<PAGE>   1
                                     EXHIBIT
                                       13





                                      1997



                                  ANNUAL REPORT








                            WELLINGTON HALL, LIMITED

                            Lexington, North Carolina






                                      -19-
<PAGE>   2
TO THE SHAREHOLDERS OF WELLINGTON HALL, LIMITED

         Fiscal year 1997 began with what seemed an opportunity for an improved
year after we established certain new marketing programs that demonstrated some
success and produced some significant new distribution at the April 1996
furniture market held just prior to beginning the year. These successes
continued into the fall and did reflect positively in the operating results for
the first half of the year when the company reported a modest profit of about
$36,000 at the second quarter's end on October 31 1996. Also during this period,
the company strengthened its management and marketing efforts with the addition
of a Vice-President to direct all marketing functions such that we could be more
focused in the pursuit of restoring both foreign and domestic sales to
profitable levels. However, the second half of the year, particularly the early
part of the fourth quarter, saw orders again go into decline when the furniture
economy seemed to have taken a further down turn and many of the programs
started in 1996 stalled or failed to produce the anticipated results.

         Because of the slow rate of incoming orders, in combination with the
high levels of inventory available to service those orders, Lexington or
domestic production operations had to be severely curtailed particularly during
the fourth quarter that resulted in inefficiencies, unabsorbed labor and
overhead cost, and significant losses for the year. To further complicate
matters, foreign operations were also interrupted in the fourth quarter because
of maintenance requirement to the wood drying processes that effectively
depleted the necessary level of in process inventories to sustain operations.
For the fiscal year then, the losses amounted to about $507,000 versus a profit
the previous year of about $73,000.

         Again this year, the April High Point market was encouraging and for
that month, including sales for both foreign and domestic products, the company
recorded almost $900,000 in new orders. Practically all of these orders were for
the Company's regular line products directed at the residential trade and
normally sold at retail. Also included in these results were sales from a
product line, new to the Company as of April, of country French and English
designs of occasional and dinning items which the Company has designated as its
Woodward Collection. The Company obtained this line when it acquired the assets
of the Woodward Company which consisted of a limited amount of inventory. The
primarily motivation for the Company's action in this regard was the existence
of a developed product line which is deemed to be very compatible with the more
casual taste of today's consumer, its compatibility with the Company's marketing
niche and it's compatibility with domestic production capabilities.

         To restore volume for foreign operations, significant efforts are
continuing to be expended to improve the sales of its residential products
normally sold through retailers but the most immediate solution and the progress
made to date has been made in OEM sales, that is, product sold to other U.S.
furniture manufacturers. This category of sales increased in fiscal 1997 and are
expect to continue upward during fiscal 1998. However, to be as profitable as
needed, the continued expansion of the customer base for OEM sales will likely
be necessary since the entire industry has been effected by the slow down in the
furniture segment of the economy and it is uncertain that growth will be
adequate from the existing customer base.

         To raise the level of production and sales volume necessary to
restoring profitability to domestic operations will be a real challenge with
losses now having been recorded for each of the last three fiscal years. The
best opportunity here will likely be the success realized from the new Woodward
Collection discussed above. The response to date has been moderately encouraging
but to establish an immanent turn around, a major account that can produce
significant volume will have to commit to the line. Such an account has shown
interest and is currently evaluating the product for their retail outlets but
nothing currently know gives reason to predict that an accommodating order or
commitment is forthcoming.

         The Company finances, primarily because of the operating loss reported
and the level of debt service, required a great deal of attention during fiscal
1997. First the company re-negotiated the interest and payment terms with the
Overseas Private Investment Corporation on its outstanding loan, negotiate a
private placement of the Company's stock thus adding $300,000 in equity,
negotiated and expanded the Company's Line of Credit with Lexington State Bank,
and prepared and filed a Registration Statement with the Securities and Exchange
Commission such that additional equity could have been raised to primarily
reduce the company indebtedness. All of these situations are further discussed
later in this report.


                                      -20-
<PAGE>   3
         The company's financial position remains tight and requires the careful
orchestration of available resources to remain viable. Most of the losses for
fiscal 1997 were, however, covered by reductions in inventory and non-cash
expenses at least to the degree that the impact on operating funds was somewhat
diminished.

         As we start another year revenues for the first quarter of fiscal 1998
are expected to increase significantly because of OEM sales. Profits will likely
be recorded for foreign operations but will be more than offset by continued
losses from domestic operations since curtailed production levels in the
Lexington plant will continue until at least the second quarter when the
Woodward Collection is scheduled to be produced which could favorably influence
volume during that period. How the second quarter and beyond will fair will most
likely depend on sustaining OEM sales, for foreign operations, and on continued
and growing acceptance of the Woodward collection for domestic operations.






Sincerely,



Hoyt Hackney, Jr.
President












Upon written request directed to the Secretary of the Company at P.O. Box 1354,
Lexington, North Carolina 27293-1354, Shareholders will be furnished a copy of
the Company's Annual Report on form 10-KSB without charge.


                                      -21-
<PAGE>   4
                          MARKET PRICES, DIVIDENDS AND
                           RELATED SHAREHOLDER MATTERS

         Until October 1995, the Common Stock of the Company traded in the
NASDAQ over-the-counter market system. Since that time, the Company's Common
Stock has traded on the NASD's over-the-counter bulletin board. According to the
information furnished by Anderson & Strudwick, a market maker in the Company's
Common Stock, the high and low bid quotations for each quarterly period within
the last two fiscal years and the current fiscal year to date is as follows:

<TABLE>
<CAPTION>
Quarter Ending    High     Low              Quarter Ending     High      Low
                  ----     ---              --------------     ----      ---
<S>      <C>      <C>      <C>              <C>      <C>      <C>       <C>
July     1995     1.00     1.00             July     1996     0.344      0.25
October  1995     0.75     0.75             October  1996      0.50     0.281
January  1996     0.75     0.25             January  1997     0.375     0.187
April    1996     0.50     0.25             April    1997     0.313     0.313
</TABLE>

         These market quotations represent inter-dealer prices, without retail
mark-up, mark-down or commission, and do not necessarily represent actual
transactions.

         As of July 27, 1997, there were approximately 572 holders of record of
the Company's Common Stock.

         The Company has not paid any dividends since its inception. Pursuant to
the terms of its line-of-credit and long-term loan agreements with Lexington
State Bank, the Company may not pay any dividends, purchase, redeem or otherwise
retire any of its capital stock or otherwise make any other distribution of its
assets resulting in the reduction of its capital without the prior written
consent of Lexington State Bank. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition."








                                      -22-
<PAGE>   5
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

         The Company's principal long-term capital resources are shareholders'
equity, the term loan of Wellington Hall with Lexington State Bank and the term
loan of WHCC with the Overseas Private Investment Corporation (OPIC). As of
April 30, 1997, total stockholders' equity was $2,266,944 and the outstanding
principal amounts of the Lexington State Bank loan and the OPIC loan were
$385,738 and $990,999, respectively.

         The Lexington State Bank loan bears interest at the prime rate plus
1.5% and is payable in monthly installments of $7,000 until maturity on April
10, 2002. It is secured by substantially all of the Company's domestic assets.
The net proceeds of the loan were used to refinance indebtedness used to
purchase and expand the Company's Lexington, North Carolina facility.

         In July 1996, the Company began negotiating with OPIC to amend the OPIC
loan agreement then in effect to provide more favorable terms. Principal
payments were scheduled to double from approximately $31,000 per quarter to
approximately $62,000 per quarter beginning on July 31, 1996 with a final
balloon payment of $185,812 due on October 31, 1999. Under the loan agreement,
WHCC was also obligated to make quarterly interest payments at the rate of 12%
per annum. On March 10, 1997, WHCC and OPIC executed an amended loan agreement
that, among other things, lowered the interest rate to 10% per annum as of
November 1, 1996 and waived principal payments from July 31, 1996 until July 31,
1997, at which time the Company began making quarterly payments of approximately
$31,000. Principal payments increase to approximately $62,000 on July 31, 1998
with a balloon payment of approximately $557,438 due on October 31, 1999. Upon
execution of the amended documents, WHCC paid OPIC a rescheduling fee of 1% of
the principal balance. The proceeds from the OPIC loan, together with funds
generated internally by Wellington Hall, were used to acquire and improve the
Honduran Facilities.

