92
million. While homes that have been repurchased by the Company under floor plan
financing arrangements are usually sold to other dealers and losses to date
under these arrangements have been insignificant, no assurance can be given that
the Company will be able to sell to other dealers homes which it may by
obligated to repurchase in the future under such floor plan financing
arrangements or that the Company will not suffer losses with respect to, and as
a consequence of, those arrangements. No dealer accounted for more than 5.4% of
the Company's net revenues in each of the past three fiscal years. See "-Sales
Network." The Company does not view any single independent dealer as being a
material customer. While the Company does not have access to financial
information regarding its independent dealers, it is not aware that any
independent dealer is experiencing financial difficulties. The Company also
finances substantially all of its retail inventory through floor plan
arrangements. Such borrowings totaled approximately $15.9 million at January 2,
1998.

COMPETITION
         The manufactured housing industry is highly competitive at both the
manufacturing and retail levels, with competition based upon factors including
total price to the dealer, customization to homeowners' preferences, product
features, quality, warranty repair service and the terms of dealer and retail
customer financing. The Company does not view any of its competitors as being
dominant in the industry. A number of these firms are larger than the Company
and possess greater manufacturing and financial resources. In addition, there
are numerous firms producing manufactured homes in the southeastern and
southcentral United States, many of which are in direct competition with the
Company in the states where its homes are sold. Certain of the Company's
competitors provide retail customers with financing from captive finance
subsidiaries. While the Company believes consumer financing has generally become
more available in the manufactured housing industry in recent years, and
although the Company has recently formed its Wenco 21 joint venture to provide
consumer financing to customers through 21st Century, a contraction in consumer
credit could provide an advantage to those competitors with established internal
financing capabilities.

         The capital requirements for entry as a producer in the manufactured
housing industry are relatively small. However, the Company believes that the
qualifications for obtaining inventory financing, which are based upon the
financial strength of the manufacturer and each of its dealers, have in recent
years become more difficult to meet.

                                       5
<PAGE>   6
         Manufactured homes compete with new site-built homes, as well as
apartments, townhouses, condominiums and existing site-built and manufactured
homes.

         The Company believes that its willingness to customize floor plans and
design features to match customer preferences is the principal factor which
differentiates it from most of its competitors in the manufactured housing
industry.

REGULATION
         The Company's manufactured homes are subject to a number of federal,
state and local laws. Construction of manufactured housing is governed by the
National Manufactured Home Construction and Safety Standards Act of 1974. In
1976, HUD issued regulations under this Act establishing comprehensive national
construction standards. The HUD regulations cover all aspects of manufactured
home construction, including structural integrity, fire safety, wind loads,
thermal protection, plumbing and electrical. Such regulations preempt
conflicting state and local regulations. 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 checks each of the Company's manufactured homes for compliance during
at least one phase of construction. In 1994, HUD amended manufactured home
construction safety standards to improve the wind force resistance of
manufactured homes sold for occupancy in coastal areas prone to hurricanes.
Failure to comply with the HUD regulations could expose the Company to a wide
variety of sanctions, including closing the Company's plants. The Company
believes its manufactured homes meet or surpass all present HUD requirements.

         Manufactured, modular and site-built homes are all built with
particleboard, 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 meet HUD
standards for formaldehyde emissions and that otherwise comply with HUD
regulations in this regard. In addition, certain components of manufactured
homes are subject to regulation by the 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 manufacturer to repair defects in
components of its homes. The CPSC, the Environmental Protection Agency and other
governmental agencies are evaluating the effects of formaldehyde. In February
1983, the Federal Trade Commission adopted regulations requiring disclosure of
manufactured home's insulation specifications.

         The Company's manufactured homes are also subject to local zoning and
housing regulations. A number of states require manufactured home producers to
post bonds to ensure the satisfaction of consumer warranty claims. A number of
states have adopted procedures governing the installation of manufactured homes.
Utility connections are subject to state and local regulation, and must be
complied with by the dealer or other person installing the home.

         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.

          Wenco Finance, the Company's finance subsidiary, is subject to a
number of state and local licensing requirements which are applicable to
businesses engaged in the origination and servicing of consumer loans. In
addition, both Wenco Finance and Wenco 21, the Company's new finance joint
venture with 21st Century, are also subject to a variety of federal and state
laws and regulations regulating consumer finance, including the Truth in Lending
Act, which regulates lending procedures and mandates certain loan disclosures
with respect to financing offered to consumers. Failure by Wenco Finance or
Wenco 21 to comply with any of these laws and regulations could have a material
adverse effect on the Company's business and results of operation.

         MH Transport, the Company's trucking subsidiary, is subject to federal
and state laws and regulations which apply to motor vehicle carriers operating
in interstate and intrastate commerce. Failure by MH Transport to comply with
any of these laws and regulations could have a material adverse effect on the
Company's business and results of operations.

         The Company believes that it is in compliance with the foregoing
existing government regulations.

RECENT ACQUISITIONS
         On December 3, 1997, the Company acquired substantially all of the
assets and liabilities of A & G, Inc., a manufactured home retailer in South
Carolina. The Company paid $1.4 million in cash and issued 94,115 shares of the
Company's common stock (approximate market value on December 3, 1997 was
$869,000).

         On November 21, 1996, the Company acquired BR Holding Corp., a company
which operates a group of companies engaged in the retail sale of manufactured
homes, and is doing business as Blue Ribbon Homes ("BR Holding"). BR Holding
also operates an insurance agency which provides homeowner insurance for
manufactured homes. The Company paid $1,075,000 in cash and issued

                                       6
<PAGE>   7
332,814 shares of the Company's common stock (approximate market value on
November 21, 1996 of $4,532,000). The acquisition was accounted for under the
purchase method of accounting; thus the Company's financial statements as of
January 3, 1997 and for the year then ended reflect the operations of BR Holding
from the date of acquisition. The total purchase price exceeded the fair value
of net assets acquired by $5,480,000, which amount is being amortized over 30
years as goodwill. In addition, the Company entered into four year non-compete
agreements with the former stockholders of BR Holding for an aggregate amount of
$50,000, which amount is included in the cash purchase price noted above. The
stock purchase agreement requires the Company to make additional payments to the
seller contingent on future earnings performance of BR Holding. Any additional
payments will be made 20% in cash and 80% in shares of the Company's common
stock and will be accounted for as goodwill and amortized over the remaining
recovery period of the goodwill. In May 1997, an additional payment totaling
approximately $197,000, 49,000 in cash and 14,256 shares of the Company's common
stock (approximate market value of $148,000) was made for earnings targets
achieved through December 31, 1996. At January 2, 1998, there was no payment
obligation.

         In July, 1996, the Company acquired Unique Dinettes, Inc. ("Unique"), a
manufacturer of ceramic tables and countertops. The total purchase price of
$434,000 was paid in cash, and exceeded the fair value of the acquired assets by
$44,000. The Unique acquisition was accounted for under the purchase method of
accounting.

         In January 1996, the Company acquired Trimmasters, Inc.
("Trimmasters"), a manufacturer of trim moulding. The total purchase price of
$356,000 was paid in cash, and exceeded the fair value of the acquired assets by
$297,000. The Trimmasters acquisition was accounted for under the purchase
method of accounting.

EMPLOYEES
         As of January 2, 1998, the Company employed 2,371 full-time employees
involved in the following functional areas: manufacturing, 1,832; sales, 135;
field service, 163; administration and clerical, 132; drivers, 64; and
management, 45. The Company's manufacturing operations require primarily
semi-skilled labor and personnel levels fluctuate with seasonal changes in
production volume.

         None of the Company's employees are represented by a collective
bargaining agreement. The Company believes that it has a good relationship with
its employees, and it has never experienced any work stoppage.

EXECUTIVE OFFICERS
         Information concerning the Executive Officers of the Company is as
follows. Executive Officers are elected annually by and serve at the pleasure of
the Board of Directors.

         Wendell L. Batchelor (age 55) is the founder of the Company and has
been the Company's President, Chief Executive Officer and a Director since the
Company's incorporation in 1982. From 1971 to 1982, Mr. Batchelor was General
Manager of Shiloh Homes, a division of Winston Industries. Mr. Batchelor was
Sales Manager of Marietta Homes, a division of Winston Industries, from 1968 to
1971. From 1966 to 1968, Mr. Batchelor was a Sales Representative for Madrid
Homes. Mr. Batchelor has served in the past as Chairman of the Alabama
Manufacturer's Housing Institute.

         Johnny R. Long (age 51) has been a Vice President of the Company
primarily responsible for purchasing and a Director since the Company's
incorporation in 1982. From 1976 to 1982, Mr. Long served as Purchasing Agent
for Shiloh Homes, a division of Winston Industries. Mr. Long was Purchasing
Agent for Bendix Homes from 1974 to 1976, for Commodore Homes from 1972 to 1974,
and for Chevelle Homes from 1966 to 1972.

         Keith W. Brown (age 41) has served as the Company's Chief Financial
Officer since the Company's incorporation in 1982 and as a Director since 1989.
Mr. Brown served as the Company's Secretary from 1982 to January 1993 and
resumed that office in September 1993. He was elected Treasurer in January 1993.
From 1980 to 1982, Mr. Brown served as Controller for Shiloh Homes, a division
of Winston Industries.

         Keith O. Holdbrooks (age 37) was elected as the Company's Chief
Operating Officer in August 1996 by the Company's board of directors. From 1991
to 1996, Mr. Holdbrooks served as General Manager for Southern Homes, a division
of the Company, and from 1989 to 1991 served as Sales Manager for Southern
Homes. From 1985 to 1989 served as salesman for Southern Lifestyle, a division
of the Company.

                                       7
<PAGE>   8
ITEM  2.   PROPERTIES

         The Company's manufactured home segment currently operates nine home
manufacturing facilities (seven in Alabama, and one in each of Texas and North
Carolina) and four component supply facilities (all in Alabama). The facilities
used by the Company's manufactured home segment are as follows:


<TABLE>
<CAPTION>
                           Building                                    Leased or
Unit                       Location                    Square Feet     Owned
----                       --------                    -----------     -----
<S>                        <C>                         <C>             <C>
Manufacturing
  Southern Energy
  Plant #1                 Addison, AL                   72,000        Owned
  Plant #2                 Addison, AL                   55,000        Owned
Southern Life/style
  Plant #1                 Addison, AL                   62,500        Owned
  Plant #2                 Addison, AL                   54,000        Leased
Southern Homes
  Plant #1                 Double Springs, AL            60,000        Owned
  Plant #2                 Double Springs, AL            52,000        Owned
  Plant #3*                Lynn, AL                      90,700        Owned
  Plant #4                 Lynn, AL                      96,000        Owned
Southern Energy Homes
    of Texas               Fort Worth, TX                98,300        Owned
Southern Energy Homes
    of North Carolina      Albemarle, NC                 77,000        Owned
Southern Energy Homes
    Of Pennsylvania*       Hegins, PA                    85,000        Leased
Component Supply
      Classic Panel        Hartselle, AL                 24,000        Owned
     Wind-Mar Supply       Addison, AL                   22,000        Owned
     Trimmasters           Haleyville, AL                50,000        Leased
     Unique Dinettes       Haleyville, AL                50,000        Leased
</TABLE>

*Closed during 1997

         The Company currently operates 21 retail sales centers, 11 of which are
in Alabama, seven of which are in South Carolina, two in Mississippi and one in
Georgia. Each of the lots are currently leased and such lease terms range from
one to five years.

