SecProbe.io

<DOCUMENT>
<TYPE>CORRESP
<SEQUENCE>1
<FILENAME>filename1.txt
<TEXT>
October 14, 2005

Securities and Exchange Commission
100 F Street NE
Mail Stop 7010
Washington, DC 20549-7010
Attn: Nili Shah

                  RE:      Cavalier Homes, Inc.
                           Form 10-K for Fiscal Year Ended December 31, 2004
                           Filed March 31, 2005
                           Form 10-K/A for Fiscal Year Ended December 31, 2004
                           Filed May 2, 2005
                           Form 10-Q for Quarter Ended April 2, 2005
                           Filed May 12, 2005
                           Form 10-Q for Quarter Ended July 2, 2005
                           Filed August 11, 2005
                           File No. 1-9792

Ladies and Gentlemen:

         We have received comments via facsimile from the staff of the
Securities and Exchange Commission (the "Commission") on August 31, 2005,
relating to the above-referenced filings of Cavalier Homes, Inc. ("Cavalier" or
the "Company"). The following paragraphs set forth our response to the numbered
items in the Commission's letter.

Form 10-K for the Fiscal Year Ended December 31, 2004
-----------------------------------------------------
1.  Summary of Significant Accounting Policies
----------------------------------------------
Revenue Recognition
-------------------
1. We note the Commission's comment to clarify statements in the Company's
Management's Discussion and Analysis under the heading of gross profit regarding
"costs" associated with recognizing dealer incentives. Estimated sales
incentives, including rebates, payable to the Company's independent retailers
are accrued at the time of sale and are recorded as a reduction of revenue. In
future filings, Cavalier will refer to special incentive programs as reductions

<PAGE>

in revenue rather than as costs to make it clear that the financial statement
impact of special incentives is to reduce revenue. Further, Cavalier will set
forth in future filings the details of and amounts related to any significant
special incentive programs. For the year-to-date period ending July 2, 2005, the
Company recorded a total reduction in revenue for estimated sales incentives of
$11,925,000, including $883,000 for a special dealer incentive program offered
for a limited time.

Recently Issued Accounting Pronouncements
-----------------------------------------
2. We note the Commission's question regarding the Company's adoption of the
provisions of FIN 45 on January 1, 2005. Cavalier's 2003 and 2004 analysis of
the potential impact of adopting FIN 45 involved comparing the Company's
recorded reserve, which was developed based on guidance in SFAS No. 5, to an
estimated reserve comprised of both a FIN 45 fair value component and a SFAS No.
5 contingency component. As a result of this analysis for the year ended
December 31, 2004, the Company recorded a positive income adjustment of $398,000
eliminating any net income impact pertaining to the delayed adoption of FIN 45.
The impact of not adopting FIN 45 in 2004 was approximately $1,113,000,
representing 0.5% of revenue and 2.9% of selling, general and administrative
expenses, which the Company believes is quantitatively and qualitatively
immaterial. The impact to revenue of adopting FIN 45 on January 1, 2005 was a
reduction in revenue for the period ending April 2, 2005 of $639,000 and a net
reduction in revenue for the period ending July, 2005 of $335,000. The $335,000
is comprised of a reduction in revenue of $664,000 and an increase of $329,000
resulting from reversal of the FIN 45 liability for homes that were shipped
subsequent to January 1, 2005 and sold to the retail customer thereby
eliminating the Company's repurchase commitment.

The Company's analysis of the impact of implementing FIN 45 for 2003, which was
calculated as of December 31, 2003, a date subsequent to the inception of the
commitment for repurchase liability, indicated that the recorded SFAS No. 5
reserve was more than sufficient to cover the estimates for the FIN 45 fair
value component and SFAS No. 5 contingency component of the repurchase
liability. If the Company had adopted FIN 45 in 2003, Cavalier would have
recorded a positive income adjustment of approximately $315,000.

The Company's quantitative analysis of the impact of implementing FIN 45 for the
year ended December 31, 2003, resulting in its conclusion that such impact was
not material to consolidated revenue and net income (loss), is as follows:
<TABLE>
<CAPTION>
<S>                             <C>             <C>                     <C>             <C>

                                             Selling, general                       Income (Loss)
                                Revenue     and administrative       Net Income  Per Share - Basic
                                                 expense               (Loss)      and diluted
           2003
As reported                  $ 247,836,000      $ 43,171,000       $ (4,570,000)      $ (0.26)
Estimted impact of FIN 45    $  (1,120,000)     $ (1,435,000)      $    315,000       $  0.02
                           -----------------------------------------------------------------------
After impact of FIN 45       $ 246,716,000      $ 41,736,000       $ (4,255,000)      $ (0.24)
                           =======================================================================
</TABLE>
<PAGE>
The Company also reviewed qualitative aspects of the impact of not adopting FIN
45 in 2003 and 2004 and concluded such impact was qualitatively immaterial.
Cavalier's qualitative assessment included consideration of the following:

        o The adjustments would not significantly change revenue or earnings
          trends.
        o If recorded, the adjustments would not result in a violation of debt
          covenants.
        o The adjustments were not deemed to be pervasive to the financial
          statements.

