EXHIBIT

                                       13

                                      1998

                                  ANNUAL REPORT

                            WELLINGTON HALL, LIMITED

                            Lexington, North Carolina

                                      -17-
<PAGE>

TO THE SHAREHOLDERS OF WELLINGTON HALL LIMITED

     Sales  declined by about  $151,000 or 3%, the third  consecutive  year of a
decline and though  relatively  small this year the resulting  sales were and/or
remained  well  below  the  level  of  sales  necessary  for the  company  to be
profitable.  During the previous year,  1997, the company  received  $300,000 of
equity  capital  and new credit of $250,000  that  allowed the company to remain
viable while solutions were pursued.  For fiscal 1998, however,  the only option
to generating cash, in absence of significant growth in orders, was the disposal
of inventory at highly discounted  prices. The results were not only losses form
low  production  operations  but also  losses form large  amounts of  discounted
inventories.  For the fiscal year,  the loss was  $1,013,000  versus a loss last
year of $507,000.

     The most  immediate  positive  development  is an order  for the  Company's
products  of  approximately  $450,000  received  in  January  of 1998 from a new
offshore dealer. The order was essentially  confirmed with a Letter of Credit in
March and though too late to affect fiscal year 1998,  the order has allowed the
Honduran operation to raise its production levels to a degree that should return
it to  profitability  in the first  fiscal  quarter of next year ending July 31,
1998.

     With possible  sales  improvements  also expected from domestic  operation,
though  probably  short  of  profitability,  management  believes  a  profit  on
consolidated sales will be reported for the fiscal quarter.

     On the longer term,  Management has concluded that off shore,  out-sourcing
of the Company's products could be a means of increasing sales and utilizing the
domestic  facility  profitably.  To accomplish  this,  management  plans to find
foreign  resources,   design  and  develop  product  for  manufacture  by  those
resources,  work closely with the sources to develop quality  execution,  and to
market, import and distribute the products through the Lexington, N.C. facility.

     In pursuit of the out-source solution, management contacted and established
a  relationship  with a potential  resource in January of 1998. The designs were
developed  and the  Company's  sales  force  began  taking  orders in March with
significant  success.  To date,  the  source  has not  satisfactorily  satisfied
management  that it has the  capability  to produce  the  product in  acceptable
quality but it is  important  to point out that the product  required  very high
standards.   The  source  could  be  used  for  less  demanding  designs  and  a
determination  is  scheduled  for late  August of 1998 as to the  future of this
relationship.  If  production  is  released on the new  designs,  sales could be
affected in the second fiscal quarter of 1999 ending October 31 1998.

     A second new or alternative source, of what could become several resources,
will have an on site  evaluation  before the end of August,  1998.  This  second
source,  different  from the  before  mentioned,  may have  product  already  in
production  suitable for marketing and distribution by the Company.  New designs
have been developed specifically for this potential source and will be presented
during the on site visit to determine  their  ability and interest in developing
suitable samples. If the source's established product is suitable, samples could
be available for introduction at the High Point  International  Furniture Market
to be held in October.  If successfully  introduced,  the product could possible
begin  shipping in  February of 1999.  The new  designs,  if pursued,  would not
likely begin shipping before the spring of 1999.

     Management  will continue to pursue  solutions to its marketing and to it's
debt or financial condition as situations might develop.

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

                                      -18-
<PAGE>

                          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:

Quarter Ending    High     Low              Quarter Ending    High     Low

July     1996     0.344    0.25             July     1997     0.25     0.25
October  1996     0.50     0.281            October  1997     0.25     0.25

January  1997     0.375    0.187            January  1998     0.22     0.19
April    1997     0.313    0.313            April    1998     0.25     0.22

     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, 1998, there were  approximately 562 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."

                                      -19-
<PAGE>

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, 1998,  total  stockholders'  equity was $1,239,492 and the outstanding
principal  amounts  of the  Lexington  State  Bank  loan and the OPIC  loan were
$338,197 and $898,092, 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.

     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 were scheduled to 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.

     On July 22, 1998, WHCC requested that OPIC waiver the principal due on July
30,  1998 and on October  31,  1998.  As of August 14,  1998,  WHCC had not been
notified  as to the final  disposition  of that  request  but WHCC only paid the
interest due on July 31, 1998.

     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, 1998,  the Company had  $1,168,172 in borrowings  under this line of credit.
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, 1998 was $93,600.

     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, 1998 was $246,000. The line of credit was reviewed on January 16, 1998
and renewed  until July 16, 1998.  Management  has been informed by LSB that the
loan will be extended to January 16, 1999.  In aggregate  $42,000 was  available
from LSB for future borrowings at April 30, 1998.

     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
$590,000. As of April 30, 1997, an aggregate of $490,000 had been borrowed under
these lines, leaving  approximately  $100,000 for future borrowings.  Borrowings
bear  interest at a rate that ranges  between 28% and 35% 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.

     The  Company's  other  primary  source of liquidity is net cash provided by
operating  activities  which was $96,316 and ($729,951) in fiscal 1998 and 1997,
respectively.  The positive cash contribution in fiscal 1998 were primarily as a
result of reductions in account  receivable,  reductions in  inventories  and an
increase in current  liabilities.  If the Company is to meet its liquidity needs
in the future,  it must  continue to generate  positive cash flows and avoid any
significant losses in the future.

