UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1998

                         Commission file number 0-14938

                         STANLEY FURNITURE COMPANY, INC.
             (Exact name of Registrant as specified in its Charter)

                               Delaware 54-1272589
                (State or other jurisdiction of (I.R.S. Employer
              incorporation or organization) Identification Number)

                  1641 Fairystone Park Highway, Stanleytown, VA
                 24168 (Address of principal executive offices,
                                Zip Code)

Registrant's  telephone number,  including area code: (540) 627-2000  Securities
registered  pursuant to Section  12(b) of the Act:  None  Securities  registered
pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.02 per share
                                (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 (Section 229.405 of this chapter) 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.[ ]

Aggregate market value of the voting stock held by  non-affiliates  of the 
Registrant based on the closing price on January 21, 1999:  $142 million

Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of January 29, 1999:

Common Stock, par value $.02 per share                         7,069,715
    (Class of Common Stock)                                Number of Shares

Documents  incorporated  by  reference:   Portions  of  the  Registrant's  Proxy
Statement for its Annual  Meeting of  Stockholders  scheduled for April 29, 1999
are incorporated by reference into Part III.







<PAGE>

                                TABLE OF CONTENTS


Part I                                                                      Page


      Item 1   Business...............................................        3
      Item 2   Properties.............................................        6
      Item 3   Legal Proceedings......................................        6
      Item 4   Submission of Matters to a Vote of Security Holders....        6



Part II


      Item 5   Market for Registrant's Common Equity and Related Stockholder
               Matters................................................        8
      Item 6   Selected Financial Data................................        9
      Item 7   Management's Discussion and Analysis of Financial Condition and
               Results of Operations..................................       10
      Item 8   Financial Statements and Supplementary Data............       13
      Item 9   Changes in and Disagreements with Accountants on Accounting and
               Financial Disclosure...................................       13



Part III


      Items 10 through 13.............................................       13



Part IV


      Item 14  Exhibits, Financial Statement Schedule and Reports
               on Form 8-K............................................       13

      Signatures  ....................................................       17

      Index to Financial Statements and Schedule......................      F-1


<PAGE>


                         Stanley Furniture Company, Inc.

                                     PART I

Item 1.     Business

General

      The Company is a leading  designer and  manufacturer  of residential  wood
furniture  exclusively  targeted at the  upper-medium  price range.  The Company
offers  diversified  product lines across all major style and product categories
within this price range.  Its product depth and extensive style  selections make
the Company a complete wood furniture  resource for retailers in its price range
and allow the Company to respond more quickly to shifting consumer  preferences.
The  Company  has  established  a  broad  distribution   network  that  includes
independent  furniture  stores,  department  stores,  and  national and regional
furniture  chains.  To produce its products  and support its broad  distribution
network,  the  Company  has  developed  efficient  and  flexible   manufacturing
processes  that it believes are unique in the  furniture  industry.  The Company
emphasizes continuous improvement in its manufacturing processes to enable it to
continue  providing  competitive  advantages  to its  customers,  such as  quick
delivery, reduced inventory investment, high quality, and value.

Products and Styles

      The Company's product lines cover all major design categories, and include
bedroom,  dining room,  youth  bedroom  (Young  AmericaTM),  living room tables,
entertainment  centers and home office.  The Company believes that the diversity
of its product lines enables it to  anticipate  and respond  quickly to changing
consumer  preferences and provides  retailers a complete wood furniture resource
in the upper-medium  price range. The Company intends to continue  expanding its
product styles with  particular  emphasis on home office and youth bedroom.  The
Company believes that its products represent good value and that the quality and
style of its furniture compare favorably with more premium-priced products.

      The  Company  provides  products  in a  variety  of  woods,  veneers,  and
finishes. The number of styles by product line currently marketed by the Company
is set forth in the following table:

                                Number of Styles
                                ----------------

       Bedroom..........................................................     26
       Dining room......................................................     19
       Youth bedroom (Young America(TM))................................     19
       Occasional:
           Living room tables...........................................     16
           Entertainment centers........................................     10
           Home office..................................................      6

     These  product lines cover all major design categories  including European
traditional, contemporary/transitional, American traditional, and country/casual
designs.

     The Company phased out of its upholstered  product line during 1998,  which
represented approximately two percent of sales in 1998.

     The  Company  designs and develops new product styles each year to replace
discontinued  items or styles and,  if desired,  to expand  product  lines.  The
Company's  product design process  begins with marketing  personnel  identifying
customer needs and  conceptualizing  product ideas, which generally consist of a
group of related furniture  pieces. A variety of sketches are produced,  usually
by Company  designers,  from which  prototype  furniture  pieces are built.  The
Company's  engineering   department  then  prepares  the  prototype  for  actual
full-scale production.  The Company consults with its marketing personnel, sales
representatives,  and selected customers  throughout this process and introduces
its new product styles at the fall and spring international furniture markets.

Distribution

     The Company has developed a broad domestic and international customer base
and  sells  its   furniture   through   approximately   70   independent   sales
representatives  to  independent  furniture  retailers and national and regional
chain stores.  Representative  customers  include Sears Homelife,  J.C.  Penney,
Rhodes, Rooms To Go, Baer's, Breuners Home Furnishings,  Robb & Stucky, Nebraska
Furniture Mart,  Furnitureland South,  Jordan's and Wickes. The Company believes
this broad network reduces its exposure to regional recessions, and allows it to
capitalize on emerging  channels of  distribution.  The Company offers  tailored
marketing programs to address each channel of distribution.

     The  general marketing  practice followed in the furniture  industry is to
exhibit products at international and regional furniture markets.  In the spring
and fall of each year, a nine-day  furniture market is held in High Point, North
Carolina,  which is attended  by most buyers and is regarded by the  industry as
the international market. The Company utilizes  approximately 60,000 square feet
of showroom  space at the High Point market to introduce new products,  increase
sales of its existing products, and test ideas for future products.

     The   Company  has  sold  to  over  3,500   customers   during  1998,  and
approximately 6% of the Company's sales in 1998 were to international customers.
No single customer accounted for more than ten percent of the Company's sales in
1998.  No material  part of the  Company's  business is dependent  upon a single
customer,  the loss of which would have a material effect on the business of the
Company.  The loss of  several of the  Company's  major  customers  could have a
material impact on the business of the Company.

Manufacturing

     The  Company's   manufacturing   operations  complement  its  product  and
distribution  strategy  by  emphasizing  continuous  improvement  in quality and
customer  responsiveness  while  reducing  costs.  The  Company's  manufacturing
processes produce smaller,  more frequent and  cost-effective  runs. The Company
focuses on identifying  and  eliminating  manufacturing  bottlenecks  and waste,
employing  statistical  process  control and, in turn,  adjusting  manufacturing
schedules on a daily basis,  using cellular  manufacturing  in the production of
components,  and  improving its  relationships  with  suppliers by  establishing
primary  supplier  relationships.  In addition,  a key element of the  Company's
manufacturing  processes  is to  involve  all  Company  personnel,  from  hourly
associates to management,  in the improvement of the manufacturing  processes by
encouraging   and  responding  to  ideas  to  improve   quality  and  to  reduce
manufacturing lead times.

     The  Company  operates  manufacturing  facilities  in North  Carolina  and
Virginia  consisting of an aggregate of more than three million square feet. The
Company  considers its present  equipment to be generally  modern,  adequate and
well maintained.

     The Company  schedules  production of its various styles based upon actual
and anticipated orders. The Company's  manufacturing processes enable it to fill
orders through  manufacturing  rather than inventory.  As a result,  the Company
shipped  customer  orders  within 22 days on average  during  1998 with  average
finished goods  inventory  turns of 7.8. Since the Company ships customer orders
on  average  in about  three  weeks,  management  believes  that the size of its
backlog is not necessarily indicative of its long-term operations. The Company's
backlog of  unshipped  orders was $36.6  million at December  31, 1998 and $34.9
million at December 31, 1997.



Raw Materials

     The  principal materials used by the Company in manufacturing its products
include lumber,  veneers,  plywood,  particle board,  hardware,  glue, finishing
materials,  glass products,  laminates,  fabrics and metals.  The Company uses a
variety of species of lumber,  including cherry, oak, ash, poplar,  pine, maple,
and mahogany.  The Company's five largest suppliers  accounted for approximately
17% of its  purchases in 1998.  The Company  believes that its sources of supply
for  these  materials  are  adequate  and  that it is not  dependent  on any one
supplier.

Competition

     The  Company is the  fifteenth  largest  furniture  manufacturer  in North
America based on 1997 sales, according to Furniture/Today,  a trade publication.
The  furniture  industry is highly  competitive  and  includes a large number of
foreign and domestic  manufacturers,  none of which  dominates  the market.  The
markets in which the Company competes include a large number of relatively small
manufacturers;  however,  certain  competitors of the Company have substantially
greater  sales  volumes and financial  resources  than the Company.  Competitive
factors in the upper-medium price range include style, price, quality, delivery,
design,  service,  and durability.  The Company believes that its  manufacturing
processes, its long-standing customer relationships and customer responsiveness,
its consistent  support of existing  diverse product lines that are high quality
and good value, and its experienced management are competitive advantages.

Associates

     At December 31, 1998, the Company employed approximately 2,875 associates.
None of the Company's  associates is represented  by a labor union.  The Company
considers its relations with its associates to be good.

Patents and Trademarks

     The trade names of the Company represent many years of continued business,
and the Company  believes such names are well  recognized  and  associated  with
quality  in the  furniture  industry.  The  Company  owns a number  of  patents,
trademarks,  and  licenses,  none of which is  considered  to be material to the
Company.

Governmental Regulations

     The  Company is subject to federal,  state, and local laws and regulations
in the areas of safety, health, and environmental pollution controls. Compliance
with these laws and  regulations  has not in the past had any material effect on
the Company's earnings, capital expenditures,  or competitive position; however,
the effect of such  compliance  in the future  cannot be  predicted.  Management
believes that the Company is in material  compliance  with  applicable  federal,
state, and local environmental regulations.