         The OPIC loan prohibits the payment of dividends and other
distributions by Wellington Hall and requires that it maintain a stated amount
of tangible net worth as well as certain financial ratios, including current
assets to current liabilities and total indebtedness to tangible net worth. In
addition, WHCC is required to maintain a stated amount of current assets in
excess of current liabilities, and WHCC and MWH are required to maintain stated
ratios of current assets to current liabilities and indebtedness to tangible net
worth. Wellington Hall, WHCC an MWH are each in compliance with the requirements
of the OPIC loan.

         Under the OPIC loan arrangement, Wellington Hall is obligated to supply
any necessary funds to WHCC to meet WHCC's obligations thereunder, and MWH has
also guaranteed the obligations of WHCC. The OPIC loan is secured by
substantially all of the tangible assets of the Honduran Facilities.

         The Company's primary sources of liquidity are bank lines of credit and
cash flow from operations. For its domestic operations, the Company has three
lines of credit with Lexington State Bank. Under its primary line, the Company
may borrow the lesser of (i) $1,200,000 or (ii) the sum of 70% of the Wellington
Hall's accounts receivable less than 60 days old, 50% of its finished good
inventories and 10% of work in process and raw material inventories. As of April
30, 1997, the Company had $1,178,400 in borrowings under this line of credit,
leaving $21,600 available for future borrowings. The Company pays interest
monthly at the rate of prime plus 1% on outstanding borrowings under the
facility. Principal payments are due on demand. The line of credit also contains
restrictive covenants that prohibit Wellington Hall from paying dividends and
making other distributions with respect to its capital stock and require it to
maintain certain financial ratios, including current assets to current credit.
The line of credit is reviewed annually for renewal.

         Wellington Hall is also indebted to Lexington State Bank under a demand
loan for $100,000 borrowed in 1993 to finance working capital. The loan bears
interest at the prime rate plus 1% payable monthly, and the outstanding balance
at April 30, 1997 was $85,600.

         On January 16, 1997, Wellington Hall executed the loan documents that
increased its line of credit from Lexington State Bank in the amount of
$250,000. Outstanding borrowings under this facility will bear interest at the
rate of prime plus 1 1/2%, payable monthly, and the outstanding balance as of
April 30, 1997 was $233,000 leaving $17,000 available for future borrowings..

         The Lexington State Bank lines of credit and demand loan are secured by
substantially all of the Company's domestic assets.

         MWH has lines of credit with two Honduran banks in an aggregate amount
of $500,000. As of April 30, 1997, an aggregate of $438,972 had been borrowed
under these lines, leaving approximately $61,028 for future borrowings.
Borrowings bear interest at rates ranging from 30% to 40% payable quarterly and
principal is payable on demand. The lines are secured by a second lien on the
fixed assets of MWH and current assets.


                                      -23-
<PAGE>   6
         The Company's other primary source of liquidity is net cash provided by
operating activities which was ($729,951) and $97,517 in fiscal 1997 and 1996,
respectively. The use of funds during 1997 was primarily as a result of the
increases in account receivable, reductions to account payable and operating
losses discussed below.

         As of April 30, 1997, accounts receivable had utilized funds and
increased by approximately $230,000 since the beginning of the fiscal year,
mostly as a result of a surge in sales late in the fourth quarter and extended
terms granted certain dealers for payment of their invoices. The receivables
represented a turnover rate of about fifty-five days, an increase of about ten
days when compared to the turnover rate reported at April 30, 1996.

         Accounts payable were reduced by approximately $105,000 reflecting
mostly the curtailment of domestic production reducing the requirements for raw
materials. The Company has generally paid its vendors and material suppliers
within their terms.

         Consolidated inventories decreased by about $208,000 during the fiscal
year primarily a result of a decrease of about $234,000 to the inventory of
domestically produced goods in response to reduced levels of incoming orders,
excessive inventories relative to sales, and to generate operating funds. In
addition the Company established a reserve of about $115,000 for slow moving
inventory against the MWH inventory. The Company utilized about $138,000 to
increase domestic inventories of foreign produced products of which
approximately $75,000 was in transit and was in response to an increased backlog
of orders for foreign produced goods. Sales and backlogs are further discussed
herein below.

         Property and equipment is reported to be down about $23,000 for the
fiscal years, however, when expenditures of approximately $74,000 are added, the
decrease is actually about $97,000. The decline is mostly the result of the
devaluation of the Honduran currency relative to the prior fiscal year end of
approximately 17.7%. The historical value of the Company's Honduran assets are
carried on the subsidiaries' books in the local currency, the lempira. Lempiras
are converted to dollars at the spot rate in effect at period end when the
Company's financial statements are consolidated, and the reduction to the
reported value of these assets appears as part of the translation adjustment.

         There are no significant capital expenditures planned for fiscal year
1998 and expenditures are expected to be limited to maintenance needs which
develop from time to time. The Company's total outlay for capital improvements
for the fiscal year ended April 30, 1997 was approximately $74,000 used
primarily to convert the Company's boilers at its domestic operations from
burning fuel oil to natural gas, to retube its boiler and to repair a dry wood
storage shed at the Honduran Facilities.

         The Company is subject to the risk that foreign currency fluctuation
may have an adverse impact on its operations, For example, if the Honduran
currency were to stabilize in the future or to increase in value against the
dollar, the Honduran subsidiary's cost might increase causing profit margins to
erode. The Company, however, does not engage in any hedging of the exchange rate
fluctuations. Since the acquisition of the Honduran subsidiary in 1989, the
lempira has continually devalued against the U.S. dollar, from 2.0 lempira to
the dollar in 1989 to 13.02 lempira to the dollar at April 30, 1997. Although
the devaluation of the lempira has resulted in reductions in the historical book
value of the assets and liabilities and a corresponding reduction to
shareholders' equity in the form of a $1.86 million cumulative translation
adjustment, the Company also benefits from lower product cost from the
subsidiary as the lempira devalues. In view of the long-term trend of the
devaluation, management believes that hedging of the exchange rate fluctuation
is unnecessary and could reduce or eliminate the benefits of lower product costs
resulting from any continued devaluation.

         As of September 1, 1996, the Company executed an Employment and Stock
Purchase Agreement with Arthur F. Bingham (the "Agreement"). On October 10, 1996
Mr. Bingham loaned the Company $285,694 at terms included in an addendum to the
Agreement. On February 12, 1997 and, during the Company's last fiscal quarter,
Mr. Bingham purchased 600,000 shares of common stock at a price of $.50 per
share, which purchase price was paid by cancellation of the foregoing loan and
for an additional investment of $14,306. Mr. Bingham has also been granted
options to purchase 600,000 additional shares at option prices ranging from $.50
to $1.30 per share, 450,000 of which are subject to certain performance
conditions.

         In 1989, the Company acquired the Honduran Facilities and anticipated
raising $1,500,000 through the sale of the Company's stock by the board of
directors. The private placement ended early in 1990 having produced about
one-half the funds anticipated. The result of not raising all the funds has been
that the Company has had to incur more debt and restrict capital expenditures
that were both in its original plans at the time of the acquisition and that
have developed since the acquisition. Because of this debt, sales needed to grow
rapidly from the time of the acquisition to a level at which operating incomes
would be adequate to service the debt and to fund capital needs if the Company
was to grow. Maintaining an adequate level of sales since the acquisition has
been possible only for limited periods of time, mostly as a result of a sluggish
furniture economy that has existed over much of that time, a period that
includes two recessions. The sluggish furniture economy has also reduced the
industry's


                                      -24-
<PAGE>   7
distribution base, especially the base of mid to small retailers more committed
to using smaller manufacturers, such as the Company, as a resource. Furthermore,
management believes that the consumer taste in home furnishings has swung away
from the more formal designs and executions that the Company has marketed to
more informal designs.

