STANLEY FURNITURE CO INC/, POS AM, 1996-11-13

STANLEY FURNITURE CO INC/
POS AM, 1996-11-13
WOOD HOUSEHOLD FURNITURE, (NO UPHOLSTERED)

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 13, 1996

REGISTRATION NO. 333-14063
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------

POST-EFFECTIVE AMENDMENT NO. 1

FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------

STANLEY FURNITURE COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)

54-1272589
(I.R.S. EMPLOYER IDENTIFICATION NO.)

ROUTE 57
STANLEYTOWN, VIRGINIA 24168
(540) 627-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

ALBERT L. PRILLAMAN
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
STANLEY FURNITURE COMPANY, INC.
ROUTE 57
STANLEYTOWN, VIRGINIA 24168
(540) 627-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

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

Copy to:

DAVID W. ROBERTSON
MCGUIRE, WOODS, BATTLE & BOOTHE, L.L.P.
ONE JAMES CENTER
901 EAST CARY STREET
RICHMOND, VIRGINIA 23219

E. WILLIAM BATES, II
KING & SPALDING
120 WEST 45TH STREET
NEW YORK, NEW YORK 10036

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2

EXPLANATORY NOTE

This Post-Effective Amendment No. 1 is being filed to reduce the number of
shares subject to this Registration Statement to 1,150,000. The form of
Prospectus contained herein reflects this reduction. The remaining 1,608,902
shares originally subject to this Registration Statement are deregistered upon
the effectiveness of this Post-Effective Amendment No. 1.

<PAGE> 3

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED NOVEMBER 13, 1996

1,000,000 SHARES

[STANLEY FURNITURE LOGO]

COMMON STOCK

ALL OF THE 1,000,000 SHARES OF COMMON STOCK, PAR VALUE $0.02 PER SHARE (THE
"COMMON STOCK"), OF STANLEY FURNITURE COMPANY, INC. (THE "COMPANY") OFFERED
HEREBY (THE "OFFERING") ARE BEING SOLD BY THE SELLING STOCKHOLDERS. SEE
"PRINCIPAL AND SELLING STOCKHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE
PROCEEDS FROM THE OFFERING.

THE COMMON STOCK IS QUOTED ON THE NASDAQ NATIONAL MARKET ("NASDAQ") UNDER
THE SYMBOL "STLY." ON NOVEMBER 12, 1996, THE LAST REPORTED SALES PRICE OF THE
COMMON STOCK ON NASDAQ WAS $16 PER SHARE. SEE "PRICE RANGE OF COMMON STOCK."

FOR A DISCUSSION OF CERTAIN RISKS OF AN INVESTMENT IN THE SHARES OF COMMON
STOCK OFFERED HEREBY, SEE "RISK FACTORS" ON PAGES 7-8 OF THIS PROSPECTUS.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.

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

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS* STOCKHOLDERS+
<S> <C> <C> <C>
PER SHARE....................................... $ $ $
TOTAL++......................................... $ $ $
</TABLE>

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

* THE COMPANY AND THE SELLING STOCKHOLDERS HAVE AGREED TO INDEMNIFY THE
UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. SEE "UNDERWRITING."

+ BEFORE DEDUCTING ESTIMATED EXPENSES OF THE OFFERING OF $325,000, ALL OF WHICH
WILL BE PAID BY THE COMPANY.

++ THE SELLING STOCKHOLDERS HAVE GRANTED THE UNDERWRITERS A 30-DAY OPTION TO
PURCHASE UP TO 150,000 ADDITIONAL SHARES OF COMMON STOCK ON THE SAME TERMS
PER SHARE SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF SUCH OPTION IS
EXERCISED IN FULL, THE TOTAL PRICE TO PUBLIC WILL BE , THE TOTAL
UNDERWRITING DISCOUNTS AND COMMISSIONS WILL BE , AND THE TOTAL
PROCEEDS TO SELLING STOCKHOLDERS WILL BE $ . SEE "UNDERWRITING."

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

THE COMMON STOCK IS BEING OFFERED BY THE UNDERWRITERS AS SET FORTH UNDER
"UNDERWRITING" HEREIN. IT IS EXPECTED THAT DELIVERY OF THE CERTIFICATES THEREFOR
WILL BE MADE AT THE OFFICES OF DILLON, READ & CO. INC., NEW YORK, NEW YORK, ON
OR ABOUT NOVEMBER , 1996. THE UNDERWRITERS INCLUDE:

DILLON, READ & CO. INC.

RAYMOND JAMES & ASSOCIATES, INC.

WHEAT FIRST BUTCHER SINGER

THE DATE OF THIS PROSPECTUS IS NOVEMBER , 1996
<PAGE> 4

[PICTURE OF LIVING ROOM FURNITURE]

SLOANE SQUARE

Stanley has a diversified product line of bedroom, dining room, living room
tables, entertainment centers, youth, home office, and upholstered furniture and
offers a quality product at a good value. The Stanley product lines cover a wide
array of styles including the Sloane Square living room tables, the
entertainment center, and upholstery shown above. Sloane Square's breadth
exemplifies Stanley's commitment to being a complete furniture resource.

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

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET
(INCLUDING NASDAQ) OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

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

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMPANY'S
COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 10B-6a UNDER THE SECURITIES
EXCHANGE ACT OF 1934. SEE "UNDERWRITING."

2
<PAGE> 5

EMPIRE

Stanley began as a dining room
company in 1924. The Empire
collection shown at right, one
of Stanley's best-selling
dining rooms, represents the
type of quality products which
have been associated with the
Stanley name for over seventy
years. Stanley's product lines
cover all major design
categories including European
traditional,
contemporary/transitional,
Mission/Shaker, 18th Century,
and country/nostalgia.

[Picture of dining room furniture]

[Picture of youth bedroom furniture]

SIMPLE PLEASURES

Simple Pleasures, part of our "Young America(TM)
by Stanley" line of youth furnishings, features
clean styling with country and contemporary
influences. Youth furniture represents over 35%
of Stanley's overall business and is one of
Stanley's fastest growing product lines.
<PAGE> 6

WE JUST LOOK EXPENSIVE.

CONCENTRICS

Traditional design elements
combined with a casual finish
[Picture of bed and nightstand] result in the classic
contemporary styling of
Concentrics, one of Stanley's
major introductions in 1995.

[Picture of home office desk and wall unit]

AMERICAN CRAFTSMAN OFFICE

The American Craftsman home office shown above,
part of Stanley's The Office(TM) program, is
only one of a wide range of office
configurations designed to meet the changing
needs of the working American Family.
<PAGE> 7

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
included elsewhere in, or incorporated by reference into, this Prospectus.
Except as otherwise noted, the information in this Prospectus, including
financial information and share and per share data, does not take into account
the repurchase of shares of Common Stock by the Company in the event the
over-allotment option is not fully exercised by the Underwriters. Certain of the
information set forth in this summary and elsewhere in this Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed under "Risk Factors."

THE COMPANY

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

The furniture industry serves a large consumer market in the U.S. with $19
billion in total shipments in 1995, according to the American Furniture
Manufacturers Association. The Company is the fifteenth largest furniture
manufacturer in North America based on 1995 sales, according to Furniture/Today,
a trade publication. The Company believes that current demographic trends are
favorable for continued growth in the upper-medium price range. During the
1990s, the aging of the U.S. "baby boom" generation is projected to result in an
increase of approximately 30% in households headed by people aged 35-54.
Additionally, children of the "baby boom" generation are expected to contribute
to growth in sales of youth furniture. Management expects that the Company will
benefit from these trends and the tendency of older, more affluent consumers to
focus the majority of their furniture expenditures on products in the medium to
high price ranges.

BUSINESS STRATEGY AND COMPETITIVE ADVANTAGES

The Company's goal is to offer the best products and value in the
upper-medium price range, and its business strategy is designed to provide
superior quality, responsive customer service, and quick delivery. The Company
believes its business strategy gives it and its customers competitive
advantages. The key elements of the Company's business strategy include:

DIVERSIFIED PRODUCT LINES. The Company's product lines cover all
major design categories and include bedroom, dining room, youth (Young
America(TM)), living room tables, entertainment centers, home office (The
Office(TM)), and upholstery. The Company believes that the diversity of its
product lines enables it to anticipate and respond quickly to changing
consumer preferences and provides retailers a complete furniture resource
in the upper-medium price range. The Company has recently expanded its
styles in youth and home office furniture to respond to growing consumer
demand for these products. The Company intends to continue expanding its
product styles with particular emphasis on upholstery, home office, and
entertainment centers. The Company believes that its products represent
good value and that the quality and style of its furniture compare
favorably with more premium-priced products. To emphasize this comparison
the Company uses the marketing theme, "We Just Look Expensive."

3
<PAGE> 8

BROAD DISTRIBUTION NETWORK. The Company has developed a diverse and
extensive customer base that provides the Company with access to a variety
of markets and flexibility to adapt to market changes. The Company believes
this broad distribution network reduces its exposure to regional
recessions. The Company sells its furniture domestically through
approximately 60 independent sales representatives to independent furniture
retailers, and national and regional chain stores. Representative customers
include Sears, J.C. Penney, Homestead House, Huffman Koos, Robb & Stucky,
Nebraska Furniture Mart, Furnitureland South, and Haverty's. In addition,
the Company has recently increased its emphasis on international
distribution. Approximately 7% of the Company's sales in 1995 and during
the first nine months of 1996 were to international customers. The Company
has sold to over 3,600 customers during the past twelve months, and no
single customer accounted for more than ten percent of sales. The Company
intends to continue to pursue all channels of distribution compatible with
its products and price range with particular emphasis on national and
regional chains and international outlets.

EFFICIENT MANUFACTURING OPERATIONS. The Company's operating strategy
is to emphasize continuous improvement in customer responsiveness, quality,
and operating efficiency. The Company's manufacturing processes, which
support its product and distribution strategy, focus on quick delivery
while minimizing inventory levels and improving quality by producing
smaller, more frequent, and cost-effective production runs. As a result,
the Company shipped customer orders within 13.7 days on average during 1995
and 16.7 days in the first nine months of 1996, with average finished goods
inventory turns of 5.2 and 6.1 times, respectively. The Company believes
its ability to deliver its products within these time frames, while
maintaining a high level of inventory turnover, is superior to that of its
competitors. In addition, the Company believes its quality performance
consistently outperforms the industry when measured by returns and
allowances as reported by the American Furniture Manufacturers Association.
Customer returns and allowances were 1.4% of net sales in 1995 compared to
the industry average of 2.7%. Consistent with the Company's philosophy of
providing its customers with a competitive advantage, the Company's quick
delivery reduces its customers' inventory investment and price markdowns,
and the high quality of the Company's products minimizes its customers'
redelivery costs.

The Company's business strategy has resulted in a 15.8% increase in net
sales and an increase of 135% in income from continuing operations for the first
nine months of 1996 compared to the comparable prior year period and income from
continuing operations per share of $1.17 for the first nine months of 1996
compared to $.53 per share for the comparable prior year period. In addition,
although past performance may not be an indicator of future performance, the
Company believes its business strategy has contributed to the continued
improvement of its operating margin for each of the past seven consecutive
quarters from 4.9% for the first quarter of 1995 to 9.8% for the third quarter
of 1996.

The Common Stock being offered hereby is held by the ML-Lee Acquisition
Fund, L.P. (the "Lee Fund") and certain affiliates of the Thomas H. Lee Company
(the "Lee Company"), which acquired their interests in the Company in connection
with a leveraged buyout transaction completed in January 1989. As of September
29, 1996, the Lee Fund and certain affiliates of the Lee Company owned 2,758,902
shares (or 58.3%) of the outstanding Common Stock. After the sale of the shares
offered hereby, the Lee Fund and such affiliates of the Lee Company will own
1,608,902 shares of Common Stock (or 35.1%, assuming the Underwriters'
over-allotment option is not exercised and the Company purchases all of the
shares of Common Stock subject to the Underwriters' over-allotment option). See
"Principal and Selling Stockholders."

The original predecessor of the Company was founded in 1924. The Company's
principal executive offices are located at Route 57, Stanleytown, Virginia 24168
and its telephone number is (540) 627-2000.

4
<PAGE> 9

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered by Selling Stockholders................ 1,000,000 shares(1)
Total Shares Outstanding.................................... 4,729,042 shares of Common
Stock, including the 1,000,000
shares offered hereby(2)(3)
Nasdaq National Market Symbol............................... STLY
</TABLE>

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

(1) Does not include 150,000 shares subject to the Underwriters' over-allotment
option. See "Underwriting."

(2) Does not take into account the repurchase of shares of Common Stock by the
Company in the event the over-allotment option is not fully exercised by the
Underwriters. See "Capitalization" and "Principal and Selling Stockholders."

(3) Does not include an aggregate of 742,388 shares of Common Stock reserved for
issuance pursuant to the Company's 1992 and 1994 Stock Option Plans and the
Executive Loan Plan.

SUMMARY FINANCIAL DATA

The following summary historical and pro forma financial information was
derived from, and should be read in conjunction with, the Company's financial
statements included elsewhere in this Prospectus. See also "Selected Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." See "Capitalization" for further information regarding
the pro forma effects on the Company's financial statements if the Underwriters'
over-allotment option is not exercised in full.

<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, ---------------------------
-------------------------------- OCTOBER 1, SEPTEMBER 29,
1993 1994 1995 1995 1996
-------- -------- -------- ---------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales...................................... $167,091 $184,342 $174,179 $127,858 $ 148,023
Gross profit(1)................................ 37,155 35,889 36,558 26,246 34,634
Operating income............................... 11,179 9,406 10,240 6,980 12,661
Gain on insurance settlement(2)................ 2,186 2,379 -- -- --
Income from continuing operations.............. 5,280 5,116 3,889 2,511 5,901
Income from continuing operations before gain
on insurance settlement, net of income
taxes........................................ 4,265 3,656 3,889 2,511 5,901
Income from continuing operations per common
share before gain on insurance settlement,
net of income taxes(3)....................... $ .90 $ .77 $ .82 $ .53 $ 1.17
Weighted average common shares, fully
diluted(3)................................... 4,725 4,725 4,727 4,728 5,052
OTHER DATA (UNAUDITED):
Operating income as a percentage of net
sales(4)..................................... 6.7% 5.1% 5.9% 5.5% 8.6%
Returns and allowances as a percentage of net
sales........................................ 1.3% 1.3% 1.4% 1.3% 1.4%
Finished goods inventory turns(5).............. 7.9x 6.6x 5.2x 5.0x 6.1x
Average days to ship an order(6)............... 23.7 18.1 13.7 13.4 16.7
EBITDA(7)...................................... $ 14,641 $ 13,383 $ 14,726 $ 10,203 $ 16,041
</TABLE>

<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 29,
1996
-------------
<S> <C>
BALANCE SHEET DATA:
Cash.................................................................................... $ 3,705
Inventories............................................................................. 38,805
Working capital......................................................................... 46,821
Total assets............................................................................ 141,632
Long-term debt including current maturities............................................. 39,503
Common stockholders' equity............................................................. 60,910
</TABLE>

5
<PAGE> 10

(1) In 1993, the Company recorded $5.0 million of business interruption
insurance replacing the gross profit on lost sales due to the fire which
occurred in February 1993 at its Stanleytown, Virginia facility. See Note 8
of the Notes to Financial Statements.

(2) In 1993, a $2.2 million pretax gain was recorded since proceeds exceeded the
book value of leasehold improvements and equipment destroyed in the fire.
Also in 1994, the Company recorded a pretax gain of $2.4 million as part of
the final insurance settlement. See Note 8 of the Notes to Financial
Statements.

(3) In July 1993, the Company completed a public offering of 1,725,000 shares of
common stock at $8.50 per share. The net proceeds of $13.1 million were used
to reduce debt. Per share data for 1993 is presented on a pro forma basis,
assuming the 1993 public offering took place on January 1, 1993. Primary per
share information is the same for all periods presented except for the nine
months ended September 29, 1996. For this period, primary weighted average
common shares were 4,848,000 and primary income from continuing operations
per common share before gain on insurance settlement, net of income taxes
was $1.22.

(4) The increase in operating income as a percentage of net sales for 1993 was
due principally to the recognition of $5.0 million of business interruption
insurance without the related sales revenue.

(5) Based on consistent Company practice of averaging monthly inventory balances
and annualizing shipments for the periods shown.

(6) Based upon calendar days, with no weighting of orders based on dollar value,
since average days to ship an order is a service measurement. Orders are
excluded from this measurement if a customer requests a delay or if the
customer's credit status will not permit shipment, and for new product
introductions for the first six months of their life cycle. The Company
began tracking this data in 1993 and this information is not available for
1991 and 1992.

(7) EBITDA is defined as income from continuing operations before interest,
taxes, depreciation, and amortization. The Company believes that EBITDA
provides useful information regarding a company's financial performance.
EBITDA should not be considered in isolation, or as an alternative to net
income as an indicator of the Company's operating performance, or as an
alternative to the Company's cash flow from operating activities as a
measure of liquidity. EBITDA amounts do not include gain on insurance
settlement for 1993 and 1994.

6
<PAGE> 11

RISK FACTORS

In addition to the other information contained in this Prospectus, and the
documents incorporated by reference herein, the following factors should be
considered carefully in evaluating the Company and its business before
purchasing any of the shares of Common Stock offered hereby.

CYCLICAL NATURE OF THE FURNITURE INDUSTRY

The furniture industry has historically been cyclical, fluctuating with
economic cycles. During economic downturns the furniture industry tends to
experience longer periods of recession and greater declines than the general
economy. The Company believes that the industry is significantly influenced by
economic conditions generally and particularly by consumer behavior and
confidence, the level of personal discretionary spending, housing activity,
demographics, interest rates, and credit availability. These factors not only
affect the ultimate consumer, but also impact furniture retailers, the
industry's primary customers. There can be no assurance that a prolonged
economic downturn would not have a material adverse effect on the Company.

COMPETITION

The residential furniture market is highly competitive and includes a large
number of manufacturers, both domestic and foreign, none of which dominates the
market. Certain of the Company's competitors have greater sales volumes and
greater financial resources than the Company. Competitive factors in the upper-
medium price range include style, price, quality, delivery, design, service, and
durability. See "Business -- Competition."

