WELLINGTON HALL, LIMITED
                                425 John Ward Rd
                              Post Office Box 1354
                      Lexington, North Carolina 27293-1354
               PROXY FOR SUBSTITUTE ANNUAL MEETING OF SHAREHOLDERS
                               September 30, 1998

The  undersigned  hereby appoints  DONALD W. LEONARD,  HOYT M. HACKNEY,  JR. AND
WILLIAM  W.  WOODRUFF,  and each of them,  as  Proxies,  each with full power of
substitution, and hereby authorizes them to represent and to vote, as designated
below, all the shares of Common Stock of Wellington Hall, Limited held of record
by the  undersigned on August 24, 1998 at the Annual Meeting of  shareholders to
be held in Lexington, N.C. on Septebmer 30, 1998 or at any adjournments thereof.
The following  proposals to be brought before the meeting are more  specifically
described in the accompanying Proxy Statement.

          (1)  ELECTION OF DIRECTORS
               FOR all nominees listed below         WITHHOLD AUTHORITY to vote
               (except as marked to contrary all     nominees listed
               below)                                below (   )
               INSTRUCTIONS:  To withhold  authority to vote for any  individual
               nominees  strike a line  through the  nominee's  name in the list
               below.)

                    Hoyt M. Hackney Jr., Ernst B. Kemm, Donald W. Leonard,
                    William W. Woodruff, Arthur F. Bingham

          (2)  To ratify the  selection of Turlington  and Company,  independent
               public  accountants,  as  auditors  of the Company for the fiscal
               year ending April 30, 1998

               VOTE FOR (   )      VOTE AGAINST  (   )      ABSTAIN  (   )

          (3)  In their discretion, the Proxies are authorized to vote upon such
               other matters as may properly come before the meeting.

Continued and to be signed on Reverse side

                                      -41-
<PAGE>

           THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

    This proxy, when properly executed, will be voted in the manner directed
   herein by the undersigned shareholder. If no direction is made, this proxy
                     will be voted FOR proposals 1,2, and 3

Please  date  and sign  exactly  as
name appears  hereon,  Joint Owners     ----------------------------------------
should   each   sign    personally.     Signature
Trustees,  custodians,   executors,
and    others    signing    in    a
representative    capacity   should     ----------------------------------------
indicate the capacity in which they     Signature
sign.

PLEASE MARK,  SIGN, DATE AND RETURN
THE PROXY CARD  PROMPTLY  USING THE                                         1998
ENCLOSED  ENVELOPE,  WHETHER OR NOT     ------------------------------------
YOU  PLAN  TO  BE  PRESENT  AT  THE     DATE:
MEETING.  IF YOU ATTEND THE MEETING
YOU CAN VOTE EITHER IN PERSON OR BY
YOUR PROXY.

                                      -42-
<PAGE>

                            WELLINGTON HALL, LIMITED
                                425 John Ward Rd
                              Post Office Box 1354
                      Lexington, North Carolina 27293-1354
                                 (336) 249-4931

               NOTICE OF SUBSTITUTE ANNUAL MEETING OF SHAREHOLDERS
                        To be held on September 30, 1998

To the Shareholders of Wellington Hall, Limited:

     Notice is hereby given that the Substitute  Annual Meeting of  Shareholders
of Wellington Hall,  Limited ("the Company") will be held on September 30, 1998,
at 10:00 A.M.  Eastern  Time,  at the offices of  Turlington  and  Company,  the
Company's  independent auditors,  located at 509 East Center Street,  Lexington,
North Carolina for the following purposes:

     1.   To elect a Board of five  directors  to serve  until  the next  Annual
          Meeting of the Shareholders and until their successors are elected and
          qualified.

     2.   To ratify the  selection by the Board of Directors of  Turlington  and
          Company as independent  auditors of the Company for fiscal year ending
          April 30, 1998.

     3.   To  transact  such other  business  as may  properly  come  before the
          meeting or any adjournment or adjournments thereof.

