FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

               (X)ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                     For the fiscal year ended June 27, 1998

                          Commission file number 1-5555
                            WELLCO ENTERPRISES, INC.
               (Exact name of Registrant as specified in charter)

    North Carolina                                       56-0769274
(State of incorporation)                    (I.R.S. employer identification no.)

       Waynesville, North Carolina                                       28786
(Address of principal executive offices)                              (Zip Code)

Registrant's telephone number, including area code 828-456-3545

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

Common Capital Stock - $1 par value                   American Stock Exchange
              (Title of class)           (Name of exchange  on which registered)

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

                       Common Capital Stock - $1 par value
                                (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes X No .

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

As of August 31,1998 1,163,246 common shares were outstanding, and the aggregate
market value of the common  shares (based upon the closing price of these shares
on the American Stock Exchange on August 28, 1998) of Wellco  Enterprises,  Inc.
held by nonaffiliates was approximately $5,000,000.

Documents incorporated by reference:
         Definitive Proxy  Statement,  to be dated October 16, 1998, in PART IV.
         Definitive  Proxy  Statement,  dated  October  17,  1997,  in PART  IV.
         Definitive  Proxy  Statement,  dated  October  18,  1996,  in PART  IV.
         Definitive  Proxy  Statement,  dated  October  17,  1995,  in PART  IV.
         Definitive  Proxy  Statement  dated  October  22,  1985,  in  PART  IV.
         Definitive Proxy Statement dated July 3, 1982, in PART IV.

                                      

<PAGE>



                                     PART I

Item 1. Business.

The Company operates in one industry  segment.  Substantially  all the Company's
revenues  are derived  from the sale of  military  footwear  and related  items,
whether sold by the Company or its  licensees.  The majority of revenues (73% in
1998 and 69% in 1997) were from  sales to the U. S.  government,  primarily  the
Defense Support Center  Philadelphia  (DSCP),  under contracts for the supply of
boots used by the U. S. Armed Forces.

For more  than the last  five  years,  the  Company  has  manufactured  and sold
military  combat boots under firm fixed price  contracts  with the United States
government.  Boot  products  are the general  issue  all-leather  boot,  the hot
weather  boot  and the  desert  boot,  all  manufactured  using  the  government
specified  Direct Molded Sole (DMS) process.  In 1998, the Company also supplied
the  Intermediate  Cold/Wet Boot (ICW) and the new Infantry  Combat  Boot/Marine
Corps (ICB).  The  government  awards fixed price boot contracts on the basis of
bids from several qualified U. S. manufacturers.

The Company also  provides,  primarily  under  long-term  licensing  agreements,
technology,  assistance  and related  services  for  manufacturing  military and
commercial  footwear to customers in the United  States and abroad.  Under these
agreements  licensees  receive  technology,  services  and  assistance,  and the
Company earns fees based primarily on the licensees'  sales volume.  In addition
to providing technical assistance, the Company also, from time to time, supplies
certain foreign military footwear manufacturers with some of their machinery and
material needs. The Company builds specialized footwear manufacturing  equipment
for use in its own and its customers' manufacturing  operations.  This equipment
is usually sold, but in some cases it is leased.

Net loss for the 1998 fiscal year was $337,000 ($.29 diluted per share) compared
to net income of $758,000 ($.66 diluted per share) for the 1997 fiscal year.

Three events significantly impacted 1998 results:

         The filing of a claim for the recovery of certain costs.

         A significant reduction in the number of pairs of DMS combat boots sold
         to the U. S. government.

         Start up costs on the first production of the ICB boot.

As stated in the  Management's  Discussion and Analysis section of the Company's
1998 annual report,  incorporated  in Part II of this Form 10-K, in April,  1998
Wellco  reached an Agreement  with DSCP  providing  for Wellco to be  reimbursed
certain contract costs. Wellco had spent a significant amount of money to assure
its meeting a performance standard that would have increased its future DMS boot
sales to DSCP during contract option years. The  interpretation  of the contract
provision  providing for this performance  standard was later changed by DSCP to
the detriment of Wellco.

Subsequently,  Wellco negotiated with DSCP an Agreement for the reimbursement to
Wellco of these costs.  In May, 1998 a claim for  $1,000,000 was filed by Wellco
under this Agreement. In an early October, 1998 meeting with Wellco, DSCP agreed
to pay Wellco $246,000 of the $1,000,000 claim. Binding arbitration will be used
to determine how much, if any, of the remaining $754,000 will be paid by DSCP to
Wellco.  It is expected that this  arbitration  procedure will take a few months
and Wellco,  although  feeling that a  significant  amount of the $754,000  will
ultimately  be paid,  cannot  reasonably  predict the what the  arbitrator  will
decide.

For a number  of years  DSCP has been  carrying  out a  program  to  reduce  its
inventory of the DMS combat

                                       -1-

<PAGE>



boot.  During the Cold War period,  DSCP was  authorized to build and maintain a
large,  ready to go to war inventory of this boot.  With the end of the Cold War
and reductions in military budgets,  DSCP no longer has the funding to support a
large inventory.  Since the early 1990's,  DSCP has been gradually reducing boot
inventory  by buying  fewer  pairs  than were  used.  There are  presently  four
contractors  in the United  States  using the DMS process to  manufacture  three
types of combat boots.  In order to maintain an industrial  base of  contractors
who  could  meet war time  needs,  this  inventory  reduction  program  is being
accomplished over several years. Information available to the Company shows that
the government's  inventory reduction program is working.  The Company estimates
that the reduced  order level for DMS boots will  continue for a few more years.
When this reduction  program is completed,  combat boot  purchases  should equal
usage, which is significantly more than the pairs currently being ordered.

In Wellco's 1998 fiscal year, DSCP accelerated its inventory  reduction  program
which  resulted  in Wellco's  DMS boot sales  being about half of 1997.  Reduced
revenues from lower sales of DMS combat boots were offset by increased  revenues
from the sale of two other  boots,  the ICW and the ICB  boots.  Wellco  had not
previously  made either of these boots.  As is often the case when  entering the
manufacture  of new products,  margins on these new boots are less than those on
DMS combat boots historically supplied by Wellco to DSCP.

The  ICB  boot,  a new  item  presently  used  only  by  the  Marine  Corps,  is
significantly  different  from  other  boots made by  Wellco.  The MD&A  section
contains  information  about Wellco  incurring  start-up costs of  approximately
$800,000 related to this boot.

The  Management's  Discussion and Analysis  section of the Company's 1998 Annual
Report contains more information about 1998 operating results.

Bidding on U. S.  government boot  solicitations  is open to any qualified U. S.
manufacturer.  In addition to meeting very stringent  manufacturing  and quality
standards,  contractors are required to comply with demanding delivery schedules
and a  significant  investment  in  specialized  equipment  is required  for the
manufacture of certain types of boots.

The Company usually  competes on U. S.  government  contracts with several other
companies,  none of which  dominates the industry.  Bidding on contracts is very
competitive,  and since most contracts are for multi-year  periods, a bidder not
receiving an award from a significant solicitation can be adversely affected.

Many factors affect the government's demand for boots and the quantity purchased
can vary from year to year.  Contractors  cannot influence the government's boot
needs. Price, quality, quick delivery and manufacturing efficiency are the areas
emphasized by the Company that strengthen its competitive position.

The U. S. government  usually evaluates bids received on solicitations for boots
using their "best value" system,  under which bidders offering the best value to
the  government  are awarded a greater  portion of total boots  purchased.  Best
value  usually  involves an evaluation of  performance  considerations,  such as
quality  and  delivery,  with the prices bid being  less  important.  As bidders
become more equal in the best value  evaluation,  price becomes more  important.
For the current DMS combat boot contract awarded April 15, 1997,  Wellco and one
other bidder were given the highest possible evaluation. However, since Wellco's
bid prices were higher,  Wellco was awarded the 25%  allocation  of total boots,
and the other competitor received 35%.

Government  contracts are subject to partial or complete  termination  under the
following circumstances:

(1)  Convenience of the Government. The government's contracting officer has the
     authority  to  partially  or  completely   terminate  a  contract  for  the
     convenience of the government only when

                                       -2-

<PAGE>



     it is in the government's  interest to terminate.  The contracting  officer
     is responsible for negotiating a settlement with the contractor.

(2)  Default of the Contractor.  The  government's  contracting  officer has the
     authority to partially or  completely  terminate a contract  because of the
     contractor's  actual or  anticipated  failure  to perform  his  contractual
     obligations.

Under certain circumstances occasioned by the egregious conduct of a contractor,
contracts may be  terminated  and a contractor  may be prohibited  for a certain
period of time from receiving government contracts.  The Company has never had a
contract either partially or completely  terminated.  All current boot contracts
contain options that are exercisable at the government's discretion. In 1998 the
government did not exercise an option on an ICB boot contract. Subsequently, the
government  agreed to award the Company a contract  for total pairs of this boot
that is  approximately  5,000 pairs less than the minimum  pairs they would have
bought under the option.

Because domestic  commercial  footwear  manufacturers are adversely  affected by
imports  from low labor cost  countries,  the Company  targets its  marketing of
technology  and assistance  primarily to military  footwear  manufacturers.  The
Company  competes against several other footwear  construction  methods commonly
used  for  heavy-duty   footwear.   These  methods  include  the  Goodyear  Welt
construction,  as well as boots bottomed by injection molding. These methods are
used in work shoes,  safety shoes, and hiking boots  manufactured both in the U.
S. and  abroad  for the  commercial  market.  Quality,  service  and  reasonable
manufacturing costs are the most important features used to market the Company's
technology, assistance and services.

The  Company  has a strong  research  and  development  program.  While  not all
research and  development  results in  successful  new  products or  significant
revenues,  the continuing development of new products and processes has been and
will continue to be a significant factor in growth and development.  The Company
developed the desert combat boot, first used in Operation Desert Storm. In 1993,
the Company  completed  initial  development  of  improvements  to the black hot
weather boot  incorporating  many of the  features it  developed  for the desert
boot.  In  1994 it was  awarded  an  option  under  that  contract  for  further
development,  and the results of this work were  subsequently  incorporated into
the black hot weather boot. In August, 1995 it was awarded a contract to develop
changes to combat boots that will result in fewer lower extremity disorders, and
completed the second phase of this work in 1998. This contract has three phases,
and after the end of the 1998  fiscal  year,  the  government  funded  the third
phase.

Although not precisely  quantified,  the Company spends a significant  amount of
time and  effort on both  Company  and  customer-sponsored  research  activities
related to the  development of new products and processes and to the improvement
of existing ones. A significant  amount of this cost is for the personnel  costs
of  mold  engineers,   rubber  technicians,   chemists,  pattern  engineers  and
management,  all of whom have many  responsibilities in addition to research and
development. The Company estimates that the cost of research and development can
vary from  $50,000 to  $300,000  per year,  depending  on the number of research
projects and the specific needs of its customers.

See Note 18 to the Consolidated  Financial  Statements for revenues by class and
information about export revenues. The Company does not have foreign operations.

The Company's backlog of all sales, not including  license fees and rentals,  as
of September,  1998 was approximately  $11,900,000  compared to $18,700,000 last
year. The Company  estimates that  substantially all of the current year backlog
will be shipped in the 1999 fiscal  year.  The current  backlog is less than the
prior year because of the  decrease in the minimum  pairs to be bought under the
current DMS boot contract,  minimum pairs under the first option of the ICW boot
contract being less than first year pairs, and to last

                                       -3-

<PAGE>



year's backlog  including  several large  machinery  orders that were shipped in
1998.

Most of the raw materials  used by the Company can be obtained from at least two
sources and are readily  available.  Because all  materials in combat boots must
meet rigid government  specifications and because quality is the first priority,
the Company  purchases  most of its raw  materials  from vendors who provide the
best  materials at a reasonable  cost. The loss of some vendors would cause some
difficulty  for  the  entire  industry,  but the  Company  believes  a  suitable
replacement  could be found in a  reasonably  short  period  of time.  Major raw
materials include leathers, fabrics and rubber, and by government regulation all
are from manufacturers in the United States.

The current DMS boot contract provides for the Company to quickly ship direct to
U. S. Armed Forces  installations  in both the U. S. and abroad.  This increases
the Company's investment in inventory, compared to prior years when shipment was
to government warehouses.

Compliance with various existing governmental  provisions relating to protection
of the  environment  has not had a  material  effect  on the  Company's  capital
expenditures, earnings or competitive position.

The Company employed an average of 305  persons during the 1998 year.


Item 2. Properties.

The Company has manufacturing, warehousing and office facilities in Waynesville,
North  Carolina  and  Aguadilla,  Puerto  Rico.  The  building and land in North
Carolina are owned by the Company. The Puerto Rico building and land are leased.

Management believes all its plants, warehouses and offices are in good condition
and are reasonably suited for the purposes for which they are presently used. As
has been the case for the last several  years,  the volume of operations in 1998
caused both the  Waynesville  and  Aguadilla  facilities to be used at less than
normal capacity.

Item 3. Legal Proceedings.

In April 1997,  the  Company  was served with a subpoena  issued by a grand jury
empaneled  in the United  States  District  Court for the  Eastern  District  of
Pennsylvania  which requires the production of certain  documents for the period
January 1, 1990 until April 29, 1997. The Company was informed through its legal
counsel that the grand jury was investigating  possible  violations of antitrust
laws primarily  involving  alleged collusive  activities among  manufacturers of
combat boots for the U.S.  Government.  In August,  1998,  the  Company's  legal
counsel was notified the Company's  documents  were being  returned and informed
that the grand jury's investigation has been closed.

In March  1998  the  Company  was  served  with a civil  action  complaint.  The
Plaintiff is alleging that the Company,  during the period October, 1995 through
September,  1996,  untimely  delivered  defective  work shoes which  resulted in
certain losses for the Plaintiff as well as precluding  Plaintiff from competing
on a  subsequent  contract.  In  addition,  the  complaint  alleges  that Wellco
submitted as its bid prototype one of the Plaintiff's  work shoes which resulted
in the  subsequent  contract  being awarded to Wellco.  It is the opinion of the
Company's  management,  based upon the information  available at this time, that
the expected outcome of these matters will not have a material adverse effect on
the results of operations and financial condition of the Company.

There are no other  material  pending  legal  proceedings,  other than  ordinary
routine litigation incidental to the

                                       -4-

<PAGE>



Company's business,  to which the Company or any of its subsidiaries are a party
or of which any of their property is subject.