FLUCTUATIONS IN PRICE OF RAW MATERIALS

During the past several years, the furniture industry has experienced
fluctuations in price for lumber, which is the most significant raw material
used by the Company, although there has been a moderation in lumber price
increases during 1995 and 1996. While the industry has historically increased
prices to reflect increased raw materials costs, there can be no assurance that,
if raw material prices increase, market and competitive pressures will permit
the Company or its competitors to increase the prices for their products on a
timely basis. There can be no assurance that the Company will continue to have
available necessary raw materials at reasonable prices. See "Business -- Raw
Materials."

DEPENDENCE ON KEY PERSONNEL

The ability of the Company to achieve its goals will depend largely upon
the management of the Company. Their experience with the Company and within the
industry will continue to be of considerable importance to the Company. The loss
of any of the Company's key personnel or its inability to attract and retain key
employees in the future could have a material adverse effect on the Company. See
"Management."

CONTROLLING STOCKHOLDERS

The Lee Fund and certain affiliates of the Lee Company own 58.3% of the
outstanding Common Stock prior to the Offering and after the Offering will own
35.1% of the outstanding Common Stock (assuming the Underwriter's over-allotment
option is not exercised and the Company purchases all of the shares of Common
Stock subject to the Underwriter's over-allotment option, see "Principal and
Selling Stockholders"). Because two of the directors of the Company are officers
of the Lee Company and the Lee Fund will continue to own a significant portion
of the outstanding Common Stock, the Lee Fund and affiliates of the Lee Company
currently have, and will continue to have after the Offering, the power
effectively to control or influence control of the Company, including in
elections of the Board of Directors and other matters submitted to a vote of the
Company's stockholders, such as extraordinary corporate transactions. The Lee
Fund and such affiliates of the Lee Company may exercise such control from time
to time. See "Principal and Selling Stockholders."

7
<PAGE> 12

SHARES ELIGIBLE FOR FUTURE SALE

The Selling Stockholders have agreed not to sell any shares of Common Stock
other than the shares offered hereby and shares sold to the Company in the event
the Underwriters do not fully exercise their over-allotment option, for a period
of 120 days following the date of this Prospectus without the prior written
consent of Dillon, Read & Co. Inc. Immediately following such 120 day period,
such shares will be eligible for sale in the public market, subject to the
volume and other limitations set forth in Rule 144 under the Securities Act of
1933, as amended. The sale of a substantial number of shares held by existing
stockholders, or the perception that such sales could occur, could adversely
affect the market price of the Common Stock.

GOVERNMENTAL REGULATIONS

The Company is subject to federal, state, and local laws and regulations in
the areas of safety, health, and environmental pollution controls. Compliance
with these regulations has not in the past had any material adverse effect on
the Company's earnings, capital expenditures, or competitive position. If the
Company fails to comply with such regulations, the Company could be subject to
liability ranging from monetary damages to injunctive action, which could
adversely affect the Company. Future changes to such regulations could also have
a material adverse effect on the Company.

Regulations issued in December 1995 under the Clean Air Act Amendments of
1990 may require the Company to reformulate certain furniture finishes or
institute process changes to reduce emissions of hazardous volatile organic
compounds. The furniture industry and its suppliers are attempting to develop
water-based and other forms of compliant finishing materials to replace
commonly-used organic-based finishes that are a major source of regulated
emissions. The Company cannot at this time estimate the impact of these new
standards on the Company's operations and future capital expenditure
requirements, or the cost of compliance. See "Business -- Environmental
Regulation."

ANTI-TAKEOVER PROVISIONS

The Company's Certificate of Incorporation and Bylaws provide for "blank
check" preferred stock, a classified board of directors, and applicability to
the Company of Section 203 of the Delaware General Corporation Law. These
provisions could discourage or make more difficult a merger, tender offer or
proxy contest, even if such events could be beneficial to the interests of
stockholders, and could potentially depress the market price of Common Stock. In
addition, Delaware law permits other such provisions, including stockholder
rights plans, which the Company would generally be able to implement at any time
without stockholder approval. See "Description of Capital Stock -- Certain
Provisions of Certificate of Incorporation and Bylaws."

8
<PAGE> 13

USE OF PROCEEDS

The Common Stock offered hereby is being sold by the Selling Stockholders,
and the Company will not receive any of the proceeds from such sale.

PRICE RANGE OF COMMON STOCK

The Common Stock is traded on Nasdaq under the symbol "STLY." The table
below sets forth the high and low sales prices per share as reported on Nasdaq.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1996
First Quarter.......................................................... $10 3/4 $ 8
Second Quarter......................................................... 12 1/8 10
Third Quarter.......................................................... 17 1/2 10 1/4
Fourth Quarter (through November 12, 1996)............................. 19 1/2 14

FISCAL 1995
First Quarter.......................................................... 9 1/2 7
Second Quarter......................................................... 8 3/8 7
Third Quarter.......................................................... 8 3/4 7
Fourth Quarter......................................................... 9 7 3/4

FISCAL 1994
First Quarter.......................................................... 16 13
Second Quarter......................................................... 15 11
Third Quarter.......................................................... 12 1/2 9
Fourth Quarter......................................................... 10 3/4 9 3/4
</TABLE>

The quotations reflect interdealer prices, without retail mark-up,
mark-down, or commissions, and may not necessarily represent actual
transactions. As of September 29, 1996, there were approximately 1,500
beneficial holders of Common Stock.

DIVIDEND POLICY

The Company currently retains all earnings to finance the growth and
development of its business. However, the Company will continue to evaluate its
dividend policy, and any future payments will depend upon the financial
condition, capital requirements, and earnings of the Company, as well as other
factors that the Board of Directors may deem relevant. The Company's ability to
pay dividends with respect to the Common Stock is restricted, under certain
covenants in loan agreements, to 50% of the Company's consolidated net earnings,
adjusted for any net cash proceeds received by the Company from the sale of its
stock and the amount of any payments for redemption, purchase or other
acquisition of its capital stock (excluding purchases by the Company of not more
than $10 million of Common Stock from the Selling Stockholders as described in
"Principal and Selling Stockholders"), subsequent to January 1, 1994. As of
September 29, 1996, $6,912,000 was available for payment of dividends under
these restrictions.

9
<PAGE> 14

CAPITALIZATION

The following table sets forth the short-term indebtedness and
capitalization of the Company as of September 29, 1996. This table should be
read in conjunction with the Financial Statements including the Notes thereto
and the Interim Financial Statements including the Notes thereto.

<TABLE>
<CAPTION>
SEPTEMBER 29, 1996
------------------
(IN THOUSANDS)
<S> <C>
Current maturities of long-term debt................................ $ 725
==============
Long-term debt:
7.28% senior notes due March 15, 2004.......................... 30,000
7.57% senior note due June 30, 2005............................ 8,625
Revolving credit facility(1)................................... --
7% convertible subordinated debentures due April 1, 2012....... 153
----------
Total long-term debt...................................... 38,778
----------
Stockholders' equity(1)(2):
Common stock, $.02 par value, 10,000,000 shares authorized,
4,729,042 shares issued and outstanding....................... 94
Capital in excess of par value................................. 64,571
Deficit........................................................ (3,755)
----------
Total stockholders' equity................................ 60,910
----------
Total capitalization................................. $ 99,688
==============
</TABLE>

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

(1) If the Underwriters' over-allotment option from the Selling Stockholders is
not exercised in full, the Company has agreed to acquire from the Selling
Stockholders any shares of Common Stock not acquired at the price per share
set forth on the cover page hereof, net of an amount equal to the
underwriting discount that otherwise would have been paid in respect of such
shares of Common Stock. See "Principal and Selling Stockholders." Assuming
an offering price of $16.00 and an underwriting discount of 5.5%, and that
the Underwriters' option is not exercised, the Company will acquire 150,000
shares of Common Stock from the Selling Stockholders for an aggregate
consideration of $2,268,000, which the Company will fund from available cash
and, if necessary, borrowings under its revolving credit facility. The
following pro forma information assumes that the repurchase of Common Stock
is financed entirely by borrowings under the revolving credit facility at an
assumed interest rate of 7%. The pro forma effects on the Company's
financial position assume that the stock was repurchased as of September 29,
1996. The pro forma effects on the Company's operating results for the year
ended December 31, 1995 and the nine months ended September 29, 1996 assume
that the stock was repurchased at the beginning of the respective twelve-
and nine-month periods.

<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
----------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Financial position at September 29, 1996:
Long-term debt including current maturities............... $39,503 $41,771
Stockholders' equity...................................... 60,910 58,642
Operating results, year ended December 31, 1995:
Interest expense.......................................... 3,534 3,693
Net income................................................ 3,889 3,792
Income from continuing operations per common
share -- primary........................................ $ .82 $ .83
Income from continuing operations per common
share -- fully diluted.................................. $ .82 $ .83
Operating results, nine months ended September 29, 1996:
Interest expense.......................................... 2,569 2,688
Net income................................................ 6,147 6,074
Income from continuing operations per common
share -- primary........................................ $ 1.22 $ 1.24
Income from continuing operations per common
share -- fully diluted.................................. $ 1.17 $ 1.19
</TABLE>

The pro forma information does not include estimated expenses of the
Offering of approximately $325,000 to be paid by the Company, which will be
incurred in the fourth quarter of 1996.

(2) Does not include an aggregate of 742,388 shares reserved for issuance
pursuant to the Company's 1992 and 1994 Stock Option Plans and the Executive
Loan Plan.

10
<PAGE> 15

SELECTED FINANCIAL DATA

The following selected financial data for each of the five years in the
period ended December 31, 1995 have been derived from the Company's audited
financial statements. The selected financial data for the nine months ended
September 29, 1996 and October 1, 1995 have been derived from the Company's
unaudited interim financial statements and include all adjustments, consisting
only of normal recurring adjustments, which management considers necessary for a
fair presentation of the financial position and results of operations for such
periods. The selected financial data should be read in conjunction with the
accompanying financial statements, including the notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein. See "Capitalization" for further
information regarding the pro forma effects on the Company's financial
statements if the Underwriters' over-allotment option is not exercised in full.

<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, --------------------------
---------------------------------------------------- OCTOBER 1, SEPTEMBER 29,
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- ---------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales........................ $144,169 $166,501 $167,091 $184,342 $174,179 $127,858 $ 148,023
Cost of sales:
From products sold........... 121,027 132,984 134,972 148,453 137,621 101,612 113,389
Business interruption
insurance(1)............... -- -- (5,036) -- -- -- --
-------- -------- -------- -------- -------- ---------- -------------
Gross profit............ 23,142 33,517 37,155 35,889 36,558 26,246 34,634
Selling, general and
administrative expenses........ 22,877 25,117 25,976 26,483 26,454 19,402 21,973
Unusual items, net (2)........... -- -- -- -- (136) (136) --
Restructuring charge
(credit)(3).................... 14,051 (2,078) -- -- -- -- --
-------- -------- -------- -------- -------- ---------- -------------
Operating income (loss).......... (13,786) 10,478 11,179 9,406 10,240 6,980 12,661
Other expense net................ 1,252 686 1,346 444 433 306 485
Gain on insurance
settlement(4).................. -- -- (2,186) (2,379) -- -- --
Interest expense................. 8,581 7,058 3,048 2,969 3,534 2,622 2,569
-------- -------- -------- -------- -------- ---------- -------------
Income (loss) from continuing
operations before income
taxes...................... (23,619) 2,734 8,971 8,372 6,273 4,052 9,607
Income tax provision (benefit)... (9,088) 1,053 3,691 3,256 2,384 1,541 3,706
-------- -------- -------- -------- -------- ---------- -------------
Income (loss) from continuing
operations................. $(14,531) $ 1,681 $ 5,280 $ 5,116 $ 3,889 $ 2,511 $ 5,901
========= ========= ========= ========= ========= ========= ============
Income from continuing operations
per common share............... $ 0.56 $ 1.39 $ 1.08 $ 0.82 $ 0.53 $ 1.17
========= ========= ========= ========= ========= ============
Weighted average number of
shares, fully diluted(5)(6).... 2,996 3,792 4,725 4,727 4,728 5,052
========= ========= ========= ========= ========= ============
SUPPLEMENTARY INCOME PER COMMON
SHARE DATA:
Income from continuing operations
per common share:
Before non-recurring gain(7)... $ 0.68 $ 0.90 $ 0.77 $ 0.82 $ 0.53 $ 1.17
Non-recurring gain on
insurance.................... -- 0.29 0.31 -- -- --
-------- -------- -------- -------- ---------- -------------
As reported.................. $ 0.68 $ 1.19 $ 1.08 $ 0.82 $ 0.53 $ 1.17
========= ========= ========= ========= ========= ============
Weighted average number of
shares, fully diluted(8)....... 4,725 4,725 4,727 4,727 4,728 5,052
========= ========= ========= ========= ========= ============
OTHER DATA (UNAUDITED):
Operating income as a percentage
of net sales before
restructuring charge
(credit)(9).................... 0.2% 5.0% 6.7% 5.1% 5.9% 5.5% 8.6%
Returns and allowances as a
percentage of net sales........ 1.4% 1.2% 1.3% 1.3% 1.4% 1.3% 1.4%
Finished goods inventory
turns(10)...................... 4.8x 7.1x 7.9x 6.6x 5.2x 5.0x 6.1x
Average days to ship an
order(11)...................... N/A N/A 23.7 18.1 13.7 13.4 16.7
EBITDA(12)....................... $ 4,098 $ 11,823 $ 14,641 $ 13,383 $ 14,726 $ 10,203 $ 16,041
</TABLE>

11
<PAGE> 16

<TABLE>
<CAPTION>
(UNAUDITED)
AT DECEMBER 31, --------------------------
---------------------------------------------------- OCTOBER 1, SEPTEMBER 29,
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash............................. $ 288 $ 649 $ 200 $ 301 $ 298 $ 273 $ 3,705
Inventories...................... 34,355 33,343 37,684 39,905 40,167 41,683 38,805
Working Capital.................. 25,396 34,650 40,833 42,912 42,422 46,435 46,821
Total assets..................... 113,724 114,302 124,859 124,519 134,551 137,302 141,632
Long-term debt including current
maturities..................... 42,021 48,582 32,647 33,395 41, 067 46,284 39,503
Subordinated notes payable to
majority stockholder(5)........ 20,000 -- -- -- -- -- --
Mandatorily redeemable preferred
stock(5)....................... 12,662 -- -- -- -- -- --
Preferred stock(5)............... 15,023 -- -- -- -- -- --
Common stockholders'
equity(5)(6)(13)............... (18,748) 29,959 47,204 50,830 54,739 53,314 60,910
</TABLE>

- ---------------
(1) In 1993, the Company recorded $5.0 million of business interruption
insurance replacing the gross profit on lost sales due to the fire which
occurred in February 1993 at its Stanleytown, Virginia facility. See Note 8
of the Notes to Financial Statements.

(2) In 1995, the Company recognized a pretax credit of $1.1 million after it
was released from a lease obligation at its previously closed Waynesboro,
Virginia manufacturing facility. Also included is a pretax charge for a
severance accrual. See Note 4 of the Notes to Financial Statements.

(3) In 1991, the Company recorded pretax charges of $14.1 million in
anticipation of the closing of the Waynesboro, Virginia facility to
eliminate excess capacity and the transfer of certain product lines to
other manufacturing facilities. Operating income for 1992 includes a
restructuring credit of $2.1 million from lower than anticipated costs of
closing the Waynesboro facility.

(4) In 1993, a $2.2 million pretax gain was recorded since proceeds exceeded
the book value of leasehold improvements and equipment destroyed in the
fire. Also, in 1994, the Company recorded a pretax gain of $2.4 million as
part of the final insurance settlement. See Note 8 of the Notes to
Financial Statements.

(5) In 1992, the Company completed a financial restructuring which resulted in
the exchange of certain long-term debt and preferred stock for common
stock.

(6) In July 1993, the Company completed a public offering of 1,725,000 shares
of common stock at $8.50 per share. The net proceeds of $13.1 million were
used to reduce debt. Primary per share information is the same for all
periods presented except for the nine months ended September 29, 1996. For
this period, primary weighted average common shares were 4,848,000 and
primary income from continuing operations per common share before gain on
insurance settlement, net of income taxes was $1.22.

(7) Income from continuing operations before insurance related gains was $4.3
million in 1993 and $3.7 million in 1994.

(8) The 1992 and 1993 periods include the effect of pro forma adjustments for
the July 1993 public offering of 1,725,000 shares of Common Stock, assuming
the 1993 public offering occurred at the beginning of each year.

(9) The increase in operating income as a percentage of net sales for 1993 was
due principally to the recognition of $5.0 million of business interruption
insurance without the related sales revenue.

(10) Based on consistent Company practice of averaging monthly inventory
balances and annualizing shipments for the periods shown.

12
<PAGE> 17

(11) Based upon calendar days, with no weighting of orders based on dollar
value, since average days to ship an order is a service measurement. Orders
are excluded from this measurement if a customer requests a delay or if the
customer's credit status will not permit shipment, and for new product
introductions for the first six months of their life cycle. The Company
began tracking this data in 1993 and this information is not available for
1991 and 1992.

(12) EBITDA is defined as income from continuing operations before interest,
taxes, depreciation, and amortization. The Company believes that EBITDA
provides useful information regarding a company's financial performance.
EBITDA should not be considered in isolation, or as an alternative to net
income as an indicator of the Company's operating performance, or as an
alternative to the Company's cash flow from operating activities as a
measure of liquidity. EBITDA amounts do not include gain on insurance
settlement for 1993 and 1994 nor do they include restructuring charges or
credits for 1991 and 1992.

(13) No dividends have been paid on the Common Stock during any of the years
presented.

13
<PAGE> 18

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

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

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
FOR THE YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, ----------------------------
------------------------- OCTOBER 1, SEPTEMBER 29,
1993 1994 1995 1995 1996
----- ----- ----- ---------- -------------
<S> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales:
From products sold....................... 80.8 80.5 79.0 79.5 76.6
Income from business interruption
insurance............................. (3.0) -- -- -- --
----- ----- ----- ---------- ------
Gross profit.......................... 22.2 19.5 21.0 20.5 23.4
Selling, general and administrative
expenses................................. 15.6 14.4 15.2 15.2 14.8
Unusual items, net......................... -- -- (0.1) (0.1) --
----- ----- ----- ---------- ------
Operating income......................... 6.7 5.1 5.9 5.5 8.6
Other expenses, net........................ 0.8 0.2 0.2 0.2 0.3
Gain on insurance settlement............... (1.3) (1.3) -- -- --
Interest expense........................... 1.8 1.6 2.0 2.1 1.7
----- ----- ----- ---------- ------
Income from continuing operations before
income taxes............................. 5.4 4.5 3.6 3.2 6.5
Income taxes............................... 2.2 1.8 1.4 1.2 2.5
----- ----- ----- ---------- ------
Income from continuing operations.......... 3.2% 2.8% 2.2% 2.0% 4.0%
===== ===== ===== ======= ==========
</TABLE>

Three and Nine Months Ended September 29, 1996 Compared to Three and
Nine Months Ended October 1, 1995

Net sales increased $7.8 million, or 17.5%, for the three-month period
ended September 29, 1996 from the comparable 1995 period. For the nine-month
period, net sales increased $20.2 million, or 15.8%, from the comparable 1995
period. The increases were due principally to higher unit volume and to a lesser
extent higher average selling prices.