     Regulations  issued in December 1995 under the Clean Air Act Amendments of
1990 as part of the National  Emission  Standards for  Hazardous Air  Pollutants
program and negotiated into the Furniture Maximum  Achievable Control Technology
Standard,  require the Company to  reformulate  certain  furniture  finishes and
institute  process and  administrative  changes to reduce emissions of hazardous
air pollutants.  The Company believes it is in compliance with these regulations
by its use of compliant coatings and by training its associates in work practice
standards.  The Company  cannot at this time estimate the future impact of these
standards on the Company's operations and capital expenditure requirements.

Forward-Looking Statements

     Certain  statements  made in this Annual Report on Form 10-K are not based
on historical facts, but are forward-looking statements. These statements can be
identified  by the  use  of  forward-looking  terminology  such  as  "believes,"
"expects,"  "may," "will," "should," or "anticipates" or the negative thereof or
other  variations  thereon  or  comparable  terminology,  or by  discussions  of
strategy.  These  statements  reflect the  Company's  reasonable  judgment  with
respect to future events and are subject to risks and  uncertainties  that could
cause  actual  results to differ  materially  from those in the  forward-looking
statements.  Such risks and  uncertainties  include the  cyclical  nature of the
furniture  industry,  fluctuations  in the  price for  lumber  which is the most
significant  raw material  used by the  Company,  competition  in the  furniture
industry, capital costs and general economic conditions.

Item 2.    Properties

     Set  forth  below is certain  information  with  respect to the  Company's
principal  properties.  The Company  believes that all these properties are well
maintained  and in  good  condition.  The  Company  believes  its  manufacturing
facilities  are being  efficiently  utilized  and each  facility  is  focused on
specific product lines to optimize  efficiency.  The Company  estimates that its
facilities are presently  operating  near  capacity,  principally on a one-shift
basis.  All Company  plants are equipped with  automatic  sprinkler  systems and
modern fire protection  equipment,  which management believes are adequate.  All
facilities set forth below are active and operational.
<TABLE>
<S>                    <C>                <C>                 <C> 
 
                                           Approximate        Owned
                                          Facility Size         or
Location               Primary Use        (Square Feet)       Leased

Stanleytown, VA        Manufacturing         1,660,000        Owned
                       and Corporate
                       Headquarters             61,000        Owned
West End, NC           Manufacturing           470,000        Owned(1)
Lexington, NC          Manufacturing           635,000        Owned
Robbinsville, NC       Manufacturing           540,000        Owned
High Point, NC         Showroom                 80,000        Leased(2)
------------------------------------
(1) This plant leases its lumber  yard;  lease  expires May 31, 2007.  (2) Lease
expires October 31, 1999. Approximately 17,500 square feet is subleased.
</TABLE>

Item 3.    Legal Proceedings

     None.

Item 4.    Submission of Matters to a Vote of Security Holders

     None.












Executive Officers of the Registrant

     The  Company's executive officers and their ages as of January 1, 1999 are
as follows:

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

Name                                     Age       Position

Albert L. Prillaman..............        53        Chairman, President and Chief
                                                     Executive Officer
John W. Johnson..................        54        Senior Vice President -
                                                     Manufacturing
Douglas I. Payne  ...............        40        Senior Vice President -
                                                     Finance and Administration,
                                                     Treasurer and Secretary
William A. Sibbick...............        42        Senior Vice President -
                                                     Sales
Kelly S. Cain  ..................        44        Senior Vice President -
                                                     Product Development
                                                     and Merchandising
Robert A. Sitler, Jr.............        38        Vice President - Human
                                                     Resources
</TABLE>

      Albert L. Prillaman has been President and Chief Executive  Officer of the
Company  since  December  1985 and  Chairman  of the  Board of  Directors  since
September 1988.  Prior thereto,  Mr. Prillaman served as a Vice President of the
Company  and  President  of the  Stanley  Furniture  division  of the  Company's
predecessor  since 1983, and in various  executive and other capacities with the
Stanley  Furniture  division of the  predecessors of the Company since 1969. Mr.
Prillaman is a director of Main Street BankGroup Incorporated.

      John  W.  Johnson  was  elected  Senior  Vice  President-Manufacturing  in
December 1998. He was Vice President of  Manufacturing  from November 1984 until
December 1998. Prior to that time, Mr. Johnson held various management positions
related to manufacturing since his employment by the Company in 1966.

      Douglas I. Payne has been Senior Vice President-Finance and Administration
since  December  1996.  He was Vice  President  of Finance and  Treasurer of the
Company from September 1993 to December 1996. He was Vice President-Treasurer of
the Company from December 1989 to September 1993.  Prior to that time, Mr. Payne
held various financial  management positions since his employment by the Company
in 1983. Mr. Payne has been Secretary of the Company since 1988.

      William A.  Sibbick has been Senior Vice  President-Sales  since  December
1997. He was Vice President-Product  Development and  Merchandising-Dining  Room
and  Occasional  from  December  1996 to December  1997.  He was Vice  President
Product  Development and  Merchandising  from April 1995 until December 1996. He
was Vice President - Product Development from June 1993 until April 1995. He was
Vice  President-Senior  Product Manager of the Stanley  Furniture  division from
January  1992  until  June  1993.  Prior  to that  time,  Mr.  Sibbick  was Vice
President-Product Manager since his employment by the Company in 1989.

      Kelly S.  Cain has been  Senior  Vice  President-Product  Development  and
Merchandising since December 1997. He was Vice President-Product Development and
Merchandising  for bedroom  product lines from  December 1996 to December  1997.
Prior to that time,  Mr. Cain held  various  management  positions  in sales and
marketing since his employment by the Company in 1985.

      Robert A. Sitler, Jr. was elected Vice  President-Human  Resources in
December 1998. Prior thereto,  he held various management positions in 
manufacturing and credit since his employment by the Company in March 1985.


<PAGE>


PART II

Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters

      The Company's common stock is quoted on The Nasdaq Stock Market ("Nasdaq")
under the symbol STLY.  The table below sets forth the high and low sales prices
per share, for the periods indicated, as reported by Nasdaq, adjusted to reflect
a two-for-one  stock split,  distributed  in the form of a stock dividend on May
15, 1998.
<TABLE>

                                                     High              Low
1998
<S>                                                 <C>              <C>

First Quarter....................                   $20.13           $13.50
Second Quarter...................                    27.50            17.88
Third Quarter....................                    27.50            16.50
Fourth Quarter...................                    19.75            10.38

1997

First Quarter....................                   $13.00          $  9.13
Second Quarter...................                    11.75             8.50
Third Quarter....................                    14.88            11.38
Fourth Quarter...................                    14.50            11.38
</TABLE>

As of January 13, 1999, there were approximately 2,200 beneficial  stockholders.
To-date,  the  Company  has  retained  all  earnings  to finance  the growth and
development of its business.  However, the Company will continue to evaluate its
dividend  policy,  and any  future  payments  will  depend  upon  the  financial
condition,  capital requirements,  and earnings of the Company, as well as other
factors that the Board of Directors may deem relevant.  The Company's ability to
pay dividends is restricted  under  certain loan  coventants.  See Note 3 of the
Notes to Financial Statements.



<PAGE>



Item 6.     Selected Financial Data
<TABLE>
<CAPTION>
                                                                   Years Ended December 31,
                                                 1998          1997           1996          1995          1994
                                                         (in thousands, except per share data)
<S>                                          <C>            <C>           <C>           <C>          <C>         
Income Statement Data:
Net sales..................................      $247,371      $211,905      $201,905      $174,179      $184,342
Cost of sales..............................       186,931       159,453       153,332       137,621       148,453
                                              -----------   -----------   -----------   -----------   -----------
  Gross profit.............................        60,440        52,452        48,573        36,558        35,889
Selling, general and admin-
  istrative expenses.......................        32,496        29,949        30,403        26,454        26,483
Unusual items, net (1).....................                                                    (136)
                                              -----------   -----------   -----------   -----------   ----------- 
  Operating income.........................        27,944        22,503        18,170        10,240         9,406
Other expense, net ........................           411           276           616           433           444
Gain on insurance settlement(2) ...........                                                                (2,379)
Interest expense...........................         4,164         3,538         3,344         3,534         2,969
                                              -----------   -----------   -----------   -----------   -----------
  Income from continuing
    operations before income
    taxes..................................        23,369        18,689        14,210         6,273         8,372
Income taxes...............................         8,886         7,102         5,470         2,384         3,256
                                              -----------   -----------   -----------   -----------   -----------
  Income from continuing
    operations.............................   $    14,483   $    11,587   $     8,740   $     3,889   $     5,116
                                              ===========   ===========   ===========   ===========   =========== 

Basic Earnings Per Share:(3)
Income from continuing
   operations..............................   $      2.07   $      1.38   $       .92   $       .41   $       .54
                                              ===========   ===========   ===========   ===========   ===========
Weighted average shares(4).................         7,008         8,394         9,444         9,454         9,450
                                              ===========   ===========   ===========   ===========   ===========

Diluted Earnings Per Share:(3)
Income from continuing
   operations(2)...........................   $      1.82   $      1.25   $       .88   $       .41   $       .54
                                              ===========   ===========   ===========   ===========   ===========
Weighted average shares(4).................         7,963         9,278         9,890         9,454         9,488
                                              ===========   ===========   ===========   ===========   ===========


Balance Sheet Data:
Cash.......................................    $    6,791   $       756    $    8,126   $       298   $       301
Inventories................................        46,514        45,730        40,239        40,167        39,905
Working capital............................        44,408        41,440        46,225        42,422        42,912
Total assets...............................       154,374       143,225       141,510       134,551       124,519
Long-term debt including
  current maturities (4) ..................        43,539        52,577        39,350        41,067        33,395
Stockholders' equity (4)(5)................        62,368        48,247        61,617        54,739        50,830
</TABLE>


(1) In 1995,  the Company  recognized a pretax credit of $1.1 million after it
was  released  from a lease  obligation  at a  previously  closed  manufacturing
facility. Also included is a pretax charge for a severance accrual.