     The Board of Directors  has fixed the close of business on August 24, 1998,
as the record date for the determination of shareholders  entitled to notice of,
and to vote at the meeting and any adjournment or adjournments thereof.

     The Company's Proxy  Statement is submitted  herewith along with the Annual
Report for the year ended April 30, 1998.

Lexington, North Carolina
September 8, 1998

                              By Order of The Board of Directors
                              William W. Woodruff, Secretary

                                      -43-
<PAGE>

                            WELLINGTON HALL, LIMITED
                                425 John Ward Rd
                              Post Office Box 1354
                      Lexington, North Carolina 27293-1354
                                 PROXY STATEMENT

     The  enclosed  proxy is  solicited  on behalf of the Board of  Directors of
Wellington  Hall,  Limited (the  "Company")  and is to be used at the Substitute
Annual  Meeting of  Shareholders  to be held at the  offices of  Turlington  and
Company, the Company's independent auditors,  located at 509 East Center Street,
Lexington,  North Carolina on September 30, 1998 at 10:00 A.M. Eastern Time, and
at any adjournments  thereof. Any shareholder  submitting the accompanying proxy
may revoke it at any time  before it is voted by: (a) giving  written  notice to
the Secretary of the Company before the Annual Meeting; (b) attending the Annual
Meeting and  announcing at the meeting that he elects to revoke his proxy and to
vote in person;  or (c)  delivering a proxy  bearing a later date to the Company
before the Annual Meeting.

     Proxies will be solicited by mail. Proxies may also be solicited personally
or by  telephone  by  employees  of the  Company  who will  not be  additionally
compensated  therefor,  or by the  Company's  transfer  agent.  The cost of such
solicitation will be borne by the Company. The Company intends to mail copies of
the Proxy Statement and the  accompanying  proxy card to the  shareholders on or
before September 7, 1998.

     Only  shareholders  of record at the close of the  business  on August  24,
1998,  are  entitled  to  notice  of and to  vote  at the  meeting.  The  shares
represented by all properly  executed proxies which are received in time for the
meeting will be voted in accordance  with the directions  given  thereon.  If no
directions  are given on a proxy,  the shares  represented by such proxy will be
voted  "FOR"  the  five  nominees  for  election  as  Directors   named  herein.
Shareholders  will be  entitled  on vote each share of Common  Stock held on the
record date. As of August 24, 1998, there were 2,289,887 shares of the Company's
Common Stock, no par value (the "Common  Stock"),  issued and  outstanding,  and
each share is entitled to one vote.

                          SECURITY OWNERSHIP OF CERTAIN
                        BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information  regarding directors and
executive officers of the Company, as well as those persons known by the Company
to own beneficially more than 5% of the outstanding Common Stock of the Company,
as of August 24, 1998:

Name and Address                      Amount and Nature               Percent
of Beneficial                         of Beneficial                   of Class
Owner                                 Ownership (1)
--------------------------------------------------------------------------------

Hoyt M. Hackney, Jr.                   226,958 (1)                       9.9
409 Edgedale Drive
High Point, N.C. 27262

Ernst B. Kemm                          297,280 (1)                      13.0
1211 Lancaster Place
High Point, N.C. 27260

Donald W. Leonard                       26,862 (1)                       1.2
105 Westover Drive
Lexington, N.C. 27292

William W. Woodruff                     16,000 (1)                       0.7
320 Maegeo Drive
Lexington, N.C. 27292

Arthur F. Bingham                      605,437 (2,3)                    26.4
315 3rd Avenue N. W.
Hickory, N.C. 28601

                                      -44-
<PAGE>

Ralph L. Eskelsen, Jr.                      -- (3)                        --
Tacao River
San Pedro Sula
Honduras, Central America

All executive officers               1,172,537 (3)                      51.2
and Directors as a Group
(6 Persons)

                          -----------------------------

(1) To the best of the  Company's  knowledge,  all persons  listed above own the
shares listed  directly and have sole voting and  investment  power with respect
thereto unless otherwise noted.

(2) Mr.  Bingham's  shares include  605,000 shares owned in a retirement plan of
which he is beneficiary.