Management does not know of any director, officer, affiliate of the Company, nor
any  stockholder of record or beneficial  owner of more than 5% of the Company's
common stock, or any associate thereof who is a party to a legal proceeding that
is adverse to the Company or any of its subsidiaries.

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

There were not any  submissions of matters to a vote of security  holders during
the fourth quarter of fiscal year 1998.




                                     PART II
Items 5, 6, 7, 7A  and 8.

The  information  called for by the  following  items is in the  Company's  1998
Annual Report to Shareholders  which is  incorporated  starting on the following
page in this Form 10-K:

                                                                   Annual Report
                                                                        Page No.
Item 5.  Market for the Registrant's Common Equity and Related
         Stockholder Matters                                                 37
Item 6.  Consolidated Selected Financial Data                                 1
Item 7.  Management's Discussion and Analysis of Results of Operations
         and Financial Condition                                           4-11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk           *
Item 8.  Financial Statements and Selected Quarterly Financial Data   13-35, 38

* This  information  is not required  because the registrant is a small business
issuer.

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

There  were no  resignations  by or  dismissals  of any  independent  accountant
engaged by the Company during the 1998 or 1997 fiscal years or during the period
from the end of the 1998 fiscal year through the date of filing this Form 10-K.

                                      -5-
<PAGE>





                                    WELLCO(R)
                                ENTERPRISES, INC.


                                  ANNUAL REPORT
                                      1998




<PAGE>



                            WELLCO ENTERPRISES, INC.
                      CONSOLIDATED SELECTED FINANCIAL DATA
                   (In Thousands Except for Per Share Amounts)
<TABLE>
<CAPTION>

                                             Year Ended
                            June 27,   June 28,   June 29,  July 1,   July 2,
                                1998       1997       1996     1995      1994
                            --------   --------   --------  -------   -------
<S>                          <C>        <C>        <C>      <C>       <C>    
Revenues                     $23,917    $21,199    $19,968  $18,003   $18,255
Net Income (Loss)               (337)       758        991      969     1,542
Basic Earnings (Loss) per
Share (B and C)                (0.29)      0.67       0.53     0.37      0.58
Diluted Earnings (Loss) per
Share (B and C)                (0.29)      0.66       0.52     0.37      0.58
Cash Dividends Declared Per
Share of Common Stock (B)        .20        .20       .125     .083 (A) 2.083
Total Assets at Year End      16,020     15,652     12,697   22,738    20,995
Long-Term Liabilities at 
Year End                      $2,253     $2,789     $2,431   $1,897    $1,647

</TABLE>

(A) Includes a special cash dividend of $2.00 per share.

(B)      All per share amounts reflect a  three-for-one  stock split in the form
         of a stock dividend paid on January 3, 1997.

(C)      In 1997,  the Company  adopted  FASB  Statement  No. 128,  Earnings per
         Share. See Note 17 to the Consolidated Financial Statements for further
         information.

See the Management's Discussion and Analysis section.


Independent Auditors
Deloitte & Touche LLP Charlotte, N.C.

Annual Meeting
November 17, 1998
Corporate Offices
Waynesville, N.C.

10-K Availability
The Company's  Form 10-K (annual  report filed with the  Securities and Exchange
Commission)  is  available  without  charge to those who wish to receive a copy.
Write to: Corporate Secretary,  Wellco Enterprises,  Inc., Box 188, Waynesville,
N.C. 28786
                                       -1-

<PAGE>



Dear Fellow Shareholders:

Fiscal 1998 has been a difficult  year for Wellco,  the first  losing year since
1984 when we  restructured  operations and market focus.  The three reasons,  in
order of magnitude are:

1.       Our largest customer,  the U.S. Defense  Department (DOD),  drastically
         accelerated  their drive to reduce Direct Molded Sole (DMS) combat boot
         inventories,  which led them to reduce their  purchases  from us during
         our 1998 Fiscal Year by approximately  60,000 pairs from the quantities
         foreseen  in the  current  five-year  contract  awarded  in 1997.  This
         resulted  in pairs of DMS  boots  shipped  in fiscal  year  1998  being
         approximately half of 1997 shipments.

         Reduced  revenues  from lower sales of DMS combat  boots were offset by
         increased  revenues from the sale of two other boots,  the Intermediate
         Cold Wet boot (ICW) and the  Infantry  Combat  Boot/Marine  (ICB) boot.
         Wellco had not previously  made either of these boots.  As is often the
         case when entering the  manufacture  of new  products,  margins on both
         these  boots  are less  than  those on DMS  combat  boots  historically
         supplied by Wellco to the DOD.

2.       A  reserve of $754,000  which  we were  required by  circumstances   to
         record  against  our claim of  $1,000,000  for DOD's   reinterpretation
         of contract language which led us to expend approximately  one  million
         dollars   to   satisfy   their   original   interpretation   which they
         subsequently  altered.  The   settlement  agreement  reached last April
         provided they would  promptly  pay  reasonable  documented  costs up to
         $1,000,000,  with any disputed amounts subject to binding  arbitration.
         Just  this  week,  they  have  committed  to  promptly  pay  the sum of
         $246,000.  While  we  believe  we will be able to  recover  most of the
         disputed  $754,000  balance in  arbitration,  prudent  accounting leads
         us to book only what we are sure of collecting.

3.       Startup  losses in the  production  of the new Marine  Infantry  Combat
         Boot. These excess costs resulted from a complicated new  manufacturing
         process,  in combination with an unrealistic  initial delivery schedule
         which we were able to meet only with our employees'  superb  dedication
         to the fulfillment of customer service commitment.

Thankfully,  the last two of the above  problem  areas  can have  only  positive
effects going forward: The proceeds from our claim can only increase as a result
of the  arbitration,  and we  anticipate  efficient  performance  in the present
balance of ICB production,  scheduled for completion in the third quarter of the
1999 Fiscal Year.

The DOD initial  contract  interpretation  that resulted in our claim relates to
quickly shipping boots after order receipt. Relying upon this interpretation, we
significantly  increased  our  investment  in  inventory.  With DOD's  change in
interpretation,  we are currently  reducing  inventory by producing  fewer pairs
than are shipped, and we have a target of reducing total inventory by $2,000,000
to $3,000,000. This will reduce future interest cost and also improve liquidity.

The  acceleration of DOD's inventory  reduction  program will continue until the
end of the second year of the  five-year  contract  in April 1999.  Based on the
significant  inventory  reduction  to date  and our  projection  of the  further
reduction  through  April,  1999, we anticipate  that,  with the exercise of the
third contract year option in April,  1999, DOD will return to the purchase rate
of  approximately  775,000  total  pairs per year,  as  foreseen  in the initial
contract projections. During the current second contract year, DOD will purchase
approximately 500,000 total pairs. Once DOD reaches their target inventory, they
should resume

                                       -2-

<PAGE>



purchasing  quantities  equal to  their  consumption,  a total of  approximately
1,000,000 pairs per year.

We recently  submitted bids for the supply of two  additional  boots to DSCP. We
understand  contract award will be made soon after the start of the government's
new fiscal year on October 1, 1998.

The  dedication,  experience and talents of all our  co-workers in  Waynesville,
North Carolina and Aguadilla, Puerto Rico remains steadfast. From helping create
a perfect  delivery record to meeting the challenges of making a new boot, their
character, worth and skill have been proven.








Horace Auberry                                           David Lutz
Chairman of the Board of Directors                       President, Treasurer
Chief Executive Officer                                  Chief Operating Officer

October 9, 1998



                                       -3-

<PAGE>

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

                              RESULTS OF OPERATIONS

Comparing the Fiscal Year ended June 27, 1998 to June 28, 1997:

Loss before  income taxes was  ($527,000)  in the 1998 fiscal year compared with
income  before  income taxes of  $1,088,000  in the 1997 fiscal  year.  The 1998
fiscal  year  pretax  income  includes  a  $226,000  non-recurring  income  item
representing  the accrual of a claim under an Agreement  with the Defense Supply
Center Philadelphia (DSCP), an agency of the U.S. Department of Defense to which
the Company sells combat boots.

In April 1998 Wellco  executed an Agreement  with DSCP.  The Agreement  provides
that DSCP will  reimburse  the  Company for certain  costs  incurred  related to
contract  performance  during the fourth quarter of the 1997 fiscal year and the
first two quarters of the 1998 fiscal year.  Wellco  maintained  that it was due
reimbursement  for costs incurred in performing in accordance  with a prior DSCP
interpretation  of the contract.  This  interpretation  was later changed to the
detriment of Wellco. The Agreement provides that any disagreement between Wellco
and DSCP on an item of cost will be  subject to  binding  arbitration.  The cost
reimbursement is limited to $1,000,000.

Wellco  submitted its claim under the  Agreement in late May,  1998  documenting
more than $1,000,000 in costs incurred.  In an early October,  1998 meeting with
Wellco,  DSCP agreed to pay Wellco  $246,000 of the  $1,000,000  claim.  Binding
arbitration  will  be used to  determine  how  much,  if any,  of the  remaining
$754,000 will be paid by DSCP to Wellco.  It is expected  that this  arbitration
procedure will take a few months and Wellco,  despite feeling that a significant
amount of the $754,000 will ultimately be paid, cannot  reasonably  predict what
the  arbitrator  will decide.  Therefore,  the 1998  Consolidated  Statements of
Operations  includes  as an item of  income  related  to  this  claim  $226,000,
representing  the agreed to $246,000 less $20,000 of related  costs.  Any amount
Wellco  will  receive  beyond  $246,000  will  be  recorded  at the  time of the
arbitration decision.

Pairs of direct  molded sole (DMS) combat boots shipped in 1998 were almost half
of 1997. On April 15, 1997,  Wellco and three other contractors were awarded DMS
combat boot contracts from DSCP for the one year period  starting April 15, with
options  for each of the  ensuing  four  years.  These are  indefinite  quantity
contracts  under  which each  contractor  is  guaranteed  delivery  orders for a
minimum  number  of pairs and DSCP can  order up to a stated  maximum  number of
pairs. Wellco's award is for 25% of total combat boot purchases,  with the other
three  contractors  receiving  35%,  20% and 20% of  total  purchases.  DSCP had
estimated  award to be in December,  1996,  and Wellco  substantially  completed
shipments under its prior contract in that month. Instead of ceasing combat boot
manufacturing  operations from January, 1997 to contract award, Wellco continued
to manufacture and stock boots in anticipation of a contract award.

This  contract  is the first one under  which boot  contractors  ship  direct to
customers, instead of to government warehouses. Past performance is a key factor
in  contractor  evaluation,  and quick  delivery  is a  significant  performance
factor. Wellco built a large inventory in order to be able to ship quickly after
receipt of orders.

This resulted in Wellco  having a  significant  inventory of combat boots at the
date of contract  award,  and in Wellco being the only  contractor  which was in
position to start shipping  immediately  upon contract award.  During the fourth
quarter of the 1997 fiscal year, Wellco was allowed to accelerate its first year
shipments  and did ship very large  quantities  against  its first year minimum.
Starting in late October, 1997, when Wellco was very close to having shipped its
guaranteed minimum pairs, DSCP significantly  reduced Wellco's orders.  This was
done to give the other three  contractors  delivery orders for their  guaranteed
minimum

                                       -4-

<PAGE>



pairs.

Because of the delay in contract award, DSCP expressed their non-binding  intent
to purchase more than the  guaranteed  minimum pairs in the first contract year.
Wellco  continued to maintain its DMS boot  inventory  in  anticipation  of DSCP
purchasing pairs above the minimum.  As other contractors reached their minimum,
DSCP determined that it could not buy pairs beyond the minimum. This resulted in
a significant  reduction in the pairs of DMS combat boots shipped by Wellco from
late October, 1997 through April, 1998.

On April 10, 1998 DSCP  exercised  it's first option on the DMS boot for the one
year period April 15, 1998 to April 15, 1999, with Wellco's option being for 25%
of total DMS pairs purchased during this year. For several years,  DSCP has been
reducing its depot  inventory of DMS boots.  Prior to option  exercise,  in late
February,  1998,  DSCP met with all DMS boot  contractors  informing  them  that
inventory  reduction  was behind  schedule.  Out of this meeting came a contract
modification reducing the total guaranteed minimum pairs to be purchased by DSCP
during the first  option  year.  For Wellco,  this is a reduction in the minimum
pairs from 155,000 to 125,000  pairs.  The price per pair for the first  155,000
pairs during the first option was increased to compensate for the reduced pairs.
DSCP has again expressed their intent,  without giving a binding commitment,  to
purchase  more than the minimum  pairs if their total usage in the first  option
year  exceeds  900,000  pairs.  Boot usage in the year ended  April 15, 1998 was
approximately 1,100,000.

The  reduction of boot  shipments,  after the  acceleration  of shipments in the
first contract year, and the reduction in minimum pairs to be ordered during the
second  contract  year,  were the primary  reasons for DMS boot shipments in the
1998 fiscal year being almost half of 1997.

Compared  to fiscal  year 1997,  sales  revenues  in 1998  increased  $2,718,000
primarily  because of shipments  under two new boot  contracts.  On February 25,
1997 Wellco was awarded a contract from DSCP to supply the Intermediate Cold/Wet
boot (ICW),  and the 1997 fiscal year  reflected  only the first  shipment under
this contract. On June 25, 1997, Wellco was awarded a contract to supply the new
Infantry Combat  Boot/Marine  Corps (ICB),  with shipments  starting in October,
1997. Wellco had not previously made either of these boots. As is often the case
when entering the  manufacture of new products,  margins on both the ICB and ICW
boots are less than those on DMS boots historically supplied by Wellco to DSCP.

Operating results for 1998 were adversely affected by start-up costs,  estimated
to be approximately  $800,000,  which incurred in the initial  production of the
ICB boot. The ICB contract  required that Wellco,  within 90 days after contract
award, manufacture and have in inventory a significant quantity of this boot. At
the end of this 90 day period,  the contract  also  required  Wellco to have the
capacity  to quickly  deliver  orders for this boot to Marine  recruit  training
centers  and major  Marine  clothing  stores.  This 90 day period  compares to a
normal "make ready" time in government boot contracts of 165 days or longer.