Gross profit margin for the three- and nine-month periods of 1996 increased
to 24.3% and 23.4%, respectively, from 20.3% and 20.5% for the comparable 1995
periods. The higher gross profit margin was due primarily to stabilizing raw
material costs, improved operating efficiencies, and the leveraging of fixed
costs due to increased production levels.

Selling, general and administrative expenses increased for the 1996 periods
due to (i) higher selling cost resulting from increased sales and increased
merchandising expenses, (ii) increased compensation expense pursuant to the
Company's incentive compensation plan for key employees, and (iii) increased
provision for bad debts. For the three-month period, these expenses as a
percentage of net sales increased to 14.5% from 14.2% for the comparable 1995
period. For the nine-month period, these expenses as a percentage of net sales
decreased to 14.8% from 15.2% for the comparable 1995 period, due principally to
higher net sales.

During the second quarter of 1995, the Company recognized an unusual item
consisting of the net effect of (i) an accrual reversal as a result of being
released from a lease obligation at its previously closed Waynesboro, Virginia
facility and (ii) a charge for severance resulting from the resignation of the
Company's former chief operating officer.

As a result of the above, operating income for the three- and nine-month
periods of 1996 increased to $5.2 million, or 9.8% of net sales, and $12.7
million, or 8.6% of net sales, respectively, from $2.7 million, or 6.1% of net
sales, and $7.0 million, or 5.5% of net sales, for the comparable 1995 periods.

14
<PAGE> 19

Interest expense for both the three- and nine-month periods of 1996
decreased due to lower debt levels.

The Company's effective income tax rate was 38.6% and 38.0% for the
nine-month periods of 1996 and 1995, respectively.

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

Net sales decreased $10.2 million, or 5.5%, from 1994 levels due
principally to lower unit volume, partially offset by the additional volume from
the upholstered products and higher average selling prices.

Gross profit margin increased to 21.0% in 1995 from 19.5% in 1994. The
higher gross profit margin was due principally to increased prices, a moderation
in lumber cost increases, a more favorable product mix and the favorable impact
from the purchase of the previously leased manufacturing facilities discussed in
Note 2 of the Notes to Financial Statements. The increase in gross profit was
slightly offset by an increased overhead absorption rate resulting from lower
output levels in 1995.

Selling, general and administrative expenses were approximately the same
for both years. However, as a percentage of net sales, these expenses increased
to 15.2% in 1995 from 14.4% in 1994. The higher percentage was due principally
to lower net sales and increased selling cost associated with new products.

As a result of the above, operating income increased to $10.2 million, or
5.9% of net sales, in 1995 from $9.4 million, or 5.1% of net sales, in 1994. The
Company estimates that upholstery operations reduced operating income by
approximately $1.0 million for both 1995 and 1994.

Interest expense for 1995 increased due principally to higher debt levels,
resulting from the purchase of two previously leased manufacturing facilities in
June 1995 and also due to slightly higher interest rates.

The Company's effective tax rate in 1995 decreased to 38.0% from 38.9% in
1994. The lower tax rate in 1995 is principally due to an increase in
non-taxable income and increased benefits from export sales.

Year Ended December 31, 1994 Compared to Year Ended December 31, 1993

Net sales increased $17.3 million, or 10.3%, from 1993 levels due
principally to higher average selling prices and higher unit volume. Lower unit
volume in the 1993 period was due principally to the disruption in production
caused by the 1993 fire at the Stanleytown, Virginia facility.

Gross profit margin decreased to 19.5% in 1994 from 22.2% in 1993. The
higher gross profit percentage for 1993 was due principally to the recognition
of $5.0 million of business interruption insurance without the related sales
revenue. This $5.0 million represented the estimated settlement proceeds for
gross profits lost and other direct costs related to lost sales from the
Stanleytown fire.

Selling, general and administrative expenses as a percentage of net sales
were 14.4% and 15.5% for 1994 and 1993, respectively. The lower percentage was
due principally to an increase in net sales and containment of cost.

As a result of the above, operating income for 1994 decreased to $9.4
million, or 5.1% of net sales, from $11.2 million, or 6.7% of net sales, in
1993. Operating income was reduced by upholstery startup costs of approximately
$1.0 million in 1994.

In 1994, the Company reached a final insurance settlement on the 1993 fire
and recorded a pretax gain of $2.4 million.

Interest expense approximated the 1993 period due principally to lower
average debt levels, which was offset by higher interest rates.

The Company's effective income tax rate decreased to 38.9% in 1994 from
41.1% in 1993. The higher 1993 rate was due principally to the effect of the 1%
federal statutory rate increase on the prior years' deferred tax balances.

15
<PAGE> 20

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES

During August 1995, the Company amended its $25.0 million revolving credit
facility which extended its maturity date to August 1998. The interest rate
under the facility was reduced to prime (8.25% on September 29, 1996) or, at the
Company's option, equal to reserve adjusted LIBOR plus 1.0% per annum. In June
1995, the Company issued a $10.0 million 7.57% senior note due 2005 in a private
placement of debt, and the proceeds were used to purchase two previously leased
manufacturing facilities. In February 1994, the Company completed the private
placement of $30.0 million of 7.28% senior notes due 2004. The proceeds from the
senior notes were used to repay an existing term note and a portion of the
revolving credit facility.

At September 29, 1996, long-term debt was $38.8 million, and approximately
$23.0 million of additional borrowing capacity was available under the revolving
credit facility. Annual debt service requirements are $878,000 in 1997, $5.1
million in both 1998 and 1999 and $5.2 million in both 2000 and 2001. The
Company expects capital expenditures for the next twelve months to range from $4
million to $5 million. The Company believes that its financial resources are
adequate to support its capital needs and debt service requirements.

OPERATING CASH FLOWS

The Company generated cash from operations of $7.4 million in the 1996
nine-month period principally as a result of higher sales. The Company used $4.0
million of the cash generated in the 1996 nine-month period primarily to fund
capital expenditures and reduce borrowings. Cash provided from the Company's
operations during the 1995 nine-month period was used substantially to fund its
operating activities for that period. For the 1995 nine-month period, compared
to the prior year period, cash was required for higher interest payments offset
by lower tax payments and less cash paid to suppliers and employees due to
reduced inventory levels.

During 1995, cash generated from operations of $6.6 million was used to
reduce borrowings under the revolving credit facility and to fund capital
expenditures in the normal course of business. The increase in cash generated
from operations was due principally to lower tax payments of $1.0 million in
1995 compared to $4.5 million in 1994. Tax payments were higher in 1994
principally due to the timing of installment payments for 1993, resulting from
the utilization of net operating losses carried forward from 1992. Also, refunds
attributed to 1994 reduced tax payments for 1995. Cash generated from operations
also increased as a result of less cash paid to suppliers and employees due to
reduced production levels. During 1994, cash provided by operations of $4.1
million and net borrowings of $1.2 million were used to fund capital
expenditures. Cash generated from operations in 1993 of $6.5 million was used to
fund capital expenditures and to reduce borrowings under the senior credit
facility.

Operating cash flows in both 1994 and 1993 include proceeds of $4.6 and
$23.2 million, respectively, received from insurance in connection with the fire
that occurred in February 1993 at the Company's Stanleytown, Virginia facility.
Cash paid to suppliers in 1994 and 1993 included costs of $2.7 million and $25.2
million, respectively, incurred in connection with the fire. Excluding the
effect of the fire, cash was required in the 1994 period to support higher
accounts receivable requirements reflecting higher sales levels, higher payments
to suppliers and employees as a result of higher production levels and higher
tax payments as discussed above. These higher payments in the 1994 period were
partially offset by lower interest payments due principally to lower debt
levels. Excluding the cash flow impact from the fire, cash provided by operating
activities improved $12.1 million in 1993 principally from higher customer
receipts, lower payments for the restructuring program instituted and accrued
for in 1991, and lower interest payments.

INVESTING ACTIVITIES

Net cash used by investing activities was $2.9 million in the 1996
nine-month period compared to $13.3 million in the 1995 nine-month period. In
the 1995 nine-month period, proceeds from the issuance of senior notes and
additional borrowings from the revolving credit facility were used to purchase
two previously leased plant facilities for $10.5 million. The 1996 expenditures
and the remaining expenditures for 1995 were primarily for plant and equipment
and other assets in the normal course of business.

Net cash used by investing activities was $14.7 million in 1995 compared to
$5.2 million and $4.3 million in 1994 and 1993, respectively. As noted above,
proceeds of $10.0 million from the senior note and additional

16
<PAGE> 21

borrowings from the revolving credit facility were used to purchase $10.5
million of previously leased manufacturing facilities. Expenditures in the 1994
period include the purchase of equipment and other capital expenditures for the
new upholstery operation of approximately $727,000. Except for fire related
expenditures in 1993, which were reimbursed by insurance, and the manufacturing
facilities purchased in 1995, expenditures in each year were primarily for plant
and equipment, and other assets in the normal course of business.

FINANCING ACTIVITIES

Net cash used by financing activities was $1.1 million in the 1996
nine-month period compared to cash provided by financing activities of $13.3
million in the 1995 nine-month period. The 1995 borrowings provided cash for the
purchase of the two previously leased plant facilities and other capital
expenditures.

Net cash provided by financing activities was $8.1 million in 1995 compared
to net cash provided by financing activities of $1.2 million in 1994 and cash
used by financing activities of $2.7 million in 1993. Cash provided by financing
activities in the 1994 period was used to fund capital expenditures. In 1993,
cash provided by the public offering ($13.1 million) and from operations enabled
the Company to redeem $3.1 million of outstanding senior subordinated debentures
and to reduce borrowings under the senior credit facility by $12.8 million.

DISCONTINUED OPERATIONS

Beginning in 1991, the Norman's of Salisbury fabric division ("Norman's")
was reflected as a discontinued operation. In 1994, the Company ceased
operations at Norman's and liquidated the division resulting in a $2.8 million
($4.5 million pretax) additional loss provision. On July 1, 1996, the Company
was released from a lease obligation resulting from the purchase and concurrent
resale of certain facilities at its former Norman's division. This obligation
was accrued as part of the 1994 charge to discontinued operations. Accordingly,
in the third quarter, the Company recorded an after tax gain of $246,000, or
$.05 per share, as a partial reversal of this accrual.

NEW ACCOUNTING STANDARD

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 requires a fair value based method of
accounting for stock based compensation, and provides an option to the Company
either to recognize compensation expense for employee stock based compensation
or to provide pro forma earnings information as if such compensation cost had
been recognized. The Company has not determined which election it will make
under SFAS 123, nor the various assumptions that will be used in the fair value
calculations. Under either method the effect on net income for the nine-month
period ended September 29, 1996 is not material, since options to purchase only
7,500 shares were granted during the period.

17
<PAGE> 22

BUSINESS

GENERAL

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

The furniture industry, which includes more than 600 furniture
manufacturers, serves a large consumer market in the U.S. with $19 billion in
total shipments in 1995, according to the American Furniture Manufacturers
Association. The Company is the fifteenth largest furniture manufacturer in
North America based on 1995 sales, according to Furniture/Today, a trade
publication. The Company believes that current demographic trends are favorable
for continued growth in the upper-medium price range. During the 1990s, the
aging of the U.S. "baby boom" generation is projected to result in an increase
of approximately 30% in households headed by people aged 35-54. Additionally,
children of the "baby boom" generation are expected to contribute to growth in
sales of youth furniture. Management expects that the Company will benefit from
these trends and the tendency of older, more affluent consumers to focus the
majority of their furniture expenditures on products in the medium to high price
ranges.

BUSINESS STRATEGY AND COMPETITIVE ADVANTAGES

DIVERSIFIED PRODUCT LINES. The Company's product lines cover all major
design categories and include bedroom, dining room, youth (Young America(TM)),
living room tables, entertainment centers, home office (The Office(TM)), and
upholstery. The Company believes that the diversity of its product lines enables
it to anticipate and respond quickly to changing consumer preferences and
provides retailers a complete furniture resource in the upper-medium price
range. The Company has recently expanded its styles in youth and home office
furniture to respond to growing consumer demand for these products. The Company
intends to continue expanding its product styles with particular emphasis on
upholstery, home office, and entertainment centers. The Company believes that
its products represent good value and that the quality and style of its
furniture compare favorably with more premium-priced products. To emphasize this
comparison the Company uses the marketing theme, "We Just Look Expensive."

BROAD DISTRIBUTION NETWORK. The Company has developed a diverse and
extensive customer base that provides the Company with access to a variety of
markets and flexibility to adapt to market changes. The Company believes this
broad distribution network reduces its exposure to regional recessions. The
Company sells its furniture domestically through approximately 60 independent
sales representatives to independent furniture retailers and national and
regional chain stores. Representative customers include Sears, J.C. Penney,
Homestead House, Huffman Koos, Robb & Stucky, Nebraska Furniture Mart,
Furnitureland South, and Haverty's. In addition, the Company has recently
increased its emphasis on international distribution. Approximately 7% of the
Company's sales in 1995 and during the first nine months of 1996 were to
international customers. The Company has sold to over 3,600 customers during the
past twelve months, and no single customer accounted for more than ten percent
of sales. The Company intends to continue to pursue

18
<PAGE> 23

all channels of distribution compatible with its products and price range with
particular emphasis on national and regional chains and international outlets.

EFFICIENT MANUFACTURING OPERATIONS. The Company's operating strategy is to
continuously improve customer responsiveness, quality, and operating efficiency.
The Company's manufacturing processes, which support its product and
distribution strategy, focus on quick delivery while minimizing inventory levels
and improving quality by producing smaller, more frequent, and cost-effective
production runs. As a result, the Company shipped customer orders within 13.7
days on average during 1995 and 16.7 days in the first nine months of 1996, with
average finished goods inventory turns of 5.2 and 6.1 times, respectively. The
Company believes its ability to deliver its products within these time frames,
while maintaining a high level of inventory turnover, is superior to that of its
competitors. In addition, the Company believes its quality performance
consistently outperforms the industry when measured by returns and allowances as
reported by the American Furniture Manufacturers Association. Customer returns
and allowances were 1.4% of net sales in 1995 compared to the industry average
of 2.7%. Consistent with the Company's philosophy of providing its customers
with a competitive advantage, the Company's quick delivery reduces its
customers' inventory investment and price markdowns, and the high quality of the
Company's products minimizes its customers' redelivery costs.

PRODUCTS AND STYLES

The Company's diverse product lines and styles provide retailers a complete
furniture resource for the purchase of upper-medium priced furniture and enables
the Company to respond quickly to changing consumer preferences.

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

<TABLE>
<CAPTION>
NUMBER OF STYLES
----------------
<S> <C>
Bedroom.............................................................. 30
Dining room.......................................................... 28
Youth bedroom (Young America(TM)).................................... 19
Occasional:
Living room tables.............................................. 28
Entertainment centers........................................... 18
Home office (The Office(TM)).................................... 8
</TABLE>

These product lines cover all major design categories including European
traditional, contemporary/ transitional, Mission/Shaker, 18th Century, and
country/nostalgia designs.

The Company introduced upholstered furniture products in the fall of 1994,
allowing the Company to expand its product offerings in the upper-medium price
range. The Company's entry into the upholstery business takes advantage of its
existing distribution network without making a significant capital investment.
The Company's upholstered products consist mainly of stationary sofas, sleepers,
love seats, and chairs. In 1995, the Company expanded its upholstered products
and currently offers a variety of frames and approximately 450 fabric
selections.

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

19
<PAGE> 24

DISTRIBUTION

The Company has developed a varied and extensive customer base that
provides it with access to a variety of markets and the flexibility to adapt to
market changes. The Company believes this broad network reduces its exposure to
regional recessions. The Company sells its furniture domestically through
approximately 60 independent sales representatives to independent furniture
retailers and national and regional chain stores. In marketing its products to
independent retailers, the Company utilizes a promotional incentive sales
program, the "Stanley Preferred Retailer." There are more than 500 Stanley
Preferred Retailers, which account for approximately half of the Company's
sales. This program is designed to encourage independent retailers to commit
retail floor space to the Company's products. The Stanley Preferred Retailer
program is designed to be flexible and is adapted to the merchandising and
marketing plans of retailers by accommodating geographic, style, and promotional
preferences. To participate, a retailer must commit a specified amount of floor
space to the Company's products and achieve specified sales volumes. In return
the participating retailer receives product discounts during promotional periods
and merchandising materials, among other incentives.

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

No single customer accounted for more than ten percent of the Company's
sales in 1995. No material part of the Company's business is dependent upon a
single customer, the loss of which would have a material effect on the business
of the Company. The loss of several of the Company's major customers could have
a material impact on the business of the Company.

MANUFACTURING

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

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

The Company schedules production of its various styles based upon actual
and anticipated orders. The Company's manufacturing processes enable it to fill
orders through manufacturing rather than inventory. Since the Company ships
customer orders on average in less than three weeks, management believes that
the size of its backlog is not necessarily indicative of its long-term
operations. The Company's backlog of unshipped orders was $22.9 million at
September 29, 1996 compared to $15.5 million at October 1, 1995.

RAW MATERIALS

The principal materials used by the Company in manufacturing its products
include lumber, veneers, plywood, particle board, hardware, glue, finishing
materials, glass products, laminates, fabrics, metals, frames, filling, and
cushioning materials. The Company uses a variety of species of lumber, including
cherry, oak, ash, poplar, pine, maple, and mahogany. The Company's five largest
suppliers accounted for approximately 22% of

20
<PAGE> 25

its purchases in 1995. The Company believes that its sources of supply for these
materials are adequate and that it is not dependent on any one supplier.