(3)  Excludes  options to  purchase  shares  that have been  granted but are not
currently exercisable and do not become exercisable within 60 days.

To the best of the  Company's  knowledge,  all  persons  listed  above have sole
voting and investment power over the shares which they own directly.

                              ELECTION OF DIRECTORS

     The Company's Bylaws provides that a minimum of three and a maximum of nine
directors  shall  serve on the  Board of  Directors,  with the  exact  number of
directors  within such  limitations to be fixed by resolution of the Board prior
to the  annual  meeting  at which  directors  are to be  elected.  The  Board of
Directors has fixed the number of directors to be elected at the Annual  Meeting
of  Shareholders  at five. It is intended  that Proxies  received in response to
this solicitation will be voted to elect five directors to hold office until the
next Annual Meeting and until their  successors  are elected and qualified.  The
enclosed Proxy can not be voted for more than five persons.

     The  requisite  quorum for the  Annual  Meeting  will be a majority  of the
outstanding  shares of Common  Stock  entitled to vote.  The  directors  will be
elected by a plurality  of the shares voted at the Annual  Meeting.  Abstentions
and broker non-votes will not be treated as a vote for or against any particular
nominee and will not effect the outcome of the election of directors.

     Management  knows of no reason why any of the five  nominees will be unable
or  unwilling  for good  cause to serve;  but if that  should  occur,  it is the
intention of those  persons  named in the Proxy to vote for such other person or
persons as the Board of Directors may recommend.  Unless otherwise directed, the
enclosed  Proxy  will be voted in favor of the five  nominees  for  election  as
Directors.

     The following table sets forth certain  information,  as of August 25, 1997
concerning the five persons nominated by the Board to serve as Directors.

                                 Position with the Company; Principal Occupation
Name                   Age       During the Preceding Five Years  (if different)
----                   ---       -----------------------------------------------

Hoyt M. Hackney, Jr.    60       President,   Chief  Executive  Officer,   Chief
                                 Financial Officer and Treasurer, Director since
                                 1978

Donald W. Leonard (1)   79       Chairman  of the Board of  Directors,  Director
                                 since 1965; Private Investor

Ernst B. Kemm           62       Executive Vice President, Director since 1978

William W. Woodruff (1) 74       Secretary , Director since 1977;  President and
                                 Owner of Woodruff Shoe Store

Arthur F. Bingham       43       Senior  Executive  Vice  President of Sales and
                                 Marketing (1996- present), Director since 1996;
                                 Sales  Representative  for Lexington  Furniture
                                 Industries (1978-1996)

                                      -45-
<PAGE>

Ralph L. Eskelsen, Jr.  52       General   Manager   and   Director  of  Muebles
                                 Wellington Hall, S.A. (1989-present)

(1)  Mr. Woodruff is Mr. Leonard's brother-in-law.

     The executive officers are elected by the Board of Directors to serve until
the next  annual  meeting  of the  Board and until  their  successors  have been
elected and qualified.

     The Board of  Directors  of the Company met two times during the year ended
April 30, 1998.  The  Compensation  Committee met once during  fiscal 1996.  The
Board does not have standing audit,  nominating or other  committees  performing
similar  functions.  All Directors  attended at least 75% of the total number of
the  meetings  of the Board of  Directors  and  committees  on which they served
during fiscal 1998.

                             EXECUTIVE COMPENSATION

     The following table sets forth information concerning  compensation paid to
the Chief Executive Officer of the Company's during the last three fiscal years.

                          Fiscal         Annual   Compensation      All Other
Name/Position              Year         Salary($)    Bonus($)   Compensation (1)
--------------------------------------------------------------------------------
Hoyt M. Hackney, Jr.       1998          107,943        0            25,738
  President                1997          130,183        0            25,738
  Treasurer                1996          128,878        0            26,577
  Chief Executive Officer                                         
  Chief Financial Officer                                      

(1)  The  amounts  reported in this column  consists of the  Company's  matching
     contribution under its 401(k) plan and deferred compensation plan.