(2) In 1994, the Company recorded a pretax gain of $2.4 million as part of the
final  insurance  settlement  due to a fire  in  1993.  Income  from  continuing
operations  before the  insurance  related  gain was $3.7  million,  or $.39 per
diluted share.

(3) Amounts have been  retroactively  adjusted to reflect the two-for-one  stock
split, distributed in the form of a stock dividend, on May 15, 1998.

(4) In 1998,  the Company  purchased  315,000  shares of its common  stock for a
total  consideration  of $5.6 million and issued  103,400  shares to the Stanley
Retirement Plan. In 1997, the Company  purchased  2,326,402 shares of its common
stock for a total  consideration  of $25.3  million.  See Note 5 of the Notes to
Financial Statements.

(5) No dividends have been paid on the Company's common stock during any of 
the years presented.

Item 7. Management's Discussion and Analysis of Financial Condition and Results 
        of Operations

      The following  discussion  should be read in conjunction with the Selected
Financial  Data  and  the  Financial  Statements  and  Notes  thereto  contained
elsewhere herein.

Results of Operations

      The following table sets forth the percentage relationship to net sales of
certain items included in the Statements of Income:
<TABLE>

<CAPTION>
                                                    For the Years Ended
                                                        December 31,
                                              1998          1997          1996
                                             -----         -----         ----- 
<S>                                         <C>          <C>            <C> 

Net sales.........................           100.0%        100.0%        100.0%
Cost of sales.....................            75.6          75.3          75.9
                                             -----         -----         -----
  Gross profit........ ...........            24.4          24.7          24.1
Selling, general and administrative
  expenses........................            13.1          14.1          15.1
                                             -----         -----         -----
     Operating income.............            11.3          10.6           9.0
Other expenses, net...............              .1            .1            .3
Interest expense..................             1.7           1.6           1.7
                                            ------        ------        ------
  Income from continuing operations
    before income taxes...........             9.5           8.9           7.0
Income taxes......................             3.6           3.4           2.7
                                            ------        ------        ------
  Income from continuing operations            5.9%          5.5%          4.3%
                                            ======        ======        ======
</TABLE>
1998 Compared to 1997

   Net sales  increased  $35.5 million,  or 16.7%,  for 1998 compared to 1997.
The increase was due primarily to higher unit volume.

  Gross profit margin for 1998  decreased to 24.4% from 24.7% for 1997.  The
decrease resulted primarily from higher raw material costs,  principally lumber,
partially offset by improved operating efficiencies.

  Selling,  general and administrative expenses as a percentage of net sales
were 13.1% and 14.1% for 1998 and 1997,  respectively.  The lower  percentage in
1998 was due  principally  to higher net sales.  The  majority of the  increased
expenditures in 1998 were selling  expenses  directly  attributable to the sales
increase.

  During the second half of 1998,  the Company  phased out of its upholstery
operations.  Upholstered  products accounted for less than 3.0% of net sales and
resulted in a pretax  operating loss of  approximately $1 million in each of the
past three years.

  As a result of the above,  operating income increased to $27.9 million, or
11.3% of net sales,  from $22.5 million, or 10.6% of net sales, in 1997.

  Interest  expense for 1998  increased  due to higher  average  debt levels
resulting from the Company's repurchases of its common stock in 1997 and 1998.

  The Company's effective income tax rate was 38% for both 1998 and 1997.
1997 Compared to 1996

  Net sales increased $10.0 million, or 5.0%, for 1997 compared to 1996. The
increase was due  primarily  to higher  average  selling  prices and to a lesser
extent higher unit volume.

  Gross profit margin for 1997  increased to 24.7% from 24.1% for 1996.  The
higher gross profit margin in 1997 was due primarily to lower raw material costs
as a percentage of net sales and improved operating efficiencies. However, gross
profit  margin  declined  from 25.2% for the first half of 1997 to 24.4% for the
second half of 1997, due primarily to increased lumber cost.

  Selling,  general and administrative expenses as a percentage of net sales
were 14.1% and 15.1% for 1997 and 1996, respectively.  These expenses were lower
in 1997 due primarily to lower selling expenses and a reduced  provision for bad
debts.

  As a result of the above, operating income for 1997 increased to $22.5
million, or 10.6% of net sales, from $18.2 million, or 9.0% of net sales, in 
1996.

  Interest  expense for 1997  increased due to higher debt levels  resulting
from the  Company's  June and November  1997  repurchases  of its common  stock.
Including the December 1996 purchase of 300,000 shares,  the Company  acquired a
total of 2,626,402 shares of its common stock for a total consideration of $27.6
million.

  The Company's  effective  income tax rate was 38.0% and 38.5% for 1997 and
1996, respectively.




Financial Condition, Liquidity and Capital Resources

      The  Company  generated  cash from  operations  of $25.0  million  in 1998
compared to $8.3 million in 1997.  The  increase was due  primarily to increased
sales and to a lesser  extent,  lower tax payments.  The Company  generated cash
from  operations of $15.3 million in 1996.  The decrease in cash  generated from
operations  in 1997  compared to 1996 was due  primarily  to higher  payments to
suppliers and employees,  due to increased production,  and higher tax payments.
The Company used the cash  generated from  operations in 1998,  1997 and 1996 to
fund capital expenditures, reduce borrowings and repurchase its common stock.

      Net cash used by investing activities was $6.5 million in 1998 compared to
$4.2 million and $4.0 million in 1997 and 1996, respectively.  Expenditures were
primarily  for plant and  equipment  and other  assets in the  normal  course of
business.  Capital  expenditures in 1999 are anticipated to be approximately $14
million.  Approximately  $10 million of capital spending in 1999 will be used to
expand  existing  facilities to add  approximately  $30-$35 million of increased
sales capacity on an annualized basis.

      Net cash used by financing activities was $12.5 million, $11.5 million and
$3.5  million  in 1998,  1997 and  1996,  respectively.  In 1998 and  1996,  the
purchase of common stock and the reduction in  borrowings  were financed by cash
generated from operations. In 1997, the purchase of common stock was financed by
the private  placement of debt, the revolving credit facility and cash generated
from operations.  Also, in 1998 and 1997, the Company received proceeds from the
exercise of stock options.

      In October 1998, the Company's Board of Directors authorized the use of up
to $10.0 million to repurchase  shares of its common  stock.  Consequently,  the
Company may, from time to time,  either directly or through  agents,  repurchase
its common stock in the open market through  negotiated  purchases or otherwise,
at prices and on terms  satisfactory to the Company.  The Company  utilized $5.6
million of the  authorized  $10.0 million to purchase a total of 315,000  shares
during 1998.  Depending on market  prices and other  conditions  relevant to the
Company, such purchases may be discontinued at any time.

      In November  1997,  the Company issued $10.0 million of 7.43% senior notes
due 2007 in a private  placement  of debt.  The  proceeds  were used to purchase
826,402 shares of its common stock from the ML-Lee  Acquisition  Fund,  L.P. and
certain of its affiliates.

      At December 31, 1998,  long-term  debt  including  current  maturities was
$43.5 million.  Approximately $24.0 million of additional borrowing capacity was
available under a revolving credit facility.  Also, the Company had cash on hand
of $6.8 million. Annual debt service requirements are $5.1 million in 1999, $5.2
million in 2000, $6.7 million in 2001, $6.8 million in 2002, and $6.9 million in
2003. The Company believes that its financial  resources are adequate to support
its capital needs and debt service requirements.

Year 2000

      In early 1998, the Company initiated a  cross-functional  team to identify
and address internal hardware,  software and equipment compliance issues arising
from the many challenges  posed by the Year 2000. Key financial  information and
operational  systems,  including equipment with embedded  microprocessors,  have
been  inventoried  and  assessed.   Detailed  plans  are  in  place  for  system
modifications or replacements, and a compliance plan for equipment with embedded
technology has been developed and is currently being implemented.

      Since  1996,  the  Company  has been  upgrading  its  information  systems
technology,   with  Year  2000  compliant   software,   to  support  its  sales,
manufacturing  and  administrative   functions.  The  cost  of  information  and
operational  systems upgrades is estimated at less than $1.0 million.  Computers
and peripheral devices are approximately  seventy-five percent compliant at this
point. Final compliance and testing for both information and operational systems
is scheduled  for  completion by mid-1999.  The estimated  cost to complete Year
2000 compliance is less than $100,000.

      In addition,  the Company is communicating with key customers,  suppliers,
financial  institutions  and others with whom it does business to determine Year
2000 compliance and is currently assessing the potential impact on operations if
third parties are not successful in converting their systems in a timely manner.

      The  Company  believes  it is taking  reasonable  steps to  prevent  major
interruptions  in its business,  resulting from the Year 2000 compliance  issue.
However,  if the Company or its key suppliers do not complete  enhancements in a
timely manner or if their  remedial  efforts are not  successful,  the Year 2000
compliance  issue may have a material  adverse  impact on the  operations of the
Company.  Contingency plans are currently being developed to minimize the impact
of any  such  interruptions,  such  as,  backup  procedures,  identification  of
alternate  suppliers and/or increasing  inventory safety stocks,  and such plans
are expected to be in place by the end of 1999.

Item 8. Financial Statements and Supplementary Data

      The financial  statements and schedule listed in Items 14(a)(1) and (a)(2)
hereof  are  incorporated  herein  by  reference  and are  filed as part of this
report.

Item 9. Changes in and Disagreements with Accountants on Accounting and 
        Financial Disclosure

      None.