     As of April 30, 1998,  accounts  receivable had decreased by  approximately
$262,000  since the  beginning of the fiscal  year,  mostly as a result of lower
sales in the fourth  quarter  which were down $152,265 or 10% as compared to the
same period last year.  The  receivables  represented  a turnover  rate of about
fifty-one days, a decrease of about four days when compared to the turnover rate
reported at April 30, 1997.  The company's  normal terms of sale for the payment
of invoices is Net 30 days for domestically  produced goods (DPG) and 3% 10; Net
30 for foreign

                                      -20-

produced   goods   (FPG).   In  the  case  of   export   sales  an   Irrevocable
Letter-Of-Credit is required.

     Current  liabilities  increased  by  approximately   $520,000  including  a
$155,821  increase in current  maturities  and about a 62,000  increase in notes
payables. All other current liabilities increased about 299,000 with half of the
total being incurred by the foreign  subsidiary as a result of wood purchases at
the very end of the  fourth  quarter  and an  increase  in a  reserve  for a the
contingent  liability for severance pay of  approximately  $36,000.  The WHL and
WHCC  accounts  payable  increased  by $64,660 and $49,252  respectively  during
fiscal year 1998 and accounted for most of the balance of the aggregate increase
in current liabilities.

     Consolidated inventories decreased by about $352,066 during the fiscal year
primarily  a  result  of a  decrease  of  about  $495,000  to the  inventory  of
domestically  produced goods in response to reduced  levels of incoming  orders,
excessive  inventories  relative  to sales,  and the highly  discounted  sale of
inventory to generate  operating  funds.  The Company utilized about $171,000 to
increase   domestic   inventories   of  foreign   produced   products  of  which
approximately  $150,000  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 up about  $45,000  reflecting
capital  expenditures for the fiscal years.  The value of the Company's  foreign
fixed assets are revalued to reflect the fluctuation in the value of the foreign
currency.  The  decline in that value  during the fiscal  year 1998 was  minimal
since the devaluation of the Honduran currency relative to the prior fiscal year
end was only approximately  1.6%. 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 1999
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, 1998 was  approximately  $45,000  used  primarily to
upgrading  the  Company's  domestic   operations  water  supply  piping  and  to
completing  the  retubing of its boiler at the Honduran  facilities  used to dry
wood,  and to install  electrical  equipment  required  by the power  company to
reduce  and  control  consumption.  . 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 13.24 lempira to the dollar at
April 30,  1998.  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 $1.87 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 450,000 additional shares at option prices ranging from $.80
to $1.30  per  share,  300,000  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 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,  1997 and 1998,  having
experienced  excessive wood deliveries  early in the fiscal year 1996 and then a
slow furniture  economy and lower sales during the balance of these 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

                                      -21-
<PAGE>

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 were to have been 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 would have had 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 could also
have  subscribed  within that thirty day period for additional  shares,  and any
available  shares  would  have  been  sold to  shareholders  who had  subscribed
therefor on a pro rata basis. Any shares still remaining after the expiration of
the offering to Wellington Hall shareholders could have been sold to persons who
were not directors, officers or shareholders of Wellington Hall.

     The  aforementioned  stock  offering  has  been  canceled  because  of  the
operating  losses and all related  cost,  estimated to have been about  $65,000,
have been expensed.

     The foregoing plan, during fiscal year 1997 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. During fiscal
year  1998,  the sale of  excessive  inventories  at  highly  discounted  prices
generated funds to support continued operations.

     The  Company  leased a 8,800  square-foot  showroom  located in High Point,
North Carolina. Approximately 4,400 square feet of space was utilized to display
the  Company's  products,  particularly  new product  introductions,  during the
semiannual  International  Furniture  Markets.  The  balance  of the  space  was
subleased  to another  manufacturer.  On March 1, 1998 the  Company's  lease was
amended to include  only the 4,400 square feet of space the Company was actually
using.  The Company  believes the showroom is in good condition and suitable for
its intended use and the amendment to the lease will have no material  effect on
the Company's  intended use of the space. The Company's  monthly  obligation for
rent will be be $4,025 versus approximately $9,050 prior to the execution of the
amendment.

RESULTS OF OPERATIONS

Fiscal Year ended April 30, 1998 compared to Fiscal Year ended April 30, 1997

     Consolidated  revenues  for the fourth  quarter and fiscal year ended April
30,  1998  were  down  $152,265  or 11% and for the year the  results  were down
$157,035 or 3% compared  with results  reported  last year.  The decline for the
quarter reflects a drop in sales of both  domestically  produced goods (DPG) and
the company's  foreign  produced  goods (FPG).  For the year the decline for DPG
sales were almost  offset by  increased  sales of FPG  experienced  in the first
three  quarters.  The  increase in FPG was the result of an 53%  increase in OEM
sales,  (products sold to other manufacturers),  and a 2.5% increase in products
sold to the  retail  trade.  These  results  were  affected  by  changes  in the
Company's prices on those product  distributed  through retailers.  Those prices
were increased between four and five percent in October 1997.

     Sales of  domestically  produced  goods for the fourth  quarter  were about
$834,000,  down $139,000 or 14% from the $973,340 reported last year while sales
for the fiscal year were  $3,673,000  down  $425,000 or 10% from the  $4,098,000
recorded last year. Sales of foreign produced goods, net of inter company sales,
for the quarter  were  approximately  $458,000  down  $14,000  from the previous
year's fourth  quarter and were  $2,075,000  for the the year versus  $1,713,709
last year, an increase of $361,000 or 21% .