     Non-salaried  directors  are paid  $100 for each  meeting  of the  Board of
Directors  they attend and a $1,000 annual  directors  fee. The Company does not
pay Directors any additional amounts for committee participation.

     Effective  January 1, 1987.  the Company  entered into a 5-year  employment
agreement with Mr. Hackney (the "Employment  Agreement") that will automatically
be extended for  successive  one-year terms unless and until either party to the
Employment Agreement gives written notice of termination. Throughout the term of
the Employment Agreement, Mr. Hackney is to serve as President,  Chief Executive
Officer and Chief  Financial  Officer of the  Company,  is to be  nominated  for
election  as a  Director  of the  Company  and is to  devote  his full  time and
attention to the Company's  business affairs.  If for any reason (other than his
"for cause"  termination) Mr. Hackney does not continue in these positions,  Mr.
Hackney may elect to terminate the Employment Agreement and receive as severance
compensation  an  amount  equal  to one  and  one-half  times  his  then  annual
compensation. Under the Employment Agreement, Mr. Hackney may be terminated only
"for  cause",  which is  defined  to mean (1)  willful  material  breach  of his
obligations under the Employment Agreement;  (2) willful gross misconduct in the
course of his employment that is substantially  injurious to the Company; or (3)
conviction in any court of a felony which results in incarceration for more than
90 consecutive days.

     In conjunction with the execution of the Employment Agreement,  the Company
and Mr.  Hackney  entered  into a  executive  deferred  compensation  agreement,
effective May 8, 1987 (the "Deferred  Compensation  Agreement"),  which provides
for the  payment of $50,000  per year for a period of 10 years  payable in equal
monthly  installments,  upon Mr.  Hackney's  retirement  at age 62. The  monthly
installment payments shall be paid to Mr. Hackney's beneficiary if he dies prior
to retirement or after  retirement  but prior to the  expiration of the ten-year
payout  period.  $24,000 in  deferred  payments  were  accrued  pursuant  to the
Deferred  Compensation  Agreement for the benefit of Mr.  Hackney  during fiscal
1998.

     If the  Company  is  (1)  merged,  liquidated,  consolidated  or  otherwise
combined  with any other  company,  or (2) if  substantially  all the  assets or
shares of stock of the Company are acquired by any other person or entity (1 and
2 above hereinafter a "Change of Control Event"), the Employment Agreement will,
pursuant to its terms,  automatically  remain in full force and effect until the
end of the  two-year  period  immediately  following  the date of the  Change of
Control Event. If the Employment  Agreement is extended beyond December 31, 1991
due to the

                                      -46-
<PAGE>

occurrence  of a Change of Control  Event,  Mr.  Hackney is to be paid an annual
salary of $155,000  throughout  the term of extension.  Upon the occurrence of a
Change of Control Event.  the Company or its successor in interest may terminate
the Employment  Agreement upon the payment to Mr. Hackney of a cash amount equal
to 1 1/2 times his then annual  compensation.  The Company or its  successor may
terminate the Deferred  Compensation  Agreement  following  the  occurrence of a
Change of Control event upon the payment to Mr.  Hackney of (a) $100,000 in cash
or (b) a cash  amount  for each  share of the  Company  stock  then owned by Mr.
Hackney equal to or greater than the lesser of (i) four times the book value per
share of such stock or (ii) 15 times the net after tax profits per share of such
stock,  computed as of the  Company's  most recent fiscal year end in accordance
with Generally Accepted Accounting Principles.