         The corporate headquarters is located in Addison, Alabama and occupies
approximately 15,400 square feet of office space.

         Each of the Company's manufacturing facilities, other than the
Company's facility in Pennsylvania and the Southern Homes #3 facility are
company owned. MH Transport owns and occupies an approximate 1,800 square foot
office building in Double Springs, Alabama.

         See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".

ITEM 3.  LEGAL PROCEEDINGS

         The Company is a defendant in a lawsuit filed on March 27, 1996 in
Fulton County Superior Court, Georgia by EurAm International, Inc., a sales
agent for the Company. On April 29, 1996 the Company removed the case to the
United States District Court for the Northern District of Georgia in Atlanta. In
this lawsuit, the plaintiff alleges that the Company has breached an agreement
relating to the sale of the Company's modular homes in Germany, including
alleged misrepresentations and faulty performance, resulting in damages alleged
to amount to $25 million. The Company believes the claim is without merit and
intends to vigorously defend the claim and there can be no assurances as to its
likely outcome.

         In addition, the Company has been informed by Gesellschoft fur Bauen
Und Wohnen Hannover MbH ("GBH"), a German housing authority, that it has
replaced the Company with a local company to complete a contract that GBH had
entered into with the Company for the purchase and erection of modular housing
in Hannover, Germany. In connection with the contract, the Company posted a
$660,000 letter of credit in favor of GBH. In March 1997, GBH made a claim
against the Company for damages of approximately $800,000 arising from the shift
in suppliers and has attempted to draw upon the letter of credit posted by the
Company. In March 1997, the Company obtained a temporary restraining order
preventing GBH from drawing upon the letter of credit. In

                                       8
<PAGE>   9
February 1998, the Alabama Supreme Court issued an opinion allowing GBH to draw
on the letter of credit. GBH promptly drew on the Company's letter of credit in
the amount of $580,000. In the opinion of management, after consultation with
legal counsel, there is no other material exposure with regard to GBH.

         The Company is a party to various other legal proceedings incidental to
its business. The majority of these legal proceedings relate to employment
matters or product warranty liability claims for which management believes
adequate reserves are maintained. In the opinion of management, after
consultation with legal counsel, the ultimate liability, if any, with respect to
these proceedings will not materially affect the financial position or results
of operations of the Company; however, the ultimate resolution of these matters,
which could occur within one year, could result in losses in excess of the
amounts reserved.

ITEM  4.  SUBMISSION TO A VOTE OF SECURITY HOLDERS

          No matters were submitted to a vote of the Stockholders of the Company
during the fourth quarter of fiscal 1997.


                                     PART II

ITEM  5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Recent Sales of Unregistered Securities

         On December 3, 1997, the registrant issued 94,115 shares of common
stock, $.0001 par value (the "Shares"), to A&G, Inc. in connection with the
registrant's acquisition of A & G, Inc. The aggregate merger consideration given
by the registrant was $2.3 million, of which $1.4 million was paid in cash and
$869,000 was paid with the Shares.

         The Shares were issued in a transaction exempt from the registration
requirements of the Securities Act of 1933 pursuant to Section 4(2) thereof. The
Shares were issued to an entity whose sole stockholder was sophisticated (or
whose representative was sophisticated) about business and financial matters.
The registrant made available to the purchaser information about the business
and finances of the registrant, including reports filed by the registrant
pursuant to the Securities Exchange Act of 1934. The registrant also permitted
the purchaser to ask questions of and receive answers from its officers and
directors concerning the registrant's business and finances. The purchaser made
certain representations to the registrant as to, among other things, investment
intent and experience and sophistication as to business and financial matters.

Record Holders
         As of March 17, 1997, there were 110 record holders. This number does
not include those stockholders holding stock in "nominee" or "street" name.

Stock Price Performance
         The Company's Common Stock has been publicly traded on the Nasdaq Stock
Market since March 12, 1993. The original price per share was $6.93.

<TABLE>
<CAPTION>
                                                  1997                       1996
                                             Price Range                Price Range
                                            High       Low             High     Low
<S>               <C>                       <C>        <C>             <C>      <C>
                  First Quarter             13.38      9.75            11.75     9.00
                  Second Quarter            10.88      7.38            15.25     9.67
                  Third Quarter             10.75      8.75            16.25    10.00
                  Fourth Quarter            10.75      8.00            18.13    11.38
</TABLE>

Dividends
         It is the Company's current policy to retain any future earnings to
finance the continuing development of its business and not to pay dividends. The
company has not paid any dividends since the initial public offering of its
stock.

                                       9
<PAGE>   10
ITEM  6.  SELECTED FINANCIAL DATA

Five-Year Selected Financial Data

Southern Energy Homes, Inc. and subsidiaries (Dollars in thousands, except per
share data)

<TABLE>
<CAPTION>
                                                                               Year Ended
                                              -------------------------------------------------------------------------------
                                               January 2,       January 3,     December 29,     December 30,      December 31
Operating Data                                       1998             1997             1995             1994             1993
<S>                                           <C>              <C>              <C>              <C>              <C>
Net revenues                                  $   298,533      $   306,844      $   241,268      $   188,750      $   143,618
Gross profit                                       44,053           43,647           31,125           24,763           19,518
Selling, general
and administrative                                 21,458           17,634           13,272           10,633            7,795
Provision for credit
  losses                                              187            1,177             --               --               --
Amortization                                          853              517              422              322              531
Non-recurring
charges(1) (2)                                      2,146             --               --               --              1,907
Operating income                                   19,409           24,319           17,431           13,808            9,285
Interest expense                                    1,412              131              146              237              654
Interest income                                       470              593              811              392              184
Provision for income
  taxes                                             7,092            9,535            6,854            5,139            3,454
Net income                                         11,375           15,246           11,242            8,824            5,244
Net income per share:
  Basic                                       $      0.76      $      1.01      $      0.79      $      0.62      $      0.40
  Diluted                                     $      0.75      $      1.00      $      0.78      $      0.62      $      0.40
Weighted average shares outstanding (3):
  Basic                                        15,002,006       15,122,578       14,300,466       14,161,135       13,094,010
  Diluted                                      15,129,530       15,260,484       14,349,197       14,328,361       13,163,705
</TABLE>




<TABLE>
<CAPTION>
                                            January 2,       January 3,     December 29,     December 30,     December 31,
Balance Sheet Data                                1998             1997             1995             1994             1993
<S>                                         <C>              <C>            <C>              <C>              <C>
Total assets                                  $123,253         $112,658         $ 75,899         $ 54,347         $ 43,340
Long-term  debt                                  4,720               --                6              596            1,502
Stockholders' equity                          $ 79,767         $ 77,377         $ 57,242         $ 38,559         $ 29,722
</TABLE>

(1)  Upon completion of the Company's initial public offering, the Company
     terminated all non-compete agreements and wrote off $1.9 million in
     non-recurring charges.

(1)  During the second quarter of 1997, the company recorded a $2.1 million
     pre-tax non-recurring charge in connection with its decision to close its
     manufactured housing facility located in Pennsylvania.

(1)  The Company adopted the provisions of Statement of Financial Accounting of
     Standards No. 128, Earnings Per Share, therefore all periods presented have
     been restated to conform to the new statement.

                                       10
<PAGE>   11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

Year Ended January 2, 1998 as Compared with Year Ended January 3, 1997

Net Revenues

Total net revenues (gross revenues less volume discounts, returns, and
allowances) and finance revenue for the year ended January 2, 1998 were $298.5
million, which represented a decrease of 2.7% over the prior fiscal year.

Net revenues of the manufactured home segment, which includes the Company's
retail operations, were $296.4 million for the year ended January 2, 1998 as
compared with $304.9 million for the prior year period. Retail home sales
accounted for $47.5 million of the manufactured home segment revenues for the
year ended January 2, 1998 as compared with $4.0 million for the prior year
period. During the fourth quarter of 1996 the Company entered into the retail
sector of the industry through the acquisition of BR Holding Corp. and a group
of retail companies doing business as Blue Ribbon Homes. Sales to dealers
accounted for approximately $248.9 million of the manufactured home segment
revenues for the fiscal year ended January 2, 1998, as compared with $300.8
million for the same period a year ago, a decrease of $52.0 million, or 17.3%.
The decline in sales to dealers was attributable to a decline in the number of
homes shipped, which was partially offset by an increase in the average
wholesale price per home shipped. Total homes shipped in the year ended January
2, 1998 was 9,165, down 16.2% from the number of homes shipped in the prior year
period. The decrease in homes sold was attributable to an overall industry
decline in the Company's core market areas and increased competition within
these market areas. The average wholesale price per home in 1997 was $27,500, as
compared with $26,500 in 1996, an increase of 3.8%.

Revenues from the Company's retail financing segment were $2.2 million for the
year ended January 2, 1998, as compared with $2.0 million for the prior year
period. This increase was attributable to the increased lending activity by the
Company's wholly owned subsidiary, Wenco Finance, Inc. ("Wenco Finance"). Wenco
Finance originated and serviced consumer loans primarily for homes manufactured
by the Company. In February 1997, the Company formed a joint venture with 21st
Century Mortgage Corporation ("21st Century"). The joint venture, Wenco 21, will
continue to offer consumer financing for homes manufactured by the Company as
well as for other homes sold through its retail centers and independent dealers.
In light of the shift in consumer finance activities to Wenco 21, Wenco Finance
suspended its loan origination activities and engaged 21st Century to service
its existing loan portfolio.

Gross Profit

Gross profit consists of net revenues less the cost of sales, which includes
labor, materials, and overhead. Gross profit for the year ended January 2, 1998
was $44.1 million, or 14.8% of net revenues, as compared with $43.6 million, or
14.2% of net revenues, in the prior year period. This increase in the gross
profit percentage was attributable primarily to increased sales from the
Company's retail segment, which have a higher gross margin than sales to
independent dealers, partially offset by decreased efficiencies associated with
lower production levels, which resulted from a decreased in backlog of orders.

Selling Expenses

Selling expenses include primarily sales commissions, advertising expenses,
salaries for support personnel, and freight costs. Selling expenses were $10.6
million, or 3.6% of net revenues, during the year ended January 2, 1998, as
compared with $7.0 million, or 2.3% of net revenues, during the prior year
period. The increase in selling expense as a percentage of net revenues was
attributable primarily to increased selling expenses associated with the
Company's retail operation, which was partially offset by savings in shipping
costs realized from an increase in shipments through MH Transport, the Company's
trucking subsidiary, which reduced the Company's reliance upon independent
trucking companies.

General and Administrative Expenses

General and administrative expenses include administrative salaries, executive
and management bonuses, insurance costs, and professional fees. General and
administrative expenses were $10.8 million, or 3.6% of net revenues, for the
year ended January 2, 1998, as compared with $10.6 million, or 3.5% of net
revenues, for the same period of 1996. The increase in general and
administrative expenses as a percentage of net revenues was attributable
primarily to salary increases and the addition of new employees who were hired
in order to staff retail operations and to resolve staffing shortages. This
increase was partially offset by a gain of approximately $775,000 resulting from
the sale of $16.7 million of the Company's installment contracts receivable
portfolio.

                                       11
<PAGE>   12
Provision for Credit Losses

The Company provides for estimated credit losses based on industry experience,
historical loss experience, current repossession trends and costs, and
management's assessment of the current credit quality of the loan portfolio. The
provision for credit losses for the year ended January 2, 1998 was $187,000 as
compared with $1.2 million for the year ended January 3, 1997. The decrease in
the current year provision reflects the suspension of loan originations by
Wenco, which occurred in February 1997.