     The  consolidated  sales  included  $31,000  and  $592,000,  for the fourth
quarter and fiscal year, respectively, of highly discounted sales of inventories
deemed to be slow moving, of unacceptable quality or discontinued product. These
sales were  generated at the Furniture  Clearance  Center or at two "Tent" sales
held at the  Lexington  N.C.  facility in May and October of 1997.  In addition,
management  estimates that a list of inventory  items published to the Company's
sales force early in the fourth quarter account for another  $200,000 or more in
highly discounted sales. All of the sales from the published list were at 50% of
the regular wholesale price.  Without these highly  discounted  sales,  revenues
would have been significantly less. All of these sales contributed significantly
and materially to cost of goods sold and to the reported operating losses.

     The sales of domestic  products  during the fourth  quarter and fiscal year
were at a levels below those sales  reported over the last two years and remains
well below the  Company's  production  capacity and an estimated  level of sales
necessary  for  the  operation  to be  profitable.  The  Company  experienced  a
significant  drop in the rate of incoming orders for these products last in 1994
and has  experienced  a  continuing  downward  trend  since that  time.  Several
fundamental factors probably contribute to the cause of this trend including the
somewhat  distress level of the furniture  economy during the period relative to
the  strong  nation  economy,  a  shrinking  distribution  base,  more  and more
retailers  have gone out of  business,  changing  consumer  taste away from more
formal designs such as the Company's  products,  and imports which have possibly
undercut the value of domestically produced goods.

                                      -22-
<PAGE>

     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.  It is uncertain whether these
trends  will  continue  but, if the  Company's  strategies  do not  successfully
counteract  these trends,  they could continue to have a material adverse effect
on the Company's results of operations and financial condition.

     The decline in domestic  sales has also  negatively  effected the Company's
foreign  operations.  The domestic operation was consuming a significant portion
of the foreign output as dimension  stock,  carved and/or turned  components and
unfinished assemblies into domestic production. The decline has effectively cost
the foreign operation its best and largest customer. To counteract this loss and
to increase  revenues and operations at the Honduran  facility,  effort has been
directed at selling other  manufactures  and wood  consumers  their products and
production  requirements;  OEM sales. These sales during the quarter ended April
30,  1998 were about  $33,000,  down about  $79,000 as  compared  to last year's
fourth  quarter.  For the fiscal  year,  sales were  approximately  $488,000  an
increase  of about  $170,000 or 54% and  accounted  for 78% of all the growth in
foreign produced goods and 8.41% of total  consolidated  sales up from 5.0% last
year.

     The company introduced a number of new designs to its domestic product line
at the International Furniture Market held in High Point, N.C. in April of 1998.
These new items have been selected to better  utilize the component and assembly
capacity of the Honduran  operation and the  finishing  capacity of the domestic
operation.  The resulting sales of those  introductions were marginal.  However,
all the items have been  committed to  production  though on a somewhat  delayed
schedule  and  November-December  delivery  such that  additional  orders can be
solicited at the October 1998 market to assure all the production is sold.

     The Company's firm backlog of orders on April 30, 1998 is reported as about
$2,382,000,  a 16.4%  increase  when  compared with the backlog of $2,047,000 on
April 30, 1997. The backlog included  $1,327,000 of domestically  produced goods
(DPG) as opposed to  $1,289,500  included  in the April 30,  1997  backlog.  The
backlog included  $1,055,000 of foreign produced goods (FPG), less inter company
orders,  versus  $758,000 on April 30,  1997.  Both the backlogs for DPG and FPG
were significantly increased by a large order received from a new dealer late in
January for export.  If this new  distribution  becomes an ongoing  process,  as
expected,  annual  sales  to  this  singular  account  could  exceed  10% of the
company's projected fiscal 1998 revenues.

     The company had at April 30, 1998 an  additional  backlog of  approximately
$640,000  for products it has begun  marketing  under the name  Wellington  Hall
Imports.  These new company sponsored  designs will be manufactured  exclusively
for the company by a foreign manufacturer with whom management has established a
relationship. The Company has no contractual relationship with the supplier. The
company planned to officially introduce the line at the International  Furniture
market  held in High  Point,  NC in April of 1998 but samples did not arrive and
now the plan is to introduce the products at the market scheduled for October of
1998.  Pre-marketing  began  throughout the country in early February,  1998. To
date the response has been very  significant,  and by mid-March  the company had
received  most of the  orders  reflected  in the above  mentioned  backlog.  The
backlog has been  excluded from the total  because of  uncertainties  about this
manufactures  ability to produce the  quality of product  the Company  requires.
Presently,  the Company hopes to make a determination about this sources quality
in August of 1998 and, if favorable,  to release  production  which would become
available  to begin  shipping  by the end of the second  fiscal  quarter  ending
October 31, 1998.

     Cost of sales increased  approximately  $24,000 to about $1,446,000 for the
fourth  quarter and about $373,000 to $4,833,000 for the fiscal year ended April
30,  1998.  For the  quarter  the Cost of Sales  were 112% of sales  mostly as a
result of $385,000 of domestic  inventories being charge to Cost of Sales during
the quarter. For the fiscal year the Cost of Sales were 86% of sales mostly as a
result of $495,000 of domestic  inventories being charge to Cost of Sales during
the year. The decline in inventory mostly reflects the highly discounted sale of
inventory  to generate  operating  funds and to rid the  Companys  inventory  of
discontinued  or  distressed  goods.  Over the last two  years the  Company  has
continually  discontinued  products  as rate of sales on items  became to low to
justify  their  continued  production.   These  Cost  of  Sales  increases  also
reflecting  reduced level of domestic and foreign  production  during the fourth
quarter  and through out much of the year to levels  below the  estimated  break
even points.