         Management believes that the resulting situation is that the Company
has too much debt service, given its sales volume most recently achieved, and
has inadequate funds for its plans to restoring and growing its sales to a level
where its operating profits can accommodate its needs. The Company's cash
position was tight during all of fiscal years 1996 and 1997, having experienced
excessive wood deliveries early in the fiscal year 1996 and then a slow
furniture economy and lower sales during the balance of the both fiscal years
while the Company continued to service its high level of indebtedness. The sale
of stock to Mr. Bingham assisted the Company in meeting its working capital and
other cash needs during fiscal 1997.

         Management recognized early in fiscal year 1997, that if sales, then in
decline, were to be restored to a level necessary to achieving adequate profits
it would first be necessary to manage the Company's limited finances in a manner
that would maintain sufficient funds to support continued operations until its
marketing efforts produced increased sales volume. In addition management
believed it essential that the Company's financial condition be strengthened by
providing funds both to finance a recovery and to addressing the debt-equity
problem in general. A strategy was formulated that addressed securing the
necessary funding and improving the debt-equity problem. The plan consists
primarily of (i) the private placement of stock to Mr. Bingham, (ii) the
Company's debt restructuring, both as discussed hereinabove, (iii) the offering
of stock to the shareholders of Company and to the public, as discussed
hereinbelow, (iv) the grant of options to certain key employees, discussed in
the Notes to the Consolidated Financial Statements, and (v) reducing inventories
to finance continued operations, as discussed hereinbelow .

         On February 21,1997, the Company filed a registration statement with
the Securities and Exchange Commission for the offer and sale of 1,689,887
shares of its common stock. The shares will be offered first to the holders of
record of its outstanding common stock as of a date at or about the time that
the registration statement becomes effective, who will have the right for thirty
days to purchase one additional share for each share then held at a price of
$.50 per share. Each Wellington Hall shareholder as of that date may also
subscribe within that thirty day period for additional shares, and any available
shares will be sold to shareholders who have subscribed therefor on a pro rata
basis. Any shares still remaining after the expiration of the offering to
Wellington Hall shareholders may be sold to persons who are not directors,
officers or shareholders of Wellington Hall.

         The aforementioned stock offering has been delayed and the registration
statement filed with respect thereto is not expected to become effective until
after the filing of the Company's 10 QSB for quarter ending July 31, 1997.

         The foregoing plan removed some of the pressure on the Company's
working capital, made funds available to support marketing requirements and
slowed the negative effect of servicing the debt for the near term. The balance
of the plan would be aimed at reducing debt and the corresponding costs thereof.

RESULTS OF OPERATIONS

Fiscal Year ended April 30, 1997 compared to Fiscal Year ended April 30, 1996

         Consolidated revenues for fiscal year ended April 30, 1997 were down
approximately $176,000 or 2.9% as compared to those reported the previous year.
This decline was due entirely to a decrease in sales volume, as prices remained
constant for much of the period or were slightly increased. Such decrease in
sales volume was largely the result of the current recession within the
furniture segment of the national economy, a shrinking distribution base and
possibly a permanent resistance by the consumer to purchasing the higher quality
and higher priced furniture of the type that historically been the Company's
principal product line. The Company has adopted various business strategies
designed to counteract the loss of revenues that these trends may cause in the
future. It is uncertain whether these trends will continue and, if the Company's
strategies do not successfully counteract these trends, they could have a
material adverse effect on the Company's results of operations and financial
condition.

         Sales for domestically produced products were down about 10.9% percent
for the fiscal year and sales of foreign produced goods increased by about
23.4%.

         The Company believes that the renewed and revised marketing effort that
it put in place in early 1996 had some positive effect on the Company's level of
incoming orders through the second fiscal quarter ended October


                                      -25-
<PAGE>   8
31, 1996, but the rate of incoming orders since that time has generally
declined. However, the amount of orders received for the month of April, mostly
as a result of orders received at the April International Furniture Market held
in High Point N.C., amounted to about $880,000, an amount which may be able to
support future sales Though these results were encouraging, the furniture
segment of the national economy continues to be poor and with the exception of
April, the Company continues to be affected particularly on the sales of its
established products to the retail trade.

         To increase revenues and operations at the Honduran Facilities,
considerable effort has been directed through out fiscal 1997 at selling other
manufactures and wood consumers their products and production requirements; OEM
sales. These sales increased by 83% in fiscal year 1997, accounted for all the
growth in foreign produced goods, and for 5% of total consolidated sales.

         Means of reversing the downward trend regarding sales of domestically
produced products and returning those operations back to profitability have been
elusive, and several avenues pursued over time have shown initial promise only
to stall and have little lasting material effect. However, on or about April 7,
1997, the Company enter into an agreement in principle to acquire the assets of
The Woodward Company which had developed and was attempting to market a
thirty-eight piece collection of country French and English designs, which
collection management believes to be compatible with the Company's marketing
niche and ideally suited for production in its domestic facility. The Woodward
Company was not established in the furniture trade, had no name identity and had
no production facilities, all of which is believed to have contributed to its
limited success in selling the collection.

         The Company believes that the designs and execution of the foregoing
collection are more suited to today's more casual consumer taste that has
negatively affected the sales of the Company's regular line of more formal
designs. To date, the Company has established a backlog of orders for this
product of about $200,000 and expects to begin shipments during its second
fiscal quarter of 1998, ending on October 31, 1997. Though orders to date might
be judged to represent only moderate success, management attributes this to the
disadvantageous timing of its involvement which occurred immediately before the
April International Furniture Market and did not allow time for a premarket
effort or notification to the trade of its presence. The lack of exposure at
that market has meant that sales can only be solicited by the Company's
independent sales representatives from photography and catalogs which only
became available in late May. Many of the orders received for this product have
been from outlets not presently supporting the Company's products, and,
therefore, the addition of this line is contributing to the expansion of the
Company's distribution base.

         On June 10, 1997 the Company and The Woodward Company formally agreed
to the aforementioned acquisition. On such date, the Company acquired about
$20,000 of inventory for which The Woodward Company will receive compensation
thirty days after the Company has shipped and invoiced the products. Otherwise,
the Company's only cash outlay has been about $6,000 for printed sales aids. The
former president of The Woodward Company, responsible for the designs and
development of these products, will receive a 5% royalty on the sales of the
items making up the collection at the time of the Company's acquisition.

         The Company's firm backlog of orders on April 30, 1997 was $2,047,369,
a 10 1/2% increase from its backlog of $1,853,400 on April 30, 1996. The April
30, 1997 backlog included $1,289,542 of domestically - manufactured products, as
opposed to $1,340,510 included in the 1996 backlog, which decrease reflects the
slow down in the home furnishing segment of the general United States economy.
The backlog for WHCC and Honduran-produced products, less intercompany orders,
was $757,827 on April 30, 1997 versus $512,990 on April 30, 1996. The increase
primarily reflects more recent success in securing orders from other
manufacturers for their products (OEM sales).

         Cost of sales increased approximately $317,000 or 8% for the fiscal
year as compared with last year, reflecting primarily the reduced level of
production. Cost of sales are further discussed below.

         Selling, general and administrative expenses increased about $77,500 or
5.6% for the fiscal year mostly as a result of the addition of Arthur Bingham as
Senior Executive Vice President of Sales and Marketing. The Company expects to
continue to support an expanded marketing effort.

         Interest expenses of $404,147 for the fiscal year represent an increase
of about $15,000 over that paid during the previous year as a result of added
borrowing. Long-term debt declined by about $75,000 but short term borrowing
increased by approximately $520,000. Of that sum, $294,000 were for domestic use
to finance about $65,000 in account receivable, about a $193,000 reduction in
current liabilities, mostly trade payable, and $35,000 to finance prepaid
expense which was mostly legal expense associated with the preparation of a
stock offering document. Domestic losses were approximately $342,000 which were
largely offset by reduction to domestic inventories of $234,000 and non cash
expenses of $88,000. The balance of the additional borrowing was for foreign
operations and was used to finance increased wood (mahogany) inventory, about
$120,000, intransit inventories, and other inventories as a result of growing
sales of the Company's foreign produced products especially it's OEM sales.