Non-Recurring Charge

During the second quarter of 1997, the Company recorded a $2.1 million (pre-tax)
non-recurring charge in connection with its decision to close its manufactured
housing facility located in Pennsylvania. The decision was based primarily on
changes in local market conditions and operating results of the facility. During
the years ended January 2,1998 and January 3,1997, this facility generated 1.0%
and 3.3%, respectively, of the total revenues of the Company. The impact of the
results of operations of this facility on the operating income of the Company
was immaterial during the years ended January 2,1998 and January 3,1997. The
asset impairment losses consisted of the write-off of goodwill, ($505,000), the
write-off of non-compete agreements ($134,000), and the write-off of certain
other operating assets ($632,000), and plant closing costs consisting primarily
of lease obligations ($400,000), warranty reserves ($260,000) and severance pay
($141,000).

Interest Expense

Interest expense for the year ended January 2, 1998 was $1.4 million as compared
with $131,000 for the year ended January 3, 1997. The increase in interest
expense in the current year was a result of increased notes payable associated
with the floor plan financing of the Company's retail inventory and the
borrowings of $6.3 million of long-term debt.
 .
Interest Income

Interest income for the year ended January 2, 1998 was $470,000 as compared with
$593,000 for the year ended January 3, 1997. The decrease in interest income
reflects lower average cash and cash equivalent balances during the year ended
January 2, 1998.

Provision for Income Taxes

Income taxes are provided for based on the tax effect of revenue and expense
transactions included in the determination of pre-tax book income. Income tax
expense for the year ended January 2, 1998 was $7.1 million, or an effective tax
rate of 38.4%, compared with $9.5 million, or an effective tax rate 38.5%, for
the year ended January 3, 1997. The decline in income tax expense is a result of
lower income in 1997.

Year Ended January 3, 1997 as Compared with Year Ended December 29, 1995

Net Revenues

Total net revenues and finance revenue for the year ended January 3, 1997 were
$306.8 million, which represented an increase of 27.2% over the prior fiscal
year. During the fourth quarter of 1996 the Company entered into the retail
sector of the industry through the acquisition of BR Holding Corp. and a group
of retail companies doing business as Blue Ribbon Homes.

Net revenues of the manufactured home segment, which includes the Company's
retail operations, were $304.8 million for the year ended January 3, 1997 as
compared with $241.2 million for the prior year period. Retail home sales
accounted for $4.0 million of the manufactured home segment revenues for the
year ended January 3, 1997. The average wholesale price per home in 1996 was
$26,500, as compared with $25,600 in 1995, an increase of 3.5%. Total homes sold
in the year ended January 3, 1997 was 10,940, up 20.5% over the number of homes
sold in the prior year period. The increase in homes sold was attributable
primarily to increased capacity from a manufactured housing facility in Alabama
which was added in the fourth quarter of 1995 and increased production from the
Texas plant.

Revenues from the Company's retail financing segment were $2.0 million for the
year ended January 3, 1997, as compared with $30,000 for the prior year period.
This increase was attributable to the increased lending activity by Wenco
Finance. Wenco Finance had been originating and servicing consumer loans
primarily for homes manufactured by the Company. In February 1997, the Company
formed a joint venture with 21st Century Mortgage Corporation ("21st Century").
The joint venture, Wenco 21, continues to offer, through 21st Century, consumer
financing for homes manufactured by the Company as well as for other homes sold
through its retail centers and independent dealers. In light of the shift in
consumer finance activities to Wenco 21, Wenco Finance suspended its loan
origination activities and has engaged 21st Century to service its existing loan
portfolio. Gross Profit

                                       12
<PAGE>   13
Gross profit for the year ended January 3, 1997 was $43.6 million, or 14.2% of
net revenues, as compared with $31.1 million, or 12.9% of net revenues, in the
prior year period. This increase in the gross profit percentage was attributable
primarily to lower material prices which were partially offset by increased
warranty costs. The increase in warranty expense was attributable primarily to
an increase in the Company's customer service staff and the expansion of the
Company's service fleet.

Selling Expenses

Selling expenses were $7.0 million, or 2.3% of net revenues, during the year
ended January 3, 1997, as compared with $5.7 million, or 2.4% of net revenues,
during the prior year period. The decrease in selling expenses as a percentage
of net revenues was attributable primarily to savings in shipping costs realized
from an increase in shipments through MH Transport, the Company's trucking
subsidiary, which reduced the Company's reliance upon independent trucking
companies.

General and Administrative expenses

General and administrative expenses were $10.6 million, or 3.5% of net revenues,
for the year ended January 3, 1997, as compared with $7.6 million, or 3.1% of
net revenues, for the same period of 1995. The increase in general and
administrative expenses as a percentage of net revenues was attributable
primarily to salary increases and the addition of new employees who were hired
in order to resolve staffing shortages which occurred as the Company continued
to expand.

Provision for Credit Losses

The provision for credit losses for the year ended January 3, 1997 was $1.2
million as compared with $0 for the year ended December 29, 1995. The increase
in the provision for loan losses was due to the increase in installment
contracts receivable from $655,000 in 1995 to $27.6 million in 1996.

Interest Income

Interest income for the year ended January 3, 1997 was $593,000 as compared with
$811,000 for the year ended December 29, 1995. The decrease in interest income
reflects lower average investment balances during the year ended January 3,
1997.

Provision for Income Taxes

Income tax expense for the year ended January 3, 1997 was $9.5 million, or an
effective tax rate of 38.5%, compared with $6.9 million, or an effective tax
rate 37.9%, for the year ended December 29, 1995. The increase in effective tax
rate is attributable in part to the Company's movement into a higher federal
income tax bracket and also reflects a proportional shift in the Company's
income from Alabama to other states which have higher income tax rates than
Alabama.


LIQUIDITY AND CAPITAL RESOURCES

Since its organization, the Company has financed its operations primarily with
cash generated from a combination of operations, stock offerings, and
borrowings.

Cash Flows

During the year ended January 2, 1998, the Company's cash provided by operations
was approximately $11.1 million. Cash provided by operations included net income
of $11.4 million, which was partially offset by increased accounts receivable
and prepayments and other of $5.1 million, decreased accounts payable and
accrued liabilities of $2.4 million, and loan originations of $1.3 million. In
addition to cash provided by operating activities, other significant cash flows
included capital expenditures of $6.1 million, purchase of subsidiary for $1.4
million, increased organization and pre-operating costs of $499,000, repurchase
of common stock of $10.2 million, investments in joint ventures of $2.7 million,
increased net borrowings of $5.2 million and the sale of installment contracts
of $16.7 million.

During the year ended January 3, 1997, the Company's cash used by operations was
approximately $9.2 million. Cash used by operations includes originations of
installment contracts of $27.5 million, increased inventory and prepayments of
$7.3 million, and decreased accounts payable of $1.2 million. These amounts were
partially offset by net income of $15.2 million, decreased accounts receivable
of $3.9 million, and increased accrued liabilities of $4.5 million. In addition
to cash provided by operating activities, other significant cash flows included
capital expenditures of $5.5 million, borrowings of $3.1 million, maturities of
investments of $2.1 million, and purchase of subsidiaries for $1.2 million.

                                       13
<PAGE>   14
At January 2, 1998, the Company's net working capital was $32.9 million,
including $17.7 million in cash and cash equivalents, as compared with $17.7
million at January 3, 1997, including $5.3 million in cash and cash equivalents.
The increase in net working capital was a result of an increase in cash and cash
equivalents of $12.4 million resulting from the sale of a portion of the
Company's installment contracts receivable, and an increase in accounts
receivable of approximately $4.8 million, increased inventories of $1.5 million,
partially offset by increased notes payable of approximately $3.9 million. The
increase in inventory and notes payable was primarily attributable to the homes
held at the recently acquired retail locations and the related floor-plan
financing. The Company also has a $15 million unsecured line of credit which is
renewable annually and bears interest at the London Interbank Offered Rate
("LIBOR") plus 1.5%. The Company's ability to draw upon this line of credit is
dependent upon meeting certain financial ratios and covenants. The Company has
no outstanding borrowings under this line.

Substantially all of the Company's dealers finance their purchases through
"floor-plan" arrangements under which 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. In connection with a floor-plan agreement,
the financial institution which provides the dealer financing 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 homes at the Company's original invoice price plus
certain administrative and shipping expenses less any principal payments made by
the dealer. At January 2, 1998, the Company's contingent repurchase liability
under floor plan financing arrangements was approximately $92 million. While
homes that have been repurchased by the Company under floor-plan financing
arrangements are usually sold to other dealers and losses experienced to date
under these arrangements have been insignificant, no assurance can be given that
the Company will be able to sell to other dealers homes which it may be
obligated to repurchase in the future under such floor plan financing
arrangements or that the Company will not suffer losses with respect to, and as
a consequence of, those arrangements.

Expansion

In November 1996, the Company acquired a group of retail sales centers in
Alabama and Mississippi. The initial purchase price consisted of approximately
$1.1 million in cash and $4.5 million of common stock issued. The Company is
obligated to make additional payments to the seller if the acquired business
meets certain earnings targets. Any additional payments will be made 20% in cash
and 80% in shares of the Company's common stock and will be accounted for as
goodwill and amortized over the remaining recovery period of the goodwill. In
May 1997, an additional payment totaling approximately $197,000, $49,000 in cash
and 14,256 shares of the Company's common stock (approximate market value of
$148,000) was made for earnings targets achieved through December 31, 1996. At
January 2, 1998, there was no payment obligation.

In December 1997, the Company acquired substantially all of the assets and
assumed all of the liabilities of a manufactured housing retailer in South
Carolina. The purchase price consisted of approximately $1.4 million in cash and
94,115 shares of the Company's common stock (approximate market value on
December 3, 1997 of $869,000).

Inflation

The Company believes that the relatively moderate rate of inflation over the
past few years has not had a significant impact on its sales or profitability.
The Company has in the past been able to pass on most of the increases in its
costs by increasing selling prices, although there can be no assurance that the
Company will be able to do so in the future.

"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995 Forward-looking statements in this report, including without limitation,
statements relating to the adequacy of the Company's resources, are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that such forward-looking statements
involve risks and uncertainties, including without limitation: the cyclical and
seasonal nature of housing markets; the availability of financing for
prospective purchasers of the Company's homes; the amount of capital that the
Company may commit to its Wenco 21 joint venture to make available consumer
loans; the performance of the loans held by the Company's finance subsidiary;
the availability and pricing of raw materials; the concentration of the
Company's business in certain regional markets; the Company's ability to execute
and manage its expansion plans; the availability of labor to implement those
plans; the highly competitive nature of the manufactured housing industry;
federal, state and local regulation of the Company's business; the company's
contingent repurchase liabilities with respect to dealer financing; the
Company's reliance on independent dealers; and other risks indicated from time
to time in the Company's filings with the Securities and Exchange Commission.