     Selling,  general and administrative expenses decreased about $29,000 or 9%
for the fourth fiscal quarter and about $61,000 during the fiscal year mostly as
a result of less commissions paid on lower sales and reduction in administration
and marketing costs.  The reported level of sales & administrative  expenses are
expected to continue  through the next quarter  with the  exception of increased
commissions, if sales increase. The decrease for the year came about even though
sales aids expense  (catalogs)  increase $61,000 and an additional  $35,000 in "
Legal and  Professional"  cost as a result of the aborted  stock  offering  were
expensed.

     Interest  expenses of $106,113 for the fiscal fourth  quarter  represent an
increase of about $1,000 over that paid during the previous year fourth quarter.
For the fiscal year 1998, interest expenses were $448,510, up about $44,000 over
the prior year, as a result of added borrowing  during the previous fiscal year.
The additional  borrowing in fiscal 1997 covered  operating losses and increased
wood  purchases  at the  Honduras  facility to raise  production  in response to
higher  backlog.  Long-term debt declined  during the year by about $170,000 and
short term borrowing  increased by approximately  $70,000 since the beginning of
the current fiscal year. Of that sum,  $10,000 were for domestic  operations and
the balance of the  additional  borrowing  were for foreign  operations and were
used to finance various elements of the operating losses.

     For the the fiscal quarter ended April 30, 1998, operating income (earnings
before  interest  and taxes)  was a loss of about  ($519,  000),  (23) cents per
share, compared to a loss of ($384,000), (17.0) cents per share for quarter

                                      -23-
<PAGE>

ended April 30,  1997.  For the fiscal  year ended April 30, 1998 the  operating
income was a loss of  ($572,220),  ($.25) per share versus the  previous  year's
loss of ($112,000) or ($.05) per share.  The net loss for the fourth quarter was
($615,000),  (27.0) cents per share versus a loss of  ($479,000) or (26.0) cents
per share,  while for the fiscal  year  there is a net loss of  ($1,013,225)  or
($.45) per share,  compared to a net loss of  ($507,212) or ($.28) per share for
the prior year, fiscal 1997.

     The net loss reported in the fourth quarter and fiscal year ended April 30,
1998 are a result  generally of slow sales and the company's  limited  operating
capital.  Because of the slow sales and to avoid increasing inventories,  it was
necessary,  during the fourth quarter and most of the year, to reduce production
volumes,  primarily assembled production,  in the Company's domestic and foreign
operations to levels below that  required to manage labor and overhead  cost. In
addition, the Company sold off inventories at discounted prices to generate cash
to cover the operating loss and to finance continued operations.

     Sales of foreign produced products for the upcoming quarter are expected to
improve as production at the Honduras facility rises allowing the higher backlog
of orders for these  products to be shipped.  There remains some doubt as to the
performance  that might be expected from the domestic  operations  which will be
more  dependent  on the  amount of orders  received  for those  products  as the
quarter progresses.

                                      -24-
<PAGE>

TURLINGTON AND COMPANY, L.L.P.

                          INDEPENDENT AUDITOR'S 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,  1998  and  1997,  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 Wellington Hall, Limited and Subsidiaries,  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
$1,522,535 and $1,591,286, respectively as of April 30, 1998 and 1997, and total
revenues of $1,870,046 and  $1,995,456,  respectively  for the years ended April
30, 1998 and 1997. These statements were audited by others auditors whose report
has been furnished to us, and our opinion,  insofar as it relates to the amounts
included in Muebles  Wellington Hall, S.A., is based solely on the report of the
other auditors.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those  standards  required  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 financial statements.  An
audit also include  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,  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, 1998 and 1997, and the results of their operations,
and their cash flows for the years 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,  1998.
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 form the outcome of this uncertainty.

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

July 28, 1998

                                      -25-
<PAGE>

KPMG Peat Marwick Aseores, S.de R.L.

                         Report of Independent Auditors
                         ------------------------------

Board of Directors
Muebles Wellington Hall, S.A. de C.V.:

We have audited the accompanying  balance sheet de Muebles Wellington Hall, S.A.
de C.V.,  San  Pedro  Sula,  Honduras,  as of  April  30,  1998 and the  related
statements of loss,  retained  earnings and cash flows for the year ended.  Such
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. The financial statements of Muebles Wellington Hall, S.A de C.V., as
of April 30, 1997, was audited by other auditors,  whose reported dated July 15,
1997, expressed an unqualified opinion on such financial statements.

We conducted our audit in  accordance  with  auditing  international  standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts an 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 audit provides a reasonable basis for our opinion.

In our opinion,  the above mentioned financial statements present fairly, in all
material  respects,  the financial  position of Muebles Wellington Hall, S.A. de
C.B., as of April 30, 1998, the results of its operations and its cash flows for
the year then ended, in conformity with the accounting international standards.