                                      -26-
<PAGE>   9
         For the the fiscal year ended April 30,1997, operating income (earnings
before interest and taxes) was ($112,446), (6.1) cents per share, compared to
$458,338, 27.1 cents per share for fiscal 1996. The net loss was ($507,212) or
($.28) per share, compared to a net profit of $73,574 or $.04 per share for
fiscal year 1996.

         The loss is a result generally of slow sales, excessive inventories
exaggerated by the slow sales, and the Company's limited operating capital.
Because of the slow sales and to avoid increasing inventories, it was necessary,
during the latter portion of the year in particular, to reduce production
volumes, primarily assembled production, in the Company's domestic operation to
levels below that required to manage labor and overhead cost. In addition, the
Company sold off inventories at discounts prices to generate cash to cover the
operating loss and to finance continued operations.

         To establish an outlet for the Company to "sell-off" distressed,
overstocked, slow selling, discontinued and other merchandise to reduce its
inventories and to generate cash, space was essentially rented in February of
1996 in The Furniture Clearance Center (FCC) located in Hickory N.C. The FCC is
a warehouse operation shared by a number of furniture manufacturers and open to
the public. Each manufacturer has an assigned area in which consigned goods are
displayed and sold. The Company does not have a contractual agreement and can
discontinue the relationship by giving reasonable notice and removing its
products. The Company's expenses with respect to this relationship are
determined basically by a commission on sales and the resulting sum is withheld
from the sales revenues. During the fiscal year ended April 30, 1997, the
Company sold, before discounts and costs, about $178,000 of domestic goods and
$117,000 of it's foreign products. The discounts generally were about 20% and
the cost were $55,000 and $36,000 respectively.

         For the fiscal year, net domestic revenues were reduced by about
$152,000, up about $37,000 over the previous year, as a result of promotional
and other discounts to its regular wholesale prices, about one third of the
total occurred in the fourth quarter. Domestic operations lost about $342,000
during the fiscal year which was $226,000 greater the the prior year. The
increase in discounted prices accounted for 16% of the increased loss while the
balance is attributable to a $41,000 increase in FCC cost (18%),a $68,000
increase in marketing expense (30%), an estimated $43,000 added production cost
as a result of inventory reductions (19%), and an estimated $105,000 to lower
sales volume (46%).

         Adding to the loss was a poor performance, particularly during the
fourth quarter, by the Company's foreign subsidiary. This was caused by reduced
production volume and sales out of that facility when the supply of dry wood
became inadequate to sustain a profitable volume. The decrease in the supply of
dry wood was the result of closing down the dry kilns for approximately three
weeks to perform unanticipated maintenance to the boilers used to generate the
necessary steam to operate the kilns. Efforts directed at overcoming the kiln
down time and the reduction to dry wood in the in process inventories was then
hindered when a late start on market samples for the April International Market
required a total commitment of production facilities and personnel to completing
the new product samples for introduction at that market.

         The lost production time mostly affected those products with the
greatest value added to the raw material cost and with the highest margins.
Essentially unaffected were certain products with little value added to the raw
material cost and with sales prices that do not attempt to offset a significant
amount of labor and overhead. The overall results were a sales increase for the
fourth quarter, but made up of a product mix that could not adequately absorb
manufacturing costs and, therefore, a net income loss.

         Additionally, management established at year end a reserve of
approximately $115,000 on its MWH books for slow moving inventory, about 10% of
the total. This action was primarily taken because the inventories included
quantities of products produced for domestic operations, WHL, that became
excessive when the sales on those items declined or failed to develop as
projected, and included items from two groups from the lines marketed to
retailer through WHCC which management chose to discontinue late in the year.
Management left those items in that inventory to avoid bearing the additional
production and transportation cost until such time that it has the products
sold. Because of the low value placed on these inventories relative to its
ultimate sales price, management believes these "slow moving" products can be
sold at prices above their cost. However, by taking the reserve, management can
chose to more expeditiously dispose of these inventories with assurance that
future operating results will not be negatively impacted.

         For the fiscal year net revenues for the Company's foreign produced
products were reduced by about $91,000, up about $42,000 over the previous year,
as a result of promotional and other discounts to its regular wholesale prices,
about one half of the total occurred in the fourth quarter. Foreign operations
loss, not including the inventory reserve discussed above, of about $74,000
during the fiscal year were $241,000 greater the the prior year. The increase in
discounted prices accounted for 17% of the increased loss while the balance can
be attributable to an increase in FCC cost of $34,000 (14%), an estimated
$156,000 added production cost mostly as result of production down time (66%),
and an estimated increase of $9,000 in other miscellaneous expenses (.4%).


                                      -27-
<PAGE>   10
         Management expects a significant increase in consolidated revenues
during the first quarter of fiscal year 1998 primarily as a result of increased
OEM sales. Operating profits are also expected to be realized from foreign
operations, but, when consolidated with results from domestic operation a net
loss is expected. Plans for the period call for continued reduced domestic
production operations that will result in profit losses. These losses are
expected to be offset by reductions to inventories to such a degree that funds
provided by operations may actually improve.










                                      -28-
<PAGE>   11
[TURLINGTON AND COMPANY, L.L.P. LETTERHEAD] 




                          INDEPENDENT AUDITORS' REPORT

To the Stockholders
Wellington Hall, Limited and Subsidiaries
Lexington, North Carolina

We have audited the accompanying consolidated balance sheets of Wellington Hall,
Limited and Subsidiaries as of April 30, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. We did not audit
the financial statements of Muebles Wellington Hall, S.A., a wholly-owned
subsidiary, which statements reflect total assets of $1,591,286 and $1,693,959,
respectively, as of April 30, 1997 and 1996, and total revenues of $1,995,456
and $1,273,301, respectively, for the years ended April 30, 1997 and 1996. These
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Muebles
Wellington Hall, S.A., is based solely on the report of the ther auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 and the report of
other auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Wellington Hall, Limited and
Subsidiaries as of April 30, 1997 and 1996, and the results of their operations,
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that Wellington Hall, Limited and Subsidiaries will continue as a going concern.
As discussed in Note 20 to the consolidated financial statements, under existing
circumstances, there is substantial doubt about the ability of Wellington Hall,
Limited and Subsidiaries to continue as a going concern at April 30, 1997.
Management's plans in regard to that matter also are described in Note 20. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.


         /s/ Turlington and Company, L.L.P.,

July 22, 1997, Except for Note 20,
As to Which the Date is August 13, 1997




                                      
<PAGE>   12
[MORALES PALAO WILLIAM Y ASOCIADOS LETTERHEAD] 




                         Report of Independent Auditors


To Shareholders of
Muebles Wellington Hall, S.A. de C.V.

We have audited the accompanying balance sheets of Muebles Wellington Hall, S.A.
de C.V. a wholly owned subsidiary of Wellington Hall Caribbean Corporation (an
indirect subsidiary of Wellington Hall, Limited) as of April 30, 1997 and 1996,
and the related statements of operations, stockholders' equity and cash flows
expressed in Honduras Lempiras for the years then ended. 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
in Honduras and the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects the financial position of Muebles Wellington Hall, S.A. de
C.V. as of April 30, 1997 and 1996, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles in the United States.