                                    PART III

      In accordance with general  instruction G(3) of Form 10-K, the information
called for by Items 10, 11, 12, and 13 of Part III is  incorporated by reference
to the  Registrant's  definitive  Proxy  Statement  for its  Annual  Meeting  of
Stockholders scheduled for April 29, 1999, except for information concerning the
executive  officers of the Registrant which is included in Part I of this report
under the caption "Executive Officers of the Registrant."


                                     PART IV


Item 14.  Exhibits, Financial Statement Schedule and Reports on Form 8-K

(a)   Documents filed as a part of this Report:

(1) The following financial statements are included in this report on Form 10-K:

      Report of Independent Accountants

      Balance Sheets as of December 31, 1998 and 1997

      Statements of Income for each of the three years in the period ended 
       December 31, 1998

      Statements of Changes in Stockholders'  Equity for each of the three years
       in the period ended December 31, 1998

      Statements of Cash Flows for each of the three years in the period ended
       December 31, 1998

      Notes to Financial Statements

(2)   Financial Statement Schedule:

      Schedule II - Valuation of Qualifying Accounts for each of the three years
      in the period ended December 31, 1998

(b)   The following  reports on Form 8-K were filed by the Registrant during the
      last quarter of the period covered by this report:

      None.

(c)   Exhibits:

 3.1     The Restated Certificate of Incorporation of the Registrant.(1)

 3.2     The  By-laws of the Registrant (incorporated by reference to Exhibit 
         3.2 to the Registrant's Registration Statement on Form S-1, No.
         33-7300).

 3.3     Amendment  adopted  March 21,  1988 to the  By-laws  of the  Registrant
         (incorporated by reference to Exhibit 3.3 to the Registrant's Form 10-K
         (Commission File No. 0-14938) for the year ended December 31, 1987).

 3.4     Amendments  adopted  February 8, 1993 to the By-laws of the Registrant
         (incorporated by reference to Exhibit 3.4 to the Registrant's
         Registration Statement on Form S-1 No. 33-57432).

 4.1     The  Certificate  of  Incorporation  and By-laws of the  Registrant  as
         currently in effect  (incorporated by reference to Exhibits 3.1 through
         3.4 hereto).

 4.2     Note  Agreement  dated February 15, 1994 between the Registrant and the
         Prudential Insurance Company of America.  (Incorporated by reference to
         Exhibit 4.6 to the Registrant's Form 10-K (Commission File No. 0-14938)
         for the year ended December 31, 1993).

 4.3     Letter  Amendment,  dated October 14, 1996, to Note  Agreements,  dated
         February 15, 1994 and June 29,  1995,  between the  Registrant  and The
         Prudential  Insurance Company of America  (incorporated by reference to
         Exhibit 4.1 to the Registrant's Form 10-Q (Commission File No. 0-14938)
         for the quarter ended September 29, 1996).

 4.4     Letter  Amendment,  dated  June 16,  1997,  to Note  Agreements,  dated
         February 15, 1994 and June 29,  1995,  between the  Registrant  and The
         Prudential  Insurance Company of America  (incorporated by reference to
         Exhibit 4.1 to the Registrant's  Statement on Form 8-K (Commission File
         No. 0-14938) filed July 9, 1997).

 4.5     Note Purchase and Private Shelf  Agreement,  dated as of June 29, 1995,
         among the Company,  The Prudential Insurance Company of America and the
         affiliates  of  Prudential  who become  Purchasers  as defined  therein
         (incorporated by reference to Exhibit 4.1 to the Registrant's  Form 8-K
         (Commission File No. 0-14938) filed December 2, 1997).

      Pursuant to Regulation S-K, Item  601(b)(4)(iii),  instruments  evidencing
long term debt less than 10% of the Registrant's  total assets have been omitted
and will be furnished to the Securities and Exchange Commission upon request.


10.1     Employment  Agreement  made as of  January  1, 1991  between  Albert L.
         Prillaman and the Company (incorporated by reference to Exhibit 10.1 to
         the  Registrant's  Form 10-K (Commission File No. 0-14938) for the year
         ended December 31, 1991).(2)

10.2     Lease dated February 23, 1987 between Stanley Interiors Corporation and
         Southern Furniture Exposition  Building,  Inc. d/b/a Southern Furniture
         Market  Center  (incorporated  by  reference  to  Exhibit  10.10 to the
         Registrant's Form 10-K (Commission File No. 0-14938) for the year ended
         December 31, 1987).

10.3     Lease  dated June 30, 1987  between A. Allan  McDonald,  Virginia  Cary
         McDonald, C. R. McDonald, Dorothy V. McDonald, and Lillian S. McDonald,
         as lessor, and Stanley Interiors  Corporation,  as lessee (incorporated
         by reference to Exhibit 10.14 to the Registrant's Form 10-K (Commission
         File No. 0-14938) for the year ended December 31, 1987).

10.4     The Stanley  Retirement  Plan, as restated  effective  January 1, 1989,
         adopted  April 20, 1995  (incorporated  by reference to Exhibit 10.4 to
         the  Registrant's  Form 10-K (Commission File No. 0-14938) for the year
         ended December 31, 1995).(2)

10.5     Amendment No. 1, The Stanley  Retirement Plan,  effective  December 31,
         1995,  adopted December 15, 1995  (incorporated by reference to Exhibit
         10.5 to the  Registrant's  Form 10-K  (Commission File No. 0-14938) for
         the year ended December 31, 1995).(2)

10.6     Supplemental  Retirement  Plan of  Stanley  Furniture  Company,  Inc.,
         as  restated  effective  January 1, 1993.(incorporated  by reference to
         Exhibit 10.8 to the  Registrant's  Form 10-K (Commission File No. 
         0-14938) for the year ended December 31, 1993).(2)

10.7     First  Amendment to Supplemental  Retirement Plan of Stanley  Furniture
         Company,  Inc.,  effective December 31, 1995, adopted December 15, 1995
         (incorporated  by reference to Exhibit  10.7 to the  Registrant's  Form
         10-K  (Commission  File No.  0-14938)  for the year ended  December 31,
         1995).(2)

10.8     Stanley Interiors Corporation Deferred Compensation Capital Enhancement
         Plan,  effective  January 1, 1986,  as amended and  restated  effective
         August 1, 1987  (incorporated  by  reference  to  Exhibit  10.12 to the
         Registrant's  Registration  Statement on Form  S-1(Commission  File No.
         0-14938), No. 33-7300).(2)

10.9     Split  Dollar  Insurance  Agreement  dated as of March 21, 1991 between
         Albert L.  Prillaman and the Registrant  (incorporated  by reference to
         Exhibit  10.43  to the  Registrant's  Form  10-K  (Commission  File No.
         0-14938) for the year ended December 31, 1991).(2)

10.10    Second  Amended and Restated  Revolving  Credit  Facility and Term Loan
         Agreement  dated  February 15, 1994 (the  "Second  Amended and Restated
         Credit  Facility")  between the  Registrant,  National  Canada  Finance
         Corp.,  and the National Bank of Canada  (incorporated  by reference to
         Exhibit 10.17 to Registrant's  Form 10-K  (Commission File No. 0-14938)
         for the year ended December 31, 1994).

10.11    First Amendment to Second Amended and Restated Credit Facility dated as
         of August 21,  1995  (incorporated  by  reference  to Exhibit  10.14 to
         Registrant's Form 10-K (Commission File No. 0-14938) for the year ended
         December 31, 1995).

10.12    1992 Stock  Option Plan  (incorporated  by  reference  to  Registrant's
         Registration  Statement  on Form S-8 No.33-58396).(2)

10.13    1994 Stock Option Plan.  (incorporated by reference to Exhibit 10.18 to
         the  Registrant's  Form 10-K (Commission File No. 0-14938) for the year
         ended December 31, 1994).(2)

10.14    1994 Executive Loan Plan.  (incorporated by reference to Exhibit 10.19 
         to the Registrant's Form 10-K (Commission File No.0-14938) for the year
         ended December 31, 1994).(2)

10.15    Employment agreement dated as of June 1, 1996, between Douglas I. Payne
         and the  Registrant  (incorporated  by reference to Exhibit 10.1 to the
         Registrant's  Form 10-Q  (Commission  File No. 0-14938) for the quarter
         ended June 30, 1996).(2)

10.16    Amendment  No.  1,  dated as of  October  1,  1996,  to the  Employment
         Agreement,  dated as of January 1, 1991,  between  the  Registrant  and
         Albert L. Prillaman  (incorporated  by reference to Exhibit 10.4 to the
         Registrant's  Form 10-Q  (Commission  File No. 0-14938) for the quarter
         ended September 29, 1996).

10.17    Assignment and Transfer Agreement, dated as of October 8, 1996, between
         National  Canada Finance Corp. and National Bank of Canada  relating to
         the Second Amended and Restated Revolving Credit Facility (incorporated
         by reference to Exhibit 10.1 to the Registrant's  Form 10-Q (Commission
         File No. 0-14938) for the quarter ended September 29, 1996).

10.18    Second  Amendment,  dated as of October 14, 1996, to the Second Amended
         and Restated  Revolving  Credit Facility  (incorporated by reference to
         Exhibit  10.2  to the  Registrant's  Form  10-Q  (Commission  File  No.
         0-14938) for the quarter ended September 29, 1996).

10.19    Stock  Purchase  Agreement,  dated  as  of  June  27,  1997  among  the
         Registrant and the Selling Stockholders named therein  (incorporated by
         reference to Exhibit 99.1 to the Registrant's Form 8-K (Commission File
         No. 0-14938) filed July 9, 1997).

10.20    Stock  Purchase  Agreement,  dated  as  of  November 11, 1997 among the
         Registrant and the Selling Stockholders named therein  (incorporated by
         reference to Exhibit 99.2 to the Registrant's Form 8-K (Commission File
         No. 0-14938) filed December 2, 1997).