                                        /s/ KPMG Peat Marwick

July 28, 1998

                                      -26-
<PAGE>

                    WELLINGTON HALL, LIMITED AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           ---------------------------
<TABLE>
<CAPTION>
                                                                  April 30
               ASSETS                                       1998           1997
                                                        -----------    -----------
Current assets:
   Cash:
<S>                                                     <C>            <C>        
      Cash on hand                                      $       400    $       400
      Cash in demand deposits                                32,114         53,715
   Accounts receivable:
      Trade                                                 726,612        986,954
      Less, allowance for doubtful accounts                 (66,947)       (63,843)
   Note receivable - officer                                 12,605         28,393
   Inventories                                            4,010,961      4,363,027
   Prepaid expenses                                          79,568        170,434
   Deferred income taxes                                     18,165         19,713
                                                        -----------    -----------
                                                          4,813,478      5,558,793
                                                        -----------    -----------
Property and equipment:
   Cost                                                   2,187,922      2,150,193
   Less, accumulated depreciation                         1,366,915      1,281,690
                                                        -----------    -----------
                                                            821,007        868,503
                                                        -----------    -----------
Other assets:
   Deferred income taxes                                    107,686         98,532
   Other                                                     35,059         34,735
                                                        -----------    -----------
                                                            142,745        133,267
                                                        -----------    -----------
                                                        $ 5,777,230      6,560,563
                                                        ===========    ===========
               LIABILITIES
Current liabilities:
   Current maturities on long-term debt                 $   356,264    $   196,443
   Notes payable - other                                  1,998,360      1,935,972
   Accounts payable - trade                                 567,100        372,139
   Customer deposits                                         64,177         45,757
   Other current liabilities                                382,813        298,014
                                                        -----------    -----------
                                                          3,368,712      2,848,325

Noncurrent liabilities:
   Long-term debt, less current maturities                  905,026      1,205,294
   Deferred compensation accrual                            264,000        240,000
                                                        -----------    -----------
                                                          4,537,738      4,293,619
                                                        -----------    -----------
               STOCKHOLDERS' EQUITY
Common stock; authorized 6,000,000 shares;
   no par shares issued and outstanding
   1998 - 2,289,887 and 1997 - 2,289,887                  3,354,531      3,354,531

Preferred stock; authorized 5,000,00 shares; $5 par;
   no shares issued and outstanding for 1997 and 1996           -0-            -0-

Cumulative translation adjustments                       (1,870,875)    (1,856,648)

Retained earnings                                          (244,164)       769,061
                                                        -----------    -----------
                                                          1,239,492      2,266,944
                                                        -----------    -----------
                                                        $ 5,777,230    $ 6,601,314
</TABLE>

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

                                      -27-
<PAGE>

                    WELLINGTON HALL, LIMITED AND SUBSIDIARIES
                        CONSOLIDATED STOCKHOLDERS' EQUITY
                        ---------------------------------

                                                        Years Ended April 30
                                                        1998           1997
                                                        ----           ----
Common stock:
    Authorized 6,000,000 shares; no par

           Balances, beginning of years              $ 3,354,531    $ 3,054,531

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

           Balances, end of years                      3,354,531      3,354,531
                                                     -----------    -----------
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                      (1,856,648)    (1,669,945)

    Translation of foreign currency statements           (14,227)      (186,703)
                                                     -----------    -----------
    Balances, end of years                            (1,870,875)    (1,856,648)
                                                     -----------    -----------
Retained earnings:

    Balances, beginning of years                         769,061      1,276,273

    Net loss for the years                            (1,013,225)      (507,212)
                                                     -----------    -----------
    Balances, end of year                               (244,164)       769,061
                                                     -----------    -----------
                                                     $ 1,239,492    $ 2,266,944
                                                     ===========    ===========

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

                                      -28-
<PAGE>

                    WELLINGTON HALL, LIMITED AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                        ---------------------------------

                                                     Years Ended April 30, 1997
                                                         1998           1997
                                                         ----           ----
Revenue:
   Sale of furniture                                 $ 5,661,309    $ 5,812,344
   Other income                                            5,859          3,925
                                                     -----------    -----------
                                                       5,667,168      5,816,269
                                                     -----------    -----------
Costs and expenses:
   Cost of goods sold                                  4,833,077      4,460,775
   Other operating, selling, general,
      and administrative expenses                      1,406,412      1,467,940
   Interest expense                                      448,510        404,147
                                                     -----------    -----------
                                                       6,687,999      6,332,862
                                                     -----------    -----------
           Income (loss) before income taxes
              (benefits)                              (1,020,831)      (516,593)

Income tax benefits                                       (7,606)        (9,381)

           Net income (loss) for the years           ($1,013,225)   ($  507,212)
                                                     ===========    ===========

Earnings (loss) per share of common stock:
   Basic and assuming full dilution:
      Net income (loss) for the years                ($      .45)   ($      .28)
                                                     ===========    ===========

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

                                      -29-
<PAGE>

                    WELLINGTON HALL, LIMITED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------

                                                        Years Ended April 30
                                                        1998            1997
                                                        ----            ----
Cash flows form operating activities:
   Net income (loss for the years)                  ($1,013,225)    ($  507,212)
   Adjustments to reconcile net income (loss)
      to net cash provided by (used for)
      operating activities:
         Depreciation                                    88,694         102,473
         Gain on sale of equipment                       (1,200)
         Deferred compensation                           24,000          24,000
        Allowance for slow-moving inventory             (45,271)        115,176
         Deferred income taxes                           (7,606)         (9,381)
       Changes in assets and liabilities:
          Accounts receivable                           262,034        (220,543)
          Note receivable, officer                       15,788            (485)
          Inventories                                   381,037         (83,840)
         Prepaid expenses                                90,608         (39,444)
         Other assets                                      (898)         (4,276)
        Accounts payable, customer deposits,
           and other current liabilities                301,155        (105,219)
                                                    -----------     -----------
       Net cash provided by (used for)
         operating activities                            96,316        (729,951)
                                                    -----------     -----------
Cash flows from investing activities:
     Purchasing of equipment                            (46,566)        (73,922)
     Proceeds from sale of equipment                                      1,200
                                                    -----------     -----------

          Net cash used for investing activities        (46,566)        (72,722)
                                                    -----------     -----------
Cash flows from financing activities:
   Short-term borrowings                                 70,077        664, 942
   Payments on long-term debt                          (140,446)       (182,620)
   Proceeds from issuance of stock                           --         300,000
                                                    -----------     -----------
          Net cash provided by (used for)
            financing activities                         70,369         782,322
                                                    -----------     -----------