                                    /s/ Morales Paloa William y Asociados
                                           MORALES PALAO WILLIAM
                                           Y ASOCIADOS

                                           ERNST & YOUNG INTERNATIONAL


San Pedro Sula, Honduras, C.A.
July 15, 1997


                                      -30-
<PAGE>   13
                    WELLINGTON HALL, LIMITED AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                 April 30
                 ASSETS                                     1997          !996
                                                        -----------    -----------
<S>                                                     <C>            <C>        
Current assets:
  Cash:
    Cash on hand                                        $       400    $       400
    Cash in demand deposits                                  53,715         55,356
  Accounts receivable:
    Trade                                                   986,954        756,872
    Less, allowance for doubtful accounts                   (63,843)       (43,800)
  Note receivable - officer                                  28,393         27,908
  Inventories                                             4,363,027      4,571,015
  Prepaid expenses                                          170,434        134,076
  Deferred income taxes                                      19,713         14,327
                                                        -----------    -----------
                                                          5,558,793      5,516,154
                                                        -----------    -----------
Property and equipment:
  Cost                                                    2,150,193      2,173,110
  Less, accumulated depreciation                          1,281,690      1,218,540
                                                        -----------    -----------
                                                            868,503        954,570
                                                        -----------    -----------
Other assets:
  Deferred income taxes                                      98,532         94,537
  Other                                                      34,735         36,053
                                                        -----------    -----------
                                                            133,267        130,590
                                                        -----------    -----------
                                                        $ 6,560,563    $ 6,601,314
                                                        ===========    ===========

               LIABILITIES
Current liabilities:
   Current maturities on long-term debt                 $   196,443    $   347,755
   Notes payable - other                                  1,935,972      1,415,698
   Accounts payable - trade                                 372,139        481,797
   Customer deposits                                         45,757         74,139
   Other current liabilities                                298,014        276,159
                                                        -----------    -----------
                                                          2,848,325      2,595,548

Noncurrent liabilities:
  Long-term debt, less current maturities                 1,205,294      1,128,907
  Deferred compensation accrual                             240,000        216,000
                                                        -----------    -----------
                                                          4,293,619      3,940,455
                                                        -----------    -----------

          STOCKHOLDERS' EQUITY
Common stock; authorized 6,000,000 shares;
  no par; shares issued and outstanding
  1997 - 2,289,887 and 1996 - 1,689,887                   3,354,531      3,054,531

Preferred stock; authorized 5,000,000 shares; $5 par;
  no shares issued and outstanding for 1997 and 1996            -0-            -0-

 Cumulative translation adjustments                      (1,856,648)    (1,669,945)

 Retained earnings                                          769,061      1,276,273
                                                        -----------    -----------
                                                          2,266,944      2,660,859
                                                        -----------    -----------
                                                        $ 6,560,563    $ 6,601,314
                                                        ===========    ===========
</TABLE>


                  The accomompanying notes are an integral part
                    of the consolidated financial statements


                                      -31-
<PAGE>   14
                    WELLINGTON HALL, LIMITED AND SUBSIDIARIES

                        CONSOLIDATED STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                        Years Ended April 30
                                                        1997            1996
                                                    -----------     -----------
<S>                                                 <C>             <C>        
Common stock:
  Authorized 6,000,000 shares; no par:

    Balances, beginning of years                    $ 3,054,531     $ 3,054,531

    Shares issued during the years                      300,000
                                                    -----------     -----------

    Balances, end of years                            3,354,531       3,054,531
                                                    -----------     -----------

Preferred stock:
  Authorized 5,000,000 shares; $5 par;
   issued and outstanding beginning and
   end of years                                             -0-             -0-
                                                    -----------     -----------

Cumulative translation adjustments:

  Balances, beginning of years                       (1,669,945)     (1,419,125)

  Translation of foreign currency statements           (186,703)       (250,820)
                                                    -----------     -----------

  Balances, end of years                             (1,856,648)     (1,669,945)
                                                    -----------     -----------

Retained earnings:

  Balances, beginning of years                        1,276,273       1,202,699

  Net income (loss) for the years                      (507,212)         73,574
                                                    -----------     -----------

  Balances, end of years                                769,061       1,276,273
                                                    -----------     -----------

                                                    $ 2,266,944     $ 2,660,859
                                                    ===========     ===========
</TABLE>


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




                                      -32-
<PAGE>   15
                    WELLINGTON HALL, LIMITED AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                        Years Ended April 30
                                                        1997            1996
                                                    -----------     -----------
<S>                                                 <C>             <C>
Revenue:
  Sale of furniture                                 $ 5,812,344     $ 5,989,959
  Other income                                            3,925           2,464
                                                    -----------     -----------
                                                      5,816,269       5,992,423
                                                    -----------     -----------

Costs and expenses:
  Cost of goods sold                                  4,460,775       4,143,692
  Other operating, selling, general,
    and administrative expenses                       1,467,940       1,390,392
  Interest expense                                      404,147         388,829
                                                    -----------     -----------
                                                      6,332,862       5,922,913
                                                    -----------     -----------

       Income (loss) before income taxes               (516,593)         69,510
        (benefits)

Income tax benefits                                      (9,381)         (4,064)
                                                    -----------     -----------

        Net income (loss) for the years             $  (507,212)    $    73,574
                                                    ===========     ===========


Earnings (loss) per share of common stock:
  Primary and assuming full dilution:

    Net income (loss) for the years                 $      (.28)    $       .04
                                                    ===========     ===========
</TABLE>




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






                                      -33-
<PAGE>   16
                    WELLINGTON HALL, LIMITED AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                         Years Ended April 30
                                                          1997           1996
                                                       ---------      ---------
<S>                                                    <C>            <C>      
Cash flows from operating activities:
  Net income (loss) for the years                      $(507,212)     $  73,574
  Adjustments to reconcile net income (loss)
    to net cash provided by (used for)
    operating activities:
     Depreciation                                        102,473        111,149
     Gain on sale of equipment                            (1,200)
     Deferred compensation                                24,000         24,000
     Allowance for slow-moving inventory                 115,176
     Deferred income taxes                                (9,381)        (6,667)
     Changes in assets and liabilities:
       Accounts receivable                              (220,543)       164,231
       Note receivable, officer                             (485)        13,001
       Inventories                                       (83,840)       (71,750)
       Prepaid expenses                                  (39,444)        37,297
       Other assets                                       (4,276)        (6,363)
       Accounts payable, customer deposits,
         and other current liabilities                  (105,219)      (240,955)
                                                       ---------      ---------

       Net cash provided by (used for)
        operating activities                            (729,951)        97,517
                                                       ---------      ---------

Cash flows from investing activities:
  Purchase of equipment                                  (73,922)       (26,947)
  Proceeds from sale of equipment                          1,200
                                                       ---------      ---------

       Net cash used for investing activities            (72,722)       (26,947)
                                                       ---------      ---------

Cash flows from financing activities:
  Short-term borrowings                                  664,942         69,533
  Payments on long-term debt                            (182,620)      (125,354)
  Proceeds from issuance of stock                        300,000

       Net cash provided by (used for)
        financing activities                             782,322        (55,821)
                                                       ---------      ---------

Effect of exchange rate changes on cash                   18,710          9,715
                                                       ---------      ---------

       Net increase (decrease) in cash                    (1,641)        24,464

Cash, beginning of years                                  55,756         31,292
                                                       ---------      ---------

Cash, end of years                                     $  54,115      $  55,756
                                                       =========      =========

Cash paid during the years for:
       Income taxes                                         $-0-      $  10,499
                                                       =========      =========

       Interest                                        $ 402,975      $ 415,494
                                                       =========      =========
</TABLE>


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


                                      -34-
<PAGE>   17
                    WELLINGTON HALL, LIMITED AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              AS OF AND FOR THE YEARS ENDED APRIL 30, 1997 AND 1996

1. Summary of Significant Accounting Policies:

      These consolidated financial statements were prepared on the basis of
      generally accepted accounting principles. The more significant of these
      principles are described as follows:

         Inventories are stated at the lower of cost or market with cost
         computed by use of the first-in, first-out method. Provision has been
         made for obsolete and slow moving inventory.

         Property and equipment is carried at cost less accumulated
         depreciation. New assets and expenditures which substantially increase
         the useful lives of the existing assets are capitalized. Maintenance
         and repairs are expensed as incurred. Depreciation is computed by use
         of the straight-line method over the estimated useful lives of the
         assets.

         The weighted average number of shares of common stock outstanding and
         "common stock equivalents" are totaled in determining both primary and
         fully diluted earnings per share.

         The consolidated financial statements include the accounts of the
         Company and its wholly-owned subsidiaries, Wellington Hall Caribbean
         Corp. and Muebles Wellington Hall, S.A. All intercompany accounts and
         transactions have been eliminated in consolidation. The Muebles
         Wellington Hall, S.A. subsidiary was formed during the year ended April
         30, 1990 and accounted for as a purchase.