10.21    Third  Amendment,  dated as of June 24, 1997, to the Second Amended and
         Restated  Revolving  Credit  Facility  and Term  Loan  Agreement  dated
         February  15, 1994  between the  Registrant,  National  Canada  Finance
         Corp.,  and the National Bank of Canada  (incorporated  by reference to
         Exhibit 99.4 to the Registrant's Form 8-K (Commission File No. 0-14938)
         filed July 9, 1997).

10.22    Fourth  Amendment,  dated  February 24, 1998, to the Second Amended and
         Restated  Revolving  Credit  Facility  and Term  Loan  Agreement  dated
         February  15, 1994  between the  Registrant,  National  Canada  Finance
         Corp.,  and the National Bank of Canada  (incorporated  by reference to
         Exhibit  10.1  to the  Registrant's  Form  10-Q  (Commission  File  No.
         0-14938) for the quarter ended March 28, 1998.

21       Listing of Subsidiaries:

         Charter Stanley Foreign Sales Corporation, a United States Virgin
          Islands Corporation.

23       Consent of PricewaterhouseCoopers LLP(1)

27       Financial Data Schedule.(1)

------------------------------------
(1)      Filed herewith
(2)      Management contract or compensatory plan


<PAGE>


                                   SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                                 STANLEY FURNITURE COMPANY, INC.

February 5, 1999                                 By:   /s/Albert L. Prillaman
                                                       Albert L. Prillaman
                                                       Chairman, President, and
                                                       Chief Executive Officer

      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/Albert L. Prillaman      Chairman, President, and Chief      February 5, 1999
(Albert L. Prillaman)        Executive Officer, and Director
                             (Principal Executive Officer)

/s/Douglas I. Payne         Senior Vice President - Finance     February 5, 1999
(Douglas I. Payne)           and Administration, Treasurer
                             and Secretary (Principal
                             Financial and Accounting Officer)

/s/David V. Harkins         Director                            February 5, 1999
(David V. Harkins)

/s/Edward J. Mack           Director                            February 5, 1999
(Edward J. Mack)

/s/Thomas L. Millner        Director                            February 5, 1999
(Thomas L. Millner)

/s/T. Scott McIlhenny, Jr.  Director                            February 5, 1999
(T.Scott McIlhenny, Jr.)


<PAGE>




<PAGE>


                         
                         STANLEY FURNITURE COMPANY, INC.
                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1998
                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULE


Financial Statements                                                        Page


Report of Independent Accountants....................................        F-2

Balance Sheets as of December 31, 1998 and 1997......................        F-3

Statements of Income for each of the three years in the period
  ended December 31, 1998............................................        F-4

Statements of Changes in Stockholders' Equity for each of the
  three years in the period ended December 31, 1998..................        F-5

Statements of Cash Flows for each of the three years in the period
  ended December 31, 1998............................................        F-6

Notes to Financial Statements........................................        F-7


Financial Statement Schedule

Schedule II - Valuation and Qualifying Accounts for each of the
  three years in the period ended December 31, 1998..................        S-1






















<PAGE>





                        Report of Independent Accountants



To The Board of Directors and Stockholders of
Stanley Furniture Company, Inc.

In our opinion,  the accompanying  balance sheets and the related  statements of
income,  changes in stockholders'  equity and cash flows present fairly,  in all
material respects,  the financial position of Stanley Furniture Company, Inc. as
of December 31, 1998 and 1997,  and the results of its  operations  and its cash
flows for each of the three  years in the  period  ended  December  31,  1998 in
conformity with generally accepted accounting  principles.  In addition,  in our
opinion,  the  financial  statement  schedule  listed  on page F-1 of Form  10-K
presents  fairly,  in all material  respects,  the information set forth therein
when read in conjunction with the related financial statements.  These financial
statements  and  financial  statement  schedule  are the  responsibility  of the
Company's  management;  our  responsibility  is to  express  an opinion on these
financial  statements and financial statement schedule based on our  audits.  We
conducted  our audits of these statements in accordance with generally  accepted
auditing  standards  which 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, assessing the
accounting principles used and  significant  estimates made  by management,  and
evaluating the overall financial  statement  presentation. We believe  that  our
audits provide  a reasonable basis for the opinion expressed above.


                                                  PricewaterhouseCoopers LLP



Richmond, Virginia
January  22, 1999


















<PAGE>
<TABLE>


                         STANLEY FURNITURE COMPANY, INC.
                                 BALANCE SHEETS
                        (in thousands, except share data)
                                                                                              December 31,
<CAPTION>
                                                                                       1998              1997
                                                                                    -----------       -----------
<S>                                                                                <C>               <C>     
ASSETS
Current assets:
  Cash .........................................................................     $    6,791       $       756
  Accounts receivable, less allowances of $1,906 and $1,895.....................         29,141            27,427
  Inventories:
    Finished goods..............................................................         22,853            21,220
    Work-in-process.............................................................          7,495             6,997
    Raw materials...............................................................         16,166            17,513
                                                                                    -----------       -----------
      Total inventories.........................................................         46,514            45,730

  Prepaid expenses and other current assets.....................................            903             1,571
  Deferred income taxes.........................................................          1,980               770
                                                                                    -----------       -----------  
   Total current assets.........................................................         85,329            76,254

Property, plant and equipment, net..............................................         52,474            51,714
Goodwill, less accumulated amortization of $3,360 and $3,024....................         10,080            10,416
Other assets....................................................................          6,491             4,841
                                                                                    -----------       -----------
    Total assets................................................................     $  154,374       $   143,225
                                                                                    ===========       ===========

LIABILITIES
Current liabilities:
  Current maturities of long-term debt..........................................     $    5,136       $     5,086
  Accounts payable..............................................................         21,837            18,164
  Accrued salaries, wages and benefits..........................................         11,939             9,687
  Other accrued expenses........................................................          2,009             1,877
                                                                                    -----------       -----------
    Total current liabilities...................................................         40,921            34,814

Long-term debt, exclusive of current maturities.................................         38,403            47,491
Deferred income taxes...........................................................         10,694            10,448
Other long-term liabilities.....................................................          1,988             2,225
                                                                                    -----------       -----------
  Total liabilities.............................................................         92,006            94,978
                                                                                    -----------       -----------

STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 10,000,000 shares authorized,
   7,069,715 and 6,865,518 shares issued and outstanding........................            141               137
Capital in excess of par value..................................................         37,073            37,439
Retained earnings...............................................................         25,154            10,671
                                                                                    -----------       -----------
  Total stockholders' equity....................................................         62,368            48,247
                                                                                    -----------       ----------- 
     Total liabilities and stockholders' equity.................................     $  154,374       $   143,225
                                                                                    ===========       ===========  

</TABLE>

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



<PAGE>
<TABLE>


                         STANLEY FURNITURE COMPANY, INC.
                              STATEMENTS OF INCOME
                      (in thousands, except per share data)
<CAPTION>

                                                 For the Years Ended
                                                     December 31,
                                    --------------------------------------------
                                       1998             1997              1996
                                    ---------        ---------         ---------
<S>                                <C>              <C>               <C> 


Net sales.....................      $247,371         $211,905          $201,905

Cost of sales.................       186,931          159,453           153,332
                                   ---------        ---------         ---------

  Gross profit.................       60,440           52,452            48,573

Selling, general and
 administrative expenses.......       32,496           29,949            30,403
                                  ----------       ----------        ----------

  Operating income.............       27,944           22,503            18,170

Other expense, net.............          411              276               616
Interest expense...............        4,164            3,538             3,344
                                  ----------       ----------        ----------

  Income from continuing operations
    before income taxes........       23,369           18,689            14,210

Income taxes...................        8,886            7,102             5,470
                                  ----------       ----------        ----------

Income from continuing 
 operations....................       14,483           11,587             8,740

Gain from discontinued
 operations, net of taxes......                                             246
                                  ----------       ----------        ----------

    Net income.................    $  14,483        $  11,587          $  8,986
                                  ==========       ==========        ==========

Basic earnings per share:
  Continuing operations.......     $    2.07        $    1.38          $    .92
  Discontinued operations.....                                              .03
                                  ----------       ----------        ----------
    Net income................     $    2.07        $    1.38          $    .95
                                  ==========       ==========        ==========
  Weighted average shares
   outstanding................        7,008             8,394             9,444
                                  ==========       ==========        ==========

Diluted earnings per share:
  Continuing operations.......     $   1.82         $    1.25          $    .88
  Discontinued operations.....                                              .03
                                  ----------       ----------        ----------
  Net income..................     $   1.82         $    1.25          $    .91
                                  ==========       ==========        ==========
  Weighted average shares
   outstanding................        7,963            9,278              9,890
                                  ==========       ==========        ==========

</TABLE>

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



<PAGE>
<TABLE>

                         STANLEY FURNITURE COMPANY, INC.
                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                 For each of the three years in the period ended
                                December 31, 1998
                                 (in thousands)

<CAPTION>
                                                                                            Capital
                                                                                              In         Retained
                                                                       Common Stock        Excess of     Earnings
                                                                    Shares      Amount     Par Value     (Deficit)
                                                                    -------     ------      --------     ---------
<S>                                                                <C>          <C>       <C>          <C>     
Balance at January 1, 1996....................................       9,454         $189     $64,452      $ (9,902)

Purchase and retirement of stock..............................        (300)          (6)     (2,262)

Compensation expense for executive loan plan, net.............                                  133

Other.........................................................           4                       27

Net income....................................................                                              8,986
                                                                    -------       ------    --------     ---------  

  Balance at December 31, 1996................................       9,158          183      62,350          (916)

Purchase and retirement of stock..............................      (2,326)         (46)    (25,283)

Compensation expense for executive loan plan, net.............                                  133

Exercise of stock options.....................................          34                      239

Net income....................................................                                             11,587
                                                                    -------       ------    --------     ---------  

  Balance at December 31, 1997................................       6,866          137      37,439        10,671

Purchase and retirement of stock..............................        (315)          (6)     (5,547)

Issuance of stock to the Stanley
  Retirement Plan.............................................         103            2       1,872