Effect of exchange rate changes on cash                    (982)         18,710
                                                    -----------     -----------
    Net increase (decrease in cash                      (21,601)         (1,641)

Cash, beginning of years                                 54,115          55,756
                                                    -----------     -----------

Cash, end of years                                  $    32,514     $    54,115
                                                    ===========     ===========
Cash paid during the years for
   Income taxes                                            $-0-            $-0-
                                                    ===========     ===========

   Interest                                         $   425,831     $   402,975
                                                    ===========     ===========

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

                                      -30-
<PAGE>

                    WELLINGTON HALL, LIMITED AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              As of and for the Years Ended April 30, 1998 and 1997
              -----------------------------------------------------

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.
     Net assets and expenditures which  substantially  increase the useful lives
     of the  existing  assets  are  capitalized.  Maintenance  and  repairs  are
     expenses as incurred.  Depreciation is computed by use of the straight-line
     method over the estimated useful lives of the assets.

     Earnings  per share are  computed  by  dividing  net  income  (loss) by the
     weighted   average  shares   outstanding  and  diluted  share   equivalents
     outstanding.

     Revenue  from  sales  is  recognized  when  materials  are  shipped  to the
     customers.

     The consolidated  financial  statements  include the accounts of Wellington
     Hall, Limited and its wholly-owned subsidiaries,  Wellington Hall Caribbean
     Corp.,  Muebles  Wellington Hall, S.A., and Palmetto  Furniture  Galleries,
     Inc.  was  formed  during  the year  ended  April 30,  1998.  Both of these
     subsidiaries were accounted for as purchases.'

     The financial  statements of foreign subsidiaries have been translated into
     U.S dollars in accordance with Statement of Financial  Accounting Standards
     (SFAS) 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 form 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 $936 and $9,970,  respectively,  during the years
     ended April 30, 1998 and 1997.

     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
     revenue and expenses  during the  reporting  period.  Actual  results could
     differ form those estimates.

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 50% of the Company's total sales. The remaining
     50% of total  sales is split  about  evenly  over the other  three  product
     lines.  Wellington Hall Caribbean Corp. is a sales organization  located in
     Lexington,  North Carolina responsible for selling Muebles Wellington Hall,
     S.A.'s  products to both the general public and Wellington  Hall,  Limited.
     Palmetto Furniture Galleries,  Inc. is also a sales organization located in
     Lexington,  North Carolina responsible for selling second quality furniture
     of both  manufacturing  affiliates.  The Company grants credit to customers
     who are located primarily in the U.S.

     The  Company's  policy  is to  maintain  its  cash  balances  in  reputable
     financial institutions insured by the Federal Deposit Insurance Corporation
     which  provides  $100,000 of insurance  coverage one 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 form time to time.

                                      -31-
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             ------------------------------------------------------

     The note  balance  at April  30,  1998 and 1997 was  $12,605  and  $28,393,
respectively.

4.   Inventories:
          Inventories consisted of the following:

                                                      1998            1997
                                                      ----            ----

     Finished goods                               $ 1,867,072     $ 1,912,759
     Work-in- process                               1,482,191       1,702,500
     Raw materials                                    730,144         862,944
                                                  -----------     -----------
                                                    4,079,407       4,478,203

     Less, allowance for slow-moving inventory        (68,446)       (115,176)

                                                  $ 4,010,961     $ 4,363,027
                                                  ===========     ===========

5.   Property and Equipment:
          The major classes are as follows:

                                                    1998          1997
                                                    ----          ----
     Land and buildings                          $1,117,651    $1,107,151
     Machinery and equipment                        889,574       869,883
     Furniture, fixtures, and other equipment       180,697       173,159
                                                 ----------    ----------

                                                 $2,187,922    $2,150,193
                                                 ==========    ==========

     Depreciation expense for the years ended April 30 1998 and 1997 amounted to
     $88,694 and $102,473, respectively.

6.   Short-term Loans:

     The Company has a demand loan payable to  Lexington  State Bank for $93,600
     and $85,600, respectively, at April 30, 1998 and 1997.

     The  Company  has a line of  credit  agreement  for  short-term  debt  with
     Lexington  State Bank. The Bank agreed to extend the Company in the form of
     a lone 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 $820,047 at April 30, 1998 and $1,055,579 at April 30, 1997. 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, 1998
     and 1997, $1,168,172 and $1,178,400,  respectively,  was advance 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,  1998 and  1997,  $246,000  and  $233,000  respectively,  was
     advanced under this agreement.

     The weighted  average  interest rate on the above  short-term loans for the
     years ended April. 30, 1998 and 1997 was 9.56% and 9.44% respectively.

     The Company had line of credit  agreements  with two Honduran banks bearing
     interest  rates  ranging  from  29% to 40%  with  outstanding  balances  of
     $490,588 and $438,972  respectively,  at April 30, 1998 and 1997. 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 approximated $35,000 and $155,000 respectively,  as of April 30, 1998
     and 1997.

                                      -32-
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             ------------------------------------------------------

7.   Long-term Debt:
          Long-term debt consisted of the following:

                                                          1998          1997
                                                          ----          ----

     E. Kemm
        Interest payable monthly at 1% above prime    $   25,000    $   25,000

     Overseas Private Investment Corporation
        Interest rate 10.00%, 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 with a balloon
        payment due October 1999                         898,092       990,999

     Lexington State Bank
        Interest rate 10.00% payable in monthly
        installments of $7,000 with interest at
        1,5% above prime                                 338,196       385,738
                                                      ----------    ----------
                                                       1,261,288     1,401,737
           Less, current maturities                      356,262       196,443
                                                      ----------    ----------
                                                      $  905,026    $1,205,294
                                                      ==========    ==========

     The  weighted  average  interest  rate paid E. Kemm  amounted  to 9.50% and
     9.56%, respectively, for the years end April 30, 1998 and 1997.