         The financial statements of foreign subsidiaries have been translated
         into U. S. dollars in accordance with Statement of Financial Accounting
         Standards No. 52. All balance sheet accounts have been translated using
         the current exchange rates at the balance sheet date. Income statement
         amounts have been translated using the average exchange rate for the
         year. The gains and losses resulting from the change in exchange rates
         during the year have been reported separately as a component of
         stockholders' equity entitled "Cumulative Translation Adjustments". Net
         currency transaction gains which occurred during the year are included
         in net earnings and amounted to approximately $9,970 and $11,969,
         respectively, during the years ended April 30, 1997 and 1996.

         The preparation of consolidated 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 consolidated financial statements and the reported
         amounts of revenues and expenses during the reporting period. Actual
         results could differ from those estimates.




                                      -35-
<PAGE>   18
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


2. Nature of Operations and Concentration of Credit Risk:

         Wellington Hall, Limited and Subsidiary, Muebles Wellington Hall, S.A.,
         are manufacturers of wall systems, dining room, bedroom, and accent and
         occasional furniture, with plant facilities located in Lexington, North
         Carolina and San Pedro Sula, Honduras. The accent and occasional
         furniture accounts for approximately 40% of the Company's total sales.
         The remaining 60% of total sales is split about evenly over the other
         three product lines. Wellington Hall Caribbean Corp., the other
         subsidiary, is a sales organization located in Lexington, North
         Carolina that is responsible for selling Muebles Wellington Hall,
         S.A.'s products to both the general public and Wellington Hall,
         Limited. The Company grants credit to customers who are located
         primarily in the United States.

         The Company's policy is to maintain its cash balances in reputable
         financial institutions insured by the Federal Deposit Insurance
         Corporation which provide $100,000 of insurance coverage on each
         customer's cash balances. At times during the years, the Company's cash
         balances exceeded $100,000. Management believes that this policy will
         not cause any adverse effect to the Company.


3. Note Receivable - Officer:

         On January 30, 1992, Hoyt Hackney, President and Chief Executive
         Officer, exercised options and awards for 180,000 shares of common
         stock at the option price of $.80 per share resulting in a net increase
         in common stock of $144,000. This increase was accomplished by cash of
         $40,000 being paid over to the Company along with the issuance of a
         demand note to the Company by Hoyt Hackney of $104,000. The note
         receivable - officer is collateralized by the assignment of the
         interest the officer has in the Company's deferred compensation accrual
         account and bears interest at the federal rate as issued from time to
         time.

         The note balance at April 30, 1997 and 1996 was $28,393 and $27,908,
         respectively.

4. Inventories:

         Inventories consisted of the following:

<TABLE>
                                                       1997             1996
                                                    ----------       ----------
                  <S>                               <C>              <C>
                  Finished goods                    $1,912,759       $1,642,115
                  Work-in-process                    1,702,500        2,057,076
                  Raw materials                        862,944          871,824
                                                    ----------       ----------
                                                     4,478,203        4,571,015
                  Less, allowance for slow-
                    moving inventory                  (115,176)
                                                    ----------       ----------
                                                    $4,363,027       $4,571,015
                                                    ==========       ==========
</TABLE>


                                      -36-
<PAGE>   19
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


5. Property and Equipment:

         The major classes are as follows:

<TABLE>
<CAPTION>
                                                                  1997             1996
                                                               ----------       ----------
                  <S>                                          <C>              <C>
                  Land and buildings                           $1,107,151       $1,121,207
                  Machinery and equipment                         869,883          887,479
                  Furniture, fixtures and other equipment         173,159          164,424
                                                               ----------       ----------
                                                               $2,150,193       $2,173,110
                                                               ==========       ==========
</TABLE>

         Depreciation expense for the years ended April 30, 1997 and 1996
         amounted to $102,473 and $111,149, respectively.

6. Short-term Loans:

         The Company has a demand loan payable to Lexington State Bank for
         $85,600 and $90,000, respectively, at April 30, 1997 and 1996.

         The Company has a line of credit agreement for short-term debt with
         Lexington State Bank. The bank agreed to extend to the Company in the
         form of a line of credit the lesser of $1,200,000 or 70% of the
         Company's accounts receivable less than 60 days old, 50% of the
         finished goods inventory, and 10% of the work-in-process and raw
         materials inventories which sum amounted to $1,055,579 at April 30,
         1997 and $973,964 at April 30, 1996. The Company executed a $1,200,000
         demand promissory note against which the bank shall advance funds at
         the Company's request. Interest is at the rate of 1% above prime. This
         agreement is reviewed annually for renewal. At April 30, 1997 and 1996,
         $1,178,400 and $1,113,000, respectively, was advanced under this
         agreement. This loan is secured by all present and future personal
         property assets of the Company.

         During the year ended April 30, 1997, the Company obtained an
         additional line of credit agreement for short-term debt with Lexington
         State Bank for up to $250,000, bearing interest at the rate of 1.5%
         above prime. The loan is secured by substantially all of the assets of
         Wellington Hall, Limited. At April 30, 1997, $233,000 was advanced
         under this agreement.

         The Company had line of credit agreements with two Honduran banks
         bearing interest rates ranging from 30% to 40% with outstanding
         balances of $438,972 and $212,698, respectively, at April 30, 1997 and
         1996. The banks have a second mortgage on fixed assets and a lien on
         inventories as security for these loans. The Company's unused credit
         lines with Honduran banks was $155,334 and $134,261, respectively, as
         of April 30, 1997 and 1996.

7. Long-term Debt:

         Long-term debt consisted of the following:

<TABLE>
<CAPTION>
                                                                        1997           1996
                                                                     ----------     ----------
                  <S>                                                <C>            <C>
                  E. Kemm:
                     Interest payable monthly at 1%
                     above prime                                     $   25,000     $   25,000
</TABLE>


                                      -37-
<PAGE>   20
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


7. Long-term Debt (Continued):

<TABLE>
<CAPTION>
                                                                        1997           1996
                                                                     ----------     ----------
                  <S>                                                <C>            <C>
                  Overseas Private Investment Corporation:
                    Interest rate 10.00% and 12.00%,
                    respectively, payable in quarterly
                    installments of $30,969 plus interest
                    through April 30, 1998.  Beginning
                    July 31, 1998, quarterly installments
                    increase to $61,937 plus interest                $  990,999     $1,021,968

                  Lexington State Bank:
                    Interest rate 10.0% and 9.75%,
                    respectively, payable in monthly
                    installments of $7,000 with
                    interest at 1.5% above prime                        385,738        429,694
                                                                     ----------     ----------
                                                                      1,401,737      1,476,662
                  Less, current maturities                              196,443        347,755
                                                                     ----------     ----------
                                                                     $1,205,294     $1,128,907
                                                                     ==========     ==========
</TABLE>

         The weighted average interest rate paid E. Kemm amounted to 9.56% and
         9.61%, respectively, for the years ended April 30, 1997 and 1996.

         E. Kemm is a stockholder and an officer of the Company.

         The Overseas Private Investment Corporation loan is secured by a first
         lien on all real estate and all current and future fixed assets of
         Muebles Wellington Hall, S.A. and a security interest in the Sales
         Agreement between Muebles Wellington Hall, S.A. and Wellington Hall
         Caribbean Corp.

         The Lexington State Bank loan is secured by a first lien on all assets
         of Wellington Hall, Limited.

         The projected payments of long-term debt in each of the five years
         subsequent to April 30, 1997 are:

<TABLE>
<CAPTION>
                  Year Ending April 30                          Amount
                  --------------------                          ------
                  <S>                                          <C>
                         1998                                  $196,443
                         1999                                   300,296
                         2000                                   677,426
                         2001                                    64,129
                         2002                                   163,443
</TABLE>

         During the year ended April 30, 1997, the Overseas Private Investment
         Corporation suspended quarterly principal payments from the period July
         31, 1996 through April 30, 1997. The interest rate was reduced from
         12.00% to 10.00%, effective November 1, 1996.