Compensation expense and stock issuance related
  to the executive loan plan..................................         100            2         131

Exercise of stock options.....................................         316            6       3,178

Net income....................................................                                             14,483
                                                                    -------       ------    --------     ---------  

  Balance at December 31, 1998................................       7,070         $141     $37,073       $25,154
                                                                    =======       ======    ========     =========
</TABLE>

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



<PAGE>
<TABLE>


                         STANLEY FURNITURE COMPANY, INC.
                            STATEMENTS OF CASH FLOWS
                                 (in thousands)
<CAPTION>

                                                                                 For the Years Ended
                                                                                    December 31,
                                                                    ---------------------------------------------     
                                                                       1998             1997              1996
                                                                    -----------       ----------       ----------
<S>                                                                <C>               <C>              <C>

Cash flows from operating activities:

  Cash received from customers..............................          $245,492         $207,590          $200,793
  Cash paid to suppliers and employees......................          (209,030)        (187,346)         (176,739)
  Interest paid.............................................            (4,228)          (3,403)           (3,483)
  Income taxes paid, net....................................            (7,211)          (8,529)           (5,259)
                                                                    -----------       ----------       ----------
    Net cash provided by operating activities...............            25,023            8,312            15,312
                                                                    -----------       ----------       ----------
Cash flows from investing activities:

  Capital expenditures......................................            (6,680)          (4,076)           (3,599)
  Purchase of other assets..................................              (106)            (143)             (370)
  Proceeds from sale of assets..............................               297                                 13
                                                                    -----------       ----------       ----------

    Net cash used by investing activities...................            (6,489)          (4,219)           (3,956)
                                                                    -----------       ----------       ----------

Cash flows from financing activities:

  Purchase and retirement of common stock...................            (5,553)         (25,329)           (2,268)
  Issuance of senior notes..................................                             10,000
  Repayment of senior notes.................................            (5,086)            (725)             (650)
  Proceeds from (repayment of) revolving
    credit facility, net....................................            (3,952)           3,952              (914)
  Proceeds from exercise of stock options...................             1,556              160
  Other, net................................................               536              479               304
                                                                    -----------       ----------       ----------

    Net cash used by financing activities...................           (12,499)         (11,463)           (3,528)
                                                                    -----------       ----------       ----------

Net increase (decrease) in cash.............................             6,035           (7,370)            7,828
Cash at beginning of year...................................               756            8,126               298
                                                                    -----------       ----------       ----------
  Cash at end of year.......................................          $  6,791          $   756          $  8,126
                                                                    ===========       ==========       ==========

</TABLE>



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




<PAGE>


                         STANLEY FURNITURE COMPANY, INC.
                          NOTES TO FINANCIAL STATEMENTS

 1.   Summary of Significant Accounting Policies

Organization and Basis of Presentation
      Stanley  Furniture  Company,  Inc. (the "Company") is a leading  designer
and manufacturer of wood furniture exclusively targeted at the upper-medium
price range of the residential market.

      The Company operates predominantly in one business segment.  Substantially
all  revenues   result  from  the  sale  of  residential   furniture   products.
Substantially  all of the  Company's  trade  accounts  receivable  are due  from
retailers in this market,  which  consists of a large number of entities  with a
broad geographical dispersion.

Inventories
      Inventories  are  valued  at the  lower  of cost or  market.  Cost for all
inventories is determined using the first-in, first-out (FIFO) method.

Property, Plant and Equipment
      Depreciation  of  property,  plant and  equipment  is  computed  using the
straight-line  method based upon the estimated  useful  lives.  Gains and losses
related to dispositions and retirements are included in income.  Maintenance and
repairs  are  charged  to income  as  incurred;  renewals  and  betterments  are
capitalized.

Capitalized Software Cost
      The Company amortizes certain purchased  computer software costs using the
straight-line  method over the  economic  lives of the related  products  not to
exceed five years.  Unamortized  cost at December 31, 1998 and 1997 was $831,000
and $838,000, respectively.

Goodwill and Long-lived Assets
      Goodwill is being  amortized on a straight-line  basis over 40 years.  The
Company  continually  evaluates the potential  impairment of long-lived  assets,
including  goodwill,  on the  basis  of  whether  the  carrying  value  is fully
recoverable from projected, undiscounted net cash flows.

Income Taxes
      Deferred income taxes are determined  based on the difference  between the
financial statement and income tax bases of assets and liabilities using enacted
tax  rates in  effect in the years in which  the  differences  are  expected  to
reverse.  Deferred  tax  expense  represents  the  change  in the  deferred  tax
asset/liability  balance.  Income tax  credits are  reported  as a reduction  of
income tax expense in the year in which the credits are generated.

Fair Value of Financial Instruments
      The  fair  value  of the  Company's  long-term  debt  is  estimated  using
discounted cash flow analysis based on the incremental borrowing rates currently
available  to the  Company  for loans  with  similar  terms and  maturities.  At
December 31, 1998, the fair value  approximated  the carrying  amount.  The fair
value of trade receivables, trade payables and letters of credit approximate the
carrying amount because of the short maturity of these instruments.


<PAGE>


                         STANLEY FURNITURE COMPANY, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

 1.   Summary of Significant Accounting Policies (continued)

Pension Plans
      The Company's  funding  policy is to  contribute  to all  qualified  plans
annually  an  amount  equal to the  normal  cost and a portion  of the  unfunded
liability, but not to exceed the maximum amount that can be deducted for federal
income tax purposes.

Earnings per Common Share
      Basic earnings per share is computed based on the average number of common
shares outstanding.  Diluted earnings per share reflects the increase in average
common  shares  outstanding  that would  result  from the  assumed  exercise  of
outstanding stock options, calculated using the treasury stock method.

Stock Options
      The  Company  applies  Accounting  Principles  Board  Opinion  No. 25 in  
accounting  for stock options and discloses the fair value of options granted as
permitted by Statement of Financial Accounting Standards No. 123.

Use of Estimates
      The  preparation  of financial  statements  in conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the amounts  reported in the financial  statements  and
accompanying  notes.  Changes in such estimates may affect  amounts  reported in
future periods.

2.    Property, Plant and Equipment
<TABLE>
<CAPTION>
                                                                    Depreciable
                                                                       lives                 (in thousands)
                                                                    (in years)            1998             1997
                                                                    -----------        --------          -------- 
<S>                                                                 <C>                <C>              <C>

      Land and buildings....................................          20 to 50          $34,699           $33,941
      Machinery and equipment...............................           5 to 12           51,728            48,180
      Office furniture and equipment........................           3 to 10            1,772             1,836
      Construction in progress..............................                              1,876               588
                                                                                       --------          --------
        Property, plant and equipment, at cost..............                             90,075            84,545
      Less accumulated depreciation.........................                             37,601            32,831
                                                                                       --------          --------
      Property, plant and equipment, net....................                            $52,474           $51,714
                                                                                       ========          ========
</TABLE>


<PAGE>


                         STANLEY FURNITURE COMPANY, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

 3.    Long-Term Debt
<TABLE>
<CAPTION>

                                                                                             (in thousands)
                                                                                          1998             1997
                                                                                       --------          --------
<S>                                                                                   <C>                <C>

      7.28% Senior notes due March 15, 2004...............................              $25,714           $30,000
      7.57% Senior note due June 30, 2005.................................                7,825             8,625
      7.43% Senior notes due November 18, 2007............................               10,000            10,000
      Revolving credit facility...........................................                                  3,952
                                                                                       --------          --------
        Total.............................................................               43,539            52,577
      Less current maturities.............................................                5,136             5,086
                                                                                       --------          --------
        Long-term debt, exclusive of current maturities...................              $38,403           $47,491
                                                                                       ========          ========
</TABLE>

      The  revolving  credit  facility  provides for  borrowings  of up to $25.0
million  through  June 2000,  automatically  renewable  thereafter  for one year
periods  unless  terminated  by either  party.  Interest  under the  facility is
payable  monthly at prime  (7.75% on  December  31,  1998) or, at the  Company's
option,  the reserve  adjusted  LIBOR plus 1.0% per annum (6.07% on December 31,
1998). The Company utilizes letters of credit to collateralize certain insurance
policies and inventory purchases.  Outstanding letters of credit at December 31,
1998 were $1.0  million.  At December  31,  1998,  $24.0  million of  additional
borrowings were available under the revolving credit facility.

      The  above  loan  agreements  require  the  Company  to  maintain  certain
financial covenants.  The Company's ability to pay dividends with respect to the
common  stock  is  restricted  to  $25.0  million  plus  50%  of  the  Company's
consolidated  net  earnings,  adjusted  for net cash  proceeds  received  by the
Company  from the sale of its stock and the amount of payments  for  redemption,
purchase or other  acquisition  of its capital  stock,  subsequent to January 1,
1997. At December 31, 1998, these covenants limit additional borrowings to $32.7
million and limit funds  available to pay dividends and repurchase the Company's
common stock to $8.9 million.

      Annual debt service requirements are $5.1 million in 1999, $5.2 million in
2000, $6.7 million in 2001, $6.8 million in 2002 and $6.9 million in 2003.