COMPETITION

The Company is the fifteenth largest out of more than 600 furniture
manufacturers in North America based on 1995 sales, according to
Furniture/Today, a trade publication. The furniture industry is highly
competitive and includes a large number of foreign and domestic manufacturers,
none of which dominates the market. The markets in which the Company competes
include a large number of relatively small manufacturers; however, certain
competitors of the Company have greater sales volumes and greater financial
resources than the Company. Competitive factors in the upper-medium price range
include style, price, quality, delivery, design, service, and durability. The
Company believes that its manufacturing processes, its long-standing customer
relationships and customer responsiveness, its consistent support of existing
diverse product lines that are high quality and good value, and its experienced
management are competitive advantages.

ASSOCIATES

At September 29, 1996, the Company employed approximately 2,700 associates.
None of the Company's associates is represented by a labor union. The Company
considers its relations with its associates to be good.

PATENTS AND TRADEMARKS

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

GOVERNMENTAL REGULATIONS

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

21
<PAGE> 26

PROPERTIES

Set forth below is certain information with respect to the Company's
principal properties. The Company believes that all these properties are
well-maintained and in good condition. The Company believes its manufacturing
facilities are being efficiently utilized and that it could increase production
at its facilities if required by customer demand. Each facility is focused on
specific product lines to optimize efficiency. The Company estimates that its
facilities are presently operating at approximately 85% of capacity, principally
on a one-shift basis. All Company plants are equipped with automatic sprinkler
systems and modern fire protection equipment, which management believes are
adequate. All facilities set forth below are active and operational.

<TABLE>
<CAPTION>
APPROXIMATE
FACILITY SIZE OWNED OR
LOCATION PRIMARY USE (SQUARE FEET) LEASED
------------------ ----------------------- ------------- ---------
<S> <C> <C> <C>
Stanleytown, VA Manufacturing 1,660,000 Owned(1)
Corporate Headquarters 61,000 Owned(1)
West End, NC Manufacturing 470,000 Owned(1)
West End, NC Lumber Yard Leased(2)
Lexington, NC Manufacturing 635,000 Owned
Robbinsville, NC Manufacturing 540,000 Owned
</TABLE>

- ---------------
(1) These facilities were leased through June 1995 at which time the Company
purchased these facilities. See Note 2 of the Notes to Financial Statements.

(2) Lease expires May 31, 2007.

The Company also leases and maintains approximately 60,000 square feet
(approximately 8,000 square feet is subleased) of showroom space in High Point,
North Carolina and 7,000 square feet of showroom space in San Francisco,
California.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The Company's executive officers and directors, their ages and years with
the Company as of September 29, 1996 are as follows:

<TABLE>
<CAPTION>
YEARS WITH
NAME AGE POSITION COMPANY
-------------------------------- --- ------------------------------------- ----------
<S> <C> <C> <C>
Albert L. Prillaman............. 50 Chairman, President, Chief Executive 27
Officer and Director
C. William Cubberley, Jr........ 56 Senior Vice President -- Sales and 11
Marketing
Bobby I. Hodges................. 59 Senior Vice 29
President -- Manufacturing
Douglas I. Payne................ 38 Vice President of Finance, Treasurer 13
and Secretary
William A. Sibbick.............. 40 Vice President -- Product Development 7
and Merchandising
Joe G. Bost..................... 49 Vice President -- Upholstery 3
C. Hunter Boll.................. 41 Director 8
David V. Harkins................ 55 Director 8
Edward J. Mack.................. 80 Director 7
</TABLE>

ALBERT L. PRILLAMAN has been a Director of the Company since March 1986,
President and Chief Executive Officer of the Company since December 1985 and
Chairman of the Board of Directors since September 1988, and his present term as
a director will expire in 1997. Prior thereto, Mr. Prillaman had served as a
Vice President of the Company and President of the Stanley Furniture division of
the Company's predecessor since 1983, and in various executive and other
capacities with the Stanley Furniture division of the predecessors of the
Company since 1969. Mr. Prillaman is a director of Main Street Bank Group
Incorporated.

22
<PAGE> 27

C. WILLIAM CUBBERLEY, JR. has been Senior Vice President -- Sales and
Marketing of the Company since April 1995. He has been a Vice President of the
Company since December 1990 and Senior Vice President -- Sales and Marketing of
the Stanley Furniture division since October 1988. Mr. Cubberley was Senior Vice
President -- Sales of the Stanley Furniture division from January 1986 to
October 1988, when he became Senior Vice President -- Sales and Marketing of the
Stanley Furniture division.

BOBBY I. HODGES has been Senior Vice President -- Manufacturing of the
Company since April 1995. He has been a Vice President since June 1993. He was
Senior Vice President -- Manufacturing of the Stanley Furniture division from
January 1986 until June 1993. He was Vice President -- Manufacturing of the
Stanley Furniture division from December 1983 until January 1986. Prior to that
time, Mr. Hodges was employed by the Company in various positions related to
manufacturing management.

DOUGLAS I. PAYNE has been Vice President of Finance and Treasurer of the
Company since September 1993. He was Vice President -- Treasurer of the Company
from December 1989 to September 1993. He was Treasurer of the Company from June
1986 to December 1989. He was Assistant Treasurer of the Company from August
1985 to June 1986. Mr. Payne has been Secretary of the Company since September
1988.

WILLIAM A. SIBBICK has been Vice President -- Product Development and
Merchandising since April 1995. He was Vice President -- Product Development
from June 1993 until April 1995. He was Vice President -- Senior Product Manager
of the Stanley Furniture division from January 1992 until June 1993. Prior to
that time, he had been Vice President -- Product Manager since his employment in
March 1989.

JOE G. BOST has been Vice President -- Upholstery since April 1995. He was
President of the Company's Norman's of Salisbury division since his employment
in January 1993 until April 1995. Prior to joining the Company, Mr. Bost was
Senior Vice -- President of Sales, Marketing, Administration and Manufacturing
of Hickorycraft, Inc., a manufacturer of upholstery and occasional tables, a
position he held since 1987.

C. HUNTER BOLL has been a Director of the Company since September 1988, and
his present term will expire in 1999. Mr. Boll is a Managing Director of the Lee
Company, a sole proprietorship engaged in acquiring or making controlling
investments in established operating companies. Mr. Boll is also Vice President
of Thomas H. Lee Advisors I, Inc., a Massachusetts business trust ("THL Advisors
I"), which is responsible for the identification of investments made by the Lee
Fund. Mr. Boll is also a Vice President of T. H. Lee Mezzanine II ("Mezzanine
II"), which is the general partner of Thomas H. Lee Advisors II, L.P., a
Delaware limited partnership ("THL Advisors II"), which is responsible for the
identification of investments made by the ML-Lee Acquisition Fund II, L.P. and
the ML-Lee Acquisition Fund II (Retirement Accounts), L.P., both Delaware
limited partnerships (together the "Lee Fund II"). THL Advisors I and THL
Advisors II also perform managerial functions for the Lee Fund and Lee Fund II,
respectively, of the type usually carried out by an investment advisor to a
business development company. From 1984 to 1986, Mr. Boll was a consultant with
The Boston Consulting Group, which renders general business consulting services.
He is a director of Petco Holding Corp.

DAVID V. HARKINS has been a Director of the Company since September 1988,
and his present term will expire in 1997. He is a Senior Managing Director of
the Lee Company. Mr. Harkins is also Senior Vice President and a Trustee of THL
Advisors I. Mr. Harkins is also Senior Vice President of Mezzanine II. Mr.
Harkins is chairman of National Dentex Corporation and also a director of First
Alert, Inc. and HomeSide, Inc.

EDWARD J. MACK has been a Director of the Company since January 17, 1989,
and his present term will expire in 1998. From 1948 to 1981 Mr. Mack served in
various capacities with Burlington Industries, Inc., including director and
Executive Vice President with responsibility for Burlington's furniture
operations. He has been an independent consultant, primarily with Burlington
Industries, Inc., and President of Global Business Services, LTD, an
international trading company for more than five years.

Officers are elected to serve until the next annual meeting of the Board of
Directors, until their successors have been elected and qualified, and serve at
the pleasure of the Board of Directors, subject to any applicable employment
agreements. Directors serve until their successors have been elected and
qualified. Mr. Mack

23
<PAGE> 28

receives compensation for serving as a Director at the rate of $15,000 per year.
Neither the Lee Company representatives nor the management Directors receive any
separate compensation for serving in that capacity. Messrs. Boll and Harkins are
expected to continue to serve as Directors of the Company. Before the 1997
annual meeting, the Company anticipates that the Board of Directors will be
expanded to include one or more additional Directors.

EMPLOYMENT AGREEMENTS. Mr. Prillaman has an employment agreement with the
Company that provides that he has the duties of President, Chief Executive
Officer and Chairman of the Board of Directors of the Company at a base salary
of at least $275,000 per year, subject to annual upward adjustment by the Board.
Mr. Prillaman is also entitled to a graduated bonus amount up to a maximum of
80% of his then current base salary, contingent upon the achievement of certain
threshold profit objectives to be determined by the Board at the beginning of
each fiscal year. The agreement is automatically extended for an additional one
year term at the end of each year unless either party to the agreement gives
notice on or before November 1 of any year that the agreement will not be
extended. In the event of such notice, employment terminates as of December 31
of the year in which such notice is given and Mr. Prillaman is entitled to
severance pay during the two years following termination in an amount equal to
his base salary plus the average of bonuses paid for the three fiscal years
preceding the year in which notice of termination is given. Mr. Prillaman is
entitled to receive the total severance pay in a single payment in the event a
change in control (as defined in the agreement) occurs. During the two years
after such a change of control, Mr. Prillaman is entitled to terminate his
employment with the Company and receive such severance pay in a single payment.
The sale of the shares of Common Stock being offered hereby does not constitute
a change of control under Mr. Prillaman's employment agreement. The agreement
provides that Mr. Prillaman will not compete with the Company for two years
after termination of the employment agreement, except that this non-competition
covenant does not apply if (i) Mr. Prillaman terminates his employment within
two years after a change of control or (ii) Mr. Prillaman voluntarily terminates
his employment and the Company does not elect to pay severance to Mr. Prillaman.

In addition, the Company has entered into an employment agreement with C.
William Cubberley, Jr., Senior Vice President -- Sales and Marketing of the
Company, on similar terms as those discussed above with respect to Mr.
Prillaman, except that Mr. Cubberley serves as a Vice President, his base salary
is at least $170,000, and he is entitled to receive a graduated bonus amount up
to a maximum of 60% of his base salary in effect from time to time.

In addition, the Company has entered into an employment agreement with
Douglas I. Payne, Vice President of Finance, Treasurer and Secretary of the
Company, on similar terms as those discussed above with respect to Mr.
Prillaman, except that Mr. Payne serves as Vice President of Finance, Treasurer
and Secretary, his base salary is at least $136,000, and he is entitled to
receive a potential annual bonus of $50,000, subject to upward adjustment.

24
<PAGE> 29

PRINCIPAL AND SELLING STOCKHOLDERS

INFORMATION REGARDING THE SELLING STOCKHOLDERS

The following table sets forth information with respect to the beneficial
ownership of shares of Common Stock as of September 29, 1996, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby by the Selling
Stockholders.

<TABLE>
<CAPTION>
NUMBER OF PERCENT OF CLASS
NUMBER OF SHARES OWNED --------------------
NUMBER OF SHARES AFTER PRIOR TO AFTER
NAME OF SELLING STOCKHOLDER SHARES OWNED TO BE SOLD(1) OFFERING OFFERING OFFERING
- ------------------------------------- ------------ ------------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
ML-Lee Acquisition Fund, L.P......... 2,675,552 1,115,256 1,560,296 56.6% 34.1%(2)
ML-Lee Acquisition Fund II, L.P...... 23,105 9,631 13,474 (3) (3)
ML-Lee Acquisition Fund (Retirement
Accounts) II, L.P.................. 18,511 7,716 10,795 (3) (3)
C. Hunter Boll(4).................... 774 323 451 (3) (3)
John W. Childs(4).................... 1,936 807 1,129 (3) (3)
David V. Harkins(4).................. 1,291 538 753 (3) (3)
David V. Harkins C/F Jessica
Harkins............................ 1,000 417 583 (3) (3)
David V. Harkins C/F Jason Harkins... 1,000 417 583 (3) (3)
State Street Bank & Trust Trustee
1989 Thomas H. Lee Nominee Trust... 30,409 12,675 17,734 (3) (3)
Glenn H. Hutchins(4)................. 1,291 538 753 (3) (3)
Scott A. Schoen(4)................... 774 323 451 (3) (3)
Thomas R. Shepherd(4)................ 645 269 376 (3) (3)
Paxman & Co.......................... 1,614 673 941 (3) (3)
Anthony J. DiNovi.................... 1,000 417 583 (3) (3)
</TABLE>

- ---------------
(1) Gives effect to the purchase of shares of Common Stock subject to the
Underwriters' over-allotment option, either pursuant to such option or the
Repurchase Agreement discussed below.

(2) Assumes the Underwriters' over-allotment option is not exercised and the
Company purchases all shares of Common Stock subject to the Underwriters'
over-allotment option. In the event the Underwriters' over-allotment option
is exercised in full, the percent ownership of the class after the Offering
would be 33.0%.

(3) Less than 1%.

(4) Does not include 774 shares in the case of Mr. Boll, 1,936 shares in the
case of Mr. Childs, 1,290 shares in the case of Mr. Harkins, 1,291 shares in
the case of Mr. Hutchins, 774 shares in the case of Mr. Schoen, and 645
shares in the case of Mr. Shepherd which these Selling Stockholders have the
right to purchase from the 1989 Thomas H. Lee Nominee Trust (the "Trust").

The Company has entered into a stock purchase agreement (the "Repurchase
Agreement") with the Selling Stockholders to purchase from them any shares of
Common Stock subject to the Underwriters' over-allotment option, in the event
the Underwriters do not fully exercise such over-allotment option. In such
event, the price to be paid by the Company to the Selling Stockholders in
connection with any such repurchase will equal the price to the public net of an
amount equal to the underwriting discount that otherwise would have been paid in
respect of such shares. Any such repurchase would occur promptly following the
expiration of the Underwriters' 30-day over-allotment option.

The Company is a party to a Management Agreement, pursuant to which the
Company's predecessors engaged the Lee Company for the purposes of providing
them with substantial consulting services and management advisory services. The
services under this Management Agreement have been in the field of financial and
strategic corporate planning and such other management areas as the parties
mutually agree. These services have included advice concerning strategic
corporate planning, potential acquisitions and financial planning. The term of
this Management Agreement began on September 29, 1988 and will expire upon the
earlier to occur of (i) the sale of all of the shares of Common Stock
beneficially owned by the Selling

25
<PAGE> 30

Stockholders or (ii) September 30, 1998. In consideration for the services
provided by the Lee Company under the Management Agreement, the Company pays the
Lee Company $250,000 annually; however, upon completion of the Offering this
amount will be reduced to $180,000. Management did not obtain bids from third
parties for similar services before the Company entered into the Management
Agreement.

The Company, the Lee Fund, certain affiliates of the Lee Company and
certain members of the Company's management are parties to a Registration Rights
Agreement dated as of November 9, 1992. Pursuant to the terms of this agreement,
the Company has agreed to pay all expenses in connection with the Offering and
has agreed to indemnify the parties thereto against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act").

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 29, 1996, by
each stockholder known by the Company to be the beneficial owner of more than 5%
of its outstanding Common Stock, by each director, by each of the named
executive officers and by all directors and executive officers as a group:

<TABLE>
<CAPTION>
PERCENT OF CLASS
AMOUNT AND NATURE --------------------------
NAME OF BENEFICIAL OWNERSHIP HISTORICAL PRO FORMA(A)
------------------------------------------- ----------------------- ---------- ------------
<S> <C> <C> <C>
ML-Lee Acquisition Fund, L.P.(b)........... 2,675,552(c) 56.6% 34.1%
Brinson Partners, Inc.(d).................. 479,545(d) 10.1 10.5
Albert L. Prillaman(e)..................... 220,810(f) 4.5 4.7
Bobby I. Hodges(e)......................... 33,257(g) (h) (h)
C. William Cubberley, Jr.(e)............... 26,511(i) (h) (h)
Douglas I. Payne(e)........................ 13,939(j) (h) (h)
William A. Sibbick(e)...................... 10,003(l) (h) (h)
David V. Harkins(k)........................ 2,581(c)(m) (h) (h)
C. Hunter Boll(k).......................... 1,548(c)(n) (h) (h)
Edward J. Mack(e).......................... 4,162 (h) (h)
All directors and executive officers as a
group (9 persons)........................ 319,837(o) 6.4% 6.6%(p)
</TABLE>

- ---------------
(a) Assumes the Underwriters' over-allotment is not exercised and the Company
purchases all shares of Common Stock subject to the Underwriters'
over-allotment option.

(b) The business address for such beneficial owner is c/o Merrill Lynch
Investment Banking Group, World Financial Center, South Tower, New York,
New York 10080-6123.

(c) The Lee Fund will own 1,560,296 shares after the sale of the Common Stock
offered hereby. In addition, the Lee Fund II owns an aggregate of 41,616
shares (.88%) of Common Stock and will own 24,269 shares (.53%) of Common
Stock after the sale of the Common Stock offered hereby. Each of THL
Advisors I (with respect to the Lee Fund), THL Advisors II (with respect to
the Lee Fund II), Thomas H. Lee, as Trustee of THL Advisors I and THL
Advisors II and an individual general partner of the Lee Fund and the Lee
Fund II, David V. Harkins, as Senior Vice President and Trustee of THL
Advisors I and Senior Vice President of Mezzanine II, and C. Hunter Boll,
as Vice President of THL Advisors I and Mezzanine II, may be deemed to be a
beneficial owner of the 2,675,552 and 41,616 shares held by the Lee Fund
and the Lee Fund II, respectively. Each of THL Advisors I, THL Advisors II,
Mr. Lee, Mr. Harkins, and Mr. Boll disclaims beneficial ownership of such
shares. A limited partnership controlled by Thomas H. Lee is also the sole
beneficiary of the Trust, which holds 30,409 (.64%) shares of Common Stock
and will own 17,734 shares (.38%) of Common Stock after the sale of the
Common Stock offered hereby.