The ICB boot incorporates several  technologies and manufacturing  methods which
are  significantly  different  than  those in the DMS boot.  During  this 90 day
period,  Wellco  rearranged  its  production  lines,   purchased  and  installed
significant new manufacturing equipment, hired and trained new employees, tested
new materials,  and developed many new manufacturing  procedures and methods. If
time had permitted, this should have been done with small trial production runs.
With only 90 days,  Wellco had to  simultaneously  do all of this and reach full
production without the benefit and efficiencies of trial production runs.

ICB boot start-up costs were charged against 1998 operating  income. In addition
to labor inefficiencies in training new employees, significant overtime premiums
were paid.  Bonuses were paid to direct labor  personnel for meeting  production
quotas.  Instead  of using  ocean  freight,  expensive  air  freight  costs were
incurred to send  materials  to the  Company's  plant in Puerto Rico and then to
send  completed  boot  uppers to the North  Carolina  plant  for  bottoming  and
finishing.  Because  the 90 day  period  did not  give  enough  time to  develop
manufacturing   procedures  and  methods  using  small  trial  production  runs,
significant material

                                       -5-

<PAGE>



losses were  incurred.  Production  quantities of materials  were  purchased and
processed. Some materials did not perform as expected,  resulting in boots which
could not be shipped  under the  contract  and whose  market value was less than
cost.

The  start-up  of ICB  production  proved to be more  expensive  than  initially
anticipated.  Management's judgement is that, if Wellco had included an adequate
amount of start-up costs in its bid prices, those prices would have been so much
higher than the prices of other  bidders that Wellco would not have received the
contract award.

Revenues from  technical  assistance  fees and equipment  rentals from licensees
increased almost $200,000 in 1998.  Technical  assistance fees increased because
of an additional fee, earned through April,  1998,  related to supplying certain
customers  with  additional  services.  In addition to  completing  a major mold
order,  a new footwear  manufacturing  installation  was completed in 1998.  The
second phase of a government research and development  contract was completed in
1998.  However,  the  sale  of  boot  making  materials,  primarily  to  foreign
customers,  decreased in 1998. These sales can vary significantly from period to
period with the needs of this group of customers.

General and  administrative  expenses  decreased  $239,000.  Bonus expense,  the
majority  of which  varies  with net  income,  decreased.  For a number of years
Wellco has made a  contribution  to The Wellco  Foundation in an amount based on
taxable  income.  Subsequent  distributions  to  qualifying  charities is at the
nomination  of Wellco  shareholders  whose names are known to the  company.  The
contribution  for 1997 was $115,000 , and no contribution  was made in 1998. The
rate of Tax Benefit to Income  Before Income Taxes is 36% for 1998 compared to a
rate of Tax Provision to Income  Before  Income Taxes of 30% for 1997.  The 1998
benefit  results from the taxable loss being  carried back for a refund of taxes
paid in prior years.

Forward Looking Information:

Information  is given above about the exercise by DSCP of Wellco's  first option
on its DMS contract and the reduction in the minimum pairs to be purchased under
this option which was a result to their depot  inventory  reduction  program not
being on  schedule.  Any amount  Wellco will  receive  from its claim with DSCP,
mentioned above, beyond $246,000 will be recorded at the time of the arbitration
decision.

Information  available  to the  Company  shows that the  government's  inventory
reduction program is working. The Company estimates that the reduced order level
for DMS boots will continue for a few more years. When this reduction program is
completed,  DMS boot purchases should equal usage,  which is significantly  more
than the pairs currently being ordered.

In late June, 1998,  Wellco was informed that DSCP was not exercising its option
under the ICB boot contract. After negotiations, DSCP agreed to issue a contract
to Wellco for 27,000  pairs,  which is  approximately  5,000 pairs less than the
minimum pairs they would have bought under the option.  This contract will allow
Wellco to recover its  investment in inventory for this boot,  instead of having
to hold this inventory until the next contract award.

On February 20, 1998,  DSCP exercised its first year option on the ICW boot, and
shipments  under this  option  started in the fourth  quarter of the 1998 fiscal
year.  Under this  option,  DSCP will  purchase a minimum of 44,000 pairs and no
more than 66,000  pairs from  Wellco.  Approximately  87,000  pairs were shipped
during the base year of this contract. As specified by the contract, pairs to be
bought in each  option  year of this  contract  are less than  those of the base
year.

Wellco recently  submitted bids for the supply of two additional  boots to DSCP.
We understand contract
                                       -6-

<PAGE>



award will be made soon after the start of the  government's  new fiscal year on
October 1, 1998.

The Company  recognizes  the need to consider  whether  its  operations  will be
adversely  impacted by Year 2000  software  failures.  Software  failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk.

The Company primarily uses packaged  software running on personal  computers and
file servers, and does not use mainframes.  Packaged software primarily consists
of  accounting,  payroll,  bar coding and inventory  control,  employee time and
attendance,  and  Microsoft  Windows  applications.  All  of  Wellco's  packaged
software has been  updated to Year 2000  compliant  versions.  The total cost of
this updating was minimal.

A lack of timely Year 2000 compliance by Wellco's major  customers,  vendors and
suppliers  could  have a  materially  adverse  affect  on  Wellco's  results  of
operations and financial  condition,  although such adverse effect should not be
long term or  permanent.  For example,  orders  received  from the DSCP for boot
shipments are received  electronically.  After shipment,  Wellco  electronically
invoices boot shipments as well as receiving  payment by bank wire  transfer.  A
lack of timely Year 2000  compliance by DSCP may  significantly  delay  Wellco's
boot shipments.  A lack of timely Year 2000 compliance with related computerized
systems,  for example  the  ability to  electronically  receive  invoicing  from
Wellco,  may significantly  delay Wellco's receipt of cash from invoices.  There
may be suppliers of materials,  machine  replacement  parts,  and other critical
items who may not be Year 2000  compliant.  This may mean a delay in getting the
necessary materials and other items to maintain a continuous flow of production.
The Company has recently  sent written  communication  to all major  vendors and
customers asking confirmation as to their Year 2000 compliance status. Responses
received to date do not indicate a problem.

Wellco will continue  monitoring  customer and vendor responses to its Year 2000
compliance questionnaire.  If vendor responses indicate a problem, Wellco may be
able to find other Year 2000 compliant  vendors,  or order excess  materials and
other items  necessary to continue  operations  until the estimated time vendors
are compliant.  If customer responses indicate a problem,  Wellco will work with
those  customers  to the extent  possible.  If Wellco has to take some or all of
these actions to minimize any Year 2000 problems, it may have to have additional
financing.  Early detection of problems will increase the probability of finding
such financing.

Except for historical  information,  this annual report includes forward looking
statements that involve risks and uncertainties,  including, but not limited to,
the  receipt  of  contracts  from  the U.  S.  government  and  the  performance
thereunder,  the effect of  customers  and vendors not being timely in Year 2000
compliance,  the  ability to control  costs under  fixed  price  contracts,  the
cancellation  of  contracts,  and other risks  detailed from time to time in the
Company's  Securities and Exchange Commission  filings,  including Form 10-K for
the year  ended  June 27,  1998.  Actual  results  may  differ  materially  from
management expectations.

See Note 23 to the  Consolidated  Financial  Statements for information  about a
subpoena served on the Company in April 1997. In August,  1998 Wellco's  counsel
was  informed  that the  investigation  was  closed and that no action was being
taken.  Note 23 also contains  information  about a civil action complaint filed
against Wellco.



Comparing the Fiscal Year ended June 28, 1997 to June 29, 1996:

Income before income taxes was  $1,088,000 in the 1997 fiscal year compared with
$1,357,000 in the 1996 fiscal year. The 1996 year included several non-recurring
items which were:


                                       -8-

<PAGE>



1.   A $601,000  charge for Loss in Affiliate,  representing  Wellco's  $305,000
     equity in the six- month  (July-December,  1995)  loss of  Alba-Waldensian,
     Inc. (Alba),  and the $296,000 write down to fair value of that investment.
     Wellco had owned  400,000  common  shares of Alba  (21.5% of total  shares)
     since  December  30, 1994.  Wellco's  investment  in Alba was  exchanged on
     December  29,  1995,  as part  of the  price  for  Wellco's  repurchase  of
     1,531,272  shares of its common  stock.  Income was also reduced by a Stock
     Repurchase Charge of $110,000, which is the portion of the stock repurchase
     price  allocated  to  an  agreement  limiting  the  selling   shareholders'
     ownership of total Wellco  shares for a period of ten years (see Note 13 to
     the Consolidated Financial Statements).

2.   The total of interest, dividend and investment income was $1,419,000 in the
     1996 year compared to $53,000 of interest  income in 1997. The prior period
     included  gains  resulting  from the sale of all  marketable  securities at
     amounts  significantly  greater than their carrying  value.  All marketable
     securities  were sold to pay for the stock  repurchase.  The current period
     only includes interest income earned on excess operating funds.

Comparative 1997 operating income,  before the above items and interest expense,
was  $1,226,000  as compared with  $688,000 in the prior year.  Several  factors
resulted in the $538,000 increase, the more significant ones being:

         1.       Total  revenues  increased  $1,231,000.  Pairs of combat boots
                  sold to the U. S. government increased approximately 6%. Pairs
                  of combat boots sold to other  customers also increased in the
                  current year.

         2.       Greater  revenues  from the sale of  combat  boots  more  than
                  offset  a  decrease  in  sales of boot  making  machinery  and
                  materials.  The 1997 year does include a significant machinery
                  sale  to a new  customer.  However,  the  1996  year  included
                  significant  boot making materials sales to a foreign customer
                  which  were  not as large as in  1997.  These  sales  can vary
                  significantly  from  period to  period  with the needs of this
                  group of customers.

         3.       Revenues from technical  assistance fees and equipment rentals
                  from  licensees,  which vary with their  shipments,  increased
                  approximately  42% in the  current  year.  In  addition to the
                  licensees  having  increased  shipments in 1997, an additional
                  fee is being  earned  until  April,  1998 related to supplying
                  certain of these customers with additional services.

         4.       Revenues  from  U.  S.  government  research  and  development
                  contracts  decreased $288,000 in 1997. The prior year includes
                  Phase I billings under a multi-phase contract whose purpose is
                  to develop a combat  boot that is more  impact  resistant  and
                  flexible. The government did not commit funding to Phase II of
                  this contract until after the end of the 1997 year.

Operating  income for 1997 was  significantly  affected by  increases in certain
costs:

1.   Interest cost increased  $152,000.  On April 15, 1997, Wellco was awarded a
     new contract  from the U. S. Defense  Personnel  Support  Center (DSCP) for
     their  purchases  of  combat  boots.  DSCP  had  estimated  award  to be in
     December,  1996, and Wellco  substantially  completed  shipments  under its
     prior contract in that month.  Instead of ceasing combat boot manufacturing
     operations  from  January,  1997 to contract  award,  Wellco  continued  to
     manufacture and inventory  boots in anticipation of a contract award.  This
     resulted  in  significant  borrowings  from a bank  line of credit on which
     $79,000 of interest cost was incurred.

                                       -8-

<PAGE>



                  Although the Note Payable related to the 1996 stock repurchase
                  (see Note 14) does not provide  for the  payment of  interest,
                  generally   accepted   accounting   principles   require   the
                  imputation of interest. This interest cost for 1997, which did
                  not occur in 1996, was $97,000.

         2.       The new DSCP  contract  requires  Wellco to ship combat  boots
                  direct to customers (more than 1,000 locations)  instead of to
                  four  government  warehouses,  as  was  the  case  with  prior
                  contracts.  Direct  customer  shipments  can  be  from  one to
                  several  hundred  pairs  per  order,   compared  to  warehouse
                  shipments which averaged several thousand pairs per shipment.

                  In  addition,  the contract  provides  for maximum  contractor
                  evaluation points for shipping within 4 days of order receipt.
                  Prior  contracts   provided  for  monthly   shipments  against
                  delivery  orders covering  several months.  After the April 15
                  contract   award,   DSCP  agreed  to  let  Wellco   accelerate
                  shipments,  which  had  the  effect  of  reducing  some of the
                  significant  inventory  build-up.  Combat  boot  sales  in the
                  fourth quarter were 120,000  pairs,  almost double the average
                  amount for preceding quarters.

                  All of this caused  excess labor costs,  freight  costs to air
                  ship  materials,  and other  inefficiencies  in developing new
                  procedures   required  by  this  significant  change  in  boot
                  shipment methods.

         3.       In February,  1997 Wellco was awarded a contract from DSCP for
                  the supply of the  intermediate  cold/wet  boot,  which is the
                  first award to Wellco of this type of boot.  The  introduction
                  of this new boot  caused  start up  costs  related  to  labor,
                  maintenance and supplies.

         4.       1997  includes  a  $73,000  reduction  in  revenues  from  the
                  adjustment of certain  estimated  contract price  adjustments,
                  which were  recorded in 1996,  to the actual  amounts  settled
                  with the government.

         5.       Group health insurance, for which the Company is self insured,
                  increased  $69,000 in 1997.  This cost  varies  from period to
                  period  with the actual  amount of health  costs  incurred  by
                  employees.

The percent of income tax  provision to pretax  income for 1997 was 30% compared
to 27% in 1996. The lower 1996 rate reflects the difference between the book and
tax basis of Wellco's investment in Alba, which was disposed of in 1996.

                         LIQUIDITY AND CAPITAL RESOURCES

Wellco uses cash from operations and a bank line of credit to supply most of its
liquidity  needs.  The  following  table  summarizes at the end of each year the
Company's cash and funds available from the bank line of credit:
<TABLE>
<CAPTION>

                                                        ( in thousands)
                                                  1998         1997         1996
                                                  ----         ----         ----
<S>                                             <C>          <C>          <C>    

Cash ....................................       $  196       $  181       $  673
Unused Bank Line of Credit ..............        1,115        2,813        1,500
                                                ------       ------       ------
Total ...................................       $1,311       $2,994       $2,173
                                                ======       ======       ======
</TABLE>

                                      -9-
<PAGE>


A reduction of $500,000 in the total bank line  available  and a higher level of
line usage caused the reduction in the amount of the unused bank line at the end
of 1998. The increased  bank line usage was primarily  caused by the purchase of
ICB boot production equipment.

The decrease in cash at the end of 1997 was  primarily  due to increased  combat
boot  inventories  and the investment in inventory for the ICW boot. For its DMS
combat boot contract, Wellco was maintaining a larger inventory to meet the four
day shipping requirement for maximum evaluation points.