     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, 1998 are:

           Year Ending April 30                  Amount
           --------------------                  ------
                  1999                         $  356,262
                  2000                            677,423
                  2001                             64,126
                  2002                             70,841
                  2003 and After                   92,636

     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.

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.  The Plan was  approved by the  stockholders  of the
     Company at the October 1, 1997 annual  stockholders'  meeting. At April 30,
     1998, no options or stock awards had been granted.

9.   Capital Stock and Capital Structure:

     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.

                                      -33-
<PAGE>

              NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
              -----------------------------------------------------

9.   Capital Stock and Capital Structure (Continued):

     All shares of capital stock represent voting shares.

     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
     plant as described in Note 8.

     Also  in  1997,  the  Company  filed  a  registration  statement  with  the
     Securities  and  Exchange  Commission  for the offer and sales of 1,689,887
     shares of its common stock at $.50 per share.  During the fiscal year ended
     April 30, 1998, the proposed stock offering was abandoned.

10.  Income Taxes:

     At April 30, 1998, the Company had federal net operating loss carryforwards
     of  $1,219,735  that expire in 2010 through  2013,  and state net operating
     loss  carryforwards  of $1,452,677  that expire in 1999 through  2003.  For
     financial  reporting  purposes,  a  valuation  allowance  of  $488,284  (an
     increase of  $243,323  during the year) has been  recognized  to offset the
     deferred tax assets  related to the  carryovers  and certain other deferred
     tax assets.

     At April 30, 1997 the Company had federal  operating loss  carryforwards of
     $490,517  that expire in 2010 through 2012,  and state net  operating  loss
     carryforwards  of $782,266 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.

     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:

                                                          1998          1997
                                                          ----          ----
     Deferred tax assets:
        Book over tax depreciation                     $             $   4,668
        Book allowance for doubtful accounts              19,596        19,713
        Tax over book inventory                           38,311        38,810
        Deferred compensation                            102,828        93,864
        State net operating loss carryforwards            74,475        41,772
        Federal net operating loss carryforwards         380,481       164,379
                                                       ---------     ---------
                                                         615,691       363,206
        Valuation allowance for deferred tax assets     (488,284)     (244,961)
                                                         127,407       118,245

     Deferred tax liability:
        Tax over book depreciation                         1,556
                                                       ---------     ---------
           Net deferred tax asset                      $ 125,851     $ 118,245
                                                       =========     =========

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

                                                          1998          1997
                                                          ----          ----
          Current assets                               $  18,165     $  19,713
          Noncurrent asset                               107,686        98,532
                                                       ---------     ---------
                                                       $ 125,851     $ 118,245
                                                       =========     =========

                                      -34-
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             ------------------------------------------------------

10.  Income Taxes (Continued):

     There  follows a  reconciliation  of the  income  taxes per the  income tax
     returns with the income tax  deductions per the  Consolidated  Statement of
     Income:

                                                    1998            1997
                                                    ----            ----
          Amounts shown by returns (net)         $      -0-      $      -0-
          Deferred income taxes                      (7,606)         (9,381)
                                                 ----------      ----------
                                                 ($   7,606)     ($   9,381)
                                                 ==========      ==========

          Effective income tax rates                   (.75%)          (1.8%)
                                                 ==========      ==========



     No provision has been made for U.S. income taxes on unremitted  earnings of
     the foreign subsidiary  (approximately $155,289 and 408,725,  respectively)
     at April 30, 1998 and 1997) since it is the present intention of management
     to indefinitely reinvest these earnings.

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

                                                    1998            1997
                                                    ----            ----
          Domestic                              ($  778,955)    ($  445,698)
          Foreign                                  (241,876)        (70,895)
                                                 ----------      ----------
                                                ($1,020,831)    ($  516,593)
                                                 ==========      ==========

     Federal,  foreign,  and state  income  taxes  (benefits)  consisted  of the
     following:

                                                    1998            1997
                                                    ----            ----
          Federal                               ($    5,800)    ($    7,036)
          Foreign                                       -0-             -0-
          State                                      (1,806)    ($    2,345)
                                                 ----------      ----------
                                                ($    7,606)    ($    9,381)
                                                 ==========      ==========

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

                                                    1998            1997
                                                    ----            ----
          Tax computed at the U.S. federal rate        34.0%           34.0%
          Increases (decreases) resulting from:
             Deferred income taxes                     (.75)           (1.8)
             Nondeductible expenses and benefit
              of domestic net operating loss          (34.0)          (34.0)
                                                 ----------      ----------
                                                      ( .75%)          (1.8%)
                                                 ----------      ----------

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

                                                    1998            1997
                                                    ----            ----
          Sales to unafilliated customers
             United States                       $5,661,309      $5,802,687
             Republic of Honduras                                $    9,657
                                                 ----------      ----------
                Total sales                      $5,661,309      $5,812,344
                                                 ==========      ==========

          Sales (export sales) or transfers
           between geographic areas:
             Sales from Republic of Honduras
              subsidiary to United States parent
              company, at market value
              (export sales)                     $1,866,247      $1,985,799
                                                 ==========       =========

                                      -35-
<PAGE>

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             ------------------------------------------------------