(d) The information with respect to Brinson Partners, Inc. ("BPI") is based
upon the Schedule 13G dated February 9, 1996 filed by BPI together with
Brinson Trust Company ("BTC"), Brinson Holdings, Inc. ("BHI"), SBC Holding
(USA), Inc. ("SBCUSA") and Swiss Bank Corporation ("SBC"). The Schedule 13G
indicates that BPI, BHI, SBCUSA and SBC share voting and dispositive power
with

26
<PAGE> 31

respect to the reported shares and that BTC, a wholly-owned subsidiary of
BPI, shares voting and dispositive power with respect to 127,309 of such
shares. BPI is a wholly-owned subsidiary of BHI. BHI is a wholly-owned
subsidiary of SBCUSA, which is a wholly-owned subsidiary of SBC. The
business principal address of BPI, BTC and BHI is 209 South LaSalle,
Chicago, Illinois 60604. The principal business address of SBCUSA is 222
Broadway, New York, New York 10038. The principal business address of SBC
is Aeschenplatz 6CH-4002, Basel, Switzerland.

(e) The business address for such persons is c/o Stanley Furniture Company,
Inc., Route 57 West, Stanleytown, Virginia 24168.

(f) Includes 161,913 shares that could be acquired through exercise of stock
options and pursuant to the Executive Loan Plan.

(g) Includes 22,046 shares that could be acquired through exercise of stock
options.

(h) Less than 1%.

(i) Includes 21,998 shares that could be acquired through exercise of stock
options.

(j) Includes 13,074 shares that could be acquired through exercise of stock
options.

(k) The business address for such persons is c/o Thomas H. Lee Company, 75
State Street, Boston, Massachusetts 02109.

(l) Represents 10,003 shares that could be acquired through exercise of stock
options.

(m) Mr. Harkins will own 2,043 shares after the sale of the Common Stock offered
hereby. Includes 1,290 shares Mr. Harkins may receive in respect of shares
of Common Stock he presently has a right to purchase from the Trust.

(n) Mr. Boll will own 1,225 shares after the sale of the Common Stock offered
hereby. Includes 774 shares Mr. Boll may receive in respect of shares of
Common Stock he presently has a right to purchase from the Trust.

(o) All directors and executive officers as a group will own, collectively, an
aggregate of 318,761 shares after the sale of the Common Stock offered
hereby. Includes 234,660 shares that could be acquired through exercise of
stock options and pursuant to the Executive Loan Plan and includes 1,400
held by a pension fund for the benefit of an executive officer, beneficial
ownership of which is disclaimed by such officer.

(p) Reflects the sale of 1,372 and 323 shares of Common Stock by David V.
Harkins and C. Hunter Boll, respectively, in connection with the Offering.

27
<PAGE> 32

DESCRIPTION OF CAPITAL STOCK

The following brief description of the Company's capital stock does not
purport to be complete and is subject in all respects to applicable Delaware law
and to the provisions of the Company's Certificate of Incorporation, as amended,
and Bylaws, copies of which have been filed with the Commission.

The authorized capital stock of the Company consists of 10 million shares
of Common Stock and one million shares of "blank check" preferred stock, $.01
par value (the "Blank Check Preferred Stock").

COMMON STOCK

Holders of Common Stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. Holders of Common Stock do not have
cumulative voting rights, and therefore holders of a majority of the shares
voting for the election of directors can elect all of the directors. In such
event, the holders of the remaining shares will not be able to elect any
directors.

Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor, after payment of dividends required to be paid on any
outstanding Blank Check Preferred Stock. In the event of the liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of Blank Check Preferred Stock then
outstanding, if any.

The Common Stock has no preemptive or conversion rights and is not subject
to further call for assessments by the Company. The Common Stock currently
outstanding is validly issued, fully paid and nonassessable.

The transfer agent and registrar for Common Stock is Continental Stock
Transfer & Trust Company of New Jersey.

BLANK CHECK PREFERRED STOCK

The Company's Certificate of Incorporation authorizes the issuance of one
million shares of Blank Check Preferred Stock. The Board of Directors is
authorized to issue Blank Check Preferred Stock in series and to fix the
designation, powers, preferences, rights, limitations, and restrictions with
respect to any series of such shares. Such Blank Check Preferred Stock may rank
prior to Common Stock as to dividend rights, liquidation preferences, or both,
may have full or limited voting rights, and may be convertible into shares of
Common Stock.

The purpose of authorizing the Board of Directors to issue preferred stock
is, in part, to eliminate delays associated with a stockholder vote in specific
instances. The issuance of preferred stock, for example in connection with a
stockholder rights plan, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding existing stock of the Company.

The Company has no present plans to issue any shares of the Blank Check
Preferred Stock.

CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS

Provisions with Anti-takeover Implications. A number of provisions of the
Company's Certificate of Incorporation and Bylaws involve matters of corporate
governance and the rights of stockholders. The Company's Certificate of
Incorporation provides the Board of Directors the ability to issue shares of
preferred stock and to set the voting rights, preferences, and other terms
thereof. This ability afforded to the Board of Directors by the Certificate of
Incorporation may be deemed to have an anti-takeover effect and may discourage
takeover attempts not first approved by the Board of Directors (including
takeovers which certain stockholders may deem to be in their best interest). The
Board of Directors is divided into three classes, each as nearly equal in number
as possible. A classified Board expands the time required to change the
composition of a majority of directors and may tend to discourage any takeover
bid for the Company. With a classified Board, two annual meetings normally will
be required for holders of a majority of the Common Stock to

28
<PAGE> 33

change the composition of a majority of the Board of Directors, since only
one-third of the Directors will be elected at each meeting. In addition,
stockholders may remove members of the classified Board only for cause. Because
of the additional time required to change the composition of the Board,
classification of the Board also may make the removal of incumbent management
more difficult.

The foregoing provisions could discourage or make more difficult a merger,
tender offer, or proxy contest involving the Company, even if such events could
be beneficial to the interests of stockholders, and could potentially depress
the market price of Common Stock. In addition, Delaware law permits other such
provisions, including shareholder rights plans, which the Company would
generally be able to implement at any time without stockholder approval.

Indemnification. The Certificate of Incorporation of the Company provides
that directors and officers of the Company will be indemnified by the Company to
the fullest extent authorized by Delaware law, as it now exists or may in the
future be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company.

Limitation of Liability. In addition, the Certificate of Incorporation
provides that directors of the Company will not be personally liable for
monetary damages to the Company for certain breaches of their fiduciary duty as
directors, unless they violated their duty of loyalty to the Company or its
stockholders, acted in bad faith, knowingly or intentionally violated the law,
authorized illegal dividends or redemptions, or derived an improper personal
benefit from their action as directors. This provision does not affect the
availability of equitable remedies or non-monetary relief, such as an injunction
or recision for breach of the duty of care. In addition, the provision applies
only to claims against the director arising out of his role as a director and
not in any other capacity (such as an officer or employee of the Company).
Furthermore, liability of a director for violations of the federal securities
laws will not be limited by this provision. Directors are not, however, liable
for monetary damages arising from decisions involving violations of the duty of
care which could be deemed grossly negligent.

Statutory Business Combination Provision. Section 203 of the Delaware
General Corporation Law ("Section 203") provides, with certain exceptions, that
a Delaware corporation may not engage in any of a broad range of business
combinations with a person or affiliate, or associate of such person, who is an
"interested stockholder" for a period of three years from the date that such
person became an interested stockholder unless: (i) the transaction resulting in
a person becoming an interested stockholder, or the business combination, is
approved by the Board of Directors of the corporation before the person becomes
an interested stockholder; (ii) the interested stockholder acquired 85% or more
of the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's Board of Directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person that is (i) the owner of 15%
or more of the outstanding voting stock of the corporation or (ii) an affiliate
or associate of the corporation and was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.

A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws by action of
its stockholders to exempt itself from coverage, provided that such bylaws or
charter amendment may not become effective until 12 months after the date it is
adopted. Effective March 21, 1988, the Company excluded itself from the coverage
of Section 203. Effective upon the consummation of the 1993 public offering, the
Company elected to be subject to the coverage of Section 203.

Nominations for Director. The Company's Bylaws provide that a stockholder
entitled to vote in the election of directors may nominate one or more persons
for election as a director only if advance written notice is given. Written
notice of such stockholders' intent to make such nomination must be received by
the Secretary of the Company or deposited in the U.S. mail, postage prepaid, to
the Secretary of the Company not

29
<PAGE> 34

later than 120 days in advance of the anniversary date of the Company's proxy
statement for the previous year's annual meeting or, in the case of a special
meeting for the election of directors, at the close of business on the seventh
day following the date on which notice of such meeting is first given to
stockholders. Any stockholder wishing to nominate one or more persons as
director must submit the following information in writing: (i) the name and
address of the stockholder who intends to make the nomination; (ii) a
representation that the stockholder is entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to nominate the person or
persons specified in the notice; (iii) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which any nomination is to
be made by the stockholder; (iv) such other information regarding each nominee
as would be required to be included in a proxy statement filed pursuant to the
proxy rules of the Securities and Exchange Commission, had the nominee been
nominated by the Board of Directors; and (v) the consent of each proposed
nominee to serve as a director of the Company if so elected. The Chairman of the
meeting may refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedure.

By requiring advance notice of stockholder nominations, this Bylaw affords
the Board of Directors the opportunity to consider the qualifications of the
proposed nominees and, to the extent deemed necessary or desirable by the Board,
to inform stockholders about such qualifications. The Bylaw does not give the
Board of Directors any power to approve or disapprove a stockholder's nomination
for election of directors. However, it may have the effect of precluding a
contest for the election if its procedures are not followed, and therefore may
discourage or deter a stockholder from conducting a solicitation of proxies to
elect his own slate of directors.

Special Meeting. The Company's Bylaws provide that a special meeting of
stockholders may be called only by the President, the Board of Directors or upon
written request of not less than 50% in interest of the stockholders entitled to
vote thereat.

30
<PAGE> 35

UNDERWRITING

The names of the Underwriters of the shares of Common Stock offered hereby
and the aggregate number of shares that each has severally agreed to purchase
from the Selling Stockholders, subject to the terms and conditions specified in
the Underwriting Agreement, are as follows:

<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
<S> <C>
Dillon, Read & Co. Inc...............................................
Raymond James & Associates, Inc......................................
Wheat, First Securities, Inc.........................................

----------------
Total...................................................... 1,000,000
=============
</TABLE>

The Managing Underwriters are Dillon, Read & Co. Inc., Raymond James &
Associates, Inc. and Wheat, First Securities, Inc.

If any shares of Common Stock offered hereby are purchased by the
Underwriters, all such shares will be so purchased. The Underwriting Agreement
contains certain provisions whereby, if any Underwriter defaults in its
obligation to purchase such shares, and the aggregate obligations of the
Underwriters so defaulting do not exceed 10% of the shares offered hereby, the
remaining Underwriters, or some of them, must assume such obligations.

The shares of Common Stock offered hereby are being initially offered
severally by the Underwriters for sale at the price set forth on the cover page
hereof, or at such price less a concession not to exceed $ per share on
sales to certain dealers. The Underwriters may allow, and such dealers may
reallow, a concession not to exceed $ per share on sales to other
Underwriters or to certain other dealers. The offering of the shares of Common
Stock is made for delivery when, as, and if accepted by the Underwriters and
subject to prior sale and to withdrawal, cancellation, or modification of the
offer without notice. The Underwriters reserve the right to reject any order for
the purchase of the shares of Common Stock. After the initial offering of Common
Stock, the public offering price, concession, and reallowance may be changed by
the Managing Underwriters.

The Selling Stockholders have granted to the Underwriters an option to
purchase an aggregate of up to 150,000 additional shares of Common Stock on the
same terms. If the Underwriters exercise this option, each of the Underwriters
will be obligated, subject to certain conditions, to purchase approximately the
same proportion of the aggregate shares so purchased as the number of shares to
be purchased by it shown on the above table bears to 1,000,000. The Underwriters
may exercise such option on or before the thirtieth day from the date hereof
solely for the purpose of covering over-allotments, if any, in connection with
the Offering.

The Company, its executive officers and directors, and the Selling
Stockholders have agreed not to offer, pledge, sell, contract to sell, grant any
option to purchase, transfer or otherwise dispose of, directly or indirectly,
any shares of Common Stock or securities convertible into or exercisable or
exchangeable for Common Stock or warrants or other rights to purchase Common
Stock without the prior written consent of Dillon, Read & Co. Inc. for a period
of 120 days after the date of this Prospectus, other than (i) in the case of the
Selling Stockholders, shares sold to the Company pursuant to the Repurchase
Agreement, (ii) in the case of the Company, stock options issued pursuant to the
Company's stock option plans in existence on the date

31
<PAGE> 36

hereof or stock issued pursuant to the Company's Executive Loan Plan, and (iii)
in the case of executive officers of the Company other than Albert Prillaman,
shares of Common Stock sold solely in connection with cashless exercises of
currently outstanding stock options held by such executive officers.

In connection with the Offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified market makers
on Nasdaq may engage in passive market making transactions in Common Stock on
Nasdaq in accordance with Rule 10b-6A under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), during the two-business-day period prior to the
commencement of offers or sales of Common Stock in the Offering. Passive market
making consists of, among other things, displaying bids on Nasdaq limited by the
bid prices of independent market makers and purchases limited by such prices and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specified percentage of the passive market maker's
average daily trading volume in Common Stock during a specified prior period and
all possible market making activity must be discontinued when such limit is
reached. Passive market making may stabilize the market price of Common Stock at
a level above that which might otherwise prevail and, if commenced, may be
discontinued at any time.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.

The Common Stock is traded on Nasdaq under the symbol "STLY."

LEGAL MATTERS

The validity of the Common Stock will be passed upon for the Company and
the Selling Stockholders by McGuire, Woods, Battle & Boothe, L.L.P., Richmond,
Virginia. Certain legal matters will be passed upon for the Underwriters by King
& Spalding, New York, New York.

EXPERTS

The balance sheets of the Company as of December 31, 1994 and 1995, the
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1995, and the information as of
and for the five years ended December 31, 1995, set forth in the Selected
Financial Data under the captions "Income Statement Data," "Supplementary Income
Per Common Share Data" and "Balance Sheet Data" have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given upon the authority of that firm as experts in auditing and accounting.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information may be inspected and copied at
the principal office of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and should be available at the
Commission's Regional Offices at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such materials can be obtained by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Commission
maintains a site on the World Wide Web at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.

The Company has filed a Registration Statement on Form S-3 under the
Securities Act with the Commission with respect to the shares of Common Stock
offered hereby. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain items of which are contained in schedules and exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to such Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract,

32
<PAGE> 37

agreement or other document filed as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed by the Company with the Commission (File No.
0-14938) pursuant to the Exchange Act are incorporated herein by reference:

(1) the Company's Annual Report on Form 10-K for the year ended December
31, 1995;

(2) the Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1996, June 30, 1996 and September 29, 1996; and

(3) The description of Common Stock set forth in the Company's registration
statement filed with the Commission pursuant to Section 12 of the
Exchange Act, and any amendment or report filed for the purpose of
updating any such description.

All other documents filed by the Company pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the Offering made hereby shall be deemed to be
incorporated herein by reference.

Any statement contained in any document incorporated or deemed to be
incorporated by reference herein shall be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any
subsequently filed document which is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.

The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of such person, a copy of any or all of the documents
which are incorporated herein by reference (not including exhibits to such
documents unless such exhibits are specifically incorporated by reference into
such documents). Requests for such copies should be directed to Stanley
Furniture Company, Inc., Route 57, Stanleytown, Virginia 24168, Attention:
Secretary (telephone: (540) 627-2000).

33
<PAGE> 38

STANLEY FURNITURE COMPANY, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED FINANCIAL STATEMENTS
Report of Independent Accountants.................................................... F-2
Balance Sheets as of December 31, 1994 and 1995...................................... F-3
Statements of Income for each of the three years in the period ended December 31,
1995............................................................................... F-4
Statements of Changes in Stockholders' Equity for each of the three years in the
period ended December 31, 1995..................................................... F-5
Statements of Cash Flows for each of the three years in the period ended December 31,
1995............................................................................... F-6
Notes to Financial Statements........................................................ F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS
Balance Sheet as of September 29, 1996............................................... F-16
Statements of Income for the three and nine months ended October 1, 1995 and
September 29, 1996................................................................. F-17
Statements of Cash Flows for the nine months ended October 1, 1995 and September 29,
1996............................................................................... F-18
Notes to Interim Financial Statements................................................ F-19
</TABLE>

F-1
<PAGE> 39

REPORT OF INDEPENDENT ACCOUNTANTS

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

We have audited the accompanying balance sheets of Stanley Furniture
Company, Inc. (the "Company") as of December 31, 1994 and 1995, and the related
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Stanley Furniture Company,
Inc. as of December 31, 1994 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.

We have also previously audited, in accordance with generally accepted
auditing standards, the balance sheets as of December 31, 1991, 1992 and 1993,
and the related statements of income, changes in stockholders' equity and cash
flows for the years ended December 31, 1991 and 1992 (none of which are
presented herein); and we expressed unqualified opinions on those financial
statements. However, our report on the Company's 1993 financial statements
contained an explanatory paragraph with respect to the change, as of the
beginning of 1993, in the method of accounting for postretirement benefits other
than pensions to conform with statement of Financial Accounting Standards No.
106.

In our opinion, the information set forth in the Selected Financial Data
under the captions "Income Statement Data" "Supplementary Income Per Common
Share Data," and "Balance Sheet Data" as of and for the five years ended
December 31, 1995, appearing on pages 10 and 11 is fairly stated, in all
material respects, in relation to the financial statements from which it has
been derived.

Coopers & Lybrand L.L.P.

Richmond, Virginia
January 26, 1996

F-2
<PAGE> 40

STANLEY FURNITURE COMPANY, INC.