The following  table  summarizes  the other major sources and (uses) of cash for
the last three years:
<TABLE>
<CAPTION>

                                                       (in thousands)

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

Income Before Depreciation, Net Investment
Income, Equity in Loss of Affiliate and Stock
Repurchase Charge .............................   $    99    $ 1,083    $   810
Net Change in Accounts Receivable, Inventory,
Accounts Payable and Accrued Liabilities ......       400     (2,718)    (1,542)
Deferred Taxes, Tax Refund Receivable, and
Other .........................................      (427)        10       (165)
Net Cash Provided By (Used In) Operations .....        72     (1,625)      (897)
Net Cash From Sale of Marketable Securities ...                           5,257
Cash Used to Repurchase Company's  Stock ......                          (5,579)
Cash From Bank  Line of Credit ................     1,883      4,350      4,500
Cash Used to Repay Bank Line of Credit ........      (685)    (2,663)    (4,520)
Cash From Bank Loan for Warehouse Addition ....       400
Cash Used for Warehouse Addition ..............      (381)
Cash Used to Repay Bank Loan ..................       (73)
Cash Used to Purchase Equipment ...............    (1,054)      (474)      (371)
Cash Dividends Paid ...........................      (233)      (227)      (140)
Cash From Stock Options Exercised .............        86        147
Net Increase (Decrease) in Cash ...............   $    15    $ ( 492)   $(1,750)
</TABLE>
                                       

For 1998, cash for a $1,831,000 increase in inventory was provided by a decrease
in accounts receivable of $2,679,000.  Accounts payable, accrued liabilities and
accrued income taxes  decreased by $448,000.  These are the primary changes that
resulted in $72,000 of cash provided by operations.

As stated  above,  cash from the bank line of  credit  was used to  finance  the
purchase of equipment for the new ICB contract.  In addition,  cash from a three
year bank term loan was used for a warehouse addition.


                                      -10-

<PAGE>



The bank's  commitment for a total $4,000,000 line of credit expires on December
31, 1998, and is subject to renewal at the bank's discretion.

The primary reason for the 1997 decrease in cash was the increased investment in
DMS combat boot  inventories  and the  investment  in inventory  for the new ICW
boot.

The primary  reason for the 1996  decrease in cash was the  increase in accounts
receivable,  as explained  above,  and the use of cash for the  Company's  stock
repurchase.  On December  29,  1995,  the Company  repurchased  1,531,272 of its
common shares for a price consisting  partially of a $5,460,000 cash payment and
$119,000 in related  expenses.  The initial payment was partially  financed by a
short term bank loan. All marketable  securities were subsequently sold to repay
the bank loan.

The new  warehouse  was  substantially  completed  by the end of the 1998 fiscal
year. In order to reduce the amount of cash invested in boot  inventory,  Wellco
has more  recently  reduced its  production  level and has had short  periods of
suspended  manufacturing  operations.  The  reduction in boot  inventories  will
extend well into the 1999 fiscal year. During this period,  use of the bank line
of credit should gradually decrease.  The settlement and collection of the claim
under the April,  1998 Agreement with DSCP should also reduce  borrowings  under
the line.

The Company has no other material commitments for capital equipment.  Note 14 to
the Consolidated Financial Statements provides information about additional cash
payments  that might result from  Wellco's  repurchase  of its stock in the 1996
fiscal year.  During the 1999 fiscal year,  Wellco will  continue to rely on the
bank  line  of  credit.  The  Company  does  not  know  of  any  other  demands,
commitments, uncertainties, or trends that will result in or that are reasonably
likely to result in its liquidity increasing or decreasing in any material way.

                                      -11-

<PAGE>

                            WELLCO ENTERPRISES, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                           FOR THE FISCAL YEARS ENDED
                 JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
                     (in thousands except per share amounts)
<TABLE>
<CAPTION>


                                                  JUNE 27,    JUNE 28,  JUNE 29,
                                                      1998        1997      1996
                                                  --------    --------  --------
<S>                                              <C>         <C>       <C>    

REVENUES (Notes  6, 18 and 20) ...............   $ 23,917    $ 21,199  $ 19,968
                                                 --------    --------  --------

COSTS AND EXPENSES:
     Cost of sales and services ..............     22,340      17,611    17,168
     General and administrative expenses .....      2,123       2,362     2,112
                                                 --------    --------   --------
     Total ...................................     24,463      19,973    19,280
                                                 --------    --------   --------

CONTRACT CLAIM (Note 21) .....................        226

OPERATING INCOME (LOSS) ......................       (320)      1,226       688
                                                 --------    --------   --------

INTEREST EXPENSE .............................        219         191        39

DIVIDEND AND INTEREST INCOME .................         12          53       215

NET INVESTMENT INCOME (Note 4) ...............                            1,204
                                                 --------    --------   --------

INCOME (LOSS) BEFORE EQUITY IN LOSS
     OF AFFILIATE AND STOCK
     REPURCHASE CHARGE .......................       (527)      1,088     2,068

EQUITY IN LOSS OF AFFILIATE (Note 5) .........                             (601)

STOCK REPURCHASE CHARGE (Note 13) ............                             (110)
                                                 --------    --------   --------

INCOME (LOSS) BEFORE INCOME TAXES ............       (527)      1,088     1,357

PROVISION (BENEFIT) FOR INCOME TAXES
(Note 12) ....................................       (190)        330       366
                                                 --------    --------   --------

NET INCOME (LOSS) ............................   $   (337)   $    758  $    991
                                                 ========    ========   ========
EARNINGS (LOSS) PER SHARE (Note 17)
     Basic earnings (loss) per share .........   $  (0.29)   $   0.67  $   0.53
     Diluted earnings (loss) per share .......   $  (0.29)   $   0.66  $   0.52
                                                 ========    ========   ========
</TABLE>



See Notes to Consolidated Financial Statements.



                                      -13-
<PAGE>


                            WELLCO ENTERPRISES, INC.
                           CONSOLIDATED BALANCE SHEETS
                         JUNE 27, 1998 AND JUNE 28, 1997
                                 (in thousands)

                                     ASSETS

<TABLE>
<CAPTION>

                                                            JUNE 27,    JUNE 28,
                                                                1998        1997
                                                            --------    --------
<S>                                                         <C>          <C>    
                             
CURRENT ASSETS:
     Cash ............................................      $   196      $   181
     Receivables, net (Notes 2, 8 and 21) ............        2,247        4,926
     Inventories (Notes 3 and 8) .....................        9,508        7,677
     Deferred taxes  (Note 12) .......................          288          341
     Income tax refund receivable (Note 12) ..........          292
     Prepaid expenses ................................            4            6
                                                            -------      -------
     Total ...........................................       12,535       13,131
                                                            -------      -------

MACHINERY LEASED TO LICENSEES, net
     (Note 6) ........................................           16           36

PROPERTY, PLANT AND EQUIPMENT, net
     (Note 7) ........................................        2,333        1,313

INTANGIBLE ASSETS:
     Excess of cost over net assets of
        subsidiary at acquisition (Note 1) ...........          228          228
     Intangible pension asset (Note 10) ..............          440          511
                                                            -------      -------
     Total ...........................................          668          739
                                                            -------      -------

DEFERRED TAXES (Note 12) .............................          468          433
                                                            -------      -------

TOTAL ................................................      $16,020      $15,652
                                                            =======      =======
</TABLE>

See Notes to Consolidated Financial Statements.


                                      -14-

<PAGE>

                            WELLCO ENTERPRISES, INC.
                           CONSOLIDATED BALANCE SHEETS
                         JUNE 27, 1998 AND JUNE 28, 1997
                        (in thousands except share data)

                             LIABILITIES AND EQUITY
<TABLE>
<CAPTION>


                                                         JUNE 27,       JUNE 28,
                                                             1998           1997
                                                         --------       --------                             
<S>                                                      <C>           <C>    

CURRENT LIABILITIES:
     Short-term borrowing from bank (Note 8) .......     $  2,885      $  1,687
     Accounts payable ..............................        1,696         2,064
     Accrued liabilities (Notes 9, 10 and 11) ......        1,490         1,570
     Accrued income taxes (Note 12) ................          241           357
     Current maturity of note payable (Note 14) ....          146           107
                                                         --------      --------
         Total .....................................        6,458         5,785
                                                         --------      --------

LONG-TERM LIABILITIES:
     Pension obligation (Note 10) ..................        1,762         1,759
     Note payable (Note 14) ........................          491         1,030

COMMITMENT AND CONTINGENCIES (Notes 22 and 23)

STOCKHOLDERS' EQUITY (Notes  5, 10, 13, 14, 15,
     and 16):
     Common stock, $1.00 par value; shares
         authorized- 2,000,000; shares issued
         and outstanding- 1,163,246 at 1998,
         1,150,646 at 1997 .........................        1,164         1,151
     Additional paid-in capital ....................          192           119
     Retained earnings .............................        6,688         6,430
     Pension liability adjustment ..................         (735)         (622)
                                                         --------      --------
         Total .....................................        7,309         7,078
                                                         --------      --------

TOTAL ..............................................     $ 16,020      $ 15,652
                                                         ========      ========
</TABLE>

See Notes to Consolidated Financial Statements.


                                      -15-

<PAGE>


                            WELLCO ENTERPRISES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           FOR THE FISCAL YEARS ENDED
                 JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
                                 (in thousands)
<TABLE>
<CAPTION>

                                                  JUNE 27,  JUNE 28,    JUNE 29,
                                                      1998      1997        1996
                                                  --------  --------    --------
<S>                                              <C>        <C>         <C>    
                    
CASH FLOWS FROM OPERATING
ACTIVITIES:
     Net income (loss) ........................   $  (337)   $   758    $   991
                                                  -------    -------    -------
     Adjustments  to reconcile  net income
     (loss) to net cash provided by (used
     in) operating activities:
         Depreciation and amortization ........       436        325        312
         Net investment income ................                          (1,204)
         Equity in loss of affiliate ..........                             601
         Stock repurchase charge ..............                             110
         (Increase) decrease in-
             Accounts receivable ..............     2,679        316     (1,975)
             Inventories ......................    (1,831)    (3,753)       371
             Other current assets .............      (237)        30         52
         Increase (decrease) in-
             Accounts payable .................      (368)       285        246
             Accrued liabilities ..............       (80)       215       (116)
             Accrued income taxes .............      (116)       218        (68)
             Pension obligation ...............       (39)       (68)       (26)
             Other ............................       (35)        49       (191)
                                                  -------    -------    -------
                                                      409     (2,383)    (1,888)
                                                  -------    -------    -------
NET CASH PROVIDED BY (USED IN)
     OPERATING ACTIVITIES .....................        72     (1,625)      (897)
                                                  -------    -------    -------

CASH FLOWS FROM INVESTING ACTIVITIES:
     Net sales of current
         marketable securities ................                             996
     Sales of noncurrent
         marketable securities ................                           4,261
     Purchases of equipment, net ..............    (1,435)      (474)      (371)
                                                  -------    -------    -------
NET CASH PROVIDED BY (USED IN)
     INVESTING  ACTIVITIES ....................    (1,435)      (474)     4,886
                                                  -------    -------    -------


                            (continued on next page)


                                      -16-
<PAGE>

                            WELLCO ENTERPRISES, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                           FOR THE FISCAL YEARS ENDED
                 JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
                                 (in thousands)

                                                  JUNE 27,   JUNE 28,   JUNE 29,
                                                      1998       1997       1996
                                                  --------   --------   --------

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

CASH FLOWS FROM FINANCING ACTIVITIES:
     Proceeds from short-term borrowings ......     1,883      4,350      4,500
     Repayment of short-term borrowings .......      (685)    (2,663)    (4,520)
     Proceeds from long-term debt .............       400
     Repayment of long-term debt ..............       (73)
     Cash dividends paid ......................      (233)      (227)      (140)
     Repurchase of common stock ...............    (5,579)
     Stock option exercise ....................        86        147
                                                  -------    -------    -------
NET CASH PROVIDED BY (USED IN)
     FINANCING ACTIVITIES .....................     1,378      1,607     (5,739)
                                                  -------    -------    -------

NET INCREASE (DECREASE) IN CASH ...............        15       (492)    (1,750)

CASH AT BEGINNING OF YEAR .....................       181        673      2,423
                                                  -------    -------    -------

CASH AT END OF YEAR ...........................   $   196    $   181    $   673
                                                  =======    =======    =======

SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
     Cash paid for-
         Interest .............................   $   170    $    94    $    39
         Income taxes .........................       141        192        561
     Noncash investing and financing activity-
         Adjustment of stock repurchase note ..      (828)       646
         Noncash decrease in Investment in
             Affiliate from stock repurchase ..                           4,928
         Note issued as part of stock
             repurchase .......................                             492
         Noncash decrease in marketable
             securities to fair value .........                            (730)
                                                  =======    =======    =======

</TABLE>


See Notes to Consolidated Financial Statements.


                                      -17-

<PAGE>



                            WELLCO ENTERPRISES, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                           FOR THE FISCAL YEARS ENDED
                 JUNE 27, 1998, JUNE 28, 1997, AND JUNE 29, 1996
                        (in thousands except share data)
<TABLE>
<CAPTION>


                                               JUNE 27,    JUNE 28,     JUNE 29,
                                                   1998        1997         1996
                                               --------    --------     -------- 
<S>                                            <C>         <C>         <C>   

COMMON STOCK (Notes 5, 13, 15 and 16):
     Balance at beginning of year ..........   $  1,151    $    374    $    885
     Repurchase of common stock ............                               (511)
     Common stock issued in stock split ....                    749
     Stock option exercise .................         13          28
                                               --------    --------    --------
     Balance at end of year ................      1,164       1,151         374
                                               --------    --------    --------


ADDITIONAL PAID-IN CAPITAL:
     (Notes 5, 13, 15 and 16):
     Balance at beginning of year ..........        119         598       1,409
     Repurchase of common stock ............                               (811)
     Transfer to common stock the par value
         of stock issued in stock split ....                   (598)
     Stock option exercise .................         73         119
                                               --------    --------    --------
     Balance at end of year ................        192         119         598
                                               --------    --------    --------

RETAINED EARNINGS (Notes 5, 13, 14 and 16):
     Balance at beginning of year ..........      6,430       6,696      15,412
     Repurchase of common stock ............                             (9,567)
     Adjustment of note payable from stock
         repurchase ........................        828        (646)
     Transfer to common stock the par value
         of stock issued in stock split ....                   (151)
     Net income (loss) .....................       (337)        758         991
     Cash dividends (per share: 1998-$.20;
         1997-$.20; 1996-$.125) ............       (233)       (227)       (140)
                                               --------    --------    --------
     Balance at end of year ................      6,688       6,430       6,696
                                               --------    --------    --------

PENSION LIABILITY ADJUSTMENT (Note 10)
     Balance at beginning of year ..........       (622)       (622)       (525)
     Change for the year ...................       (113)                    (97)
                                               --------    --------    --------
     Balance at end of year ................       (735)       (622)       (622)
                                               --------    --------    --------

TOTAL STOCKHOLDERS' EQUITY .................   $  7,309    $  7,078    $  7,046
                                               ========    ========    ========
</TABLE>

See Notes to Consolidated Financial Statements.