The Company estimates the fair value of its manufacturer's inventory repurchase
agreements under the provisions of FIN 45 at inception (the date a home is
shipped to dealers whose floor plan financing includes Cavalier's repurchase
commitment). The Company records the fair value of the repurchase commitment as
a reduction in revenue. The fair value of the inventory repurchase agreement has
been estimated on a "pooled dealer" approach based on the creditworthiness of
the independent dealers, as determined by the floor plan institution, and is
derived using an income approach. Specifically, the fair value of the
inventory repurchase agreement is determined by calculating the net
present value of the difference in (a) the interest cost to carry the inventory
over the maximum repurchase liability period at the prevailing floor plan note
interest rate and (b) the interest cost to carry the inventory over the maximum
repurchase liability period at the interest rate of a similar type loan without
a manufacturer's repurchase agreement in force. If dealer inventory is sold to a
retail customer or the repurchase commitment period expires, then the FIN 45
liability is reversed and revenue is increased. The Company believes it is
appropriate to increase revenue at the time the repurchase commitment period
expires as the commitment is directly related to the sale of Cavalier's product.
If it becomes probable that a dealer will default and a SFAS No. 5 loss reserve
should be recorded, then such contingent liability is recorded equal to the
estimated loss on repurchase.

3. Installment Contracts Receivable
-----------------------------------
3. We note the Commission's request for additional information with respect to
the sale of loans to other financial institutions with limited recourse
provisions. In future filings, we will disclose both the nature and extent of
these obligations. Since the time frame of the recourse provision is limited to
loans 90 days delinquent on any of the first four payments and the Company has
never been obligated to repurchase loans under the limited recourse provisions
of these contracts, the Company believes the estimated fair value of the
recourse liability would be virtually zero for both recording and disclosure
purposes.

10. Commitments and Contingencies
---------------------------------
4. We note the Commission's request for information on the Company's
consideration of FIN 46R 4.h (3). The Company expects to complete its response
to this comment by November 1, 2005, and will forward such response to the
Commission as soon as available.

5. We note the Commission's request for information on the Company's
consideration of FIN 46R 4.h (2). The Company expects to complete its response
to this comment by November 1, 2005, and will forward such response to the
Commission as soon as available.
<PAGE>

6. We note the Commission's additional question regarding Cavalier's exposure to
loss under legal proceedings. We confirm that the Company believes the
reasonably possible loss in excess of accrual is immaterial. The Company records
estimated losses and probable insurance recoveries on a gross basis. Any
insurance recoveries to be included in the Company's balance sheet would be
recorded in accordance with the provisions of SFAS No. 5 paragraph 17; however,
for the periods ended December 31, 2004 and 2003 and July 2, 2005, the Company
did not have any insurance recoveries recorded in its balance sheet. The loss
contingencies recorded were as follows: $296,000 (2004), $340,000(2003) and $0
(2005).

Form 10-Q for the Fiscal Quarter Ended July 2, 2005
---------------------------------------------------
8.  Commitments and Contingencies
---------------------------------
7. We note the Commission's question regarding the Company's reversal of
$1,157,000 of its provision for losses on inventory repurchases for the six
months ended July 2, 2005. During the six months ended July 2, 2005, our total
repurchase liability (including a SFAS No. 5 loss contingency and a FIN 45 fair
value of repurchase commitment) decreased by approximately $262,000. The
$1,157,000 reversal of the provision for losses on inventory repurchases, which
was recorded as a reduction in selling, general and administrative expenses, is
attributable primarily to (1) a reduction in the level of inventory subject to
repurchase held by specifically identified dealers for which default is deemed
probable; and (2) the retail sale of inventory subject to repurchase that was
shipped to independent dealers prior to January 1, 2005. As noted above in our
response to the Commission's comment 2., with the Company's adoption of FIN 45
as of January 1, 2005, the estimated fair value of the repurchase commitment is
recorded as a reduction in revenue at the time inventory is shipped. Also, as
inventory that was shipped subsequent to January 1, 2005 is sold to the retail
customer, the FIN 45 liability is reversed as an increase to revenue. The net
increase in the FIN 45 liability and net reduction in revenue for the six months
ended July 2, 2005 totaled $974,000.

Cavalier hereby acknowledges the following:

        o Cavalier is responsible for the adequacy and accuracy of the
          disclosure in its filings;
        o Staff comments or changes to disclosure in response to staff comments
          in Company filings reviewed by the staff do not foreclose the
          Commission from taking any action with respect to such filings; and
        o Cavalier may not assert staff comments as a defense in any proceeding
          initiated by the Commission or any person under the federal
          securities laws of the United States.

If you have any questions or require any further information with respect to the
Cavalier's filings, please telephone either myself at (256) 747-9831 or David
Roberson at (256) 747-9838.
<PAGE>

                                   Sincerely,

                                                     /s/ Michael R. Murphy
                                                     ---------------------
                                                     Michael R. Murphy
                                                     Chief Financial Officer

cc:      David Roberson
         June Martin
         Paul S. Ware, Esq.
         Laura P. Washburn, Esq.
         Brian Barksdale
         Elton Sims
         Lori Snodgrass
         Bobby Tesney, Audit Committee, Chairman
         A. Douglas Jumper, Sr., Audit Committee
         J. Don Williams, Audit Committee
</TEXT>
</DOCUMENT>