4.    Income Taxes

      The  provision  for  income  taxes on income  from  continuing  operations
consists of (in thousands):
<TABLE>
<CAPTION>

                                             1998        1997          1996
                                           ------       ------        ------ 
<S>                                      <C>           <C>           <C>
           
         Current:
           Federal...............          $8,558       $6,454        $5,217
           State.................           1,292          757           952
                                           ------       ------        ------                    
             Total current.......           9,850        7,211         6,169
                                           ------       ------        ------                     
         Deferred:
           Federal...............            (852)         (96)         (567)
           State.................            (112)         (13)         (132)
                                           ------       ------        ------                   
             Total deferred......            (964)        (109)         (699)
                                           ------       ------        ------                    
               Income taxes......          $8,886       $7,102        $5,470
                                           ======       ======        ======    

</TABLE>

<PAGE>


                         STANLEY FURNITURE COMPANY, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4.    Income Taxes (continued)

      A reconciliation  of the difference  between the federal  statutory income
tax rate and the effective income tax rate on income from continuing  operations
follows:
<TABLE>

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

         Federal statutory rate......................          35.0%             35.0%             35.0%
         State taxes, net of federal benefit.........           3.3               2.6               3.8
         Goodwill....................................            .5                .6                .8
         Life insurance..............................           (.6)              (.7)              (.7)
         Tax savings from foreign sales
           corporation...............................           (.2)              (.5)             (1.4)
         Other, net..................................                             1.0               1.0
                                                               -----             -----             -----
           Effective income tax rate.................          38.0%             38.0%             38.5%
                                                               =====             =====             =====
</TABLE>

      The income tax effects of temporary differences that comprise deferred tax
assets and liabilities at December 31 follow (in thousands):
<TABLE>

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

         Current deferred tax assets (liabilities):
           Accounts receivable.........................................       $     444        $    (180)
           Inventory...................................................             141              (18)
           Employee benefits...........................................           1,452              901
           Other accrued expenses......................................             (57)              67
                                                                              ---------        ---------
             Net current deferred tax asset............................       $   1,980        $     770
                                                                              =========        =========

         Noncurrent deferred tax liabilities:
           Property, plant and equipment...............................       $   9,681        $  10,236
           Employee benefits...........................................           1,013              212
                                                                              ---------        ---------
             Net noncurrent deferred tax liability.....................       $  10,694        $  10,448
                                                                              =========        =========  
</TABLE>

 5.    Stockholders' Equity

      The Company effected a two-for-one stock split, distributed in the form of
a stock dividend on May 15, 1998, to  stockholders of record on May 1, 1998. All
related amounts have been retroactively adjusted to reflect the stock split.

      In 1998, the Company  contributed 103,400 shares of its common stock, with
 a fair value of $1.9 million,  to the Stanley Retirement Plan.

      During 1998, the Company's Board of Directors  authorized the use of up to
$10 million to repurchase its common stock. The Company purchased 315,000 shares
for approximately $5.6 million in 1998.


<PAGE>


                         STANLEY FURNITURE COMPANY, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5.    Stockholders' Equity (continued)

      In 1997, the Company  completed two  transactions  for the purchase of its
common  stock  owned by the ML-Lee  Acquisition  Fund,  L.P.  and certain of its
affiliates (the "Lee Fund"). In June 1997, 1.5 million shares were purchased for
an  aggregate  purchase  price of $15.0  million and in November  1997,  826,402
shares were purchased for an aggregate purchase price of $10.3 million. Assuming
the shares were  repurchased at the beginning of the year and financed  entirely
by borrowings  under the revolving  credit facility at an assumed rate of 7.25%,
the pro forma diluted earnings per share would have been $1.39 for 1997.

      During 1996, a secondary  offering of  2,000,000  shares of the  Company's
common  stock  owned by the Lee  Fund  was  completed.  In  connection  with the
offering,  the Company incurred  approximately $325,000 of expenses. The Company
also  purchased  300,000  shares of its common stock,  which were subject to the
over-allotment   option  from  the   secondary   offering,   for  an   aggregate
consideration of $2.3 million.

      In addition to its common stock, the Company's authorized capital includes
1,000,000 shares of "blank check" preferred stock.  None was outstanding  during
the three years ended December 31, 1998. The Board of Directors is authorized to
issue  such  stock in series and to fix the  designation,  powers,  preferences,
rights,  limitations and restrictions with respect to any series of such shares.
Such "blank check" preferred stock may rank prior to common stock as to dividend
rights,  liquidation preferences or both, may have full or limited voting rights
and may be convertible into shares of common stock.

      Basic and diluted  earnings per share are  calculated  using the following
share data (in thousands):
<TABLE>

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

        Weighted average shares outstanding
            for basic calculation....................           7,008             8,394          9,444
        Add:  Effect of stock options................             955               884            446
                                                                -----             -----          ----- 
            Weighted average shares outstanding,
                 adjusted for diluted calculation....           7,963             9,278          9,890
                                                                =====             =====          =====
</TABLE>

 6.    Employee Stock Plans

      During 1994,  the Company  entered into a  contractual  agreement to issue
100,000 shares of common stock to the chief executive officer at $5.00 per share
(the market price on the date of the  agreement) in exchange for a  non-recourse
7.6% note  receivable.  One tenth of the principal  amount plus accrued interest
was due each December 31 until 1998 and the remaining  principal was due January
2, 1999.  The Company  agreed to forgive the accrued  interest plus one tenth of
the  initial  principal  amount  each  December  31, if the  executive  remained
employed  by the  Company.  During  1996,  the  Company  agreed to  forgive  the
outstanding  loan  balance  over  the  remaining  three  years,  subject  to the
executive's  continued employment.  Compensation expense was $271,000,  $285,000
and $308,000 for 1998,  1997 and 1996,  respectively.  At December 31, 1998, the
contractual  agreement was completed and 100,000 shares were issued to the chief
executive officer.


<PAGE>


                         STANLEY FURNITURE COMPANY, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6.  Employee Stock Plans (continued)

      The Company's stock option plans provide for the granting of stock options
up to an  aggregate of 1,400,000  shares of common stock to key  employees.  The
exercise  price  may not be less  than the fair  market  value of the  Company's
common stock on the grant date. Granted options vest 20% annually.

      At  December  31, 1998 and 1997,  options to purchase  930,878 and 992,376
shares, were exercisable with a weighted-average exercise price of approximately
$5.00.  At December 31, 1998, 702 shares were available for grant.  Activity for
the three years ended December 31, 1998 follows:
<TABLE>

                                                                             Number          Weighted-Average
                                                                            of shares         Exercise Price
                                                                           ----------        ----------------
        <S>                                                                <C>                   <C>

         Outstanding at January 1, 1996............................         1,355,906             $ 4.80
           Lapsed..................................................           (30,432)              4.90
           Exercised...............................................            (5,000)              4.88
           Granted.................................................            40,000               7.39
                                                                           ----------

         Outstanding at December 31, 1996..........................         1,360,474               4.87
           Lapsed..................................................           (18,000)              4.59
           Exercised...............................................           (33,804)              4.74
           Granted.................................................            35,000              10.06
                                                                           ----------

         Outstanding at December 31, 1997..........................         1,343,670               4.95
           Lapsed..................................................           (36,400)              7.43
           Exercised...............................................          (316,392)              4.95
           Granted.................................................            43,000              17.75
                                                                           ----------                   

         Outstanding at December 31, 1998..........................         1,033,878             $ 5.47
                                                                           ==========                   
</TABLE>

      Options  outstanding at December 31, 1998,  include 953,878 shares with an
exercise  price  ranging  from $4.25 to $6.06 and a  weighted-average  remaining
contractual  life of  approximately  6  years.  The  remaining  options  have an
exercise  price ranging from $8.19 to $18.75 with a  weighted-average  remaining
contractual life of approximately 9 years.

      The  estimated  per share  weighted-average  fair  value of stock  options
granted during 1998, 1997, and 1996 was $11.78, $7.25 and $4.00 respectively, on
the date of grant.  A risk-free  interest rate of 4.7%,  5.4% and 6.8% for 1998,
1997, and 1996 respectively,  and a 50% volatility rate with an expected life of
10 years was assumed in estimating the fair value.



<PAGE>



                         STANLEY FURNITURE COMPANY, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6.    Stock Options (continued)

      The following table summarizes the pro forma effects assuming compensation
cost for such awards had been recorded  based upon the estimated  fair value (in
thousands, except per share data):
<TABLE>

                                                   1998                     1997                     1996
                                            --------------------    --------------------     -------------------- 
                                               As          Pro         As           Pro         As           Pro
                                            Reported      Forma     Reported       Forma     Reported       Forma
                                            --------    -------     --------     -------     --------      ------ 
<S>                                        <C>         <C>          <C>         <C>           <C>         <C>

Net income..........................        $14,483     $14,175      $11,587     $11,326       $8,986      $8,754
Basic earnings per share............           2.07        2.02         1.38        1.35          .95         .93
Diluted earnings per share..........           1.82        1.79         1.25        1.23          .91         .90
</TABLE>

 7   Employee Benefit Plans

Defined Contribution Plan

     The Company maintains a defined  contribution plan covering  substantially
all of its employees.  Discretionary  matching and profit sharing  contributions
for 1998,  1997 and 1996  totaled  $1.5  million,  $1.2  million  and  $856,000,
respectively.