                                       14
<PAGE>   15
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

Consolidated Balance Sheets
Southern Energy Homes, Inc. and subsidiaries

<TABLE>
<CAPTION>
                                                            January 2,           January 3,
                                                                  1998                 1997
                                                         -------------        -------------
<S>                                                      <C>                  <C>
Assets
Current Assets
Cash and cash equivalents                                $  17,676,000        $   5,299,000
Accounts receivable, less allowance for doubtful
  accounts of $180,000 and $362,000, respectively           22,399,000           17,558,000
Installment contracts receivable                               165,000              421,000
Inventories                                                 28,479,000           27,019,000
Deferred tax benefits                                        1,816,000            1,829,000
Prepayments and other                                        1,134,000              890,000
                                                         -------------        -------------
                                                            71,669,000           53,016,000
                                                         -------------        -------------
Property, plant, and equipment:
Property, plant, and equipment, at cost                     28,982,000           23,527,000
Less - accumulated depreciation                             (7,130,000)          (5,169,000)
                                                         -------------        -------------
                                                            21,852,000           18,358,000
                                                         -------------        -------------
Intangibles and other non-current assets:
Installment contracts receivable, less allowance
  for credit losses of $696,000 and $1,142,000,
  respectively                                               9,673,000           26,064,000
Goodwill                                                    14,258,000           13,093,000
Non-compete agreements                                         421,000              667,000
Organization and pre-operating costs                           825,000              649,000
Other assets                                                 4,555,000              811,000
                                                         -------------        -------------
                                                            29,732,000           41,284,000
                                                         -------------        -------------
                                                         $ 123,253,000        $ 112,658,000
                                                         =============        =============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable                                            $  15,932,000        $  12,025,000
Current maturities of long-term debt                         1,106,000                   --
Accounts payable                                             3,449,000            4,303,000
Volume incentive payable                                     7,828,000            8,541,000
Accrued payroll-related expenses                             2,693,000            2,743,000
Accrued workers' compensation                                1,995,000            2,426,000
Accrued warranty                                             1,939,000            1,944,000
Accrued other                                                3,824,000            3,299,000
                                                         -------------        -------------
                                                            38,766,000           35,281,000
                                                         -------------        -------------
Long-term debt                                               4,720,000                   --
                                                         -------------        -------------
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock, $.0001 par value, 1,000,000
  shares authorized, none outstanding                               --                   --
Common stock, $.0001 par value, 40,000,000 shares
  authorized, 15,572,326 shares issued at January
  2, 1998; 20,000,000 shares authorized 15,437,801
  shares issued at January 3, 1997                               2,000                2,000
Treasury stock, at cost, 1,122,100 shares at
  January 2, 1998 and no shares at January 3, 1997         (10,201,000)                  --
Capital in excess of par                                    37,215,000           35,999,000
Retained earnings                                           52,751,000           41,376,000
                                                         -------------        -------------
                                                            79,767,000           77,377,000
                                                         -------------        -------------
                                                         $ 123,253,000        $ 112,658,000
                                                         =============        =============
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.


                                       15
<PAGE>   16
Consolidated Statements of Operations
Southern Energy Homes, Inc. and subsidiaries

<TABLE>
<CAPTION>
                                                                    Year Ended
                                                  January 2,         January 3,       December 29,
                                                        1998               1997               1995
                                                  (52 Weeks)         (53 Weeks)         (52 Weeks)
                                                ------------       ------------       ------------
<S>                                             <C>                <C>                <C>
Net revenues                                    $298,533,000       $306,844,000       $241,268,000
Cost of sales                                    254,480,000        263,197,000        210,143,000
                                                ------------       ------------       ------------
Gross profit                                      44,053,000         43,647,000         31,125,000
                                                ------------       ------------       ------------
Operating expenses:
Selling                                           10,635,000          7,015,000          5,712,000
General and administrative                        10,823,000         10,619,000          7,560,000
Provision for credit losses                          187,000          1,177,000                 --
Amortization of intangibles                          853,000            517,000            422,000
Non-recurring charge                               2,146,000                 --                 --
                                                ------------       ------------       ------------
                                                  24,644,000         19,328,000         13,694,000
                                                ------------       ------------       ------------
Operating income                                  19,409,000         24,319,000         17,431,000
                                                ------------       ------------       ------------
Interest expense                                   1,412,000            131,000            146,000
Interest income                                      470,000            593,000            811,000
                                                ------------       ------------       ------------
Income before provision for
 income taxes                                     18,467,000         24,781,000         18,096,000
Provision for income taxes                         7,092,000          9,535,000          6,854,000
Net income                                      $ 11,375,000       $ 15,246,000       $ 11,242,000
Net income per share:
  Basic                                         $       0.76       $       1.01       $       0.79
                                                ============       ============       ============
  Diluted                                       $       0.75       $       1.00       $       0.78
                                                ============       ============       ============
Weighted average number of common shares:
  Basic                                           15,002,006         15,122,578         14,300,466
                                                ============       ============       ============
  Diluted                                         15,129,530         15,260,484         14,349,197
                                                ============       ============       ============
</TABLE>


                                       16
<PAGE>   17
Consolidated Statements of Stockholders' Equity
Southern Energy Homes, Inc. and subsidiaries

<TABLE>
<CAPTION>
                                                                                              Capital
                                        Common Stock              Treasury Stock            in Excess      Retained
                                     Shares        Amount        Shares         Amount         of Par      Earnings         Total
                               ------------  ------------  ------------   ------------   ------------  ------------  ------------
<S>                            <C>           <C>           <C>            <C>            <C>           <C>           <C>
Balance, December 30, 1994       14,161,311  $      1,000            --   $          0   $ 23,670,000  $ 14,888,000  $ 38,559,000
Net proceeds from issuance of
   common stock                     862,500            --            --             --      7,236,000            --     7,236,000
Exercise of stock options            29,577            --            --             --        205,000            --       205,000
Net income                               --            --            --             --             --    11,242,000    11,242,000
                               ------------  ------------  ------------   ------------   ------------  ------------  ------------
Balance, December 29, 1995       15,053,388         1,000            --             --     31,111,000    26,130,000    57,242,000
Exercise of stock options            51,599            --            --             --        357,000            --       357,000
Issuance of common stock
   in connection with
   acquisition                      332,814         1,000            --             --      4,531,000            --     4,532,000
Net income                               --            --            --             --             --    15,246,000    15,246,000
                               ------------  ------------  ------------   ------------   ------------  ------------  ------------
Balance, January 3, 1997         15,437,801         2,000            --             --     35,999,000    41,376,000    77,377,000
Exercise of stock options            26,154            --            --             --        181,000            --       181,000
Issuance of common stock
   in connection with
   acquisitions                     108,371            --            --             --      1,035,000            --     1,035,000
Treasury stock repurchases               --            --    (1,122,100)   (10,201,000)            --            --   (10,201,000)
Net income                               --            --            --             --             --    11,375,000    11,375,000
                               ------------  ------------  ------------   ------------   ------------  ------------  ------------
Balance, January 2, 1998         15,572,326  $      2,000    (1,122,100)  $(10,201,000)  $ 37,215,000  $ 52,751,000  $ 79,767,000
                               ============  ============  ============   ============   ============  ============  ============
</TABLE>

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


                                       17
<PAGE>   18
CONSOLIDATED Statements of Cash Flows
Southern Energy Homes, Inc. and subsidiaries

<TABLE>
<CAPTION>
                                                                              Year Ended
                                                           ------------------------------------------------
                                                             January 2,        January 3,       December 29
                                                                   1998              1997              1995
                                                             (52 Weeks)        (53 Weeks)        (52 Weeks)
                                                           ------------      ------------      ------------
<S>                                                        <C>               <C>               <C>
Operating activities:
Net income                                                 $ 11,375,000      $ 15,246,000      $ 11,242,000
Adjustments to reconcile net income to net cash
 provided by (used in) operating activities:
  Equity income of joint ventures                              (282,000)               --                --
  Gain on sale of installment contracts                        (775,000)               --                --
  Non-recurring charge                                        2,146,000                --                --
  Depreciation of property, plant, and equipment              2,244,000         1,168,000         1,273,000
  Provision (credit) for deferred income taxes                   13,000          (560,000)         (158,000)
  Gain on sale of property, plant, and equipment                (25,000)           37,000            13,000
  Amortization of intangibles                                   853,000           517,000           422,000
  Provision (credit) for doubtful accounts receivable           (77,000)          210,000            22,000
  Accretion of discount on debt                                      --                --            78,000
  Provision for credit losses on installment contracts          187,000         1,177,000                --
  Origination of installment contracts                       (1,272,000)      (27,497,000)               --
  Principal collected on originated
   installment contracts                                        996,000           490,000                --
Change in assets and liabilities, net of effect
 from purchase of subsidiaries:
   Accounts receivable                                       (4,850,000)        3,936,000        (5,277,000)
   Inventories                                                3,194,000        (7,039,000)       (1,260,000)
   Prepayments and other                                       (250,000)         (255,000)         (723,000)
   Accounts payable                                            (854,000)       (1,174,000)          328,000
   Accrued liabilities                                       (1,572,000)        4,525,000         2,418,000
                                                           ------------      ------------      ------------
Net cash provided by (used in) operating activitie           11,051,000        (9,219,000)        8,378,000
                                                           ------------      ------------      ------------
Investing activities:
  Purchase of subsidiaries, net of cash acquired             (1,410,000)       (1,217,000)         (942,000)
  Capital expenditures                                       (6,089,000)       (5,501,000)       (5,161,000)
  Maturities of investments                                          --         2,076,000         4,924,000
  Investments in joint ventures                              (2,712,000)         (770,000)               --
  Increase in organization and pre-operating costs             (499,000)         (305,000)         (482,000)
  Proceeds from sale of property, plant, and equipment          162,000            68,000            42,000
                                                           ------------      ------------      ------------
Net cash used in investing activities                       (10,548,000)       (5,649,000)       (1,619,000)
                                                           ------------      ------------      ------------
Financing activities:
Purchase of treasury stock                                  (10,201,000)               --                --
Net borrowings on notes payable                                (668,000)        3,060,000                --
Repayments of long-term debt                                   (500,000)               --        (1,454,000)
Borrowings on long-term debt                                  6,326,000                --                --
Net proceeds from issuance of common stock                           --                --         7,236,000
Proceeds from exercise of stock options                         181,000           357,000           205,000
Proceeds from sale of installment contracts                  16,736,000                --                --
                                                           ------------      ------------      ------------
Net cash provided by financing activities                    11,874,000         3,417,000         5,987,000
                                                           ------------      ------------      ------------
Net increase (decrease) in cash and cash equivalents         12,377,000       (11,451,000)        2,746,000
Cash and cash equivalents at beginning of period              5,299,000        16,750,000         4,004,000
                                                           ------------      ------------      ------------
Cash and cash equivalents at end of period                 $ 17,676,000      $  5,299,000      $ 16,750,000
                                                           ============      ============      ============
Supplemental cash flow information:
Cash paid for interest                                     $  1,290,000      $    131,000      $     78,000
Cash paid for income taxes                                 $  7,434,000      $  9,369,000      $  7,568,000
</TABLE>

Supplemental disclosures of non-cash investing activities:

         During fiscal 1997, the Company purchased A & G, Inc. for $6.5 million,
of which $0.9 million was paid through the issuance of 94,115 shares of the
Company's common stock. See Note 3.

         During fiscal 1996, the Company purchased BR Holding Corp. for $5.6
million, of which $4.5 million was paid through the issuance of 332,814 shares
of the Company's common stock. During 1997 an additional payment was made in the
amount of $197,000, of which $148,000 was paid through the issuance of 14,256
shares of the Company's common stock. See Note 3.