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................... $ 301 $ 298
Accounts receivable, less allowances of $933 and $1,157............ 23,760 22,732
Inventories:
Finished goods................................................ 20,893 22,391
Work-in-process............................................... 5,957 5,368
Raw materials................................................. 13,055 12,408
-------- --------
39,905 40,167
Prepaid expenses and other current assets.......................... 1,446 435
Deferred income taxes.............................................. 2,003 2,420
-------- --------
Total current assets.......................................... 67,415 66,052
-------- --------
Property, plant and equipment, at cost.................................. 64,827 78,399
Less accumulated depreciation...................................... 20,049 24,168
-------- --------
44,778 54,231
-------- --------
Goodwill, less accumulated amortization of $2,016 and $2,352............ 11,424 11,088
Other assets............................................................ 902 3,180
-------- --------
$124,519 $134,551
======== ========
LIABILITIES
Current liabilities:
Current maturities of long-term debt............................... $ $ 650
Accounts payable................................................... 14,659 13,637
Accrued salaries, wages and benefits............................... 7,119 6,619
Other accrued expenses............................................. 2,725 2,724
-------- --------
Total current liabilities..................................... 24,503 23,630
Long-term debt, exclusive of current maturities......................... 33,395 40,417
Deferred income taxes................................................... 11,541 12,180
Other long-term liabilities............................................. 4,250 3,585
-------- --------
Total liabilities............................................. 73,689 79,812
-------- --------
STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 10,000,000 shares authorized, 4,726,550
and 4,726,578 shares issued and outstanding........................... 94 94
Capital in excess of par value.......................................... 64,527 64,547
Deficit................................................................. (13,791) (9,902)
-------- --------
Total stockholders' equity......................................... 50,830 54,739
-------- --------
$124,519 $134,551
======== ========
</TABLE>

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

F-3
<PAGE> 41

STANLEY FURNITURE COMPANY, INC.

STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales..................................................... $167,091 $184,342 $174,179
Cost of sales:
From products sold....................................... 134,972 148,453 137,621
Business interruption insurance.......................... (5,036) -- --
-------- -------- --------
129,936 148,453 137,621
-------- -------- --------
Gross profit........................................ 37,155 35,889 36,558
Selling, general and administrative expenses.................. 25,976 26,483 26,454
Unusual items, net............................................ -- -- (136)
-------- -------- --------
Operating income......................................... 11,179 9,406 10,240
Gain on insurance settlement.................................. (2,186) (2,379) --
Other expense, net............................................ 1,346 444 433
Interest expense.............................................. 3,048 2,969 3,534
-------- -------- --------
Income from continuing operations before income taxes.... 8,971 8,372 6,273
Income taxes.................................................. 3,691 3,256 2,384
-------- -------- --------
Income from continuing operations............................. 5,280 5,116 3,889
Discontinued operations, including provision for operating
losses of $1,721, net of income taxes....................... -- (2,758) --
-------- -------- --------
Net income.......................................... $ 5,280 $ 2,358 $ 3,889
======== ======== ========
Earnings (loss) per common share:
Continuing operations.................................... $ 1.39 $ 1.08 $ .82
Discontinued operations.................................. -- (.58) --
-------- -------- --------
Net income.......................................... $ 1.39 $ .50 $ .82
======== ======== ========
Weighted average number of shares............................. 3,792 4,725 4,727
======== ======== ========
</TABLE>

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

F-4
<PAGE> 42

STANLEY FURNITURE COMPANY, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
ADJUSTMENT
CAPITAL FOR
COMMON STOCK IN MINIMUM
---------------- EXCESS OF PENSION
SHARES AMOUNT PAR VALUE LIABILITY DEFICIT
------ ------ --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992................... 2,997 $ 60 $51,328 $ -0- $(21,429)
Public offering................................ 1,725 34 13,053
Adjustment for minimum pension liability....... (1,122)
Net income..................................... 5,280
----- ----- -------- --------- --------
Balance at December 31, 1993.............. 4,722 94 64,381 (1,122) (16,149)
Exercise of stock options...................... 5 66
Adjustment for minimum pension liability....... 1,122
Compensation expense related to executive loan
plan......................................... 80
Net income..................................... 2,358
----- ----- -------- --------- --------
Balance at December 31, 1994.............. 4,727 94 64,527 -0- (13,791)
Compensation expense related to executive loan
plan, net.................................... 20
Net income..................................... 3,889
----- ----- -------- --------- --------
Balance at December 31, 1995.............. 4,727 $ 94 $64,547 $ -0- $ (9,902)
===== ===== ======= ======== ========
</TABLE>

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

F-5
<PAGE> 43

STANLEY FURNITURE COMPANY, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers.......................... $ 166,706 $ 183,458 $ 175,189
Cash paid to suppliers and employees.................. (179,218) (176,194) (164,022)
Interest paid......................................... (3,529) (2,464) (3,535)
Income taxes paid, net................................ (321) (4,463) (1,033)
Proceeds received on insurance coverage............... 23,196 4,625
Operating activities of discontinued operations....... (285) (867)
--------- --------- ---------
Net cash provided by operating activities........ 6,549 4,095 6,599
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures.................................. (6,392) (4,968) (14,225)
Proceeds received on insurance coverage............... 2,679
Purchase of other assets.............................. (591) (650) (467)
Proceeds from sale of assets.......................... 91 108 25
Investing activities of discontinued operations....... (47) 357
--------- --------- ---------
Net cash used by investing activities............ (4,260) (5,153) (14,667)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock................ 13,087
Issuance of senior notes.............................. 30,000 10,000
Redemption of senior subordinated debentures.......... (3,093)
Repayment of term note................................ (2,616) (16,569)
Repayment of revolving credit facility, net........... (10,229) (12,685) (2,320)
Proceeds from insurance policy loans.................. 292 345 385
Other, net............................................ (179) 68
--------- --------- ---------
Net cash provided (used) by financing
activities..................................... (2,738) 1,159 8,065
--------- --------- ---------
Net (decrease) increase in cash............................ (449) 101 (3)
Cash at beginning of year.................................. 649 200 301
--------- --------- ---------
Cash at end of year................................... $ 200 $ 301 $ 298
========= ========= =========
</TABLE>

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

F-6
<PAGE> 44

STANLEY FURNITURE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Basis of Presentation

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

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

Inventories

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

Property, Plant and Equipment

Depreciation of property, plant and equipment is computed using the
straight-line method based upon the estimated useful lives of the assets and
amounted to $3.7 million, $4.0 million and $4.5 million for 1993, 1994 and 1995,
respectively. Depreciable lives are as follows:

<TABLE>
<CAPTION>
YEARS
--------
<S> <C>
Buildings......................................................... 40 to 50
Machinery and equipment........................................... 5 to 12
Leasehold improvements............................................ 3 to 20
Furniture, fixtures and office equipment.......................... 3 to 10
</TABLE>

Gains and losses related to dispositions and retirements are included in
income. Maintenance and repairs are charged to income as incurred; renewals and
betterments are capitalized.

Capitalized Software Cost

The Company amortizes certain purchased computer software costs using the
straight-line method over the economic lives of the related products not to
exceed five years. Unamortized cost at December 31, 1994 and 1995 was $39,000
and $473,000, respectively.

Goodwill and Long-lived Assets

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

Income Taxes

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

F-7
<PAGE> 45

STANLEY FURNITURE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fair Value of Financial Instruments

The fair value of the Company's long-term debt is estimated using
discounted cash flow analysis based on the incremental borrowing rates currently
available to the Company for loans with similar terms and maturities, and at
December 31, 1995, the fair value approximated the carrying amount. The fair
value of trade receivables, trade payables and letters of credit approximate the
carrying amount because of the short maturity of these instruments.

Pension Plans

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

Earnings Per Common Share

Earnings per common share are based upon the weighted average number of
shares outstanding. All share and per share data have been restated to reflect
the one-for-two reverse stock split, effective July 1993.

Supplementary earnings per common share are presented below. Income from
continuing operations for the 1993 and 1994 periods reflect a non-recurring gain
from insurance proceeds. The 1993 period reflects the effect of proforma
adjustments for the 1993 public offering. It is assumed that the transaction
took effect at the beginning of the year. The 1994 and 1995 per share
information is included for comparison purposes.

<TABLE>
<CAPTION>
1993 1994 1995
----- ----- ----
<S> <C> <C> <C>
Continuing operations:
Before non-recurring gain.................................. $ .90 $ .77 $.82
Non-recurring gain on insurance............................ .29 .31
----- ----- ----
As reported........................................... 1.19 1.08 .82
Discontinued operations......................................... (.58)
----- ----- ----
Net income................................................. $1.19 $ .50 $.82
===== ===== ====
</TABLE>

2. PROPERTY, PLANT AND EQUIPMENT AT DECEMBER 31

<TABLE>
<CAPTION>
(IN THOUSANDS)
1994 1995
------- -------
<S> <C> <C>
Land and buildings................................................ $17,853 $33,594
Machinery and equipment........................................... 41,059 43,127
Leasehold improvements............................................ 3,986 153
Furniture, fixtures and office equipment.......................... 1,289 1,387
Construction in progress.......................................... 640 138
------- -------
$64,827 $78,399
======= =======
</TABLE>

In June 1995, the Company purchased the manufacturing facilities at its
Stanleytown, Virginia and West End, North Carolina locations, which it
previously leased. The total purchase price was $10.5 million for both
facilities. As a result of the purchase, the Company also reclassified related
leasehold improvements with a net book value of $3.3 million to land and
buildings.

F-8
<PAGE> 46

STANLEY FURNITURE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. LONG-TERM DEBT AT DECEMBER 31

<TABLE>
<CAPTION>
(IN THOUSANDS)
1994 1995
------- -------
<S> <C> <C>
7.28% Senior notes due March 15, 2004............................. $30,000 $30,000
7.57% Senior note due June 30, 2005............................... 10,000
Revolving credit facility......................................... 3,234 914
7% Convertible subordinated debentures due April 1, 2012.......... 161 153
------- -------
Total................................................... 33,395 41,067
Less current maturities........................................... 650
------- -------
$33,395 $40,417
======= =======
</TABLE>

During August 1995, the Company amended its $25.0 million revolving credit
facility which extended its maturity date to August 1998. The interest rate
under the facility was reduced to prime (8.5% on December 31, 1995) or, at the
Company's option, equal to reserve adjusted LIBOR plus 1.0% per annum. As of
December 31, 1995, approximately $21.9 million of additional borrowings were
available under the revolving credit facility. In June 1995, the Company issued
a $10.0 million 7.57% senior note due 2005 in a private placement of debt and
the proceeds were used to purchase two plant facilities, as discussed in Note 2.
In February 1994, the Company completed the private placement of $30.0 million
of 7.28% senior notes due in 2004. The proceeds were used to repay a term note
and a portion of the revolving credit facility.

The Company utilizes letters of credit to collateralize certain insurance
policies and inventory purchases. Outstanding letters of credit at December 31,
1994 and 1995 were $1.8 million and $2.2 million, respectively.

The above loan agreements require the Company to maintain certain financial
covenants and prohibit the Company from paying dividends and acquiring or
retiring its common stock.

Aggregate maturities of long-term debt for the next five years are as
follows: 1996 -- $650,000; 1997 -- $878,000; 1998 -- $6.0 million; 1999 -- $5.1
million; 2000 -- $5.2 million.

4. UNUSUAL ITEMS

During the second quarter of 1995, the Company was released from a lease
obligation at its previously closed Waynesboro, Virginia manufacturing facility.
Accordingly, the Company recognized a pretax credit of $1.1 million related to
the reversal of an accrual set up in 1991 for the closing of the facility.
Unusual items also included a pretax charge for severance resulting from the
resignation of the Company's Chief Operating Officer.

F-9
<PAGE> 47

STANLEY FURNITURE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. INCOME TAXES

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

<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Current:
Federal................................................ $1,123 $2,314 $1,750
State.................................................. 245 669 412
------ ------ ------
Total current..................................... 1,368 2,983 2,162
------ ------ ------
Deferred:
Federal................................................ 1,940 214 156
State.................................................. 383 59 66
------ ------ ------
Total deferred.................................... 2,323 273 222
------ ------ ------
Income taxes...................................... $3,691 $3,256 $2,384
====== ====== ======
</TABLE>

A reconciliation of the difference between the federal statutory income tax
rate and the effective income tax rate on income from continuing operations at
December 31 follows:

<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate............................................ 35.0% 35.0% 35.0%
State taxes, net of federal benefit............................... 4.6 5.0 5.0
Goodwill.......................................................... 1.3 1.4 1.9
Life insurance.................................................... (0.7) (0.9) (1.5)
Tax savings from foreign sales corporation........................ (0.4) (0.4) (0.8)
Federal tax rate change........................................... 2.8
Tax credits....................................................... (1.3) (0.8) (0.2)
Other, net........................................................ (0.2) (0.4) (1.4)
---- ---- ----
Effective income tax rate.................................... 41.1% 38.9% 38.0%
==== ==== ====
</TABLE>

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

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Current deferred tax assets (liabilities):
Accounts receivable............................................... $ 360 $ 379
Inventory......................................................... (439) (432)
Employee benefits................................................. 1,305 1,834
Other accrued expenses............................................ 777 639
------- -------
Net current deferred tax asset............................... $ 2,003 $ 2,420
======= =======
Noncurrent deferred tax (assets) liabilities:
Inventory......................................................... $ 966 $ 500
Property, plant and equipment..................................... 11,302 11,552
Employee benefits................................................. (785) 215
Restructuring costs............................................... (183) (95)
Other............................................................. 241 8
------- -------
Net noncurrent deferred tax liability........................ $11,541 $12,180
======= =======
</TABLE>

At December 31, 1994, the Company had alternative minimum tax credit
carryforwards of $519,000 which were utilized in 1995. The Company's federal
income tax returns have been examined and closed by the Internal Revenue Service
through 1992.

F-10
<PAGE> 48

STANLEY FURNITURE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. STOCKHOLDERS' EQUITY, STOCK OPTIONS, AND RELATED MATTERS

In December 1994, the Company adopted the Stanley Furniture Company, Inc.
1994 Stock Option Plan (the "1994 Plan"). The 1994 Plan and the Company's 1992
Stock Option Plan provide for the granting of stock options for up to an
aggregate of 700,000 shares of common stock to certain key employees. Options
granted may be either nonqualified or qualified stock options and the exercise
price may not be less than 100% of the fair market value of the Company's common
stock on the date the options are granted. Granted options vest 20% annually.

At December 31, 1994 and 1995, options to purchase 182,297 and 229,053
shares, respectively, were exercisable and 16,935 were available for grant at
December 31, 1995. Activity for the two years ended December 31, 1995 follows:

<TABLE>
<CAPTION>
NUMBER OPTION PRICE PER
OF SHARES SHARE
--------- -----------------
<S> <C> <C>
Outstanding at December 31, 1993......................... 668,317 $ 8.50 to $12.86
Exercised................................................ (5,112) 8.50 to 12.86
Cancelled................................................ (602,834) 12.86
Granted.................................................. 609,629 10.00
---------
Outstanding at December 31, 1994.................... 670,000 8.50 to 10.00
Lapsed................................................... (5,327) 8.50 to 10.00
Cancelled................................................ (156,720) 8.50 to 10.00
Granted.................................................. 170,000 8.75
---------
Outstanding at December 31, 1995.................... 677,953 $ 8.50 to $10.00
========
</TABLE>

During 1994, the Company established the Executive Loan Plan. Under the
Executive Loan Plan, the Company has entered into a contractual agreement to
issue 50,000 shares of common stock to the Chief Executive Officer at $10 per
share (the market price per share on the date of the agreement) in exchange for
a non-recourse 7.6% note receivable payable in five annual installments with the
balance due January 2, 1999. The Company has also agreed to forgive interest
plus one half of the contractual purchase price over the next five years, if the
Chief Executive Officer remains employed by the Company. The contractual
agreement under the Executive Loan Plan with the former Chief Operating Officer
was cancelled in July 1995. Accordingly, net compensation expense including
interest and income taxes was $160,000 and $98,000 for 1994 and 1995,
respectively.

In addition to its common stock, the Company's authorized capital includes
1,000,000 shares of "blank check" preferred stock. None was outstanding during
the three years ended December 31, 1995. The Board of Directors is authorized to
issue such stock in series and to fix the designation, powers, preferences,
rights, limitations and restrictions with respect to any series of such shares.
Such "blank check" preferred stock may rank prior to common stock as to dividend
rights, liquidation preferences or both, may have full or limited voting rights
and may be convertible into shares of common stock.

7. EMPLOYEE BENEFIT PLANS

Pension Plans

The Company maintains a non-contributory defined benefit pension plan (the
"Stanley Retirement Plan"), covering substantially all employees. The benefits
provided by the plan are based on an employee's years of service and average
compensation. Plan assets are invested principally in fixed income and equity
instruments. The Company also maintains a supplemental retirement plan covering
certain key employees (the "Supplemental Plan").

F-11
<PAGE> 49

STANLEY FURNITURE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. EMPLOYEE BENEFIT PLANS (CONTINUED)

A Supplemental Plan participant who retires under any provision of the
Stanley Retirement Plan will receive a supplemental retirement allowance equal
to the excess, if any, of an eligible employee's benefit under the Stanley
Retirement Plan in effect on January 1, 1987, over his benefit actually received
at retirement. The Supplemental Plan is unfunded and benefit payments are made
directly from Company assets.

Effective December 31, 1995, the Company amended both the Stanley
Retirement Plan and the Supplemental Plan to cease future benefit accruals under
the plans. Accordingly, the Company recognized a pretax loss on curtailment of
$31,000. The following table sets forth the plans' financial status at December
31 (in thousands):

<TABLE>
<CAPTION>
1994 1995
-------------------------- --------------------------
STANLEY STANLEY
RETIREMENT SUPPLEMENTAL RETIREMENT SUPPLEMENTAL
PLAN PLAN PLAN PLAN
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Accumulated benefit obligation:
Vested............................. $(10,603) $ (483) $(14,641) $ (897)
Nonvested.......................... (737) (70) (1,127) (97)
--------- ---------- --------- ---------
Accumulated benefit obligation.......... $(11,340) $ (553) $(15,768) $ (994)
======== ========== ======== ==========
Projected benefit obligation............ $(13,209) $ (1,016) $(15,768) $ (994)
Plan assets at fair value............... 12,012 15,842
--------- ---------- --------- ---------
Plan assets more than (less than)
projected benefit obligation.......... (1,197) (1,016) 74 (994)
Unrecognized (gain) loss................ 2,400 (284) 3,206
Prior service cost...................... (112) 659
--------- ---------- --------- ---------
Prepaid (accrued) pension costs.... $ 1,091 $ (641) $ 3,280 $ (994)
======== ========== ======== ==========
</TABLE>

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

<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Service cost................................................ $ 799 $ 904 $ 774
Interest cost............................................... 1,333 1,315 1,256
Actual return on assets..................................... (382) (109) (1,320)
Net amortization and deferral............................... (444) (589) 965
Loss on curtailment......................................... 31
------ ------ ------
$1,306 $1,521 $1,706
====== ====== ======
</TABLE>

The assumptions used as of December 31 to determine the plans' funded
status, pension cost and loss on curtailment were:

<TABLE>
<CAPTION>
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Discount rate for funded status.............................. 7.75% 9.00% 7.67%
Discount rate for pension cost............................... 8.25% 7.75% 9.00%
Salary progression........................................... 4.00% 5.00% 5.00%
Return on assets............................................. 8.25% 8.00% 7.75%
</TABLE>

A reduction in the discount rate of 0.25% would create an additional
minimum pension liability of $3.9 million and would result in a charge to
stockholders' equity of $2.3 million, net of deferred taxes.