Pension Plans

     Benefits did not accrue under the Company's  pension plans after 1995.
The financial  status of the plans at December 31 follows (in thousands):
<TABLE>

                                                              1998                               1997
                                                  ----------------------------       ---------------------------- 
                                                    Stanley            Supple-         Stanley            Supple-
                                                  Retirement           mental        Retirement           mental
                                                     Plan               Plan             Plan              Plan
                                                  ----------           -------       ----------          -------- 
<S>                                                 <C>               <C>             <C>              <C>

Change in benefit obligation:
   Beginning benefit obligation...............       $17,146           $ 1,210          $15,970          $    990
   Interest cost..............................         1,188                91            1,200                79
   Actuarial loss.............................           924               160            1,472               157
   Benefits paid..............................        (1,582)              (17)          (1,496)              (16)
   Settlement cost............................           287
                                                  ----------           -------       ----------          --------  
       Ending benefit obligation..............        17,963             1,444           17,146             1,210
                                                  ----------           -------       ----------          --------    
Change in plan assets:
   Beginning fair value of plan assets........        17,170                             16,116
   Actual return on plan assets...............         1,201                              1,726
   Employer contributions.....................         2,239                                824
   Benefits paid..............................        (1,582)                            (1,496)
                                                  ----------           -------       ----------          --------    
       Ending fair value of plan assets.......        19,028                             17,170
                                                  ----------           -------       ----------          --------    
Funded status.................................         1,065            (1,444)              24            (1,210)
Unrecognized loss (gain)......................         5,420                              4,776                (5)
                                                  ----------           -------       ----------          --------   
    Prepaid (accrued) pension costs...........      $  6,485           $(1,444)        $  4,800           $(1,215)
                                                  ==========           =======       ==========          ========
</TABLE>


<PAGE>


                         STANLEY FURNITURE COMPANY, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7.    Employee Benefit Plans (continued)

      At December 31, 1998, the Stanley  Retirement Plan assets included Company
stock with a fair value of $1.9 million.  These shares were  contributed  during
1998.
<TABLE>
<CAPTION>

      Components of net periodic pension cost follow (in thousands):

                                                            1998              1997             1996
                                                         --------          --------          -------- 
        <S>                                              <C>               <C>              <C>
     
         Interest cost..........................          $ 1,279           $ 1,279           $ 1,295
         Expected return on plan assets.........           (1,290)           (1,216)           (1,228)
         Net amortization and deferral..........              435               179               555
                                                         --------          --------          --------
            Net periodic benefit cost...........              424               242               622
         Settlement expense.....................              376
                                                         --------          --------          --------
            Total expense.......................          $   800           $   242           $   622
                                                         ========          ========          ========
</TABLE>

      The assumptions  used as of December 31 to determine the plans'  financial
status and pension cost were:
<TABLE>

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

         Discount rate for funded status.............           6.65%             7.00%            7.75%
         Discount rate for pension cost..............           7.00%             7.75%            7.67%
         Return on assets............................           7.50%             7.50%            7.50%
</TABLE>


<PAGE>

                         STANLEY FURNITURE COMPANY, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7.    Employee Benefit Plans (continued)

Postretirement Benefits Other Than Pensions

      The Company  provides health care benefits to eligible  retired  employees
between the ages of 55 and 65 and provides life  insurance  benefits to eligible
retired  employees  from age 55 until  death.  The  plan's  financial  status at
December 31 follows (in thousands):
<TABLE>
                                                                                 1998             1997
                                                                               --------         --------
        <S>                                                                     <C>             <C> 

         Change in benefit obligation:
           Beginning benefit obligation................................          $3,641           $3,603
           Service cost................................................              44               36
           Interest cost...............................................             239              261
           Actuarial gain..............................................              93              183
           Plan participants' contributions............................             105              112
           Benefits paid...............................................            (554)            (554)
                                                                               --------         --------
               Ending benefit obligation...............................           3,568            3,641
                                                                               --------         --------
         Change in plan assets:
           Beginning fair value of plan assets.........................
           Employer contributions......................................             449              442
           Plan participants' contributions............................             105              112
           Benefits paid...............................................            (554)            (554)
                                                                               --------         --------
               Ending fair value of plan assets........................
         Funded status.................................................          (3,568)          (3,641)
         Unrecognized net loss.........................................             946              895
         Unrecognized transition obligation............................           1,824            1,954
                                                                               --------         -------- 
           Accrued benefit cost........................................         $  (798)         $  (792)
                                                                               ========         ========
</TABLE>

      Components   of  net  periodic   postretirement   benefit  cost  were  (in
thousands):
<TABLE>

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

      Service cost............................................           $  44       $  36        $  35
      Interest cost...........................................             239         261          274
      Amortization of transition obligation...................             130         131          130
      Amortization and deferral...............................              41          29           33
                                                                        ------      ------       ------
            Net periodic postretirement benefit cost..........           $ 454       $ 457        $ 472
                                                                        ======      ======       ======
</TABLE>




<PAGE>


                         STANLEY FURNITURE COMPANY, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

 7.   Employee Benefit Plans (continued)

      The  weighted-average  discount  rates used in  determining  the actuarial
present value of the projected  benefit  obligation were 6.65%,  7.00% and 7.75%
for 1998,  1997 and 1996,  respectively.  The rate of increase in future  health
care benefit cost used in  determining  the  obligation for 1998 and 1997 was 9%
gradually  decreasing  to  5.5%  beginning  in  2004,  and  for  1996 it was 10%
gradually decreasing to 5.5% beginning in 2003.

      An  increase or decrease in the assumed health care cost trend rate of one
percentage point in each future year would affect the accumulated postretirement
benefit  obligation  at December 31,  1998,  by  approximately  $100,000 and the
annual postretirement benefit cost by approximately $13,000.

Deferred Compensation

      The Company has a deferred  compensation  plan, funded with life insurance
policies,  which permits certain management employees to defer portions of their
compensation and earn a fixed rate of return. The accrued  liabilities  relating
to this plan of $1.4  million at  December  31, 1998 and 1997,  are  included in
accrued salaries,  wages and benefits and other long-term liabilities.  The cash
surrender value, net of policy loans, is included in other assets.

 8.   Leases

      The Company  leases  showroom  space and certain other  equipment.  Rental
expenses charged to operations were $1.2 million,  $1.1 million, and $970,000 in
1998,  1997 and  1996,  respectively.  Future  minimum  lease  payments,  net of
subleases,  are approximately as follows:  1999 - $1.2 million; 2000 - $234,000;
2001 - $142,000; and thereafter - $68,000.

 9.   Discontinued Operations

      In 1996, the Company was released from a lease  obligation  resulting from
the purchase and concurrent  resale of certain  facilities at a former division,
which ceased operations in 1994. Accordingly,  the Company recorded an after tax
gain of  $246,000,  or $.03 per  share,  as a  partial  reversal  of a  previous
accrual, representing the final adjustment for the cost of the closure.

 10.  Related Party Transactions

      During 1996 and 1997, the Company  completed three purchases of its common
stock from the Lee Fund totaling 2.6 million shares for a total consideration of
$27.6 million.  The Lee Fund sold to public investors its remaining ownership in
January 1998. The Company maintained a management agreement with an affiliate of
the Lee Fund which was terminated in November  1997.  Fees paid pursuant to this
agreement amounted to $125,000 in 1997 and $241,000 in 1996.




<PAGE>


                         STANLEY FURNITURE COMPANY, INC.
                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

11.   Supplemental Cash Flow Information
<TABLE>
                                                                                     (in thousands)
                                                                         1998             1997             1996
                                                                       -------          -------          -------  
     <S>                                                              <C>              <C>              <C>    

      Net income............................................           $14,483          $11,587          $ 8,986
      Adjustments to reconcile net income to net cash
        provided by operating activities:
         Depreciation.......................................             5,328            5,000            4,774
         Amortization.......................................               447              432              426
         Other, net.........................................               555              340              463
         Loss on disposal of fabric division................                                                (246)
         Changes in assets and liabilities:
           Accounts receivable..............................            (1,714)          (4,331)            (364)
           Inventories......................................              (784)          (5,491)             (72)
           Prepaid expenses and other current assets........               315           (2,180)          (1,347)
           Accounts payable.................................             3,673            3,534              993
           Accrued salaries, wages and benefits.............             2,125              (27)           2,965
           Other accrued expenses...........................             1,760             (713)            (479)
           Deferred income taxes............................              (964)            (109)            (134)
           Other assets.....................................                36               32               29
           Other long-term liabilities......................              (237)             238             (682)
                                                                       -------          -------          -------  

             Net cash provided by operating activities......           $25,023          $ 8,312          $15,312
                                                                       =======          =======          =======
</TABLE>

12.   Quarterly Results of Operations (Unaudited)
<TABLE>
                                                               (in thousands, except per share data)
      1998 Quarters:                                  First           Second             Third           Fourth
                                                      -----           ------             -----           ------
     <S>                                            <C>               <C>              <C>               <C>    

      Net sales............................          $57,691           $61,863          $63,832           $63,985
      Gross profit.........................           14,145            15,273           15,383            15,639
      Net income...........................            3,270             3,580            3,706             3,927
      Net income per share:
         Basic.............................          $   .48           $   .51          $   .52        $      .56
         Diluted...........................              .41               .45              .46               .50

      1997 Quarters:

      Net sales............................          $49,631           $49,469          $54,270           $58,534
      Gross profit.........................           12,461            12,488           13,288            14,214
      Net income...........................            2,772             2,756            2,935             3,125
      Net income per share:
         Basic.............................          $   .30           $   .30          $   .38        $      .42
         Diluted...........................              .28               .28              .34               .38
                                       
</TABLE>
<PAGE>


                        STANLEY FURNITURE COMPANY, INC.
                     SCHEDULE II - VALUATION AND QUALIFYING
               ACCOUNTS For each of the Three Years in the Period
                             Ended December 31, 1998
                                 (In thousands)
<TABLE>
<CAPTION>




Column A              Column B        Column C         Column D        Column E
--------------------------------------------------------------------------------
                                      Charged
                     Balance at      (Credited)                         Balance
                     Beginning       to Costs &                        at End of
Descriptions         of Period        Expenses        Deductions         Period

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

1998
 Doubtful receivables.. $1,116          $435              $388(a)        $1,163
 Discounts, returns,
   and allowances......    779           (36)(b)                            743
                        ------          ----              ----           ------
                        $1,895          $399              $388           $1,906
                        ======          ====              ====           ====== 
1997
 Doubtful receivables.. $1,332          $ 20              $236(a)        $1,116
 Discounts, returns,
  and allowances.......    613           166(b)                             779
                        ------          ----              ----           ------
                        $1,945          $186              $236           $1,895
                        ======          ====              ====           ======                               
1996
 Doubtful receivables.. $  600          $860              $128(a)        $1,332
 Discounts, returns,
  and allowances.......    557           56(b)                              613
                        ------          ----              ----           ------                        
                        $1,157          $916              $128           $1,945
                        ======          ====              ====           ======                            
</TABLE>

------------------------------------
(a)  Uncollectible receivables written off, net of recoveries.
(b)  Represents net decrease in the reserve.





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