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


                                       18
<PAGE>   19
Notes To Consolidated Financial Statements
Southern Energy Homes, Inc. and subsidiaries

1. The Company and Basis of Presentation:

         Southern Energy Homes, Inc. (the "Company") is primarily involved in
two industry segments: the production and retail sale of manufactured homes and
the retail financing of manufactured homes. The Company produces manufactured
homes, primarily on a custom basis, for wholesale to dealers located primarily
in the southeastern and south central regions of the United States. In fiscal
1996 the Company acquired a retail home sales operation through a merger with BR
Holding Corp. ("BR Holding") and in fiscal 1997 the Company expanded its retail
operations through the acquisition of A & G, Inc. ("A & G") (see Note 3). Retail
sales are primarily in the southeastern United States. Wenco Finance, Inc., the
Company's wholly owned finance subsidiary ("Wenco Finance"), until February 1997
had been originating and servicing consumer loans primarily for homes
manufactured by the Company. In February 1997, the Company formed a joint
venture with 21st Century Mortgage Corporation ("21st Century") (see Note 3).
The joint venture, Wenco 21, will continue to offer consumer financing for homes
manufactured by the Company as well as other homes sold through its retail
centers and independent dealers. In light of the shift in consumer finance
activities to Wenco 21, Wenco Finance has suspended its loan origination
activities and has engaged 21st Century to service its existing loan portfolio.

         The Company is on a 52/53-week year with the fiscal year ending on the
Friday closest to the last day of December. The 1997 and 1995 fiscal years
included 52 weeks and the 1996 fiscal year included 53 weeks. All references to
years relate to fiscal years rather than calendar years.

         The Company's business is seasonal and cyclical with the potential for
significant fluctuations in quarterly earnings being affected by factors
impacting the broader housing market, including the availability and cost of
customer financing and changes in the cost of construction materials.

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

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

2. Summary of Significant Accounting Policies:

Consolidation

         The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated in the consolidated financial statements. The
Company accounts for its investments of 50% or less in joint ventures, where it
does not have the ability to control, on the equity basis of accounting.
Therefore, the Company's share of income/loss is recorded as equity income from
the venture in the accompanying consolidated statements of operations (see Note
3).

Cash and Cash Equivalents

         For purposes of reporting cash flows, the Company considers cash and
cash equivalents to include cash on hand and highly liquid debt instruments and
investments purchased with an original maturity of three months or
less.Inventories Inventories are valued at first-in, first-out ("FIFO") cost,
which is not in excess of market. An analysis of inventories follows:

<TABLE>
<CAPTION>
                                                January 2,            January 3,
                                                      1998                  1997
                                               -----------           -----------
<S>                                            <C>                   <C>
Raw materials                                  $ 9,498,000           $11,607,000
Work in progress                                 1,089,000             1,108,000
Finished goods                                  17,892,000            14,304,000
                                               -----------           -----------
                                               $28,479,000           $27,019,000
</TABLE>

Property, Plant, and Equipment

         Property, plant, and equipment are recorded at cost. Depreciation is
computed on the straight-line, accelerated cost recovery system or modified
accelerated cost recovery system method over the estimated service lives of
depreciable assets (5-39 years for buildings and improvements, 3-10 years for
machinery and equipment, 5-10 years for office equipment, and 7-10 years for
leasehold improvements, which is the lesser of the lease term or the asset's
useful life). Cost of property, plant, and equipment is as follows:

<TABLE>
<CAPTION>
                                                  January 2,          January 3,
                                                        1998                1997
                                                 -----------         -----------
<S>                                              <C>                 <C>
Land                                             $   495,000         $   493,000
Buildings and improvements                        15,938,000          10,465,000
Machinery and equipment                            9,503,000           7,963,000
Office equipment                                   1,323,000             836,000
</TABLE>


                                       19
<PAGE>   20
<TABLE>
<S>                                              <C>                 <C>
Leasehold improvements                             1,649,000           1,140,000
Construction in progress                              74,000           2,630,000
                                                 -----------         -----------
                                                 $28,982,000         $23,527,000
                                                 ===========         ===========
</TABLE>

         Maintenance and repairs are charged to expense as incurred;
expenditures for renewals and betterments are capitalized. When assets are
retired or otherwise disposed of, the property, plant, and equipment accounts
are relieved of cost and accumulated depreciation and any resulting gain or loss
is credited or charged to income. Allowance for Credit Losses

         The allowance for credit losses is established to provide for losses
inherent in the installment contracts receivable portfolio. The allowance for
credit losses is determined based on the Company's historical loss experience
after adjusting for current economic conditions. Management, after assessing the
loss experience and economic conditions, adjusts the allowance account through
periodic provisions. Actual credit losses are charged to the allowance when
incurred.

         An analysis of the allowance for losses on installment contracts
receivable is as follows:

<TABLE>
<CAPTION>
                                                January 2,           January 3,
                                                      1998                 1997
                                               -----------          -----------
<S>                                            <C>                  <C>
Balance, beginning of year                     $ 1,142,000          $        --
Provision for credit losses                        187,000            1,177,000
Charge-offs                                       (633,000)             (35,000)
                                               -----------          -----------
Balance, end of year                           $   696,000          $ 1,142,000
                                               ===========          ===========
</TABLE>

Intangible Assets

         The intangible assets recorded by the Company in connection with
various acquisitions are amortized on a straight-line basis. As of January 2,
1998 and January 3, 1997, accumulated amortization of intangibles amounted to
$3,011,000 and $2,158,000, respectively (see Note 8). The applicable intangible
amortization periods are as follows:

Goodwill                                     30 years
Non-compete agreements                       4 to 10 years
Organization and pre-operating costs         5 years

Long-Lived Assets

         The Company continually evaluates whether events and circumstances have
occurred that indicate that the remaining balance of long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be held and
used in the operations of the Company may be impaired and not be recoverable. In
performing this evaluation, the Company uses an estimate of the related cash
flows expected to result from the use of the asset and its eventual disposition.
When this evaluation indicates the asset has been impaired, the Company will
measure such impairment based on the asset's fair value and the amount of such
impairment is charged to earnings (see Note 8).

Volume Incentive Payable

         The Company provides rebates to dealers based upon a predetermined
formula applied to the volume of homes sold to the dealer during the year. Such
rebates (reflected as a reduction of gross sales) are recorded at the time sales
to independent dealers are recognized.

Product Warranties

         The Company warrants its products against certain manufacturing defects
for a period of up to five years commencing at the time of retail sale. The
estimated cost of such warranties is accrued at the time of sale to the
independent dealer based on historical warranty costs incurred. Periodic
adjustments to the accrual will be made as events occur which indicate changes
are necessary.

Insurance Arrangements

         The Company is partially self-insured for workers' compensation and
health insurance claims. The Company purchases insurance coverage for all
workers' compensation claims in excess of $300,000 per occurrence (with an
annual aggregate stop-loss limit of $4,000,000 for all claims), and for all
health-care claims in excess of $55,000 per occurrence (with an annual aggregate
stop-loss limit of approximately $4,400,000 for all claims). Amounts are accrued
currently for the estimated costs of claims incurred, including related
expenses. Management considers accrued liabilities for unsettled claims to be
adequate; however, there is no assurance that the amounts accrued will not vary
from the ultimate amounts incurred upon final disposition of all outstanding
claims. As a result, periodic adjustments to the reserves will be made as events
occur which indicate changes are necessary.

Fair Value of Financial Instruments

         Because of the short-term nature of the Company's financial
instruments, the low interest rate volatility associated with the installment
contracts receivable, and the recent closing of a


                                       20
<PAGE>   21
long-term debt facility, the fair value of the Company's financial instruments
at January 2, 1998 and January 3, 1997 approximated book value at those dates.

Revenue Recognition - Manufactured Housing

         The Company manufactures its homes pursuant to dealer orders, and sales
to independent dealers and related transit costs are recognized upon completion
of the home. Almost all of the Company's sales to its independent dealers are
under floor-plan financing arrangements. Under these floor-plan financing
arrangements, the Company bills the dealers upon completion of manufacture and
at the same time transfers title. Consistent with these arrangements, the
Company typically does not allow independent dealers to cancel a purchase after
manufacture by the Company has commenced. The Company carries insurance which
covers possible damage to a home while on the Company's premises prior to
shipment and during shipment when transported by the Company's trucking
subsidiary. Independent trucking companies transporting the Company's homes
carry insurance to cover damage during shipment. With respect to its retail
operations, the Company records a retail home sale when the customer signs an
installment contract for the purchase of a manufactured home and the Company
receives the appropriate down payment.

Revenue Recognition - Retail Financing

         Interest income from installment contract receivables is recognized
using the interest method. Accrual of interest income on installment contract
receivables is suspended when a loan is contractually delinquent for 90 days or
more. Interest accrual resumes when the loan becomes contractually current, and
past-due interest income is recognized at that time. Most of the installment
contract receivables are with borrowers in the southern portion of the United
States and are collateralized by manufactured homes.

Net Income per Share

         In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings
per Share, which establishes standards for computing and presenting earnings per
share ("EPS"). It replaces the presentation of primary EPS with a presentation
of basic EPS, 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 basic EPS computation to the numerator and denominator of the
diluted EPS computation.

         The Company adopted this statement in fiscal 1997 and, in accordance
with SFAS No. 128, has restated all prior period EPS data presented. The EPS
results are as follows:

<TABLE>
<CAPTION>
                                                                Shares
                                                             Available
                                                   Net       to Common      Earnings
                                                Income    Shareholders     per Share
                                           -----------    ------------     ---------
<S>                                        <C>            <C>              <C>
January 2, 1998
    Basic                                  $11,375,000      15,002,006     $0.76
    Dilutive effect of options issued               --         127,524     (0.01)
                                           -----------     -----------     -----
    Diluted                                $11,375,000      15,129,530     $0.75
                                           -----------     -----------     -----
January 3, 1997
    Basic                                  $15,246,000      15,122,578     $1.01
    Dilutive effect of options issued               --         137,906     (0.01)
                                           -----------     -----------     -----
    Diluted                                $15,246,000      15,260,484     $1.00
                                           -----------     -----------     -----
December 29, 1995
    Basic                                  $11,242,000      14,300,466     $0.79
    Dilutive effect of options issued               --          48,731     (0.01)
                                           -----------     -----------     -----
    Diluted                                $11,242,000      14,349,197     $0.78
                                           -----------     -----------     -----
</TABLE>

3. Business Combinations and Investments in Joint Ventures

Joint Ventures:

         On December 3, 1997, the Company acquired substantially all of the
assets and the business of A & G, a manufactured housing retail company
headquartered in Charleston, South Carolina. The Company paid $1.4 million in
cash and issued 94,115 shares of the Company's common stock (approximate market
value on December 3, 1997 of $869,000). The acquisition was accounted for under
the purchase method of accounting; thus the financial statements for the year
ended January 2, 1998 reflect the operations of A & G from the date of
acquisition. The total purchase price exceeded the fair value of net assets
acquired (assets of $4.9 million less liabilities of $4.6 million) by
approximately $2.0 million, which amount is being amortized over 30 years as
goodwill. The results of operations with respect to A & G were not significant
and, accordingly, no pro forma results have been provided.


                                       21
<PAGE>   22
         On July 3, 1997, the Company made an initial capital contribution of
$2.0 million to purchase a one-third interest in a manufacturing joint venture
which produces rafters used in the production of the Company's homes. The
Company's share of income from the joint venture amounted to $97,000 in 1997.

         In February 1997, the Company made an initial capital contribution of
$500,000 to Wenco 21, representing a 50% ownership interest in the joint
venture. The company's share of income from Wenco 21 in 1997 amounted to
$58,000.