                                      -18-

<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Fiscal Years Ended June 27, 1998, June 28, 1997, and June 29, 1996

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

         Principles of Consolidation
                  The accompanying financial statements include the consolidated
                  accounts  of the Company  and its  wholly-owned  subsidiaries.
                  Appropriate  eliminations  have  been  made  of  all  material
                  intercompany transactions and balances.

         Inventories
                  Raw  materials  and  supplies  are  valued  at  the  lower  of
                  first-in, first-out cost or market. Finished goods and work in
                  process are valued at the lower of actual cost,  determined on
                  a specific basis, or market.

         Income Taxes
                  The  provision  for income  taxes is based on taxes  currently
                  payable  adjusted for the net change in the deferred tax asset
                  or liability  during the current year. A deferred tax asset or
                  liability  arises  from  temporary   differences  between  the
                  carrying  value  of  assets  and   liabilities  for  financial
                  reporting and income tax purposes.

         Fair Value of Financial Instruments
                  The carrying values of financial  instruments at June 27, 1998
                  (cash,  receivables  and accounts  payable)  approximate  fair
                  value.  The carrying value of the note payable is equal to the
                  present value of estimated  future cash flows using a discount
                  rate  commensurate  with the  uncertainties  involved and thus
                  approximates fair value.

         Depreciation
                  The  Company   uses  the   straight-line   method  to  compute
                  depreciation  on machinery  leased to licensees  and property,
                  plant and equipment used by the Company.

         Machinery Leased to Licensees
                  Certain  shoe-making  machinery is leased to  licensees  under
                  cancelable operating leases. Such activity is accounted for by
                  the operating method whereby leased assets are capitalized and
                  depreciated  over their estimated useful lives (5 to 10 years)
                  and rentals,  based  primarily on the volume of shoes produced
                  or  shipped by the  lessees,  are  recorded  during the period
                  earned.

         Intangible Asset
                  The  excess of the fair value (as  determined  by the Board of
                  Directors)  of Wellco  Enterprises,  Inc.  common stock issued
                  over the net assets of Ro-Search, Incorporated, a wholly owned
                  subsidiary of Wellco,  at acquisition is not being  amortized.
                  This  asset  arose  prior  to  1970  and,  in the  opinion  of
                  management, there has not been any diminution in its value.

         Pensions
                  The Company has two non-contributory,  defined benefit pension
                  plans  covering  substantially  all  employees  at  its  North
                  Carolina  plant.  The Company's  policy is to fund the minimum
                  amount  required by the Employee  Retirement  Income  Security
                  Act.




                                      -19-

<PAGE>



         Revenue Recognition

                  All  government  combat boot  production  contracts  are fixed
                  price and usually have a delivery  schedule of twelve  months.
                  If the purchase order requires  shipment to a depot warehouse,
                  revenue is recognized for each boot shipment after it has been
                  accepted by the government's Quality Assurance Representative.
                  If  the  purchase  order  requires  shipment  directly  to the
                  consumer, revenues are recognized upon shipment.

                  Government research and development contracts are typically no
                  more  than one year in  duration.  Revenue  is  recognized  as
                  services are performed and invoiced.  Revenues from  licensees
                  are recognized in the period services are rendered or products
                  are shipped.

         Fiscal Year
                  The Company's fiscal year ends on the Saturday closest to June
                  30. All years presented contain 52 weeks.

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

         Stock-Based Compensation Plans
                  Statement  of  Financial  Accounting  Standards  No. 123 (SFAS
                  123),   "Accounting  for  Stock-  Based   Compensation,"   was
                  effective as of the  beginning  of the 1997 fiscal year.  SFAS
                  123  provides  for a choice  of using a fair  value  method to
                  record    compensation    expense   related   to   stock-based
                  compensation,   or  to   continue   using   the   compensation
                  recognition  provisions of Accounting Principles Board Opinion
                  25 (APB 25),  "Accounting for Stock Issued to Employees".  The
                  Company   chose  to   continue   using  APB  25  under   which
                  compensation  expense is  generally  recognized  if there is a
                  difference  between the award price for stock  options and the
                  stock's market price at the date of award.

         Recent Statements of the Financial Accounting Standards Board
                  In June 1997, the Financial  Accounting Standards Board issued
                  Statement  of  Financial  Accounting  Standards  No. 130 (SFAS
                  130), "Reporting Comprehensive Income," which is effective for
                  the Company's  fiscal year ending July 3, 1999. This statement
                  establishes   standards   for   reporting   and   display   of
                  comprehensive   income  and  its  components  and  accumulated
                  balances.  Comprehensive  income is  defined  to  include  all
                  changes in equity except those  resulting from  investments by
                  owners  and  distributions  to  owners.  Under  SFAS 130,  the
                  Company's pension liability adjustment would be reported as an
                  item of comprehensive income.

                  In June 1997, the Financial  Accounting Standards Board issued
                  Statement  of  Financial  Accounting  Standards  No. 131 (SFAS
                  131), "Disclosures About Segments of an Enterprise and Related
                  Information," which is effective for the Company's fiscal year
                  ending  July 3,  1999.  This  Statement  supersedes  Financial
                  Accounting   Standards  Board  Statement  No.  14,  "Financial
                  Reporting  for  Segments  of  a  Business  Enterprise",  which
                  presently   determines  the  Company's   segment  and  related
                  reporting,  and under which the Company has one segment.  SFAS
                  131  requires   disclosure   of  financial   and   descriptive
                  information about reportable  operating segments,  revenues by
                  products or services, and revenues and assets

                                      -20-

<PAGE>



                  by  geographic  areas.  The  Company  believes  that  the only
                  significant effects on its disclosures resulting from SFAS 131
                  would be the  additional  disclosures  if it has more than one
                  reportable  operating  segment.  The  Company  has  not as yet
                  determined  if it  has  more  than  one  reportable  operating
                  segment under SFAS 131.

                  In February 1998,  the Financial  Accounting  Standards  Board
                  issued  Statement of Financial  Accounting  Standards  No. 132
                  (SFAS 132),  "Employers'  Disclosures About Pensions and Other
                  Postretirement Benefits," which is effective for the Company's
                  fiscal year ending July 3, 1999. This Statement supersedes the
                  disclosure  requirements  of  Financial  Accounting  Standards
                  Board Statement No. 87, "Employer's  Accounting for Pensions",
                  No.   88,   "Employers'   Accounting   for   Settlements   and
                  Curtailments   of  Defined   Benefit  Pension  Plans  and  for
                  Termination Benefits", and No. 106, "Employers' Accounting for
                  Postretirement   Benefits  Other  Than  Pensions".   SFAS  132
                  standardizes  the  disclosure  requirements  for  pensions and
                  other postretirement benefits and does not address measurement
                  or recognition of such items.

2. RECEIVABLES:

The majority of receivables at June 27, 1998 are from the U. S. Government.  The
Company's  policy is to require  either a confirmed  irrevocable  bank letter of
credit  or  advance  payment  on  significant  orders  from  foreign  customers.
Allowances for doubtful accounts in 1998 and 1997 are not significant.

3.       INVENTORIES:

         The components of inventories are:
<TABLE>
<CAPTION>

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

Finished Goods ...............................           $4,747           $2,551
Work in Process ..............................            2,077            2,647
Raw Materials and Supplies ...................            2,684            2,479
                                                         ------           ------
Total ........................................           $9,508           $7,677
                                                         ======           ======
</TABLE>

4. MARKETABLE SECURITIES:

         In the 1996 fiscal year, all marketable securities were sold to provide
         the majority of the cash portion of the consideration paid by Wellco to
         repurchase  1,531,272 shares of its outstanding  common stock (see Note
         13).

         Proceeds  from the sale of  marketable  securities  in fiscal 1996 were
         $4,261,000.  Gross  realized  gains and  losses in fiscal  1996 were as
         follows:


                                     -21-

<PAGE>

<TABLE>
<CAPTION>


                                                                  (in thousands)
                                                                            1996
                                                                            ----
<S>                                                                     <C>   

Gross Realized Gains ....................................               $ 1,326
Gross Realized Losses ...................................                  (122)
                                                                        -------
Net Investment Income ...................................               $ 1,204
                                                                        =======
</TABLE>


5.   INVESTMENT IN AFFILIATE:

         On December 30, 1994,  Wellco purchased from Coronet  Insurance Company
         for cash 400,000  shares of the common stock of Alba  Waldensian,  Inc.
         (Alba) which represented 21.5% of total Alba common shares.

         Operating  results for the fiscal year ended June 29, 1996  includes as
         Equity in Loss of Affiliate a charge of $601,000, representing Wellco's
         $305,000  equity  in Alba's  loss for the  six-month  period  from July
         through  December,  1995 and a $296,000  reduction of this investment's
         carrying value to fair value.

         On  December  29,  1995,   these  shares  were  used  as  part  of  the
         consideration  paid for the repurchase of 1,531,272  shares of Wellco's
         common stock (See Note 13).

         Other than this  investment,  there were no business  relationships  or
         transactions between Wellco and Alba.

6.       MACHINERY LEASED TO LICENSEES:

         Accumulated  depreciation  netted  against the cost of leased assets in
         the  1998  and 1997  Consolidated  Balance  Sheets  is  $1,503,000  and
         $1,483,000,  respectively.  Rental  revenues for the fiscal years 1998,
         1997, and 1996 were $141,000, $178,000 and $128,000,  substantially all
         of which vary with lessees' production or shipments.


7.       PROPERTY, PLANT AND EQUIPMENT:

         The cost and accumulated  depreciation of property, plant and equipment
         are summarized as follows:
<TABLE>
<CAPTION>


                                                          (in thousands)
                                                                       Estimated
                                              1998         1997      Useful Life
                                              ----         ----      -----------
<S>                                         <C>          <C>          <C>   

Land ................................       $  107       $  107       N/A
Buildings ...........................          774          774       45 Years
Construction in Progress
(Warehouse Addition) ................          381                    N/A
Machinery & Equipment ...............        3,632        2,797       2-20 Years


                                      -22-

<PAGE>



                                                                       Estimated
                                              1998         1997      Useful Life
                                              ----         ----      -----------
<S>                                         <C>          <C>          <C>    

Furniture & Fixtures ................          709          610       2-10 years
Leasehold Improvements ..............           63           63       *
Total Cost ..........................       $5,666       $4,351
Total Accumulated
Depreciation ........................       $3,333       $3,038
</TABLE>

                  *Leasehold  improvements are amortized using the straight-line
                  method over the shorter of the  estimated  useful lives of the
                  improvements or the period of the respective leases.

8.       LINES OF CREDIT:

         In April  1998 the  Company  increased  its bank  line of  credit  from
         $2,000,000 to $4,000,000.  The increased line,  which expires  December
         31, 1998, can be renewed annually at the bank's  discretion.  This line
         of credit is secured by a blanket lien on all  machinery  and equipment
         (carrying  value  of  $1,646,000)  and  all  non-governmental  accounts
         receivable and inventory ($1,606,000).  At June 27, 1998, borrowings on
         the  line of  credit  were  $2,885,000  with  $1,115,000  available  in
         additional borrowings.

         Interest is at the prime rate of 8.5% at June 27, 1998. The bank credit
         agreement contains, among other provisions, defined levels of net worth
         and current ratio requirements.  The Company was not in compliance with
         the  current  ratio loan  covenant  at June 27,  1998.  The Company has
         received  from the bank a waiver  for the period  ended  June 27,  1998
         regarding  this loan covenant  violation.  The covenants are subject to
         review at the end of each fiscal quarter.

9.       ACCRUED LIABILITIES:
         The components of accrued liabilities are:

<TABLE>
<CAPTION>
                                                               (in thousands)
                                                           1998             1997
                                                           ----             ----
<S>                                                      <C>              <C>    
Compensation .................................           $  763           $  892
Pension ......................................              191              133
Retiree Health Benefits ......................              225              170
Contribution .................................                               115
Interest Expense .............................              146               97
Other ........................................              165              163
                                                         ------           ------
Total ........................................           $1,490           $1,570
                                                         ======           ======
</TABLE>



                                      -23-

<PAGE>



10. PENSION PLANS:

         The Company's pension plans provide retirement benefits based on either
         years of service or final average annual earnings.