F-12
<PAGE> 50

STANLEY FURNITURE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. EMPLOYEE BENEFIT PLANS (CONTINUED)

401(k) Plan

The Company also maintains the Stanley 401(k) Retirement Savings Plan
("401(k) Plan") for all of its eligible employees. Through December 31, 1995,
the plan allowed for contributions by employees up to 20% of their salaries and
also permitted discretionary contributions by the Company, although no
discretionary contributions have been made to the plan by the Company. In
connection with the curtailment of benefits in the Stanley Retirement Plan and
Supplemental Plan, the Company amended its 401(k) Plan and expects to begin
making discretionary matching and profit sharing contributions in 1996.

Postretirement Benefits Other Than Pensions

The Company provides certain health care benefits to eligible retired
employees between the ages of 55 and 65 and provides certain life insurance
benefits to eligible retired employees from age 55 until death. Substantially
all of the Company's employees are eligible for these benefits after attaining
specified years of service and age provisions. Employees who elect benefits at
retirement contribute to the cost of coverage. The plan is unfunded. Prior to
1993, the Company expensed the cost of these benefits when paid. Effective
January 1, 1993, the Company adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." Accordingly, the expected cost of
retiree benefits, other than pensions, are charged to expense during the years
the employees render service.

The Company elected to recognize the January 1, 1993, obligation of $8.1
million through charges to earnings over 20 years. On March 3, 1993, the Company
also adopted plan design changes which reduced the January 1, 1993, obligation
to $2.9 million. The following table sets forth the plan's financial status at
December 31 (in thousands):

<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Retirees.......................................................... $(4,769) $(4,875)
Fully eligible active plan participants........................... (333) (232)
Other active plan participants.................................... (634) (714)
------- -------
Total accumulated postretirement benefit obligation.......... (5,736) (5,821)
Unrecognized net loss............................................. 2,927 2,752
Unrecognized transition obligation................................ 2,406 2,272
------- -------
Net accrued postretirement benefit cost...................... $ (403) $ (797)
======= =======
</TABLE>

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

<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Service cost.................................................... $ 72 $ 74 $ 93
Interest cost................................................... 239 242 510
Amortization of transition obligation, after reduction for plan
design changes................................................ 146 359 134
Amortization and deferral....................................... 21 182
---- ---- ----
$457 $696 $919
==== ==== ====
</TABLE>

The weighted average discount rates used in determining the actuarial
present value of the projected benefit obligation were 7.75%, 9.00% and 7.67%
for 1993, 1994 and 1995, respectively. The rate of increase in future health
care benefit cost used in determining the obligation for 1993 was 17% gradually
decreasing to 5.75% beginning in 2007; for 1994 was 15% gradually decreasing to
7% beginning in 2005; and, for 1995 was 12% gradually decreasing to 6% beginning
in 2002.

F-13
<PAGE> 51

STANLEY FURNITURE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. EMPLOYEE BENEFIT PLANS (CONTINUED)

Increasing the assumed health care cost trend rate by one percentage point
in each future year would increase the accumulated postretirement benefit
obligation at December 31, 1995 by $307,000 and the aggregate of the service
cost and interest cost components of net periodic postretirement benefit cost
for 1995 by $31,000.

Deferred Compensation

The Company has a deferred compensation plan which permits certain
management employees to defer portions of their compensation. The employees earn
a fixed rate of interest on the deferred amounts. The plan is funded through the
purchase of whole life insurance contracts on the employees, and the Company
borrows against the cash surrender value of these policies to fund any benefit
payments. The accrued liabilities relating to this plan of $1.3 million and $1.4
million at December 31, 1994 and 1995, respectively, are included in accrued
salaries, wages and benefits and other longterm liabilities. The cash surrender
value, net of policy loans, is included in other assets.

8. INSURANCE CLAIM ACCOUNTING

In February 1993, a fire at the Stanleytown, Virginia facility damaged
approximately 12% of the Company's total manufacturing facilities. The Company's
insurance coverage provided for the complete replacement of the damaged building
(which was leased), equipment and inventory, and reimbursement for business
interruption losses.

The Company recorded business interruption insurance in 1993 based on
estimated profits attributed to lost sales since the fire. The amount recognized
represents the estimated gross profit that would have been realized on lost
sales. Accordingly, $5.0 million of estimated income from business interruption
insurance is included in gross profit in 1993. Also, a $2.2 million pretax gain
was recorded in 1993 since proceeds from insurance exceeded the book value of
leasehold improvements and equipment destroyed in the fire. In 1994, the Company
reached a final insurance settlement and recorded a gain of $2.4 million.

9. DISCONTINUED OPERATIONS

Beginning in 1991, Norman's was reflected as a discontinued operation. In
1994, the Company ceased operations at Norman's and liquidated the division
resulting in a $2.8 million ($4.5 million pretax) additional loss provision. Net
sales applicable to Norman's were $12.1 million and $4.1 million for 1993 and
1994, respectively.

10. LEASES

The company leased a substantial portion of its facilities under operating
leases through June 1995, at which time the Company purchased these facilities,
as described in Note 2. Rental expenses charged to operations were $2.0 million,
$1.9 million and $1.4 million in 1993, 1994 and 1995, respectively. The Company
continues to lease two showrooms and certain other equipment. Future minimum
lease payments, net of subleases, are approximately as follows:
1996 -- $769,000; 1997 -- $801,000; 1998 -- $534,000; 1999 -- $354,000; and
thereafter -- $12,000.

11. RELATED PARTY TRANSACTIONS

Approximately 58% of the Company's common stock is owned by the ML-Lee
Acquisition Fund, L.P. (the "Majority Stockholder") and certain affiliates of
the Thomas H. Lee Company. The Company has entered into a management agreement
with an affiliate of its Majority Stockholder. Fees paid pursuant to this
agreement amounted to $250,000 annually in 1993, 1994 and 1995.

F-14
<PAGE> 52

STANLEY FURNITURE COMPANY, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

12. SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Net income............................................... $ 5,280 $ 2,358 $ 3,889
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization....................... 4,808 4,421 4,919
Other, net.......................................... 295 249 118
Loss on disposal of fabric division................. 2,758
Changes in assets and liabilities:
Accounts receivable............................ (289) (1,011) 1,028
Inventories.................................... (4,147) (2,221) (262)
Prepaid expenses and other current assets...... 374 (892) (1,030)
Insurance claim receivable..................... (4,152) 2,029
Operating assets of discontinued operations.... (285) (867)
Accounts payable............................... 2,082 (922) (1,022)
Accrued salaries, wages and benefits........... (589) 585 (500)
Other accrued expenses......................... (34) (632) 137
Deferred income taxes.......................... 2,038 189 222
Other assets........................................ 57 22 25
Other long-term liabilities......................... 1,111 (1,971) (925)
------- ------- -------
Net cash provided by operating activities...... $ 6,549 $ 4,095 $ 6,599
======= ======= =======
</TABLE>

13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The Company's unaudited quarterly results of operations were as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
<S> <C> <C> <C> <C>
FISCAL 1994 QUARTERS
Net sales.................................... $44,737 $44,101 $43,845 $51,659
Gross profit................................. 8,677 8,544 8,865 9,803
Income from continuing operations............ 2,386(a) 957 863 910
Net income (loss)............................ (372)(b) 957 863 910
Income from continuing operations per
share...................................... .49(a) .20 .18 .19
Net income (loss) per share.................. (.08)(b) .20 .18 .19
FISCAL 1995 QUARTERS
Net sales.................................... $44,989 $38,163 $44,706 $46,321
Gross profit................................. 9,101 8,050 9,095 10,312
Net income................................... 794 719 998 1,378
Net income per share......................... .17 .15 .21 .29
</TABLE>

- ---------------
(a) In the first quarter of 1994, the Company reached a final insurance
settlement and recorded a gain of $1.5 million ($2.4 million pretax) or 31
cents per share.

(b) In the first quarter of 1994, the Company decided to cease operations at
Norman's and recorded a loss from discontinued operations of $2.8 million
($4.5 million pretax) or 58 cents per share.

F-15
<PAGE> 53

STANLEY FURNITURE COMPANY, INC.

BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
SEPTEMBER 29,
1996
-------------
<S> <C>
ASSETS
Current assets:
Cash....................................................................... $ 3,705
Accounts receivable, less allowances of $1,961............................. 28,173
Inventories:
Finished goods........................................................ 21,527
Work-in-process....................................................... 5,756
Raw materials......................................................... 11,522
-----------
38,805
Prepaid expenses and other current assets.................................. 415
Deferred income taxes...................................................... 2,615
-----------
Total current assets.................................................. 73,713
-----------
Property, plant and equipment, at cost.......................................... 80,054
Less accumulated depreciation.............................................. 26,946
-----------
53,108
-----------
Goodwill, less accumulated amortization of $2,604............................... 10,836
Other assets.................................................................... 3,975
-----------
$ 141,632
===========
LIABILITIES
Current liabilities:
Current maturities of long-term debt....................................... $ 725
Accounts payable........................................................... 14,176
Accrued salaries, wages and benefits....................................... 8,802
Other accrued expenses..................................................... 3,189
-----------
Total current liabilities............................................. 26,892
-----------
Long-term debt, exclusive of current maturities................................. 38,778
Deferred income taxes........................................................... 12,650
Other long-term liabilities..................................................... 2,402
-----------
Total liabilities..................................................... 80,722
-----------
STOCKHOLDERS' EQUITY
Common stock, $.02 par value, 10,000,000 shares authorized, 4,729,042 shares
issued and outstanding........................................................ 94
Capital in excess of par value.................................................. 64,571
Deficit......................................................................... (3,755)
-----------
Total stockholders' equity................................................. 60,910
-----------
$ 141,632
===========
</TABLE>

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

F-16
<PAGE> 54

STANLEY FURNITURE COMPANY, INC.

STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
OCTOBER 1, SEPTEMBER 29, OCTOBER 1, SEPTEMBER 29,
1995 1996 1995 1996
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Net sales....................................... $ 44,706 $52,550 $ 127,858 $ 148,023
Cost of sales................................... 35,611 39,772 101,612 113,389
--------- ---------- ---------- -----------
Gross profit............................... 9,095 12,778 26,246 34,634
Selling, general and administrative expenses.... 6,347 7,619 19,402 21,973
Unusual items, net.............................. (136)
--------- ---------- ---------- -----------
Operating income........................... 2,748 5,159 6,980 12,661
Other expense, net.............................. 109 90 306 485
Interest expense................................ 1,028 852 2,622 2,569
--------- ---------- ---------- -----------
Income from continuing operations before
income taxes............................. 1,611 4,217 4,052 9,607
Income tax provision............................ 613 1,602 1,541 3,706
--------- ---------- ---------- -----------
Income from continuing operations.......... 998 2,615 2,511 5,901
Gain from discontinued operations, net of
taxes......................................... 246 246
--------- ---------- ---------- -----------
Net income...................................... $ 998 $ 2,861 $ 2,511 $ 6,147
========= ========== ========== ===========
Primary earnings per share:
Continuing operations...................... $ .21 $ .53 $ .53 $ 1.22
Discontinued operations.................... .05 .05
--------- ---------- ---------- -----------
Net income............................ $ .21 $ .58 $ .53 $ 1.27
========= ========== ========== ===========
Weighted average number of shares............... 4,728 4,954 4,728 4,848
========= ========== ========== ===========
Fully diluted earnings per share:
Continuing operations...................... $ .21 $ .52 $ .53 $ 1.17
Discontinued operations.................... .05 .05
--------- ---------- ---------- -----------
Net income............................ $ .21 $ .57 $ .53 $ 1.22
========= ========== ========== ===========
Weighted average number of shares............... 4,728 5,051 4,728 5,052
========= ========== ========== ===========
</TABLE>

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

F-17
<PAGE> 55

STANLEY FURNITURE COMPANY, INC.

STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
OCTOBER 1, SEPTEMBER 29,
1995 1996
---------- -------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers.................................... $ 126,394 $ 141,887
Cash paid to suppliers and employees............................ (122,447) (127,917)
Interest paid................................................... (3,019) (3,169)
Income taxes paid, net.......................................... (932) (3,409)
---------- -----------
Net cash provided (used) by operating activities........... (4) 7,392
---------- -----------
Cash flows from investing activities:
Capital expenditures............................................ (12,932) (2,706)
Purchase of other assets........................................ (399) (181)
Proceeds from sale of assets.................................... 25 12
---------- -----------
Net cash used by investing activities...................... (13,306) (2,875)
---------- -----------
Cash flows from financing activities:
Issuance of senior notes........................................ 10,000 --
(Repayment of) proceeds from revolving credit facility, net..... 2,897 (914)
Repayment of senior note........................................ -- (650)
Proceeds from insurance policy loans............................ 385 430
Proceeds from exercise of stock options......................... -- 24
---------- -----------
Net cash (used) provided by financing activities........... 13,282 (1,110)
---------- -----------
Net increase (decrease) in cash...................................... (28) 3,407
Cash at beginning of year............................................ 301 298
---------- -----------
Cash at end of quarter............................................... $ 273 $ 3,705
========== ===========
Supplemental Cash Flow Information:
Net income........................................................... $ 2,511 $ 6,147
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization................................... 3,529 3,865
Loss on sale of assets.......................................... 44 265
Other........................................................... (30) (246)
Changes in assets and liabilities:
Accounts receivable........................................ (1,501) (5,441)
Inventories................................................ (1,778) 1,362
Prepaid expenses and other current assets.................. (265) (1,101)
Accounts payable........................................... (3,196) 539
Accrued salaries, wages and benefits....................... 1,458 2,183
Other accrued expenses..................................... 356 41
Deferred income taxes...................................... (193) 114
Other assets.................................................... (54) (69)
Other long-term liabilities..................................... (885) (267)
---------- -----------
Net cash provided (used) by operating activities..................... $ (4) $ 7,392
========== ===========
</TABLE>

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

F-18
<PAGE> 56

STANLEY FURNITURE COMPANY, INC.

NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)

1. PREPARATION OF INTERIM FINANCIAL STATEMENTS

The interim financial statements of Stanley Furniture Company, Inc.
(referred to as "Stanley" or the "Company") have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission
("SEC"). In the opinion of management, these statements include all adjustments
necessary for a fair presentation of the results of all interim periods reported
herein. All such adjustments are of a normal recurring nature. Certain
information and footnote disclosures prepared in accordance with generally
accepted accounting principles have been either condensed or omitted pursuant to
SEC rules and regulations. However, management believes that the disclosures
made are adequate for a fair presentation of results of operations and financial
position. It is suggested that these financial statements be read in conjunction
with the audited financial statements and accompanying notes included elsewhere
in this Prospectus.

2. PROPERTY, PLANT AND EQUIPMENT

<TABLE>
<CAPTION>
SEPTEMBER 29,
1996
--------------
(IN THOUSANDS)
<S> <C>
Land and buildings..................................................... $ 33,643
Machinery and equipment................................................ 44,424
Leasehold improvements................................................. 153
Furniture, fixtures and office equipment............................... 1,382
Construction in progress............................................... 452
-----------
$ 80,054
===========
</TABLE>

3. LONG-TERM DEBT

<TABLE>
<CAPTION>
SEPTEMBER 29,
1996
--------------
(IN THOUSANDS)
<S> <C>
7.28% senior notes due March 15, 2004.................................. $ 30,000
7.57% senior note due June 30, 2005.................................... 9,350
Revolving credit facility..............................................
7% convertible subordinated debentures due April 1, 2012............... 153
-----------
Total........................................................ 39,503
Less current maturities................................................ 725
-----------
$ 38,778
===========
</TABLE>

4. DISCONTINUED OPERATIONS

On July 1, 1996, the Company was released from a lease obligation resulting
from the purchase and concurrent resale of certain facilities at its former
Norman's of Salisbury division. This obligation was accrued as part of the 1994
charge to discontinued operations in connection with the liquidation of
Norman's. Accordingly, in the third quarter of 1996, the Company recorded an
after tax gain of $246,000, or $.05 per share, as a partial reversal of this
accrual.

5. NEW ACCOUNTING STANDARD

F-19
<PAGE> 57

STANLEY FURNITURE COMPANY, INC.

NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

5. NEW ACCOUNTING STANDARD (CONTINUED)

either recognize compensation expense for employee stock based compensation or
to provide proforma earnings information as if such compensation cost had been
recognized. The Company has not determined which election it will make under
SFAS 123, nor the various assumptions that will be used in the fair value
calculations. Under either method the effect on net income for the nine-month
period ended September 29, 1996 is not material, since options to purchase only
7,500 shares were granted during the period.

6. SUBSEQUENT EVENT

On October 15, 1996, the Company filed a registration statement with the
SEC for a public offering of its common stock held by a major stockholder. In
connection with this offering, the Company has agreed to acquire from the
Selling Stockholders any shares of Common Stock not acquired at the price
offered to the public, net of an amount equal to the underwriting discount that
otherwise would have been paid in respect of such shares of Common Stock. See
"Principal and Selling Stockholders." Assuming an offering price of $16.00 and
an underwriting discount of 5.5%, and that the Underwriters' option is not
exercised, the Company will acquire 150,000 shares of Common Stock from the
Selling Stockholders for an aggregate consideration of $2,268,000, which the
Company will fund from available cash and, if necessary, borrowings under its
revolving credit facility. The following pro forma information assumes that the
repurchase of Common Stock is financed entirely by borrowings under the
revolving credit facility at an assumed interest rate of 7%. The pro forma
effects on the Company's financial position assume that the stock was
repurchased as of September 29, 1996. The pro forma effects on the Company's
operating results for the year ended December 31, 1995 and the nine-months ended
September 29, 1996 assume that the stock was repurchased at the beginning of the
respective twelve-and nine-month periods.