     Effective  September 1, 1996, the Company entered into a 10-year employment
agreement  with  Arthur  F.  Bingham  ("the   Employment   Agreement")  that  is
automatically  extended for  successive  one-year  terms unless and until either
party to the Employment  Agreement gives written notice of' termination pursuant
to the terms  therein.  Throughout  the term of the  Employment  Agreement,  Mr.
Bingham is to serve as Senior  Executive  Vice  President of Sales and Marketing
and as an  exclusive  sales  representative  of the Company and is to devote his
full time and attention to such positions. The Employment Agreement contemplates
that,  for the term thereof,  Mr.  Bingham shall also serve as a Director of the
Company.  If, for any reason other than the  termination of his employment  "for
cause," Mr. Bingham does not continue in these positions,  Mr. Bingham may elect
to terminate the Employment  Agreement and receive as severance  compensation an
amount equal to one and one-half times his then annual  compensation.  Under the
Employment  Agreement,  Mr. Bingham may be terminated only "for cause," which is
defined  to mean (1)  willful  material  breach  of his  obligations  under  the
Employment  Agreement,  which breach is not  substantially  cured by Mr. Bingham
within ten business  days after the Company  gives to him written  notice of the
specific  alleged  breach (it being  understood  that Mr.  Bingham's  failure to
perform or discharge  his duties and  responsibilities  hereunder as a result of
his  incapacity due to physical or mental illness or injury or accident or death
shall not be deemed such a breach);  (2) willful gross  misconduct in the course
of his  employment  that  is  substantially  injurious  to the  Company;  or (3)
conviction in any court of a felony that results in incarceration  for more than
ninety  consecutive days (unless such conviction is reversed in any final appeal
thereof).

     Pursuant to the Employment  Agreement,  Mr. Bingham is to be compensated in
an amount equal to a commission of 5% of all sales of products of WHCC and 6% of
all sales of products of the Company,  both to exclude what is commonly referred
to as OEM sales, a commission of 5% on all orders  considered  "House" orders, a
commission of 5% on inventory sales used to raise capital and reduce  inventory,
annual  compensation  of $30,000 and an annual bonus equal to the amount that 2%
of the sales in the North  Carolina  territory  from WHCC and 1% of the sales in
the North Carolina  territory from the Company  exceeds  $30,000 for each fiscal
year  beginning  September 1, 1996 through August 31, 1997. No bonuses were paid
during fiscal year ending April 30, 1998..

     If the Company is merged,  liquidated,  consolidated or otherwise  combined
with any other company,  or if  substantially  all the assets of the Company are
acquired by any other person or entity,  or if the control of the Company  shall
pass to any other  person or entity not  presently  in control,  the  Employment
Agreement  shall  remain in full  force  and  effect  or,  at the  option of the
Company,  upon the  occurrence  of any such  event  described  hereinabove,  the
Company or its  successor  may  terminate  this  Employment  Agreement  upon the
payment to Mr.  Bingham of an amount  equal to 1 1/2 times his  earnings for the
last fiscal year prior to  termination,  such  payment to be made within  thirty
days after the date of termination.  For purposes of determining  Mr.  Bingham's
earnings,  there shall be included both the commissions paid under Mr. Bingham's
sales territory and the annual  compensation  paid for Mr. Bingham's  service as
Senior Executive Vice President of Sales and Marketing.

     On February  10,  1997,  the Board of  Directors  of the  Company  adopted,
subject to shareholder approval, the 1997 Stock Option and Restricted Stock Plan
(the  "Plan").  The Plan has a ten year term and,  unless  sooner  terminated as
provided in the Plan, will terminate on February 9, 2007.

     The Plan will be  administered  by an option  committee  (the  "Committee")
appointed by the Board of Directors of the Company.  The Committee  must consist
of no fewer than two directors appointed by the Board, none of whom is a current
employee of the Company, a former employee that receives  compensation for prior
services  rendered  during the taxable year, an individual  receiving  direct or
indirect  remuneration from the Company in any capacity other than as a director
or a former or current officer of the Company,  all with the intent of complying
Section 162(m) of the Internal Revenue Code of 1988, as amended (the "Code").

     Under the Plan,  the Company may grant  incentive  stock options  ("ISOs"),
nonqualified  stock  options or  restricted  stock  awards up to an aggregate of
1,200,000  shares of the  Company's  common  stock,  no par value  (the  "Common
Stock").  No individual may receive  options or restricted  stock under the Plan
aggregating  more than 600,000  shares of Common Stock over the ten-year life of
the Plan. The number and class of shares available under

                                       -47
<PAGE>

the Plan  will be  adjusted  appropriately  in the  event of  stock  splits  and
combinations,  share dividends and similar changes in the  capitalization of the
Company.  Any shares of Common Stock that are subject to incentive stock options
or  nonqualified  stock options  granted under the Plan and that are not issued,
and any shares of Common  Stock that are issued  pursuant  to  restricted  stock
awards  under  the Plan and that are  subsequently  forfeited,  may again be the
subject of grants or awards under the Plan.