         The components of pension expense computed in accordance with Statement
         of Financial  Accounting  Standards No. 87  "Employers'  Accounting For
         Pensions" are:
<TABLE>
<CAPTION>

                                                            (in thousands)
                                                   1998        1997        1996
                                                   ----        ----        ----
<S>                                               <C>         <C>         <C>    

Benefits Earned for Service in the
Current Year ...............................      $ 139       $ 147       $ 148
Interest on the Projected Benefit
Obligation .................................        394         388         368
Return on Plan Assets ......................       (254)       (234)       (206)
Amortization of: Unrecognized Net
Pension Obligation at July 1, 1987;
Cost of Benefit Changes Since That
Date; and Gains and Losses
Against Actuarial  Assumptions .............        162         163         156
Pension Expense ............................      $ 441       $ 464       $ 466
</TABLE>

         The liability of the plans at June 27, 1998 and June 28, 1997,  and the
         components of the pension liability accrued in the balance sheets are:
<TABLE>
<CAPTION>

                                                              (in thousands)

Pension Liability:                                         1998            1997
                                                           ----            ----
<S>                                                      <C>             <C>    

Accumulated Benefit Obligation,
  Substantially All Vested .......................       $ 5,482        $ 5,152
Obligation for Actuarially Projected
  Future Salary Increases ........................           333            297
Projected Benefit Obligation .....................         5,815          5,449
Plan Assets at Fair Value ........................        (3,530)        (3,261)
Projected Obligation Greater than Assets .........         2,285          2,188
Less Projected Future Salary Increases ...........          (333)          (296)
Pension Liability Recognized in the
  Consolidated Financial Statements ..............       $ 1,952        $ 1,892

                                                              (in thousands)

Components of Pension Liability:                           1998            1997
                                                           ----            ----
Unamortized Costs Not Yet Charged Against Operations-
Net Obligation at July 1, 1987 ...........................  284             355


                                      -24-

<PAGE>


<S>                                                       <C>           <C>   

Net Obligation From Changes to the Plans
  Since July 1, 1987 ...............................          276           323
Net Loss From Actuarial Assumptions Being
  Different From
Actual .............................................        1,325         1,072
Less Projected Future Salary Increases .............         (333)         (296)
Total Liability Not Yet Charged Against
  Operations .......................................        1,552         1,454
Amount of Liability That Has Been Charged
  Against Operations ...............................          400           438
Total Pension Liability ............................      $ 1,952       $ 1,892

</TABLE>

         The pension  liability not yet charged against  operations is a part of
         the long-term  pension  obligation  liability.  This  liability at June
         27,1998 is offset by an intangible  pension asset of $440,000 ($511,000
         at June 28,  1997) and an equity  reduction,  net of income  taxes,  of
         $735,000 for 1998 and  $622,000  for 1997.  Plan assets are invested in
         the General Investment  Account of the Company's actuary.  This account
         invests  primarily in high-quality,  fixed income mortgage  obligations
         and corporate bonds. The assumed average discount rate and the expected
         long-term  rate of return on plan  assets is 7.0% for 1998 and 7.5% for
         1997.  To the  extent  projected  benefits  are based on final  average
         annual  earnings,  the assumed rate of annual increase in future salary
         levels is 5.5%.


11. RETIREE HEALTH BENEFITS:

         The  Company  accounts  for the costs  and  liability  of  health  care
         benefits for retired employees using Statement of Financial  Accounting
         Standards No. 106 (FAS 106),  "Employers  Accounting for Postretirement
         Benefits Other Than Pensions". The liability at the date of adoption of
         FAS 106 (July 4, 1993) is being recognized over employee future service
         lives.

         Employees of the North  Carolina  plant who meet  certain  criteria and
         retire early (age 62-64) or become  disabled,  receive for  themselves,
         but not for  their  dependents,  the  same  health  insurance  benefits
         received by active employees.  All benefits terminate when the employee
         becomes eligible to receive Medicare (usually age 65 or 30 months after
         disability  date).  This benefit is provided at no cost to the employee
         and the Company does not fund the cost of this  benefit  prior to costs
         actually being incurred.

         The cost of retiree  health  benefits  included in 1998,  1997 and 1996
Statements of Operations was:
<TABLE>
<CAPTION>
                                                            (in thousands)
                                                          1998     1997     1996
                                                          ----     ----     ----
<S>                                                        <C>      <C>      <C>    
Benefits Earned for Current Service .................      $23      $25      $26
Interest Cost on Accumulated Liability ..............       23       24       22
Amortization of the July 4, 1993 Liability ..........       14       14       13
                                                           ---      ---      ---
Total Cost ..........................................      $60      $63      $61
                                                           ===      ===      ===
</TABLE>
                                      -25-

<PAGE>

         The  reconciliation  of the total liability to the amount included as a
         liability in the  Consolidated  Balance  Sheet (see Note 9) at June 27,
         1998 and June 28, 1997 is:
<TABLE>
<CAPTION>

                                                            (in thousands)

Accumulated Liability For:                                       1998      1997
                                                                 ----      ----
<S>                                                             <C>       <C>    

Retired Employees ..........................................    $  45     $  16
Other Employees ............................................      336       268
Total ......................................................      381       284
Less Balance of Unrecognized Liability at July 4, 1993 .....     (213)     (227)
Unrecognized Net Gain Since July 4, 1993 ...................       57       113
Liability Recognized in the Consolidated Balance Sheet .....    $ 225     $ 170
</TABLE>


         The assumed health care cost trend rate used to project expected future
         cost was 12.0% in 1998 (11.0% in 1997),  gradually  decreasing to 6% by
         2004 and remaining at 6% thereafter.  The assumed discount rate used to
         determine  the  accumulated  liability was 7% for 1998 and 8% for 1997.
         The effect of a 1% increase in the assumed  health care cost trend rate
         for each future year would not have a significant effect on the service
         and  interest  cost  components  of the  current  period cost or on the
         accumulated liability.


12. INCOME TAXES:

         The Company  accounts for the  provision and liability for income taxes
         using Statement of Financial  Accounting Standards No. 109, "Accounting
         for  Income  Taxes."  The  provision  for income  taxes  consist of the
         following:
<TABLE>
<CAPTION>

                                                            (in thousands)
                                                   1998        1997         1996
                                                   ----        ----         ----
<S>                                               <C>         <C>         <C>   

Federal Provision (Benefit):
   Currently Payable (Refundable) ..........      $(294)      $ 355       $ 457
    Deferred ...............................         76         (87)       (185)
    Total Federal ..........................       (218)        268         272
State Provision ............................         28          62          94
Total Provision (Benefit) ..................      $(190)      $ 330       $ 366

</TABLE>

     A  reconciliation  of the effective  income tax rate for the 1998, 1997 and
     1996 fiscal years is as follows:


                                      -26-

<PAGE>


<TABLE>
<CAPTION>


                                                         1998     1997      1996
                                                         ----     ----      ----
<S>                                                       <C>      <C>      <C>    
Statutory Federal Income Tax  Rate ..................     34%      34%      34%
Current Period Income of Puerto Rico Subsidiary
Substantially Exempt From Puerto Rican and
Federal Income Taxes ................................      9%      (7%)     (7%)
State Taxes, Net of Federal Tax Benefit .............     (4%)      5%       5%
Difference in Book and Tax Basis of Investment
in Affiliate ........................................                       (6%)
Standstill Agreement ................................                         3%
Untaxed Foreign Sales Corporation Income ............      2%       *        *
Non-deductible Expenses .............................     (4%)      *        *
Other ...............................................     (1%)     (2%)     (2%)
Effective Income Tax Rate ...........................     36%      30%      27%
* less than 1%
</TABLE>

Income  earned in Puerto Rico by the  Company's  Puerto Rican  subsidiary is 90%
exempt from Puerto Rican income tax through  2000.  Income earned in Puerto Rico
by this subsidiary has not been subject to United States federal income tax. The
Small Business Job  Protection  Act (Act),  passed by Congress on August 2, 1996
and subsequently signed by the President, terminated, subject to a phase out for
existing  companies,  the  federal  tax  credit  on this  income  for tax  years
beginning  after  December  31, 1996.  Under the phase out,  the Company  should
receive a full credit  through  fiscal year 2002.  For fiscal years 2003 through
2006,  the credit will be limited,  and will be completely  eliminated  starting
with the 2007 fiscal year.

The  accumulated  undistributed  earnings  ($4,577,000 at June 27, 1998) of this
subsidiary  are subject to a Puerto Rican tollgate tax (5%) when remitted to the
parent company.  Accrued tax liabilities have been provided for the tollgate tax
reasonably expected to be paid in the future.

At June  27,1998,  the  Company  has an income  tax  refund  receivable  for the
carryback of the 1998 loss.

Significant  components of the Company's  deferred tax assets and liabilities as
of the end of fiscal 1998 and 1997 are as follows:
<TABLE>
<CAPTION>


                                                                  (in thousands)
Deferred Tax Assets:                                               1998     1997
                                                                   ----     ----
<S>                                                                <C>      <C>   
Pension Cost Charged Against Financial Statement Income,
Not Yet Deducted From Taxable Income .........................     $ 71     $104
Tax Effect of Pension Liability Charged Against Equity .......      379      320



                                      -27-

<PAGE>



<S>                                                               <C>        <C>    

Employee Compensation Charged Against Financial
Statement Income, Not Yet Deducted From Taxable Income ....       162        158
Additional Costs Inventoried for Tax Purposes .............       112        142
State NOL Carry Forward ...................................        70
Other .....................................................        88         99
Total Deferred Tax Assets .................................       882        823
Valuation Allowance .......................................       (70)
Net Deferred Tax Assets ...................................       812        823
Deferred Tax Liabilities:
Depreciation Deducted From Taxable Income Not Yet
Charged Against Financial Statement Income ................        56         49
Net Deferred Tax Assets ...................................     $ 756      $ 774
</TABLE>

         The company has recorded a valuation allowance of approximately $70,000
         in order to reduce its  deferred  tax assets  relating  to certain  tax
         carry  forwards  to an  amount  which  is more  likely  than  not to be
         realized.


13. REPURCHASE OF STOCK:

         On December 29, 1995 Wellco  repurchased from Coronet Insurance Company
         and some of its affiliates (Coronet and Affiliates) 1,531,272 shares of
         Wellco  common  stock,   which  represented   57.69%  of  total  shares
         outstanding  at that time.  Cash of  $5,460,000  and 400,000  shares of
         Alba-  Waldensian,  Inc.  (Alba)  common  stock was paid to Coronet and
         Affiliates for these Wellco shares.  In addition,  the Stock Repurchase
         Agreement provides that certain additional payments may be made through
         Wellco's  fiscal year 2003 (see Note 14).  Under North Carolina law the
         shares repurchased constitute authorized but unissued shares.

         The Stock Repurchase  Agreement provides that for a period of ten years
         after  December  29,  1995  Coronet  and  Affiliates  will limit  their
         ownership  of Wellco  common stock to not more than 20% of total shares
         outstanding.  The  Consolidated  Statement of Operations for the fiscal
         year ended June 29, 1996 included a Stock Repurchase Charge of $110,000
         representing the value assigned to this limitation.

         This  repurchase  was recorded at the cash paid,  the fair value of the
         Alba shares, the present value of the additional amount projected to be
         paid through  fiscal year 2002,  and the amount of  investment  banker,
         legal,  accounting  and other  costs  incurred  related  to this  share
         repurchase,  a total of $10,884,000.  The par value of the common stock
         repurchased  ($511,000) was charged against Common Stock. The excess of
         total  amount  paid  over  the  par  value  of  Wellco's  common  stock
         repurchased was charged to Additional  Paid-In  Capital  ($811,000) and
         Retained Earnings ($9,567,000).

         Although the stock  repurchase  occurred,  the related Stock Repurchase
         Agreement  was not  executed by Coronet and  Affiliates,  nor have they
         performed certain other actions required by the

                                      -28-

<PAGE>



         Agreement.  In addition,  the Circuit  Court of Cook County in Illinois
         has  since  issued  an Order of  Liquidation  (Order)  against  Coronet
         Insurance Company.  This Order requires all persons having assets which
         are, or may be, the property of Coronet  Insurance Company to turn over
         these assets to the Director of Insurance of the State of Illinois.

         Wellco's  counsel  has  advised  that,  because  the  Stock  Repurchase
         Agreement was not executed by Coronet and  Affiliates and other actions
         required  of them by the  Agreement  were not  performed,  and  because
         Coronet  Insurance  Company  is being  liquidated  by the  Director  of
         Insurance of the State of Illinois,  some uncertainty exists as to: (i)
         the enforceability of provisions of the Stock Repurchase Agreement, and
         (ii) if  enforceable,  to whom  any  additional  obligation  under  the
         Agreement is owed. However,  the Consolidated  Financial  Statements of
         Wellco reflect the full application of the stock  repurchase  agreement
         (See Note 14).

14. NOTES PAYABLE:

         Note 13 gives information about certain additional payments that may be
         made under the Stock Repurchase Agreement, as well as information about
         the uncertainty as to the Agreement's  enforceability.  Notwithstanding
         this,   generally  accepted  accounting   principles  require  that  an
         obligation be reflected as a Note Payable in the  Consolidated  Balance
         Sheets for the estimated  additional payments that would be made if the
         Agreement is enforceable. Since the date of stock repurchase,  Wellco's
         Consolidated  Balance Sheets have included a Note Payable  representing
         the present  value of the  estimated  amounts that would be paid if the
         Agreement is enforceable.  The amount of the estimated  payment for the
         fiscal year of 2003, discounted at a rate of 8.5%, is $309,000.

         During the third and  fourth  quarters  of the 1998  fiscal  year,  the
         Company  revised its initial  estimate of the amount that might be paid
         because of the decreased  profits for the fiscal year.  This  decreased
         the Note  Payable  as  shown  in the  Consolidated  Balance  Sheet  and
         increased Retained Earnings by $828,000.

         The Stock  Repurchase  Agreement,  as  drafted,  provides  that  actual
         payments, if any, would only be made in the amount by which 60% of each
         fiscal year's net income exceeds a certain defined  amount,  calculated
         on a cumulative  basis, and applying to fiscal years 1997 through 2002.
         The  Note  Payable  has  been  calculated  on  this  basis.  The  Stock
         Repurchase  Agreement  does not provide  for the  payment of  interest.
         However, generally accepted accounting principles require that interest
         be imputed,  and $97,000 of interest  expense was  recorded in 1997 and
         $49,000 in 1998. Total payments under the note cannot exceed $1,531,000
         and all obligations under the note terminate after the 2003 fiscal year
         payment.

         A bank had provided a three year term loan as part of the cash required
         to  construct  a  new  warehouse   adjoining  the  Company's   existing
         facilities  in  Waynesville,  North  Carolina.  This loan is payable in
         monthly  installments of $12,125 plus interest at the bank's prime rate
         of 8.5% at June 27, 1998 and $328,000 was  outstanding  under this loan
         at June 27, 1998. The  installments  of long-term debt maturing in each
         of the three  fiscal  years are:  1999 - $146,000,  2000 - $146,000 and
         2001 - $36,000.

15. STOCK OPTIONS:

         On July 2, 1997, the Board of Directors  approved the 1997 Stock Option
         Plan for Key  Employees  (1997 Key  Employees  Plan) and the 1997 Stock
         Option Plan for  Non-Employee  Directors (1997  Non-Employee  Directors
         Plan). Both plans were subsequently approved by shareholders at their

                                      -29-

<PAGE>



         1997 Annual Meeting.

         These  Plans  provide for the  granting  of options to purchase  99,000
         shares (1997 Key Employee  Plan) and 16,000  shares (1997  Non-Employee
         Directors  Plan),  and at June 27,  1998,  options for the  purchase of
         93,000  shares were granted  under the 1997 Key Emloyee Plan and 14,000
         shares under the 1997  Non-Employee  Directors Plan.  Under both Plans,
         the option  price is the market  price on the date  granted and options
         have a life of 10 years from the date  granted.  Options  granted under
         both of these plans were fully  exercisable  on the date granted except
         for certain  options  granted to certain  officers  which are not fully
         exercisable until future years in order to qualify them for certain tax
         treatment.  Options for the purchase of 83,600 shares were  immediately
         exercisable,  with the remaining  options being  exercisable  in 1999 -
         11,700; 2000 - 8,300; and 2001 - 3,400.