                                      -38-
<PAGE>   21
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


8. Stock Option Plan:

         On February 10, 1997, the Board of Directors approved the Wellington
         Hall, Limited 1997 Stock Option and Restricted Stock Plan (the Plan).
         The Plan has a term of ten years, expiring on February 9, 2007. Under
         the Plan, the Company may grant options or restricted stock awards to
         key employees, officers, or directors for up to an aggregate of
         1,200,000 shares of common stock, with no individual receiving more
         than 600,000 shares. The price of the shares issued under the Plan are
         to be determined at the time of the grant, not to be below 100% of the
         fair market value of the common stock at the time of the grant. At
         report date, the Plan had yet to be approved by the stockholders of the
         Company, but is slated to be voted on at the September 1997 annual
         stockholders' meeting.

9. Capital Stock:

         The Company, in accordance with its long-term loan agreement and line
         of credit with Lexington State Bank, is restricted from paying
         dividends on its capital stock without prior written consent of the
         bank.

         During the year ended April 30, 1997, the Company issued an additional
         600,000 shares of common stock at $.50 per share to an existing
         officer/stockholder. In addition, the officer was given a stock option
         plan as described in Note 8.

         Also in 1997, the Company filed a registration statement with the
         Securities and Exchange Commission for the offer and sale of 1,689,887
         shares of its common stock at $.50 per share. The registration
         statement had not yet become effective as of the report date.

10. Income Taxes:

         At April 30, 1997, the Company had federal operating loss carryforwards
         of $491,121 that expire in 2010 through 2012, and state net operating
         loss carryforwards of $782,870 that expire in 1998 through 2002.

         For financial reporting purposes, a valuation allowance of $244,961 has
         been recognized to offset the deferred tax assets related to the
         carryovers and certain other deferred tax assets.

         At April 30, 1996, the Company had federal operating loss carryforwards
         of $62,373 that expire in 2010 and 2011, and state net operating loss
         carryforwards of $975,358 that expire in 1997, 1998, 2000, and 2001.
         For financial reporting purposes, a valuation allowance of $116,734 has
         been recognized to offset the deferred tax assets related to the
         carryovers and certain other deferred tax assets.

         Deferred income taxes reflect the net tax effects of temporary
         differences between the carrying amounts of assets and liabilities for
         financial reporting purposes and the amounts used for income tax
         purposes. Significant components of the Company's deferred tax assets
         and liabilities are as follows:




                                      -39-
<PAGE>   22
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. Income Taxes (Continued):

<TABLE>
<CAPTION>
                                                                 1997             1996
                                                              ---------        ---------
         <S>                                                  <C>              <C>
         Deferred tax assets:
           Book over tax depreciation                         $   4,668        $  10,059
           Book allowance for doubtful
             accounts                                            19,713           14,327
           Tax over book inventory                               38,810           42,402
           Deferred compensation                                 93,864           84,478
           State net operating loss
             carryforward                                        41,772           49,938
           Federal net operating loss
             carryforward                                       164,379           24,394
                                                              ---------        ---------
                                                                363,206          225,598
           Valuation allowance for deferred
             tax assets                                        (244,961)        (116,734)
                                                              ---------        ---------
                Deferred tax assets                           $ 118,245        $ 108,864  
                                                              =========        =========
</TABLE>

         Classification of the Company's Consolidated Balance Sheets is as
         follows:

<TABLE>
<CAPTION>
                                                     1997           1996
                                                   --------       --------
         <S>                                       <C>            <C>
         Current                                   $ 19,713       $ 14,327
         Noncurrent                                  98,532         94,537
                                                   --------       --------
                                                   $118,245       $108,864
                                                   ========       ========
</TABLE>

         There follows reconciliations of the income taxes per the income tax
         returns with the income tax deductions per the Consolidated Statements
         of Income:

<TABLE>
<CAPTION>
                                                     1997           1996
                                                   --------       --------
         <S>                                       <C>            <C>
         Amounts shown by returns (net)                           $  2,603
         Deferred income taxes                     $ (9,381)        (6,667)
                                                   --------       --------
                                                   $ (9,381)      $ (4,064)
                                                   ========       ========

         Effective income tax rates                    (1.8)%         (5.8)%
                                                   ========       ========
</TABLE>

         No provision has been made for U. S. income taxes on unremitted
         earnings of the foreign subsidiary (approximately $1,143,000 and
         $1,094,000, respectively, at April 30, 1997 and 1996) since it is the
         present intention of management to indefinitely reinvest these
         earnings.

         The components of income (loss) before income taxes are as follows:


<TABLE>
<CAPTION>
                                                      1997           1996
                                                   ---------      ---------
         <S>                                       <C>            <C>
         Domestic                                  $(445,698)     $  47,499
         Foreign                                     (70,895)        22,011
                                                   ---------      ---------
                                                   $(516,593)     $  69,510
                                                   =========      =========
</TABLE>


                                      -40-
<PAGE>   23
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


10. Income Taxes (Continued):

         Federal, foreign, and state income taxes (benefits) consisted of the
         following:
<TABLE>
<CAPTION>
                                                     1997           1996
                                                   --------       --------
         <S>                                       <C>            <C>
         Federal                                   $ (7,036)      $ (5,809)
         Foreign                                                        36
         State                                       (2,345)         1,709
                                                   --------       --------
                                                   $ (9,381)      $ (4,064)
                                                   ========       ========
</TABLE>

         The following schedule reconciles the differences between the U. S.
         federal income tax rate and the effective tax rate:

<TABLE>
<CAPTION>
                                                             1997       1996
                                                            ------     ------
         <S>                                                <C>        <C>
         Tax computed at the U. S. federal rate              34.0 %     34.0 %
         Increases (decreases) resulting from:
           State income tax, net of federal benefit                      2.4
           Foreign income taxed at
             different rates                                           (10.7)
           Deferred income taxes                             (1.8)      (9.6)
           Nondeductible expenses and benefit
             of domestic net operating loss                 (34.0)     (17.4)
           Other                                                        (4.5)
                                                            -----      -----
                                                             (1.8)%     (5.8)%
                                                            =====      =====
</TABLE>

11. Financial Information Relating to Foreign and Domestic Operations and
    Export Sales:

<TABLE>
<CAPTION>
                                                               1997           1996
                                                           -----------    -----------
         <S>                                               <C>            <C>
         Sales to unaffiliated customers:
           United States                                   $ 5,802,687    $ 5,985,826
           Republic of Honduras                                  9,657          4,133
                                                           -----------    -----------
               Total sales                                 $ 5,812,344    $ 5,989,959
                                                           ===========    ===========

         Sales (export sales) or transfers between
           geographic areas:
             Sales from Republic of Honduras subsidiary
              to United States parent company, at market
              value (export sales)                         $ 1,985,799    $ 1,269,168
                                                           ===========    ===========

             Transfers from United States parent
              company to Republic of Honduras subsidiary
              of materials and supplies, at cost           $   237,235    $   211,206
                                                           ===========    ===========

           Operating profit:
            United States                                  $  (178,275)   $   333,693
            Republic of Honduras                                65,829        124,646
                                                           -----------    -----------

            Income (loss) before interest
               and income taxes                            $  (112,446)   $   458,339
                                                           ===========    ===========
</TABLE>


                                      -41-
<PAGE>   24
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. Financial Information Relating to Foreign and Domestic Operations and Export
    Sales (Continued):

<TABLE>
<CAPTION>
                                                1997           1996
                                             ----------     ----------
         <S>                                 <C>            <C>
         Identifiable assets:
           United States                     $5,112,362     $4,907,355
           Republic of Honduras               1,448,201      1,693,959
                                             ----------     ----------
               Total assets                  $6,560,563     $6,601,314
                                             ==========     ==========
</TABLE>

12. Leases:

         The Company leases showroom space under a five and one-half year
         operating lease expiring in April 1999. The Company subleases a portion
         of this showroom space to another company.

         The Company also leases office equipment under noncancelable leases
         expiring in 1998 through 2001.