         In December 1996, the Company purchased a 33% interest in a
manufacturing joint venture with other manufactured home builders for $770,000.
The joint venture manufactures cabinet doors for sale to participants in the
joint venture as well as third party customers. The Company's share of income
from this joint venture in 1997 amounted to $127,000.

         On November 21, 1996, the Company acquired BR Holding, a holding
company which operated a group of retail companies participating in the retail
sale of manufactured homes. BR Holding also operated an insurance agency, which
provided homeowner insurance for manufactured homes. The Company paid $1,075,000
in cash and issued 332,814 shares of the Company's common stock (approximate
market value on November 21, 1996 of $4,532,000). The acquisition was accounted
for under the purchase method of accounting; thus the financial statements
reflect the operations of BR Holding from the date of acquisition. The total
purchase price exceeded the fair value of net assets acquired (assets of $9.9
million less liabilities of $9.8 million) by $5,480,000, which amount is being
amortized over 30 years as goodwill. In addition, the Company entered into
four-year non-compete agreements with the former stockholders of BR Holding for
an aggregate amount of $50,000, which amount is included in the cash purchase
price noted above. The stock purchase agreement requires the Company to make
additional payments to the seller contingent on future earnings performance of
BR Holding. Any additional payments will be made 20% in cash and 80% in shares
of the Company's common stock and will be accounted for as goodwill and
amortized over the remaining recovery period of the goodwill. In fiscal 1997 an
additional payment was made in the amount of $197,000 ($49,000 in cash and
$148,000 in stock) related to this contingency. At January 2, 1998, there was no
payment obligation. The results of operations with respect to BR Holding were
not significant and, accordingly, no pro forma results have been provided.

         On November 20, 1995, the Company acquired substantially all of the
assets and assumed certain of the liabilities of Imperial Homes Corporation,
Inc. ("Imperial-PA"). This transaction was accounted for under the purchase
method of accounting. The aggregate purchase price of approximately $2.5 million
was composed of approximately $950,000 in cash and the assumption of $1.5
million in liabilities. The total purchase price exceeded the fair value of net
assets acquired by approximately $522,000, which amount was being amortized over
30 years as goodwill. In addition, the Company entered into 10-year non-compete
agreements with the former stockholders of Imperial-PA for an aggregate amount
of $150,000, which amount was included in the cash purchase price noted above.
During the second quarter of 1997, the Company decided to close this facility
(see Note 8).

4. Sale of Installment contracts:

         In August 1997, the Company sold at par installment contracts totaling
$16.7 million, along with the related servicing. The Company retained an
interest in certain of the cash flows ascribed to such loans (the "interest only
strip"). The fair value of the interest only strip was calculated using the
expected future cash flows discounted at the current market rate and considering
prepayment and default rates on the loans. The Company also retained credit
risks on the installment contracts sold and has recorded a reserve for such
estimated credit losses over the life of the loan in accordance with SFAS No.
125, Accounting for Transfer and Servicing of Financial Assets and
Extinguishment of Liabilities.

5. Income Taxes:

         The provision (benefit) for income taxes for the respective periods was
as follows:

<TABLE>
<CAPTION>
                              January 2,         January 3,        December 29,
                                    1998               1997                1995
                              ----------        -----------         -----------
<S>                           <C>               <C>                 <C>
Federal:
    Current                   $6,594,000        $ 9,294,000         $ 6,516,000
    Deferred                      11,000           (521,000)           (142,000)
                              ----------        -----------         -----------
                               6,605,000          8,773,000           6,374,000
                              ----------        -----------         -----------
State:
    Current                      485,000            801,000             496,000
    Deferred                       2,000            (39,000)            (16,000)
                              ----------        -----------         -----------
                                 487,000            762,000             480,000
                              ----------        -----------         -----------
Total provision               $7,092,000        $ 9,535,000         $ 6,854,000
                              ==========        ===========         ===========
</TABLE>

         The provision for income taxes differed from the amounts computed by
applying the federal statutory rate of 35% due to the following:

<TABLE>
<CAPTION>
                                                January 2,     January 3,     December 29,
                                                      1998           1997             1995
                                                ----------     ----------     ------------
<S>                                             <C>            <C>            <C>
Tax provision at the federal statutory rate     $6,463,000     $8,671,000     $6,334,000
State income taxes, net of federal benefit         316,000        496,000        367,000
Goodwill amortization                              127,000         58,000         57,000
</TABLE>


                                       22
<PAGE>   23
<TABLE>
<CAPTION>
                                                January 2,     January 3,     December 29,
                                                      1998           1997             1995
                                                ----------     ----------     ------------
<S>                                             <C>            <C>            <C>
Other                                              186,000        310,000         96,000
                                                ----------     ----------     ----------
                                                $7,092,000     $9,535,000     $6,854,000
                                                ==========     ==========     ==========
</TABLE>

    Temporary differences which created deferred tax assets at January 2, 1998
and January 3, 1997 are as follows:

<TABLE>
<CAPTION>
                                                     January 2,       January 3,
                                                           1998             1997
                                                     ----------       ----------
<S>                                                  <C>              <C>
Deferred income tax assets:
    Warranty accrual                                 $  720,000       $  721,000
    Workers' compensation accrual                       871,000          867,000
    Accrued expenses                                    423,000          457,000
    Inventory                                           358,000           54,000
    Other                                               313,000          252,000
                                                     ----------       ----------
                                                      2,685,000        2,351,000
                                                     ----------       ----------
Deferred income tax liabilities:
    Depreciation                                        168,000          338,000
    Goodwill amortization                               170,000          115,000
    Organization and pre-operating costs                175,000           69,000
    Other                                               356,000               --
                                                     ----------       ----------
                                                        869,000          522,000
                                                     ----------       ----------
Net deferred income tax asset                        $1,816,000       $1,829,000
                                                     ==========       ==========
</TABLE>

6. Notes Payable and Long-Term Debt:

         The Company routinely finances its inventory of homes held by its
retail centers through floor-plan notes payable with various financial
institutions. The notes normally require periodic payments of principal and
interest, and full payment when the home is sold to a customer. The weighted
average interest rate on these borrowings during 1997 and 1996 was 7.0% and
9.13%, respectively.

         The Company has a $15 million unsecured bank line of credit which is
renewable annually and bears interest at the London Interbank Offered Rate
("LIBOR") plus 1.5% (7.22% at January 2, 1998). The Company's ability to draw
upon this line of credit is dependent upon meeting certain financial ratios and
covenants. The Company had no outstanding borrowings on this line at January 2,
1998 and January 3, 1997.

         The Company's long-term debt at January 2, 1998 and January 3, 1997 is
as follows:

<TABLE>
<CAPTION>
                                                       January 2,     January 3,
                                                             1998           1997
                                                       ----------     ----------
<S>                                                    <C>            <C>
Working capital loan payable, interest at 7.22%,
 due in monthly installments of $83,333 through
 June 11, 2002, secured by real estate                 $4,500,000     $       --
Construction term loan payable, interest at 7.46%,
 secured by real estate, due February 17, 1998          1,326,000             --
Total long-term debt                                    5,826,000             --
                                                       ----------     ----------
Less amounts due within one year                        1,106,000             --
                                                       ----------     ----------
                                                       $4,720,000     $       --
                                                       ==========     ==========
</TABLE>

         The Company has received a commitment letter to refinance the $1.3
million construction term loan over 10 years with monthly principal and interest
payments of $15,474. As a result, a portion of the loan has been classified as
long term.

         The Company's term loans contain various restrictive covenants,
generally common to such loan agreements, with which the Company was in
compliance at January 2, 1998.

         The Company's long-term debt contractually matures in each of the next
five fiscal years as follows: $1,106,000 in 1998, $1,099,000 in 1999, $1,106,000
in 2000, $1,114,000 in 2001, $622,000 in 2002, and $779,000 thereafter.

7. Commitments and Contingencies:

Repurchase Agreements

         It is customary practice for companies in the manufactured housing
industry to enter into repurchase agreements with financial institutions which
provide financing to dealers. Generally, the agreements provide for the
manufacturer to repurchase manufactured homes from the financing institution in
the event of repossession upon a dealer's default. The Company's contingent
liability under such agreements was approximately $92 million as of January 2,
1998 and $91 as of January 3, 1997. Losses


                                       23
<PAGE>   24
experienced under these agreements have not been significant and, in the opinion
of management, any future losses under these agreements will not have a material
effect on the financial statements of the Company.

Interest Reimbursement

         The Company has agreements with certain dealers to reimburse them for
their interest costs incurred in connection with floor-plan financing. Interest
expense related to these agreements is classified as a selling expense in the
accompanying consolidated statements of operations. For the years ended January
2, 1998, January 3, 1997, and December 29, 1995, interest expense related to
these agreements amounted to $841,000, $735,000, and $634,000, respectively.
Employee Benefit Plans

         The Company maintains a stock option plan which authorizes a total of
907,814 shares of Company common stock for issuance to key employees and
advisors. The Company granted options to acquire 192,200, 93,909, and 138,654
shares of common stock in 1997, 1996, and 1995, respectively, at exercise prices
ranging from $6.67 to $10.125. The exercise price of each option approximated
the fair market value of the Company's common stock at the date of grant. At
January 2, 1998, options to purchase 373,748 shares were exercisable. Total
options outstanding were 490,464 at January 2, 1998 with a weighted average
remaining contractual life of 8.6 years.

         The Company also maintains a stock option plan, which authorizes a
total of 75,000 shares of Company common stock for issuance to the Company's
outside directors. In 1997 and 1996, the Company granted options to acquire
11,250 and 15,000 shares of common stock to certain outside directors at
exercise prices ranging from $11.00 to $11.625. The exercise prices of the
options approximated the fair market value of the Company's common stock at the
date of grant. At January 2, 1998, options to purchase 26,250 shares were
exercisable. Total options outstanding were 26,250 at January 2, 1998 with a
weighted average remaining contractual life of 9.1 years.

         The Company accounts for these plans under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation expense for the
Company's stock option plans for awards in 1997 and in 1996 been determined
under SFAS No. 123, Accounting for Stock-Based Compensation, based on the fair
market value of the options at the grant date, the Company's net income and
income per share would have been reduced to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
                                                  1997               1996               1995
                                        --------------     --------------     --------------
<S>                                     <C>                <C>                <C>
Net income - as reported                $   11,375,000     $   15,246,000     $   11,242,000
Net income -pro forma                   $   10,783,000     $   14,993,000     $   11,166,000
As reported - net income per share:
        Basic                           $         0.76     $         1.01     $         0.79
        Diluted                         $         0.75     $         1.00     $         0.78
Pro forma- net income per share:
        Basic                           $         0.72     $         0.99     $         0.78
        Diluted                         $         0.71     $         0.98     $         0.78
</TABLE>

         The following table summarizes the changes in the number of shares
under option pursuant to the plans described above:

<TABLE>
<CAPTION>
                                                   Weighted                   Weighted                   Weighted
                                                    Average                    Average                    Average
                                   January 2,      Exercise   January 3,      Exercise  December 29,     Exercise
                                         1998         Price         1997         Price         1995         Price
                                     --------      --------     --------      --------     --------      --------
<S>                                <C>             <C>        <C>             <C>       <C>              <C>
Outstanding at beginning of year      339,763      $   7.45      285,032      $   6.91      190,391      $   6.93
Granted                               203,450          8.14      108,909          7.58      138,654          6.89
Exercised                             (26,154)         6.93      (51,599)         6.93      (29,577)         6.93
Forfeited                                (345)         6.93       (2,579)         6.93      (14,436)         6.93
                                     --------      --------     --------      --------     --------      --------
Outstanding at end of year            516,714          7.75      339,763          7.45      285,032          6.91
                                     ========      ========     ========      ========     ========      ========
Exercisable at end of year            399,998      $   7.33      194,931      $   7.28      106,952      $   6.93
Weighted average  fair value of
 options granted                     $   4.24                   $   6.21                   $   2.82
</TABLE>

         The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997: dividend yield of 0.0%; expected volatility
of 0.39%; risk-free interest rate of 6.28%; and expected life of five years.
Vesting of the 1997 grants is 131,250 options vesting immediately and the
remainder vesting equally over three years. The 1996 and 1995 assumptions are:
dividend yield of 0.0%; expected volatility of 0.42%; risk-free interest rate of
6.09%; expected life of five years; and vesting of 100% over a two-year period.
The weighted average contractual life of the options outstanding at January 2,
1998 is nine years.