         Under the 1996 Stock Option  Plan,  the  Compensation  Committee of the
         Board of  Directors  was  authorized  to grant  stock  options  for the
         purchase of up to 60,000 shares of the Company's common stock.  Options
         for 52,500  shares have been granted under the 1996 Plan and the option
         exercise price was the market price on the date granted.

         In addition, the Company has a small number of granted and unexercised,
         fully  exercisable  stock options under the 1985 Stock Option Plan. All
         options available under the 1985 Plan have been granted.

         Transactions  involving these Plans for the last three fiscal years are
summarized below:

<TABLE>
<CAPTION>

                                                        No. of  Weighted-Average
Option Shares:                                          Shares    Exercise Price
<S>                                                    <C>           <C>    

Outstanding at July 1, 1995 ...................          2,100       $    5.50
Granted .......................................         52,500            5.32
Outstanding at June 29, 1996 ..................         54,600            5.33
Exercised .....................................        (27,500)           5.34
Outstanding at June 28, 1997 ..................         27,100            5.32
Granted .......................................        107,000           12.10
Exercised .....................................        (12,600)           6.73
Forfeited .....................................         (2,000)          12.00
Outstanding at June 27, 1998 ..................        119,500           11.13
</TABLE>



         The following table  summarizes  information  about fixed stock options
outstanding at June 27, 1998:

                                      -30-

<PAGE>

                                                                Weighted-Average
                                                                       Remaining
             Range of Exercise    Weighted Average              Contractual Life
Number                  Prices      Exercise Price                      in Years
 16,500            $5.00-$5.50               $5.05                           7.0
103,000           $12.00-$17.50             $12.11                           9.0


         Statement  of  Financial  Accounting  Standards  No.  123  (SFAS  123),
         "Accounting for  Stock-Based  Compensation,"  became  effective for the
         Company's 1997 fiscal year. As allowed by SFAS 123, the Company elected
         to continue applying the compensation expense recognition provisions of
         Accounting Principles Board Opinion 25 and related interpretations, and
         has not recognized  compensation expense for its Plans. If compensation
         expense  had been  recognized,  using the fair  value of options on the
         date  granted  computed  under the method  prescribed  by SFAS 123, net
         income  (loss) and net income  (loss) per share would have been reduced
         to the pro forma  amounts shown below (in  thousands,  except per share
         amounts):
<TABLE>
<CAPTION>

                                                             1998           1996
                                                             ----           ----
<S>                                                         <C>          <C>    
Net Income (Loss), As Reported ......................       $(337)       $   991
Net Income (Loss), Pro Forma ........................       $(626)       $   957
Net Income (Loss) Per Share, As Reported ............       $(.29)       $   .53
Net Income (Loss) Per Share, Pro Forma ..............       $(.54)       $   .51
</TABLE>

         No options were granted during 1997.

         The fair value on the date options  were  granted (the amount  deducted
         from net income as reported in arriving at pro forma net income  (loss)
         amounts  above) was estimated  using the  Black-Scholes  option pricing
         model using the following assumptions:

<TABLE>
<CAPTION>


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

Expected Dividend Yield                                     1.67%          3.78%
Expected Stock Price Volatility                            39.40%         19.24%
Risk-Free Interest Rate                                     5.55%          5.48%
Expected Life of Options in Years                            2.90           2.29
Weighted-Average Fair Value of
Options Granted                                             $3.54          $0.65
</TABLE>


16. STOCK SPLIT:

All common  shares and per share  amounts give effect to a  three-for-one  stock
split affected in the
                                      -31-

<PAGE>



         form of a stock dividend distributed on January 3, 1997 to stockholders
         of record on December 6, 1996.  The par value of the new shares issued,
         $749,000,  was  transferred  to Common  Stock from  Additional  Paid-In
         Capital ($598,000) and Retained Earnings ($151,000).


17.  EARNINGS PER SHARE:

         In February 1997, the Financial  Accounting  Standards Board issued the
         Statement  of  Financial  Accounting  Standards  No.  128  (SFAS  128),
         "Earnings  per Share"  effective for  financial  statements  issued for
         periods  ending  after  December  15,  1997.  This  Statement  requires
         companies  to  present  basic  earnings  per share  (EPS)  and  diluted
         earnings per share.

         Basic  earnings  per share is computed by dividing  net earnings by the
         weighted average number of common shares outstanding during the period.
         Diluted  earnings per share is computed by dividing net earnings by the
         weighted average number of common shares  outstanding during the period
         plus  the  dilutive  potential  common  shares  that  would  have  been
         outstanding  upon the assumed  exercise of dilutive stock  options.  As
         required  by SFAS No.  128,  all  earnings  per share  data for  fiscal
         periods prior to 1998 has been restated.

         The following is the  reconciliation of the numerators and denominators
         of the basic and diluted earnings per share computations:

<TABLE>
<CAPTION>

                                               For the Fiscal Year Ended 6-27-98
                                                Income       Shares    Per-Share
                                             (Numerator  (Denominator)    Amount

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

Basic EPS Available to Shareholders ..........$(337,000)   1,161,103   $  (0.29)
Effect of Dilutive Stock-based
  Compensation                                
Arrangements (Note: N/A - Anti-dilutive)
Diluted EPS Available to Shareholders ....... $(337,000)   1,161,103   $  (0.29)


                                               For the Fiscal Year Ended 6-28-97
                                                Income       Shares    Per-Share
                                             (Numerator) (Denominator)    Amount

<S>                                           <C>         <C>           <C>   
Basic EPS Available to Shareholders ......... $ 758,000   1,126,113     $   0.67
Effect of Dilutive Stock-based Compensation
Arrangements ...................................             26,698
Diluted EPS Available to Shareholders ....... $ 758,000   1,152,811     $   0.66




                                      -32-

<PAGE>



                                               For the Fiscal Year Ended 6-29-96
                                                Income       Shares    Per-Share
                                              (Numerator) Denominator)    Amount

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

Basic EPS Available to Shareholders ............$ 991,000   1,884,648   $   0.53
Effect of Dilutive Stock-based Compensation
Arrangements ...................................               17,080
Diluted EPS Available to Shareholders ..........$ 991,000   1,901,728   $   0.52
</TABLE>

18. SEGMENT AND REVENUE INFORMATION:

The Company operates in one industry  segment.  Substantially  all the Company's
operating  activity is from the sale of  military  footwear  and related  items,
whether sold directly by the Company or its licensees.

Revenues by class of product,  major customer and export revenues for 1998, 1997
and 1996 were:
<TABLE>
<CAPTION>

                                                       Percent of Total Revenues
                                                     1998        1997       1996
                                                     ----        ----       ----
<S>                                                   <C>       <C>         <C>    
Revenues By Class of Product:
Sales of Footwear and Related Items ...........        95%        96%        97%
Revenues From Licensees .......................         5%         4%         3%
Total .........................................       100%       100%       100%
Major Customer-U. S. Government ...............        73%        69%        70%
Export Revenues ...............................         5%         8%        12%

</TABLE>
         The majority of export  revenues  are to Canada,  and Central and South
American countries.



19. YEAR 2000 DATE CONVERSION (UNAUDITED):

         The Company recognizes the need to consider whether its operations will
         be adversely  impacted by Year 2000 software  failures.  While software
         and systems used by Wellco is now compliant  with Year 2000,  customers
         and  vendors  who will not be timely  compliant  with  Year 2000  could
         adversely   affect   Wellco's   results  of  operations  and  financial
         condition,  although  such  adverse  affect  should not be long term or
         permanent.   See  the  Forward  Looking  section  of  the  Management's
         Discussion  and Analysis  section of this Annual Report for the actions
         Wellco is taking to identify and minimize any Year 2000 problems.





                                      -33-

<PAGE>



GOVERNMENT BOOT CONTRACT REVENUES:

         Revenues in 1998 include $210,000  representing the estimated amount of
         certain contract actions not yet settled with the U. S. government. Any
         difference  between these  estimates and the actual  amounts  agreed to
         will be  included in the period of  settlement.  Income  before  income
         taxes in 1997 was  decreased by $73,000 from contract  actions  settled
         with the U.S.  Government at amounts different than previously recorded
         estimates. There were no differences of significance for 1998.

21. CONTRACT CLAIM:

         In April 1998 Wellco  executed an Agreement  with Defense Supply Center
         Philadelphia  (DSCP).  The Agreement  provides that DSCP will reimburse
         the Company for certain costs incurred related to contract  performance
         during the fourth  quarter  of the 1997  fiscal  year and the first two
         quarters of the 1998 fiscal  year.  Wellco  maintained  that it was due
         reimbursement  for costs  incurred in performing  in accordance  with a
         prior DSCP  interpretation  of the contract.  This  interpretation  was
         later changed to the detriment of Wellco.  The Agreement  provides that
         any  disagreement  between  Wellco  and DSCP on an item of cost will be
         subject to binding  arbitration.  The cost  reimbursement is limited to
         $1,000,000.

         Wellco  submitted  its claim  under  the  Agreement  in late May,  1998
         documenting  more  than  $1,000,000  in  costs  incurred.  In an  early
         October,  1998 meeting with Wellco,  DSCP agreed to pay Wellco $246,000
         of the $1,000,000 claim.  Binding arbitration will be used to determine
         how much,  if any, of the  remaining  $754,000  will be paid by DSCP to
         Wellco. It is expected that this arbitration  procedure will take a few
         months and Wellco,  although confident that a significant amount of the
         $754,000 will ultimately be paid,  cannot  reasonably  predict what the
         arbitrator will decide.  Therefore, the 1998 Consolidated Statements of
         Operations   includes   $226,000  of  income  related  to  this  claim,
         representing  the agreed to $246,000 less $20,000 of related costs. Any
         amount Wellco will receive beyond $246,000 will be recorded at the time
         of the arbitration decision.


22. COMMITMENT:

         Under a Resolution  of its Board of  Directors,  Wellco is committed to
         purchase its Common Stock which,  as of September 6, 1990, was owned by
         or under option with an active or retired  employee at that date.  This
         purchase is at the employee or retiree  option and is activated only by
         the  termination  of employment  or death of the retiree.  The purchase
         price is to be based on  Wellco's  tangible  book  value at the time of
         purchase.  The maximum  shares that could be purchased at June 27, 1998
         is approximately 83,000.

23. CONTINGENCIES:

         In April 1997, the Company was served with a subpoena issued by a grand
         jury  empaneled  in the United  States  District  Court for the Eastern
         District of  Pennsylvania  which  requires  the  production  of certain
         documents  for the period  January 1, 1990 until  April 29,  1997.  The
         Company was informed  through its legal counsel that the grand jury was
         investigating possible violations of antitrust laws primarily involving
         alleged  collusive  activities among  manufacturers of combat boots for
         the U.S.  Government.  In August, 1998, the Company's legal counsel was
         notified the Company's  documents were being returned and informed that
         the grand jury's investigation has been closed.

         In March  1998  the  Company was served with a civil action  complaint.
         The Plaintiff is alleging that

                                      -34-

<PAGE>



         the Company,  during the period October, 1995 through September,  1996,
         untimely  delivered  defective  work shoes  which  resulted  in certain
         losses for the Plaintiff as well as precluding Plaintiff from competing
         on a subsequent  contract.  In  addition,  the  complaint  alleges that
         Wellco submitted as its bid prototype one of the Plaintiff's work shoes
         which resulted in the subsequent  contract being awarded to Wellco.  It
         is the opinion of the Company's management,  based upon the information
         available at this time, that the expected outcome of these matters will
         not have a material  adverse  effect on the results of  operations  and
         financial condition of the Company.



                                      -35-

<PAGE>










                          INDEPENDENT AUDITORS' REPORT



Board of Directors and Stockholders
Wellco Enterprises, Inc.
Waynesville, North Carolina

We  have  audited  the  accompanying   consolidated  balance  sheets  of  Wellco
Enterprises,  Inc. and  subsidiaries  as of June 27, 1998 and June 28, 1997, and
the related  consolidated  statements of operations,  stockholders'  equity, and
cash flows for each of the three years in the period ended June 27, 1998.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit  also  includes  examining,  on a test  basis,  evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the  financial  position of Wellco  Enterprises,  Inc.  and
subsidiaries  as of June 27,  1998 and June 28,  1997,  and the results of their
operations  and their cash flows for each of the three years in the period ended
June 27, 1998 in conformity with generally accepted accounting principles.


DELOITTE & TOUCHE LLP
Charlotte, North Carolina

October 8, 1998












                                      -36-

<PAGE>



                            WELLCO ENTERPRISES, INC.
                PRICE RANGE, DIVIDENDS AND MARKET OF COMMON STOCK
<TABLE>
<CAPTION>

                                     Fiscal Year 1998 Quarters

                           First         Second         Third             Fourth
<S>                        <C>           <C>            <C>               <C>    

Market Price Per Share-
High                       20 7/8        17 1/2         14 1/4            13
Low                        12            13 3/4         11 3/4            10 1/2
Per Share Cash Dividend 
  Declared                                 $.10                             $.10


                                     Fiscal Year 1997 Quarters

                           First         Second          Third            Fourth
Market Price Per Share-
High                       10 1/3        15              14 5/8           14 3/4
Low                         6 1/2         8               9               11 1/5
Per Share Cash Dividend 
  Declared                                $.10                              $.10
</TABLE>


The Company's Common Stock is traded on the American Stock Exchange.

The number of holders of record of Wellco's  Common  Stock as of August 28, 1998
was 277.

All per share amounts have been adjusted to give effect to a three-for-one split
in the form of a stock dividend paid on January 3, 1997.


Registrar and Transfer Agent
ChaseMellon Shareholders Services
New York, N. Y.