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

                                                    1998            1997
                                                    ----            ----
          Transfers from United States parent
           company to Republic of Honduras
           subsidiary of materials and supplies,
           at cost                               $  228,421      $  237,235
                                                 ==========      ==========

          Operating profit:
             United States                      ($  504,788)    ($  178,275)
             Republic of Honduras                   (67,533)         65,829
                                                 ----------      ----------
                Loss before interest and
                 income taxes                   ($  572,321)    ($  112,446)
                                                 ==========      ==========

                                                    1998             1997
                                                    ----             ----
          Identifiable assets:
             United States                       $4,305,277      $5,112,362
             Republic of Honduras                 1,471,953       1,448,201
                                                 ----------      ----------
                Total assets                     $5,777,230      $6,560,563
                                                 ==========      ==========

12.  Leases

     The Company leases  showroom space under a five and one-half year operating
     lease  expiring  in April 1999.  This lease was amended in March 1998.  The
     Company  formerly  sublet 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 $43,043 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:

                                                    1998            1997
                                                    ----            ----
          Lease expense                          $   97,634      $  109,210
          Sublease income                            46,214          46,776
                                                 ----------      ----------
             Net lease expense                   $   51,420      $   62,434
                                                 ==========      ==========

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, 1998
     and 1997,  the  estimated  contingent  liability  aggregated  approximately
     $153,030 and $155,564, respectively.

14.  Earnings Per Share:

     During  the year  ended  April  30,  1998,  Wellington  Hall,  Limited  and
     Subsidiaries adopted Statement of Financial Accounting Standards (SFAS) No.
     128, "Earnings Per Share".  SFAS No. 128 requires entities to present basic
     earnings  per  share  computed  by  dividing  income  available  to  common
     stockholders  by the weighed  average  number of common shares  outstanding
     (2,289,887 shares in 1998 and 1,839,887 shares in 1997). The company has no
     diluted share equivalents  outstanding and,  therefore,  the computation of
     diluted  earnings per share results in the same earnings as basic  earnings
     per  share.  The  adoption  of SFAS No 128 had no  material  impact  on the
     calculation of earnings per share for the year ended April 30, 1997.

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.

                                      -36-
<PAGE>

                  NOTES TO CONSOLIDATED STATEMENTS (CONTINUED)
                  --------------------------------------------

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,  1998 and 1997 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,  1998  and  1997  were  $2,714  and  $7,259,
     respectively.

18.  Quarterly Financial Data - Unaudited:

     The following is a summary of the quarterly  results of operations  for the
     years ended April 30, 1998, and 1997:

<TABLE>
<CAPTION>
                                                   Fiscal 1998 Quarters
                                                   --------------------
                                     First         Second          Third          Fourth
                                     -----         ------          -----          ------

<S>                              <C>             <C>           <C>             <C>        
     Net Sales                   $ 1,572,819     $1,467,983    $ 1,327,101     $ 1,293,406

     Cost of goods sold            1,350,591      1,004,333      1,032,302       1,445,851

     Gross profit                    222,228        463,650        294,799        (152,445)

     Net income (loss)              (289,389)         5,783       (114,505)       (615,114)

     Net income (loss) per
        common share (primary
        and fully diluted)              (.13)           -0-           (.05)           (.27)

<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

     Gross profit                    396,107        520,229        446,923         (11,690)

     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>

19.  Disclosures about Fair Value of Financial Instruments:

     Statement of Financial Account Standards (SFAS0 No. 107,  "Disclosure 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 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.

                                      -37-
<PAGE>

             NOTES ON CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
             ------------------------------------------------------

19.  Disclosures About Fair Value of Financial Instruments (continued):

     Notes payable - other:
          Due to the fact that these  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>
                                            1998                          1997
                                            ----                          ----
                                   Carrying         Fair         Carrying         Fair
                                    Amount          Value         Amount          Value
                                    ------          -----         ------          -----
<S>                              <C>             <C>           <C>             <C>        
     Case                        $    32,514     $   32,514    $    54,115     $    54,115
     Note receivable-officer          12,605         12,605         28,393          28,393
     Note payable-other            1,998,360      1,998,360      1,935,972       1,935,972
     Long-term debt                1,261,288      1,261,288      1,401,737       1,401,737
</TABLE>

20.  Going Concern Considerations:

     As reflected in the accompanying  consolidated  financial  statements,  the
     Company  incurred a $1,013,225  net loss for the year ended April 30, 1998.
     The Company's gross profit percentage decreased from 23% for the year ended
     April  30,  1997  to 15%  for the  year  ended  April  30,  1998.  Accounts
     receivable  turnover  declined  during the year ended April 31,  1998.  The
     Company's  lines of credit and short-term  borrowings  were at near maximum
     levels  at April 30,  1998.  Principal  payments  on the  Overseas  Private
     Investment  Corporation  loan are  scheduled  to increase  from  $30,969 to
     $61,937 beginning with the July 31, 1998 payment.

     Management is currently  developing new product lines with a  concentration
     on higher  volume  items  which  should  result  in lower  unit  costs.  In
     addition,  increased  foreign  business is expected as well as an increased
     cash flow  from the  usage of  existing  inventories.  Management  may also
     dispose of certain assets.

     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 $23,558 and
     $23,948, respectively, at April 30, 1998 and 1997.

22.  Subsequent Event:

     On June 26, 1998, the Board of Directors of Wellington Hall Caribbean Corp.
     voted to pursue the sale of its  Honduran  subsidiary,  Muebles  Wellington
     Hall, S.A.

                                      -38-

                             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

                                      -39-