     Awards  may be  granted  under  the Plan only to key  employees  (including
statutory  employees  within the  meaning of  Section  3121(d)(3)  of the Code),
officers or directors of the Company,  whether or not  employees.  The Committee
will determine those persons who will receive ISOs,  nonqualified  stock options
and restricted stock awards under the Plan.

     The Plan  provides  that the Board of  Directors  may  terminate,  amend or
revise the terms of the Plan at any time,  except that no  amendment or revision
shall (i) increase the maximum  aggregate  number of shares subject to the Plan,
except as permitted  by the Plan in order to make  appropriate  adjustments  for
stock  splits,  share  dividends or similar  changes in the Common  Stock;  (ii)
change the minimum  purchase price for shares  subject to options  granted under
the Plan; (iii) extend the maximum duration of ten years  established  under the
Plan for any option or for a restricted stock award; or (iv) permit the granting
of an  option  or a  restricted  stock  award  to  anyone  other  than  eligible
recipients under the terms of the Plan.

     With respect to nonqualified  stock options or restricted stock awards, the
Committee is authorized under the terms of the Plan, in its discretion,  to make
loans or payments to  optionees or  restricted  stock award  recipients  for the
purpose of assisting such persons with payment of personal income taxes incurred
upon  exercise of  nonqualified  stock options or the lapse of  restrictions  to
which restricted stock is subject.

     If the Company becomes a party to any merger or  consolidation  in which it
is not the surviving entity or pursuant to which the shareholders of the Company
exchange their Common Stock, or if the Company  dissolves or liquidates or sells
all or  substantially  all of its assets,  the Committee may, in its discretion,
cause all ISOs and  nonqualified  stock  options  outstanding  under the Plan to
become  immediately  exercisable and, to the extent not exercised,  such options
will  terminate on the  effective  date of such  transaction.  In addition,  the
Committee may, in its  discretion,  cause all  restricted  stock awards that are
still subject to any  restrictions or conditions to become fully vested,  and no
longer subject to forfeiture,  on such effective date, unless otherwise provided
in the applicable restricted stock agreement.

     The price of shares subject to stock options granted under the Plan will be
determined by the  Committee at the time of grant of the option,  but may not be
less than 100% of the fair market  value of the Common  Stock at the time of the
grant.  On July 28,  1998,  the fair market value of the common stock was $ .25.
The  Committee  will  determine  at the time of grant the  dates on which  stock
options will become  exercisable and may accelerate the scheduled  exercise date
of an option if deemed appropriate.  The Committee may, in its discretion,  make
any  ISO or  nonqualified  stock  option  subject  to the  satisfaction  of such
corporate or individual  performance or other vesting standards as the Committee
deems appropriate.  No stock option may expire later than ten year from the date
of grant.  ISOs granted under the Plan are subject to the  following  additional
conditions:  (i) no ISO may be  granted  to a person  who  owns,  at the time of
grant, stock representing more than 10% of the total voting power of all classes
of stock of the Company  unless the option price for the shares  subject to such
ISO is at least 110% of the fair market  value on the date of grant and such ISO
award is  exercisable  only within five years after its date of grant;  and (ii)
the total fair market value of shares subject to ISOs which are  exercisable for
the first time by an optionee in a given calendar year may not exceed  $100,000,
valued as of the date of the ISO's grant.