         Net minimum lease payments on the foregoing leases amount to $104,702
         for 1998, $35,913 for 1999, $1,695 for 2000, and $1,695 for 2001. Net
         lease expenses of the foregoing leases for the years are summarized as
         follows:

<TABLE>
<CAPTION>
                                          1997          1996
                                        --------      --------
             <S>                        <C>           <C>
             Lease expense              $109,210      $103,170
             Sublease income              46,776        16,692
                                        --------      --------
               Net lease expense        $ 62,434      $ 86,478
</TABLE>                                ========      ========


13. Contingent Liability:

         In accordance with the Honduran Labor Code, the Company has the
         obligation to pay severance compensation to its employees in the event
         of dismissal under certain specific circumstances. It is the policy of
         the Company to pay such severance payments in accordance with the Law.
         At April 30, 1997 and 1996, the estimated contingent liability
         aggregated approximately $155,564 and $133,488, respectively.

14. Earnings Per Share:

         Earnings per share of common stock are based on the average number of
         shares of common stock outstanding during each period.

         For the years ended April 30, 1997 and 1996, the equivalents were
         dilutive and the primary earnings per share were computed based on the
         average number of common shares and common share equivalents
         outstanding. When dilutive, stock options are included as share
         equivalents using the treasury stock method. The number of shares used
         in computing primary earnings per share were 1,839,887 and 1,689,887,
         respectively, for the years ended April 30, 1997 and 1996. The number
         of shares used in computing fully diluted earnings per share were
         1,839,887 and 1,689,887, respectively, for the years ended April 30,
         1997 and 1996.


                                      -42-
<PAGE>   25
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


15. Incentive Plan:

         The Company has an Incentive Plan covering certain officers and key
         employees who have the greatest opportunities to contribute to current
         earnings and the future success of the Company's operations. The amount
         determined under the Incentive Plan is based upon profits of the
         Company.

         On January 1, 1987, the President of the Company executed a new
         employment contract and forfeited his rights under the Incentive Plan
         as one of the conditions of the new contract.

16. Deferred Compensation Agreement:

         On May 8, 1987, the Company adopted a Deferred Compensation Agreement
         with the President of the Company which will provide for the payment of
         $50,000 per year for 10 years in monthly installments when the
         President reaches age 62 and retires. The Agreement provides that if he
         dies before he has received the total payments or if he dies before
         retirement, then his beneficiary shall receive the benefit balance
         thereof in monthly installments. In future years, the deferred
         compensation will be accrued over the remaining term of service by the
         President on a present value basis. The accruals for the years ended
         April 30, 1997 and 1996 were $24,000.

17. Profit Sharing Plan:

         During the year ended April 30, 1987, the Company adopted a combined
         Profit Sharing and Salary Reduction Plan. The Company contributes 50%
         of the employee contributions with a 2% maximum Company contribution on
         each employee's salary. The Plan also has a feature whereby the
         Directors can set aside certain profits as determined annually by the
         Directors. The Profit Sharing and Salary Reduction Plans are tax exempt
         under applicable sections of the Internal Revenue Code. The
         contributions by the Company for the years ended April 30, 1997 and
         1996 were $7,259 and $8,143, respectively.

18. Quarterly Financial Data - Unaudited:

         The following is a summary of the quarterly results of operations for
         the years ended April 30, 1997 and 1996:

<TABLE>
<CAPTION>
                                                         Fiscal 1997 Quarters
                                       -------------------------------------------------------
                                          First          Second        Third          Fourth
                                       -----------    -----------   -----------    -----------
             <S>                       <C>            <C>           <C>            <C>
             Net sales                 $ 1,246,698    $ 1,586,709   $ 1,533,266    $ 1,445,671

             Cost of goods sold            850,591      1,066,480     1,086,343      1,457,361

             Net income (loss)             (15,016)        51,478       (63,809)      (479,865)

             Net income (loss) per
               common share (primary
               and fully diluted)             (.01)           .03          (.04)          (.26)
</TABLE>


                                      -43-
<PAGE>   26
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. Quarterly Financial Data - Unaudited (Continued):

<TABLE>
<CAPTION>
                                                        Fiscal 1996 Quarters
                                        ------------------------------------------------------
                                           First         Second        Third          Fourth
                                        -----------   -----------   -----------    -----------
             <S>                        <C>           <C>           <C>            <C>
             Net sales                  $ 1,473,474   $ 1,614,388   $ 1,496,387    $ 1,405,710

             Cost of goods sold             981,741     1,095,476     1,111,108        955,367

             Net income (loss)               44,756        13,361       (31,015)        46,472

             Net income (loss) per
                common share (primary
                and fully diluted)              .02           .01          (.02)           .03
</TABLE>


19. Disclosures About Fair Value of Financial Instruments:

         Statement of Financial Accounting Standards No. 107, "Disclosures About
         Fair Value of Financial Instruments", requires that the Company
         disclose estimated fair values for its financial instruments. The
         following methods and assumptions were used to estimate the fair value
         of each class of financial instruments for which it is practicable to
         estimate that value:

             Cash:
                 The carrying amount approximates fair value.

             Note receivable - officer:
                 The carrying amount approximates fair value.

             Notes payable - other:
                 Due to the fact that these are short-term notes payable within
                 one year, the carrying amount approximates fair value.

             Long-term debt:
                 The fair value of long-term debt is estimated based on the
                 current rates the Company could obtain on debt of the same
                 remaining maturities.

         The estimated fair values of the Company's financial instruments are as
         follows:

<TABLE>
<CAPTION>
                                           1997                      1996
                                 -----------------------   -----------------------
                                  Carrying       Fair       Carrying       Fair
                                   Amount        Value       Amount        Value
                                 ----------   ----------   ----------   ----------
             <S>                 <C>          <C>          <C>          <C>       
             Cash                $   54,115   $   54,115   $   55,756   $   55,756
             Note receivable -
               officer               28,393       28,393       27,908       27,908
             Notes payable -
               other              1,935,972    1,935,972    1,415,698    1,415,698
             Long-term debt       1,401,737    1,401,737    1,476,662    1,520,652
</TABLE>


                                      -44-
<PAGE>   27
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


20. Going Concern Considerations:

         As reflected in the accompanying consolidated financial statements, the
         Company incurred a $507,212 net loss for the year ended April 30, 1997.
         The Company also incurred a negative cash flow from operating
         activities of $729,951. The Company's gross profit percentage decreased
         from 31% for the year ended April 30, 1996 to 23% for the year ended
         April 30, 1997. Accounts receivable turnover and inventory turnover
         declined during the year ended April 30, 1997. The Company's lines of
         credit and short-term borrowings were at near maximum levels at April
         30, 1997. Principal payments on the Overseas Private Investment
         Corporation loan had been suspended for much of the year ended April
         30, 1997 and are scheduled to resume July 31, 1997.

         Management is currently developing new product lines with a
         concentration of higher volume items which should result in lower unit
         cost. In addition, increased foreign business is expected as well as an
         increased cash flow from the usage of existing inventories. Management
         also projects a significant cash inflow from the proposed public
         offering discussed in Note 9. On July 31, 1997, the required principal
         payment on the Overseas Private Investment Corporation loan was made.

         The consolidated financial statements do not include any adjustments
         that might result from the outcome of this uncertainty.

21. Statutory Reserve:

         According to the Commercial Code of the Republic of Honduras, the
         statutory reserve must be constituted annually appropriating at least
         5% of the period's earnings until it reaches 20% of capital stock. The
         statutory reserve, which is included in retained earnings, amounted to
         $23,948 and $28,187, respectively, at April 30, 1997 and 1996.








                                      -45-
<PAGE>   28
                             OFFICERS AND DIRECTORS

                                    OFFICERS

Hoyt M. Hackney, Jr.                         Ralph L. Eskelson, Jr.
     President and Treasurer                 General Manager
                                                  Muebles Wellington Hall, S.A.

Ernst B. Kemm                                William W. Woodruff
     Executive Vice President                Secretary


                                    DIRECTORS

Donald W. Leonard                            William W. Woodruff
     Chairman of the Board                   President of Woodruff
                                                  Shoe Store

Hoyt M. Hackney, Jr.                         Ernst B. Kemm
     President and Treasurer                 Executive Vice President

Arthur F. Bingham
     Senior Executive Vice President


                                 TRANSFER AGENT

                         Wachovia Bank and Trust Company






                                      -46-