         The Company maintains employment agreements with certain employees
which renew automatically for additional one-year periods unless terminated by
either of the parties. The agreements provide for minimum base salaries and
incentive compensation (as


                                       24
<PAGE>   25
defined therein). In addition, the agreements provide for payment of up to six
months' salary and/or bonus upon certain circumstances (for example, termination
without cause or upon death).

         The Company offers a 401(k) retirement plan to employees having
completed one year of service, whereby eligible employees may contribute up to
20% of their annual compensation subject to limitations by the Internal Revenue
Service. The Company may match up to 100% of the employee contributions as
limited by the Internal Revenue Service. For the years ended January 2, 1998,
January 3, 1997, and December 29, 1995, the Company expensed $78,000, $66,000,
and $63,000, respectively, related to the plan.

Operating Leases

         The Company leases certain manufacturing facilities and retail sales
centers under operating leases. Rent expense under all leases was $1.1 million
for the year ended January 2, 1998, $404,000 for the year ended January 3, 1997,
and $150,000 for the year ended December 29, 1995. Future minimum lease payments
at January 2, 1998 are $1.5 million, $1.5 million, $1.4 million, $1.1 million,
and $277,000 for each of the next five years.

Litigation

         The Company is a defendant in a lawsuit filed on March 27, 1996 in
Fulton County Superior Court, Georgia, by EurAm International, Inc., a sales
agent for the Company. On April 29, 1996, the Company removed the case to the
United States District Court for the Northern District of Georgia in Atlanta. In
this lawsuit, the plaintiff alleges that the Company has breached an agreement
relating to the sale of the Company's modular homes in Germany, including
alleged misrepresentations and faulty performance, resulting in damages alleged
to amount to $25 million. The Company believes the claim is without merit and
intends to vigorously defend the claim but there can be no assurances as to its
likely outcome.

         In addition, the Company has been informed by Gesellschoft fur Bauen
Und Wohnen Hannover MbH ("GBH"), a German housing authority, that it has
replaced the Company with a local company to complete a contract that GBH had
entered into with the Company for the purchase and erection of modular housing
in Hannover, Germany. In connection with the contract, the Company posted a
$660,000 letter of credit in favor of GBH. In March 1997, GBH made a claim
against the Company for damages of approximately $800,000 arising from the shift
in suppliers and attempted to draw upon the letter of credit posted by the
Company. In March 1997, the Company obtained a temporary restraining order
preventing GBH from drawing upon the letter of credit. In February 1998, the
Alabama Supreme Court issued an opinion allowing GBH to draw on the letter of
credit. GBH promptly drew on the Company's letter of credit in the amount of
$580,000. In the opinion of management, after consultation with legal counsel,
there is no other material exposure with regard to GBH.

         The Company is a party to various other legal proceedings incidental to
its business. The majority of these legal proceedings relate to employment
matters or product warranty liability claims for which management believes
adequate reserves are maintained. In the opinion of management, after
consultation with legal counsel, the ultimate liability, if any, with respect to
these proceedings will not materially affect the financial position or results
of operations of the Company; however, the ultimate resolution of these matters,
which could occur within one year, could result in losses in excess of the
amounts reserved.

8. Non-Recurring Charge:

         During the second quarter of 1997, the Company recorded a $2.1 million
pre-tax ($1.3 million after-tax) non-recurring charge in connection with its
decision to close its manufactured housing facility located in Pennsylvania. The
decision was based primarily on changes in local market conditions and operating
results of the facility. During the fiscal years ended January 2, 1998 and
January 3, 1997, this facility generated 1.0% and 3.3%, respectively, of the
total revenues of the Company. The impact of this facility on the operating
income of the Company was immaterial during the fiscal years ended January 2,
1998 and January 3, 1997. The asset impairment losses consist of the write-off
of goodwill ($505,000), the write-off of non-compete agreements ($134,000), and
the write-off of certain other operating assets ($632,000), and plant closing
costs consisting primarily of lease obligations ($400,000), warranty reserves
($260,000), and severance pay ($141,000).

9. Related Party Transactions:

         The Company had sales to a development company affiliated with certain
stockholders who were also executive officers of the Company during the years
ended January 2, 1998, January 3, 1997, and December 29, 1995, which amounted to
$250,000, $691,000, and $1.4 million, respectively. Transactions with the
development company have been at prices and on terms no less favorable to the
Company than with third parties.

10. Stockholders' equity:

         In fiscal 1997, the Company's Board of Directors voted to increase the
number of authorized shares of common stock to be issued from 20 million shares
to 40 million shares. On June 4, 1996, the Board of Directors of the Company
voted to approve a 3-for-2 stock split of the Company's common stock, payable in
the form of a 50% stock dividend on July 3, 1996 to stockholders of record on
June 19, 1996. The stock split resulted in one additional share of common stock
being issued for each two shares of common stock issued and outstanding on the
record date. The par value of the common stock remained unchanged at $.0001 per
share. Cash was paid in lieu of issuing fractional shares. All share and per
share amounts have been retroactively restated to reflect this split.


                                       25
<PAGE>   26
11. Pending Accounting Pronouncements:

         In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and display of comprehensive
income which is the total of net income and all other non-owner changes in
stockholders' equity, and its components. The Company will adopt the standard in
1998.

         In June 1997, the FASB also issued SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, which requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments and report a measure of segment profit or loss,
certain specific revenue and expense items, and segment assets. This statement
also requires that a public business enterprise report descriptive information
about the way that the operating segments were determined, the products and
services provided by the operating segments, differences between the
measurements used in reporting segment information and those used in the
enterprise's general purpose financial statements, and changes in the
measurement of segment amounts from period to period. The Company will adopt the
standard in 1998.

12. Summary of Unaudited Quarterly Financial Data:

         Unaudited quarterly financial information is as follows:

<TABLE>
<CAPTION>
                                                                     Quarter Ended                             Year Ended
                                              -----------------------------------------------------------     ------------
                                                 April 4,         July 4,      October 3,      January 2,       January 2,
                                                     1997            1997            1997            1998             1998
                                              -----------     -----------     -----------     -----------     ------------
<S>                                           <C>             <C>             <C>             <C>             <C>
Net revenues                                  $80,116,000     $76,879,000     $76,327,000     $65,211,000     $298,533,000
Gross profit                                   12,498,000      11,126,000      11,564,000       8,865,000       44,053,000
Provision for income taxes                      2,315,000       1,202,000       2,234,000       1,341,000        7,092,000
Net income                                      3,783,000       1,837,000       3,606,000       2,149,000       11,375,000
Net income per share:
    Basic                                     $      0.25     $      0.12     $      0.25     $      0.15     $       0.76
    Diluted                                   $      0.24     $      0.12     $      0.24     $      0.15     $       0.75
Weighted average number of common shares:
    Basic                                      15,437,801      15,352,116      14,693,233      14,529,958       15,002,006
    Diluted                                    15,567,433      15,438,783      14,822,184      14,611,507       15,129,530
</TABLE>

<TABLE>
<CAPTION>
                                                                   Quarter Ended                           Year Ended
                                              -------------------------------------------------------     -----------
                                               March 29,       June 28,   September 29,    January 3,      January 3,
                                                    1996           1996           1996           1997            1997
                                              ----------     ----------     ----------     ----------     -----------
<S>                                           <C>            <C>          <C>              <C>            <C>
Net revenues                                  71,111,000     83,921,000     77,414,000     74,398,000     306,844,000
Gross Profit                                   9,348,000     12,603,000     10,924,000     10,772,000      43,647,000
Provision for income taxes                     2,067,000      2,761,000      2,509,000      2,198,000       9,535,000
Net income                                     3,297,000      4,418,000      4,017,000      3,514,000      15,246,000
Net income per share:
        Basic                                 $     0.22     $     0.29     $     0.27     $     0.23     $      1.01
        Diluted                               $     0.22     $     0.29     $     0.26     $     0.23     $      1.00
Weighted average number of common shares:
        Basic                                 15,053,413     15,071,239     15,101,706     15,253,940      15,122,578
        Diluted                               15,215,299     15,260,681     15,263,554     15,411,957      15,260,484
</TABLE>

13. Business Segment Information:

         The Company's operations by industry segment are presented in the table
below:

<TABLE>
<CAPTION>
                                                Year Ended
                                January 2,        January 3,       December 29,
                                      1998              1997               1995
                              ------------     -------------      -------------
<S>                           <C>              <C>                <C>
Net revenues:
    Manufactured housing      $296,360,000     $ 304,865,000      $ 241,238,000
    Retail financing             2,173,000         1,979,000             30,000
                              ------------     -------------      -------------
                              $298,533,000     $ 306,844,000      $ 241,268,000
                              ============     =============      =============
Operating income:
    Manufactured housing      $ 18,219,000     $  24,909,000      $  17,468,000
    Retail financing             1,190,000          (590,000)           (37,000)
                              ------------     -------------      -------------
                              $ 19,409,000     $  24,319,000      $  17,431,000
                              ============     =============      =============
Identifiable assets:
    Manufactured housing      $110,746,000     $  85,023,000      $  75,153,000
    Retail financing            12,507,000        27,635,000            746,000
                              ------------     -------------      -------------
                              $123,253,000     $ 112,658,000      $  75,899,000
                              ============     =============      =============
</TABLE>


                                       26
<PAGE>   27
Report of Independent Public Accountants
Southern Energy Homes, Inc. and subsidiaries

To Southern Energy Homes, Inc.:

         We have audited the accompanying consolidated balance sheets of
Southern Energy Homes, Inc. (a Delaware Corporation) and Subsidiaries as of
January 2, 1998 and January 3, 1997 and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years ended
January 2, 1998, January 3, 1997 and December 29, 1995. 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Southern Energy Homes, Inc. and Subsidiaries as of January 2, 1998 and January
3, 1997 and the results of their operations and their cash flows for each of the
years ended January 2, 1998, January 3, 1997 and December 29, 1995, in
conformity with generally accepted accounting principles.

Birmingham, Alabama
February 14, 1998

ARTHUR ANDERSEN LLP

Statement of Management's Responsibility
Southern Energy Homes, Inc. and subsidiaries

         The financial statements and related information herein were prepared
by the Company and were based on generally accepted accounting principles,
appropriate in the circumstances to reflect in all material respects the
consolidated financial position of the Company as of January 2, 1998 and January
3, 1997, and the consolidated results of operations and cash flows for the years
ended January 2, 1998, January 3, 1997, and December 29, 1995. The financial
information presented elsewhere in this report has been prepared in a manner
consistent with the financial statement disclosures.