     Restricted  stock  may be issued  under  the terms of the Plan to  eligible
recipients who are selected from time to time by the Committee.  Such restricted
stock will be subject to such  restrictions  and conditions as may be determined
by the Committee at the time of the award. These restrictions and conditions may
include  (but are not  required  to  include)  restrictions  on  transfer of the
awarded shares of Common Stock, vesting conditions based on continued employment
with  the  Company  for a  specified  period  of time  following  the  award  or
satisfaction of individual or corporate performance criteria, or satisfaction of
other vesting  standards.  The lapse of restrictions and conditions with respect
to  restricted  stock may be  accelerated  at any time by the  Committee  in its
discretion.  Restrictions  and conditions  imposed on shares of restricted stock
shall  lapse,  in whole or in part,  as  provided  in the  applicable  agreement
evidencing the restricted stock award, but must lapse, if at all, not later than
ten years from the date of the award.

     Because the Plan is a  discretionary  plan, it is not possible to determine
what awards the Committee will grant thereunder.

                                      -48-
<PAGE>

FEDERAL INCOME TAX CONSEQUENCES OF STOCK OPTION AND RESTRICTED STOCK PLAN

     ISOs  granted  under the Plan are intended to qualify as  "incentive  stock
options" under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code").  The grant of an ISO generally does not result in taxable income to the
participant  at the time of grant or at the time of exercise.  however,  for any
year in which Common Stock is purchased  upon exercise of an ISO, the difference
between the fair market  value of the Common  Stock at the time of exercise  and
its adjusted basis to the  participant  will be treated as an item of adjustment
for purposes of computation of the employee's alternative minimum taxable income
under Section 55 of the Code. If the participant exercises and ISO and sells the
Common Stock  purchased  thereunder at a gain,  the excess of the sales price of
the Common Stock over its adjusted basis to the participant will be taxable as a
long-term capital gain if the sale is made more than two years from the granting
of the ISO and  more  than  one  year  from  the  transfer  of the  stock to the
participant.  If the sale is made  within two years  after the  granting  of the
option  or  within  one  year  after  the  Common  Stock is  transferred  to the
participant  and if sales  proceeds  exceed the fair market  value of the Common
Stock on the date of exercise, the participant generally will recognize ordinary
income,  equal  to the fair  market  value  of the  Common  Stock on the date of
exercise less the option price, and capital gain (long-term or short-term as the
case may be), equal to the amount realized in excess of the fair market value of
the Common Stock on the date of exercise.  No tax deduction will be available to
the Company as a result of the granting of ISOs,  the exercise of such  options,
or the sale by participants of the Common Stock purchased.  However, the Company
will be entitled to a deduction in an amount equal to the  ordinary  income,  if
any, realized by a participant on the sale of Common Stock purchased pursuant to
the exercise of an ISO.

     Nonqualified  stock  options  granted  under the plant are not  intended to
qualify as ISOs under the Code.  The grant of a  nonqualified  stock option will
not result in taxable  income to the  participant or a deduction to the Company.
On the date any such option is exercised, a participant generally will be deemed
to receive ordinary income equal to the amount by which the fair market value of
the Common Stock on the exercise date exceeds the option price,  and the Company
will generally receive a deduction in the same amount.

     Participants will recognize  taxable income at the time unrestricted  stock
is  received  under  the  Plan  equal  to the fair  market  value of the  shares
received.  The  Company  will be  entitled  to a  deduction  equal to the amount
includable in the participant's income.

     In general,  there will be no federal income tax consequences to either the
Company or the participant upon the grant of restricted stock. At that time, the
participant will recognize taxable income equal to the then fair market value of
the  Common  Stock  and the  Company  will  generally  receive  a  corresponding
deduction.  However,  participants  may elect,  within 30 days after the date of
grant,  to  recognize  ordinary  income  equal to the fair  market  value of the
restricted  stock on the date of grant and the  Company  will be  entitled  to a
corresponding deduction at that time.