                                      -37-

<PAGE>




                            WELLCO ENTERPRISES, INC.
                        SELECTED QUARTERLY FINANCIAL DATA
                                   (Unaudited)
                   (In Thousands Except for Per Share Amounts)
<TABLE>
<CAPTION>

                                      Fiscal Year 1998 Quarters

                           First         Second          Third            Fourth
<S>                       <C>            <C>           <C>            <C>   

Revenues                  $5,676         $7,926         $5,162           $5,153
Cost of Sales and
  Services                 5,435          7,317          5,046            4,542
Net Income (Loss)           (233)            15        (A) 434        (B)  (553)
Net Income (Loss)
  Per Share                $(.20)          $.01           $.37            $(.48)


                                      Fiscal Year 1997 Quarters


                           First         Second          Third            Fourth
<S>                       <C>            <C>        <C>                   <C>    

Revenues                  $4,990         $4,738     (C)  $2,501           $8,970
Cost of Sales and 
  Services                 4,086          3,917           2,008            7,600
Net Income (Loss)            298            208             (91)      (D)    343
Net Income (Loss)
  Per Share)                $.27           $.18           $(.08)            $.30
</TABLE>

(A)      Increased by $718,000 for the  contract  claim  discussed in Note 21 to
         the Consolidated Financial Statements. In the March, 1998 meeting which
         resulted in this claim, Wellco outlined the cost items that would be in
         its  claim  and DSCP did not react  unfavorably  to any  item.  After a
         $20,000 reduction for certain costs related to reaching this Agreement,
         in  accordance   with  SOP  81-1,   "Accounting   For   Performance  of
         Construction - Type and Certain  Production - Type Contracts,  $980,000
         was  recorded  as an item of income in the  third  quarter  of the 1998
         fiscal year.
(B)      Decreased by $501,000 related to the adjustment of the claim receivable
         mentioned  in (A)  above.  See  Note 21 to the  Consolidated  Financial
         Statements.
(C)      In December 1996, Wellco substantially  completed combat boot shipments
         under the prior  combat boot  contract,  and since it was not awarded a
         new contract until April 15, 1997, pairs of combat boots shipped in the
         quarter ended March 29, 1997 were significantly less that normal.
(D)      Reduced by $76,000  contribution to the Wellco  Foundation.  Reduced by
         $28,000  representing  the  adjustment of tax  provisions for the first
         three quarters,  made at estimated  annual  effective tax rates, to the
         actual  rate for the year.  Reduced by $54,000 of interest  cost.  Also
         reduced by excess labor costs,  freight costs and other  inefficiencies
         caused by a significant change in combat boot shipment methods.



                                      -38-

<PAGE>




Officers and Directors

HORACE AUBERRY
Chairman of the Board and Chief Executive Officer

ROLF KAUFMAN
Vice Chairman of the Board

DAVID LUTZ
President and Chief Operating Officer and Treasurer

Officers

SVEN E. OBERG
V. P. - Technical Director

RICHARD A. WOOD, Jr.
Secretary, Attorney, Member of the law firm of McGuire, Wood & Bissette, P. A.

TAMMY FRANCIS
Assistant Secretary and Controller

Directors

WILLIAM M. COUSINS, Jr.
President of William M. Cousins, Jr., Inc.
(Management Consultants)

JAMES T. EMERSON
Retired Engineer

CLAUDE S.  ABERNETHY, Jr.
Senior Vice President of Interstate / Johnson Lane

J. AARON PREVOST
Retired Banker

WILLIAM D. SCHUBERT
Principal of Advanced Management Concepts
(Management Consultants)

FRED K. WEBB, Jr.
Special Projects Manager of Wellco Enterprises, Inc.








                                      -39-

<PAGE>

                                                      


                                    PART III

Responsive  information  called  for by the  following  Items 10, 11, 12 and 13,
except for certain  information about executive officers provided below, will be
filed  not later  than 120 days  after  the  close of the  fiscal  year with the
Securities and Exchange  Commission in a Proxy Statement dated October 16, 1998,
and  is  incorporated  herein  by  reference.  After  each  item  and  shown  in
parenthesis  is the proxy  heading for the  section  containing  the  responsive
information.

Item  10.  Directors  and  Executive  Officers  of  the  Registrant.  (Board  of
Directors)

         The Proxy Statement is not expected to contain  information  disclosing
delinquent Form 4 filers.

         Identification of Executive Officers and Certain Significant Employees:


Name                               Age       Office
Horace Auberry                     67        Chairman of the Board of Directors,
                                             Chief Executive Officer
Rolf Kaufman                       68        Vice Chairman, Board of Directors
Sven Oberg                         59        Vice President-Technical Director
David Lutz, CPA                    53        President, Treasurer and Director
Richard A. Wood, Jr.               61        Secretary
Tammy Francis, CPA                 39        Controller, Assistant Secretary


In 1996, Mr. Kaufman  retired from the office of President and remains active as
a consultant to the Company  serving in the position as Vice Chairman,  Board of
Directors.  Mr. Lutz was elected to the office of President in 1996,  previously
serving as Secretary/ Treasurer.  Ms. Francis has been Controller since October,
1996.  She was  Controller  of  Atlas  Precision,  Inc.,  an  injection  molding
manufacturer,  from 1995 until  October,  1996.  From 1990 until  1995,  she was
Manager of Finance and Accounting at Haywood Electric Membership Corporation,  a
rural utility company.  Prior to becoming  Secretary of the Company in 1996, Mr.
Wood served for more than the past five years as Assistant  Secretary.  Mr. Wood
is a partner in the law firm of McGuire, Wood & Bissett,  general counsel to the
Company.

Executive  officers are elected by the Board of Directors to serve a term of one
year. There are no arrangements or  understandings  pursuant to which any of the
officers are elected, and all are elected to serve for one year terms.

Item 11. Executive Compensation.  (Executive Compensation)

Item 12.  Security  Ownership  of  Certain  Beneficial  Owners  and  Management.
(Security Ownership)

Item  13.   Certain   Relationships   and   Related   Transactions.   (Board  of
Directors/Security Ownership)

Since the  beginning  of the 1998  fiscal  year,  no  executive  officer  of the
Registrant or member of his immediate  family has had any  transaction or series
of similar transactions with the Registrant or any of its subsidiaries exceeding
$60,000, and there are no currently proposed transactions exceeding $60,000.

                                       -6-

<PAGE>



Since the beginning of the 1998  fiscal year, no -
(1)  (executive officer of the Registrant or member of his immediate family,
(2)  corporation  or  organization  of which  any such  person  is an  executive
     officer, partner, owner or 10% or more beneficial owner, or
(3)  trust or other estate in which any such person has a  substantial  interest
     or as to which such person serves as trustee or in a similar capacity,
was  indebted  to the  Registrant  or its  subsidiaries  in an amount  exceeding
$60,000.


                                     PART IV

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

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

1. All Financial Statements

                                                                            Page
                                                                          Number
Independent Auditors' Report                                                 11
The following consolidated financial statements of
Wellco Enterprises, Inc. are in the Registrant's 1998 
Annual Report which is integrated into Part II of this Form 10-K
immediately after page 12
Balance Sheets-at June 27, 1998  and June 28, 1997                        14-15*
Statements of Operations-years ended June 27,1998, June 28, 1997 
and June 29, 1996                                                            13*
Statements of Cash Flows-years ended June 27, 1998, June 28, 1997
and June 29, 1996                                                         16-17*
Statements of Stockholders' Equity-years ended June 27, 1998, June
28, 1997 and June 29, 1996                                                   18*
Notes to Consolidated Financial Statements                                19-35*

* Page number in the 1998 Annual Report to Shareholders integrated in Part II of
this Form 10-K.

2. Financial Statement Schedules

                                                                            Page
                                                                          Number
Schedule II                             Valuation Accounts                   13

All other schedules are omitted because they are not applicable or not required.





                                       -7-

<PAGE>



Exhibits

Exhibit                                                                     Page
Number         Description                                                Number
      3        Articles of Incorporation and By-Laws                        (a)
      10       Material Contracts:
               A. Bonus Arrangement*                                        (b)
               B. 1985 Stock Option Plan for Key Employees of 
                  Wellco Enterprises, Inc.*                                 (c)
               C. 1996 Stock Option Plan for Key Employees of 
                  Wellco Enterprises, Inc.*                                 (d)
               D. 1997 Stock Option Plan for Key Employees of 
                  Wellco Enterprises, Inc.*                                 (e)
               E. 1997 Stock Option Plan for Non-Employee 
                  Directors of Wellco                                       (e)
               Enterprises, Inc.*
      21       Subsidiaries of Registrant                                   14
      23       Consent of Experts                                           (f)

* Management Compensation Arrangement/Plan.

Copies of the below  listed  exhibits  may be  obtained  on  written  request to
Corporate  Secretary,  Wellco  Enterprises,  Inc., Box 188,  Waynesville,  N. C.
28786, accompanied by payment of the following amounts for each copy:

Exhibit 3         $40.00
Exhibit 10 A.       2.00
Exhibit 10 B.       3.00
Exhibit 10 C.       3.00
Exhibit 10 D.       3.00
Exhibit 10 E.       3.00

         (a)      Exhibit  was filed in Part IV of Form 10-K for the fiscal year
                  ended July 1, 1995, and is incorporated herein by reference.

         (b)      Exhibit  was filed in PART IV of Form 10-K for the fiscal year
                  ended July 3, 1982, and is incorporated herein by reference.

         (c)      Exhibit  was filed as Exhibit A to the Proxy  Statement  dated
                  October 22, 1985, and is incorporated herein by reference.

         (d)      Exhibit  was filed as Exhibit A to the Proxy  Statement  dated
                  October 18, 1996, and is incorporated herein by reference.

         (e)      Exhibit  was filed as Exhibit A to the Proxy  Statement  dated
                  October 17, 1997, and is incorporated herein by reference.

         (f) Consent is contained  in opinion of  independent  certified  public
accountants on page 11.


                                       -8-

<PAGE>



Item 14 (b) - Reports on Form 8-K

There were no reports on Form 8-K for the three months ended June 27, 1998.



                                       -9-

<PAGE>



                                   SIGNATURES

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

WELLCO ENTERPRISES, INC.


/s/ Horace Auberry
By: Horace Auberry, Chairman of the Board of Directors
(Principal Executive Officer)


/s/ David Lutz
By: David Lutz, President and Treasurer
(Principal Financial Officer)


/s/ Tammy Francis
By: Tammy Francis, Controller
 (Principal Accounting Officer)


Date: October 9, 1998

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


/s/ Horace Auberry                                           /s/ Rolf Kaufman
Horace Auberry, Chairman                                  Rolf Kaufman, Director


/s/ David Lutz                                              /s/ J. Aaron Prevost
David Lutz, Director                                  J. Aaron Prevost, Director


/s/ Fred K. Webb, Jr.
Fred K. Webb, Jr.,  Director



Date: October 9, 1998





                                      -10-

<PAGE>









                    INDEPENDENT AUDITORS' REPORT AND CONSENT



Board of Directors and Stockholders
Wellco Enterprises, Inc.
Waynesville, North Carolina

We  have  audited  the  accompanying   consolidated  balance  sheets  of  Wellco
Enterprises,  Inc. and  subsidiaries  as of June 27, 1998 and June 28, 1997, and
the related  consolidated  statements of operations,  stockholders'  equity, and
cash flows for each of the three years in the period  ended June 27,  1998.  Our
audits also included the  financial  statement  schedule  filed under Part IV of
Item 14(a)2. 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  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,  the  financial  position of Wellco  Enterprises,  Inc.  and
subsidiaries  as of June 27,  1998 and June 28,  1997,  and the results of their
operations  and their cash flows for each of the three years in the period ended
June 27, 1998 in conformity with generally accepted accounting principles. Also,
in our opinion,  such financial statement schedule,  when considered in relation
to the basic consolidated financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

We  consent  to the  incorporation  by  reference  of the  above  report  in the
Prospectus  constituting  part of the Registration  Statement  33-8246 of Wellco
Enterprises, Inc. on Form S-8.


DELOITTE & TOUCHE LLP
Charlotte, North Carolina

October 8, 1998








                                      -11-

<PAGE>




                            WELLCO ENTERPRISES, INC.
                                    FORM 10-K
                         FISCAL YEAR ENDED JUNE 27, 1998
               INDEX TO FINANCIAL STATEMENT SCHEDULE AND EXHIBITS


                                                                            Page
Financial Statement Schedule:                                             Number
Schedule II-Valuation Accounts                                               13
Exhibits:
Exhibit 3-Articles of Incorporation and By-Laws                              (a)
Exhibit 10 A.-Bonus Arrangement                                              (b)
Exhibit 10 B.-1985 Stock Option Plan for Key Employees 
                      of Wellco Enterprises, Inc.                            (c)
Exhibit 10 C.-1996 Stock Option Plan for Key Employees
                      of Wellco Enterprises, Inc.                            (d)
Exhibit 10 D.-1997 Stock Option Plan for Key Employees 
                      of Wellco Enterprises, Inc.                            (e)
Exhibit 10 E.-1997 Stock Option Plan for  Non-Employe                        
                      Directors of Wellco Enterprises, Inc.                  (e)
Exhibit 21-Subsidiaries of Registrant                                        14
Exhibit 23-Consent of Experts                                                (f)

(a)      Exhibit  was filed in Part IV of Form 10-K for the  fiscal  year  ended
         July 1, 1995, and is incorporated herein by reference.

(b)      Exhibit  was filed in PART IV of Form 10-K for the  fiscal  year  ended
         July 3, 1982, and is incorporated herein by reference.

(c)      Exhibit was filed as Exhibit A to the Proxy Statement dated October 22,
         1985, and is incorporated herein by reference.

(d)      Exhibit was filed as Exhibit A to the Proxy Statement dated October 18,
         1996, and is incorporated herein by reference.

(e)      Exhibit was filed as Exhibit A to the Proxy Statement dated October 17,
         1997, and is incorporated herein by reference.

(f) Consent is contained in opinion of Independent  Certified Public Accountants
on page 11.


                                      -12-

<PAGE>



                                   SCHEDULE II


             WELLCO ENTERPRISES, INC. AND WHOLLY-OWNED SUBSIDIARIES
                               VALUATION ACCOUNTS
    FOR THE FISCAL YEARS ENDED JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996



                  BALANCE AT      ADDITIONS
                BEGINNING OF     CHARGED TO                           BALANCE AT
DESCRIPTION             YEAR         INCOME          DEDUCTIONS      END OF YEAR
Allowance for
doubtful
accounts-
1998                     $58                                                $58
1997                     $37        $21 (A)                                 $58
1996                     $37                                                $37

(A) Additions to allowance for doubtful accounts.




                                      -13-

<PAGE>