         Management is responsible for the reliability and integrity of these
statements. In meeting this responsibility, management maintains an accounting
system and related internal controls to provide reasonable assurance that the
financial records are reliable for preparing financial statements and
maintaining accountability for assets. The Company's systems and controls are
also designed to provide reasonable assurance that assets are safeguarded and
those transactions are executed in accordance with management's authorizations
and recorded properly.

         The Board of Directors has appointed an Audit Committee that meets
periodically with management and the independent public accountants.

         Arthur Andersen LLP has audited the consolidated financial statements
in accordance with generally accepted auditing standards and their report
appears herein.


                                       27
<PAGE>   28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

         None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

         Information concerning the Company's directors and executive officers
required by this Item is incorporated by reference to the text appearing under
Part I, Item 1 -- Business under the caption "Executive Officers". Information
regarding compliance with Section 16(a) of the securities Exchange Act of 1934
is incorporated by reference from the Company's Definitive Proxy Statement for
the Annual Meeting of Stockholders to be held June 4, 1997.

ITEM 11. EXECUTIVE COMPENSATION

         Information required by this Item is incorporated by reference from the
Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on June 4, 1997.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information required by this Item is incorporated by reference from the
Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on June 4, 1997.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information required by this Item is incorporated by reference from the
Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to
be held on June 4, 1997.

                                     PART IV

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

(a)      The following documents are filed as part of this report:

         (1)      Financial Statements

         Consolidated Balance Sheets as of January 2, 1998 and January 3, 1997.

         Consolidated Statements of Operations for each of the fiscal years
         ended January 2, 1998, January 3, 1997 and December 29, 1995.

         Consolidated Statements of Stockholders' Equity for each of the fiscal
         years ended January 2, 1998, January 3, 1997 and December 29, 1995.

         Consolidated Statements of Cash Flows for each of the fiscal years
         ended January 2, 1998, January 3, 1997 and December 29, 1995.

         Notes to Consolidated Financial Statements

         Report of Independent Public Accountants

         Statement of Management's Responsibility

         (2)      Financial Statement Schedules

         No financial statement schedules are included since the information is
         not applicable, not required, or is included in the financial
         statements or notes thereto.

         (3)      Listing of Exhibits

         The following exhibits are hereby incorporated by reference:

         2.1      Asset Purchase Agreement, dated as of July 31, 1994, by and
                  among the Registrant, Imperial Manufactured Homes of N.C.,
                  Inc. ("Imperial") and the stockholders of Imperial. (Filed as
                  Exhibit 2.1 to the Current Report on Form 8-K dated August 14,
                  1994, File No. 0-21204.)

         2.2      Real Estate Purchase Agreement, dated as of July 31, 1994,
                  between Imperial N.C. Associates and


                                       28
<PAGE>   29
                  Lawyer's Title of North Carolina, Inc. and Assignment of such
                  Agreement to Southern Energy Homes of North Carolina, Inc.
                  (Filed as Exhibit 2.2 to the Current Report on Form 8-K dated
                  August 14, 1994, File No. 0-21204.)

         3.1      Certificate of Incorporation of the Company. (Filed as Exhibit
                  3.1 to the Registration Statement on Form S-1, Registration
                  No. 33-57420.)

         3.2      By-Laws of the Company. (Filed as Exhibit 3.2 to the
                  Registration Statement on Form S-1, Registration No.
                  33-57420.)

         4.1      Specimen of Stock Certificate. (Filed as Exhibit 4.1 to the
                  Registration Statement on Form S-1, Registration No.
                  33-57420.)

         4.7      Southern Development Council, Inc. Promissory Note. (Filed as
                  Exhibit 4.10 to the Registration Statement on form S-1,
                  Registration No. 33-57420.)

         4.8      Stockholders' Agreement, dated as of June 8, 1989. (Filed as
                  Exhibit 4.12 to the Registration Statement on Form S-1,
                  Registration No. 33-57420.)

         4.9      Form of First Amendment to Stockholders' Agreement, dated as
                  of January 13, 1993. (Filed as Exhibit 4.13 to the
                  Registration Statement on Form S-1, Registration No.
                  33-57420.)

         *10.1    Employment Agreement with Wendell L. Batchelor, dated as of
                  June 8, 1989. (Filed as Exhibit 10.1 to the Registration
                  Statement on Form S-1, Registration No. 33-57420.)

         *10.2    Employment Agreement with Keith Brown, dated June 8, 1989.
                  (Filed as Exhibit 10.2 to the Registration Statement on Form
                  S-1, Registration No. 33-57420.)

         *10.3    Employment Agreement with Johnny R. Long, dated June 8, 1989.
                  (Filed as Exhibit 10.3 to the Registration Statement on Form
                  S-1, Registration No. 33-57420.)

         *10.4    Southern Energy Homes, Inc. 1993 Stock Option Plan. (Filed as
                  Exhibit 10.4 to the Registration Statement on Form S-1,
                  Registration No. 33-57420.)

         *10.5    Form of Southern Energy Homes, Inc. 401(k) Retirement Plan.
                  (Filed as Exhibit 10.5 to the Registration Statement on Form
                  S-1, Registration No. 33-57420.)

         *10.6    Management Agreement, effective as of June 8, 1989, by and
                  between Lee Capital Holdings and Southern Energy Homes, Inc.
                  (Filed as Exhibit 10.14 to the Registration Statement on Form
                  S-1, Registration No. 33-57420.)

         10.7     Southern Development Council, Inc. Loan Commitment Agreement.
                  (Filed as Exhibit 10.15 to the Registration Statement on Form
                  S-1, Registration No. 33-57420.)

         10.8     Lease Agreement by and between Hillard Brannon and Southern
                  Energy Homes, Inc., dated July 30, 1992. (Filed as Exhibit
                  10.16 to the Registration Statement on Form S-1, Registration
                  No. 33-57420.)

         10.9     Lease Agreement by and between Hillard Brannon and Southern
                  Energy Homes, Inc., dated November 16, 1989. (Filed as Exhibit
                  10.17 to the Registration Statement on Form S-1, Registration
                  No. 33-57420.)

         10.10    Lease Agreement by and between Robert Lowell Burdick, Nina
                  Burdick Vono, Carolyn Burdick Hunsaker, Jean Burdick Hall,
                  Mildred Burdick Marmont and Lane Burdick Adams, as Landlord,
                  and Southern Energy Homes, Inc. dated as of November 20, 1985,
                  as amended. (Filed as Exhibit 10.23 to the Registration
                  Statement on Form S-1, Registration No. 33-57420.)

         10.11    Agreement and Plan of Merger of Southern Energy Homes, Inc., a
                  Delaware corporation, and Southern Energy Homes, Inc., an
                  Alabama corporation, dated as of January 15, 1993. (Filed as
                  Exhibit 10.25 to the Registration Statement on Form S-1,
                  Registration No. 33-57420.)

         10.12    Certificate of Merger Merging Southern Energy Homes, Inc., an
                  Alabama corporation, with and into Southern Energy Homes,
                  Inc., a Delaware corporation, dated as of January 19, 1993.
                  (Filed as Exhibit 10.26 to the Registration Statement on Form
                  S-1, Registration No. 33-57420.)

         10.13    Assignment of Lease and Rights dated June 29, 1993 between
                  B.B.H.L.P. Partnership and Southern energy Homes, Inc. (Filed
                  as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
                  quarter ended July 2, 1993, File No. 0-21204.)

         10.14    Lease Agreement dated as of June 1, 1984 between The
                  Industrial Development Board of the Town of Addison, Alabama
                  and B.B.H.L.P. Partnership. (Filed as Exhibit 10.2 to the
                  Quarterly Report on form 10-Q for the quarter ended July 2,
                  1993, File No. 0-21204.)

         10.15    Assignment of Lease and Rights dated June 19, 1993 between
                  B.B.H.L.P. and Southern Energy Homes, Inc. (Filed as Exhibit
                  10.3 to the Quarterly Report on Form 10-Q for the quarter
                  ended July 2, 1993, File No. 2-21204.)

         10.16    Lease Agreement dated as of December 1, 1986 between The
                  Industrial Development Board of the Town of Addison, Alabama
                  and B.B.H.L.P. Partnership. (Filed as Exhibit 10.4 to the
                  Quarterly Report on Form 10-Q for the quarter ended July 2,
                  1993, File No. 0-21204.)

         10.17    Letter Agreement dated May 18, 1993 and Master Note dated May
                  19, 1993 between the Company and AmSouth Bank, N.A. (Filed as
                  Exhibit 10.27 to the Registration Statement on Form


                                       29
<PAGE>   30
                  S-1, Registration No. 33-68954.)

         10.18    Deed of Real Estate dated August 5, 1993 relating to the
                  Company's Plant No. 2 in Addison, Alabama. (Filed as Exhibit
                  10.27 to the Registration Statement on Form S-1, Registration
                  No. 33-68954.)

         10.19    Deed of Real Estate dated July 30, 1993 relating to the
                  Company's manufacturing facility in Fort Worth, Texas. (Filed
                  as Exhibit 10.27 to the Registration Statement on Form S-1,
                  Registration No. 33-68954.)

         *10.20   Southern Energy Homes, Inc. 1996 Option Plan for Non-employee
                  Directors. (Filed as Exhibit 10.20 th the Company's Annual
                  Report of Form 10-K for the year ended December 29, 1995.)

         10.21    Agreement and Plan of Reorganization of Southern Energy Homes,
                  Inc., a Delaware Corporation, and SE Management, Inc., an
                  Alabama Corporation, dated November 22, 1996.

         *10.22   Amended and Restated Employment Agreement with Wendell L.
                  Batchelor, dated as of June 14, 1996.

         *10.23   Amended and Restated Employment Agreement with Keith W. Brown,
                  dated as of June 14, 1996.

         10.24    Asset Purchase Agreement, dated as of December 3, 1997, by and
                  among the Registrant, A&G, Inc. and the sole stockholder of
                  A&G, Inc.

         21       List of Subsidiaries of the Registrant.

         23       Consent of Arthur Andersen LLP.

         27       Financial Data Schedule.

*        Management contract or compensatory plan or arrangement.

(b) The Company did not file a current report on form 8-K during the 4th Quarter
of fiscal 1997.


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<PAGE>   31
                                   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.

                                             SOUTHERN ENERGY HOMES, INC.
                                             Registrant

                                             By:/S/ Wendell L. Batchelor
                                                ------------------------
                                                Wendell L. Batchelor
                                                Chairman, President
                                                and Chief Executive Officer

Date:  March 25, 1998

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

SIGNATURE                           TITLE                               DATE

/S/ Wendell L. Batchelor            Chairman, President,          March 25, 1998
-----------------------             Chief Executive Officer
Wendell L. Batchelor                and Director

/S/ Johnny R. Long                  Executive Vice President      March 25, 1998
-----------------------             and Director
Johnny R. Long

/S/ Keith W. Brown                  Executive Vice President,     March 25, 1998
-----------------------             Chief Financial Officer,
Keith W. Brown                      Treasurer, Secretary
                                    and Director

/S/ Keith O. Holdbrooks             Executive Vice President      March 25, 1998
-----------------------             and Chief Operating Officer
Keith O. Holdbrooks

/S/ Paul J. Evanson                 Director                      March 25, 1998
-----------------------
Paul J. Evanson

/S/ Joseph J. Incandela             Director                      March 25, 1998
-----------------------
Joseph J. Incandela

/S/ Jonathan O. Lee                 Director                      March 25, 1998
-----------------------
Jonathan O. Lee


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