     Any  discussion  herein  pertaining  to a  deduction  for  the  Company  is
qualified  by  application  of  Section  162(m) of the Code and the  regulations
thereunder. Section 162(m) limits to $1,000,000 per year the allowable deduction
for compensation  paid to or accrued by the chief executive officer and the four
most  highly  compensated  officers  (other  than the chief  executive  officer)
("Covered Employees"), except that such limit does not include "performace-based
compensation,"  as that term is  defined  therein.  If the Plan is  approved  by
shareholders in the manner  prescribed by applicable  regulations,  compensation
realized  upon  the  exercise  of  options  will be  "performance-based"  if the
exercise  price is at least  equal to the fair  market  value of the  underlying
stock on the date of  grant.  The Plan is  intended  to meet the  provisions  of
Section 162(m) such that any deductions  realized from stock option transactions
thereunder will not be limited.  Compensation derived from other awards that may
be  granted  under  the  Plan  may be  deemed  "performance-based"  if they  are
designated  as such by the  Committee and if the grant thereof is subject tot he
attainment of certain  performance goals.  Except as permitted by Section 162(m)
and the  regulations  promulgated  thereunder,  compensation  derived by Covered
Employees from awards that are not "performance-based" will not be deductible by
the Company.

                              CERTAIN TRANSACTIONS

     In connection with the employment of Arthur F. Bingham as Senior  Executive
Vice President of Sales and Marketing, Mr. Bingham made a loan to the Company in
October 1996 of $285,694  for a term of up to two years and bearing  interest at
the applicable  federal rate under Section 1274(d) of the Internal  Revenue Code
of 1986, as amended.  On February 12, 1997, Mr. Bingham purchased 600,000 shares
of Common  Stock of the  Company  at a purchase  price of $.50 per share,  which
purchase  price  was  paid by  cancellation  of the  foregoing  loan  and for an
additional  investment of $14,306.  The Company paid to Mr. Bingham  interest on
the loan in the amount of $6,368. Like those  transactions,  all future material
affiliated  transactions and loans will be made or entered into under terms that
are no less  favorable  to the  Company  than  those that can be  obtained  from
unaffiliated  third  parties.  In  addition,   all  future  material  affiliated
transactions and loans, and any forgiveness of loans, must be approved by a

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<PAGE>

majority of the independent  outside members of the Company's Board of Directors
who do not have an interest in the transactions.

                        SELECTION OF INDEPENDENT AUDITORS

     Subject to  ratification  by the  shareholders,  the Board of Directors has
selected Turlington and Company, an independent public accounting firm, to audit
the  accounts  of the  Company  for the  fiscal  year  ending  April  30,  1999.
Turlington  and  Company has acted as auditors  for the  Company  since 1978.  A
representative of Turlington and Company is expected to be present at the Annual
Meeting,  will have the opportunity to make a statement and will be available to
respond to appropriate questions.

     The Board of Directors  recommends a vote FOR  ratifying  the  selection of
Turlington  and Company as auditors for the Company for fiscal year ending April
30, 1999.

                             SHAREHOLDERS PROPOSALS

     Any  shareholder  desiring  to  present a  proposal  for action at the next
annual  meeting  of  shareholders  must  submit his  proposal  in writing to the
Secretary  of the Company in  Lexington,  North  Carolina  by May 8, 1998,  if a
description of such proposal is to be included in the Proxy Statement  issued by
the Company.

                                  OTHER MATTERS

     No business other than that set forth herein is expected to come before the
meeting,  but  should any other  matters  requiring  a vote of the  shareholders
arise,  including a question of adjourning the meeting, the persons names in the
accompanying  Proxy will vote thereon  according  to their best  judgment in the
interests of the Company.

     Where a choice is  specified  on any Proxy as to the vote on any  matter to
come  before  the  meeting,  the  Proxy  will be voted in  accordance  with such
specifications. If no specification is made by the Proxy is properly signed, the
shares  represented  thereby  will be voted in favor of each  proposal set forth
herein.

                                        Order of the Board of Directors

                                        William W. Woodruff
                                        Secretary

September 7, 1998

WHETHER  OR NOT YOU PLAN TO BE PRESENT  AT THE  MEETING,  YOU ARE URGED TO SIGN,
DATE AND MAIL THE ENCLOSED PROXY  PROMPTLY.  IF YOU ATTEND THE MEETING,  YOU CAN
VOTE EITHER IN PERSON OR BY YOUR PROXY.

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