The pro forma information does not include offering expenses of
approximately $325,000 payable by the Company, which will be incurred in the
fourth quarter of 1996.

F-20
<PAGE> 58

[STANLEY FURNITURE COMPANY, INC. LOGO]
<PAGE> 59

[COMPANY LOGO WITH STATEMENT "CONTINUOUS IMPROVEMENT IS OUR GOAL"]
<PAGE> 60

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

NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, SHARES OF
COMMON STOCK IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 9
Price Range of Common Stock........... 9
Dividend Policy....................... 9
Capitalization........................ 10
Selected Financial Data............... 11
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 14
Business.............................. 18
Management............................ 22
Principal and Selling Stockholders.... 25
Description of Capital Stock.......... 28
Underwriting.......................... 31
Legal Matters......................... 32
Experts............................... 32
Available Information................. 32
Incorporation of Certain Documents by
Reference........................... 33
Index to Financial Statements......... F-1
</TABLE>

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

[STANLEY FURNITURE LOGO]

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

1,000,000 SHARES

COMMON STOCK

PROSPECTUS

NOVEMBER , 1996

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

DILLON, READ & CO. INC.

RAYMOND JAMES & ASSOCIATES, INC.

WHEAT FIRST BUTCHER SINGER

- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 61

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The table below sets forth the expenses to be incurred in connection with
the issuance and distribution of the shares registered for offer and sale
hereby, other than underwriting discounts and commissions. All such expenses
will be paid by the Company. All amounts shown represent estimates except the
Securities Act registration fee and the NASD filing fee.

<TABLE>
<S> <C>
Registration fee under the Securities Act...................... $ 15,362.07
NASD fee....................................................... 5,570.00
Printing expenses.............................................. 125,000.00
Accounting fees and expenses................................... 25,000.00
Registrar and Transfer Agent's fees and expenses............... 5,000.00
Legal fees and expenses (not including Blue Sky)............... 60,000.00
Blue Sky fees.................................................. 1,100.00
Miscellaneous.................................................. 87,967.93
===========
Total................................................ $325,000.00
===========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Article SEVENTH of the Certificate of Incorporation of the Company and
Section 3 of Article VIII of the By-laws of the Company provide that the Company
will, to the full extent permitted by Section 145 of the Delaware General
Corporation Law, as amended from time to time, indemnify all persons whom it may
indemnify pursuant thereto.

As authorized by Section 145 of the General Corporation Law of the State of
Delaware (the "Delaware Corporation Law"), each director and officer of the
Company may be indemnified by the Company against expenses (including attorneys'
fees, judgments, fines and amounts paid in settlement) actually and reasonably
incurred in connection with the defense or settlement of any threatened, pending
or completed legal proceedings in which he is involved by reason of the fact
that he is or was a director or officer of the Company if he acted in good faith
and in a manner that he reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, if he had no reasonable cause to believe that his conduct was
unlawful. If the legal proceeding, however, is by or in the right of the
Company, the director or officer may not be indemnified in respect of any claim,
issue or matter as to which he shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the Company unless a
court determines otherwise.

The Certificate of Incorporation of the Company, provides that to the
fullest extent permitted by the Delaware Corporation Law, a director of the
Company shall not be liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director.

II-1
<PAGE> 62

ITEM 16. EXHIBITS.

<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.(1)
2.1 Agreement and Plan of Merger dated as of July 24, 1992 by and among the Registrant,
Stanley Holding Corporation, Stanley Acquisition Corporation, the ML-Lee Acquisition
Fund (Retirement Accounts) II, L.P., and the persons listed on Schedules I and II
thereto (incorporated by reference to Exhibit 2.1 to the Registrant's Registration
Statement on Form S-4 No. 33-50050).
4.1 The Certificate of Incorporation of the Registrant (incorporated by reference to
Exhibit 3.1 to the Registrant's Registration Statement on Form S-1, No. 33-7300).
4.2 The Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-1, No. 33-7300).
4.3 Amendment adopted March 21, 1988 to the Bylaws of the Registrant (incorporated by
reference to Exhibit 3.3 to the Registrant's Form 10-K (Commission File No. 0-14938)
for the year ended December 31, 1987).
4.4 Amendments adopted February 8, 1993 to the Bylaws of the Registrant (incorporated by
reference to Exhibit 3.4 to the Registrant's Registration Statement on Form S-1 No.
33-57432).
4.5 Certificate of Stock Designation of the Registrant dated May 1, 1991 as modified by
an Amendment to Certificate of Designation dated May 31, 1991 (incorporated by
reference to Exhibit 3.6 to the Registrant's Form 10-K for the year ended December
31, 1991).
4.6 Certificate of Merger dated as of November 9, 1992 (incorporated by reference to
Exhibit 3.6 to the Registrant's Statement on Form S-1 No. 33-57432).
4.7 Certificate of Amendment dated June 30, 1993 (incorporated by reference to Exhibit
3.7 to the Registrant's Form 10-K for the year ended December 31, 1994).
4.8 Registration Rights Agreement dated as of November 9, 1992 by and among the
Registrant, ML-Lee Acquisition Fund, L.P., ML-Lee Acquisition Fund II, L.P., ML-Lee
Acquisition Fund (Retirement Accounts) II, L.P., Lee Stockholders (as defined
therein) and Management Stockholders (as defined therein) (incorporated by reference
to Exhibit 4.3 to the Registrant's Registration Statement on Form S-1 No. 33-57432).
4.9 Form of Indenture (including the Form of the Debenture) (incorporated by reference to
Exhibit 4 to the Registrant's Registration Statement on Form S-1, No. 33-12746).
4.10 First Supplemental Indenture dated as of January 17, 1989 (incorporated by reference
to Exhibit 4.2 to the Registrant's Form 10-K for the year ended December 31, 1988).
4.11 Second Supplemental Indenture dated as of November 9, 1992 (incorporated by reference
to Exhibit 4.5 to the Registrant's Form 10-K for the year ended December 31, 1993).
4.12 Note Agreement dated February 15, 1994 between the Registrant and the Prudential
Insurance Company of America. (incorporated by reference to Exhibit 4.6 to the
Registrant's Form 10-K for the year ended December 31, 1993).
5.1 Opinion and consent of McGuire, Woods, Battle & Boothe, L.L.P. as to the validity of
the Common Stock.(2)
23.1 Consent of Coopers & Lybrand L.L.P.(1)
23.2 Consent of McGuire, Woods, Battle & Boothe, L.L.P. (included as part of Exhibit 5.1).
24.1 Power of Attorney (contained on signature page).
99.1 Form of Stock Purchase Agreement to be entered among the Company and the Selling
Stockholders listed on Schedule I thereto in connection with the Offering.(1)
99.2 Form of Amendment No. 2 to Management Agreement with Thomas H. Lee Company(1).
</TABLE>

- ---------------
(1) Filed with this Registration Statement.

(2) Previously filed.

II-2
<PAGE> 63

ITEM 17. UNDERTAKINGS.

(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the Registrant's annual report pursuant to section 13(a) or section 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of
an employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.

(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.

II-3
<PAGE> 64

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Stanleytown, in the Commonwealth of Virginia, November 13, 1996.

STANLEY FURNITURE COMPANY, INC.

By: /s/ ALBERT L. PRILLAMAN
------------------------------------
ALBERT L. PRILLAMAN, PRESIDENT,
CHIEF EXECUTIVE OFFICER, AND
CHAIRMAN OF THE BOARD

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

Pursuant to the requirements of the Securities Act of 1933, this Amendment
has been signed on November 13, 1996 by the following persons in the respective
capacities indicated opposite their names.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------ -------------------------------

<C> <S> <C>
/s/ ALBERT L. PRILLAMAN* President, Chief Executive
- ------------------------------------------ Officer, Chairman of the Board,
(ALBERT L. PRILLAMAN) and Director (Principal
Executive Officer)

/s/ DOUGLAS I. PAYNE* Vice President of Finance,
- ------------------------------------------ Treasurer and Secretary
(DOUGLAS I. PAYNE) (Principal Financial and
Accounting Officer)

/s/ DAVID V. HARKINS* Director
- ------------------------------------------
(DAVID V. HARKINS)

/s/ C. HUNTER BOLL* Director
- ------------------------------------------
(C. HUNTER BOLL)

/s/ EDWARD J. MACK* Director
- ------------------------------------------
(EDWARD J. MACK)

*By: /s/ ALBERT L. PRILLAMAN
- ------------------------------------------
Albert L. Prillaman, Individually
and as Attorney-in-fact
</TABLE>

II-4
<PAGE> 65

EXHIBIT INDEX

<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
23.1 Consent of Coopers & Lybrand L.L.P.
99.1 Form of Stock Purchase Agreement to be entered into among the Company and the Selling
Stockholders listed on Schedule I thereto in connection with the Offering.
99.2 Form of Amendment No. 2 to Management Agreement with Thomas H. Lee Company.
</TABLE>

<PAGE> 1
EXHIBIT 1.1

K&S DRAFT
11/07/96

[FORM OF UNDERWRITING AGREEMENT]

STANLEY FURNITURE COMPANY, INC.

COMMON STOCK

($ .02 PAR VALUE)

UNDERWRITING AGREEMENT

NOVEMBER __, 1996
<PAGE> 2

UNDERWRITING AGREEMENT

November __, 1996

Dillon, Read & Co. Inc.
Raymond James & Associates, Inc.
Wheat, First Securities, Inc.

c/o Dillon, Read & Co. Inc.
535 Madison Avenue
New York, New York 10022

as representatives
(the "REPRESENTATIVES")
of the several underwriters
listed on Schedule A hereto

Ladies and Gentlemen:

Each of the parties listed on Schedule B hereto (the "SELLING
STOCKHOLDERS"), severally propose to sell to the several underwriters named in
Schedule A (the "UNDERWRITERS") an aggregate of ___________ shares (the "FIRM
SHARES") of Common Stock, par value $.02 per share (the "COMMON STOCK"), of
Stanley Furniture Company, Inc. (the "COMPANY"). In addition, solely for the
purpose of covering over-allotments, if any, the Selling Stockholders severally
propose to sell to the Underwriters, at the Underwriters' option, an aggregate
of up to ________ additional shares of Common Stock (the "ADDITIONAL SHARES").
The Additional Shares and the Firm Shares are collectively referred to herein
as the "SHARES". The Shares are described in the Prospectus that is referred
to below.

The Company has filed, in accordance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations thereunder
(collectively, the "ACT"), with the Securities and Exchange Commission (the
"COMMISSION") a registration statement on Form S-3, including a prospectus,
relating to the Shares, which incorporates by reference documents which the
Company has filed or will file in accordance with the provisions of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder (collectively, the "EXCHANGE ACT"). The Company has furnished to
you, for use by the Underwriters and by dealers, copies of one or more
preliminary prospectuses and the documents incorporated by reference therein
(each thereof, including the documents incorporated therein by reference, being
herein called a "PRELIMINARY PROSPECTUS"). Except where the context otherwise
requires, the registration statement (including post-effective amendment No. 1
thereto) as in effect at the time of execution of this Agreement or, if the
registration statement is not yet effective, as amended when it becomes
effective, including all documents filed as a part thereof or incorporated
<PAGE> 3
2

by reference therein, and including any information contained in a prospectus
subsequently filed with the Commission pursuant to Rule 424(b) or Rule 434(c)
under the Act and deemed to be part of the registration statement at the time
of effectiveness pursuant to Rule 430A under the Act and any "abbreviated term
sheet" described in Rule 434(c) under the Act that is deemed to be a part of
such registration statement pursuant to Rule 434(d) under the Act (a "TERM
SHEET"), is herein called the "REGISTRATION STATEMENT", and the prospectus,
including all documents incorporated therein by reference, any Term Sheet that,
in addition to the related preliminary prospectus, constitutes a part thereof
pursuant to Rule 434(a) under the Act and any prospectus required pursuant to
Rule 434(c)(2) of the Act (the "INTEGRATED PROSPECTUS"), each in the form filed
by the Company with the Commission pursuant to Rule 424(b) under the Act or, if
none of such filings is required, in the form of final prospectus included in
the Registration Statement at the time it became effective, is herein called
the "PROSPECTUS". Any reference herein to the "date" of a Prospectus that
includes a Term Sheet shall mean the date of such Term Sheet.

The Selling Stockholders and the Underwriters agree as follows:

1. SALE AND PURCHASE. On the basis of the representations and
warranties and the other terms and conditions herein set forth, the Selling
Stockholders severally agree to sell to the respective Underwriters and each of
the Underwriters, severally and not jointly, agrees to purchase from each
Selling Stockholder the respective number of Firm Shares (subject to such
adjustment as you may determine to avoid fractional shares) which bears the
same proportion to the total number of Firm Shares to be sold by the Selling
Stockholders as the number of Firm Shares set forth opposite the name of such
Underwriter on Schedule A bears to the number of Firm Shares to be sold by the
Selling Stockholders , at a purchase price of $_____________ per Share. You
may release the Firm Shares for public sale promptly after this Agreement
becomes effective. You may, from time to time, increase or decrease the public
offering price after the initial public offering to such extent as you may
determine.

In addition, on the basis of the representations and warranties and
the other terms and conditions herein set forth, each of the Selling
Stockholders, severally and not jointly, grants to the several Underwriters an
option to purchase, and the Underwriters shall have the right to purchase,
severally and not jointly, from the Selling Stockholders all or a portion of
the Additional Shares set forth opposite the name of such Selling Stockholder
on Schedule B as may be necessary to cover over allotments made in connection
with the offering of the Shares, at the same purchase price per share to be
paid by the several Underwriters to the Selling Stockholders for the Firm
Shares. This option may be exercised at any time (but not more than once) on
or before the thirtieth day following the date hereof, by written notice to the
Company and the Representatives of the Selling Stockholders referred to in the
immediately succeeding paragraph. Such notice shall set forth the aggregate
number of Additional Shares as to which the option is being exercised and the
date and time when the Additional Shares are to be delivered (such date and
time being herein referred to as the "additional time of purchase"); provided,
however, that the additional time of purchase shall not be earlier than the
time of purchase (as defined below) nor earlier than the
<PAGE> 4
3

second business day(1) after the date on which the option shall have been
exercised nor later than the eighth business day after the date on which the
option shall have been exercised. The number of Additional Shares to be
purchased by each Underwriter shall be the number that bears the same
proportion to the aggregate number of Additional Shares being purchased as the
number of Firm Shares set forth opposite the name of such Underwriter on
Schedule A bears to the total number of Firm Shares (subject, in each case, to
such adjustment as you may determine to eliminate fractional shares). The
number of Additional Shares to be sold by each Selling Stockholder shall be the
number which bears the same proportion to the aggregate number of Additional
Shares being purchased as the number of Additional Shares set forth opposite
the name of such Selling Stockholder on Schedule B bears to the total number of
Additional Shares available for sale under the over-allotment option (subject,
in each case, to such adjustment as you may determine to eliminate fractional
shares).

Pursuant to powers of attorney, which shall be satisfactory to counsel
for the Underwriters, granted by each Selling Stockholder (the "POWERS OF
ATTORNEY"), ________________ and ________________ will act as representatives
of the Selling Stockholders. The foregoing representatives (the
"REPRESENTATIVES OF THE SELLING STOCKHOLDERS") are authorized, on behalf of
each Selling Stockholder, to execute any documents necessary or desirable in
connection with the sale of the Shares to be sold hereunder by each Selling
Stockholder, to make delivery of the certificates of such Shares, to receive
the proceeds of the sale of such Shares, to give receipts for such proceeds, to
pay therefrom the expenses to be borne by each Selling Stockholder in
connection with the sale and public offering of the Shares, to distribute the
balance of such proceeds to each Selling Stockholder in proportion to the
number of Shares sold by each Selling Stockholder, to receive notices on behalf
of each Selling Stockholder and to take such other action as may be necessary
or desirable in connection with the transactions contemplated by this
Agreement.

2. PAYMENT AND DELIVERY. Payment of the purchase price for the
Firm Shares shall be made to the Selling Stockholders by certified or official
bank check, in New York Clearing House funds, at the office of Dillon, Read &
Co. in New York City, against delivery of the Firm Shares for the respective
accounts of the Underwriters. Such payment and delivery shall be made at 10:00
a.m., New York City time, on ____________, 1996 (unless another time shall be
agreed to by you, the Company and the Representatives of the Selling
Stockholders or unless postponed in accordance with the provisions of Section
10). The time at which such payment and delivery are actually made is called
the "time of purchase". The Firm Shares shall be delivered in such names and
in such denominations as you shall specify on the second business day preceding
the time of purchase. For the purpose of expediting the checking of the
certificates for the Firm Shares by you, the Selling Stockholders agree to make
such certificates available to you for such purpose at least one full business
day preceding the time of purchase.

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

(1) As used herein, business day shall mean a day on which the New York
Stock Exchange is open for trading.
<PAGE> 5
4

Payment of the purchase price for the Additional Shares shall be made
at the additional time of purchase in the same manner and at the same office as
the payment for the Firm Shares. The Additional Shares shall be delivered in
such names and in such denominations as you shall specify on the second
business day preceding the additional time of purchase. For the purpose of
expediting the checking of the certificates for the Additional Shares by you,
the Selling Stockholders agree to make such certificates available to you for
such purpose at least one full business day preceding the additional time of
purchase.

3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each of the Underwriters that:

(a) each Preliminary Prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Act, fully complied
when so filed in all material respects with the Act; when as the case
may be, the Registration Statement becomes or became effective and at
all times subsequent thereto up to the time of purchase and the
additional time of purchase, as the case may be, the Registration
Statement and the Prospectus, and any supplements or amendments
thereto, fully complied and will fully comply in all material respects
with the provisions of the Act; the documents incorporated by
reference in the Prospectus, at the time they were filed with the
Commission, complied in all material respects with the requirements of
the Exchange Act; and the Registration Statement at all such times did
not and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and the
Prospectus at all such times did not and will not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading;
provided, however, that the Company makes any representation or
warranty with respect to any statement contained in the Registration
Statement or the Prospectus in reliance upon and in conformity with
information concerning the Underwriters that was furnished in writing
by or on behalf of any Underwriter through you to the Company
expressly for use in the Registration Statement or the Prospectus and
set forth in the section of the Registration Statement and the
Prospectus entitled "Underwriting";

(b) the conditions for use of a registration statement on
Form S-3 set forth in the General Instructions to Form S-3 have been
satisfied with respect to the Company and the transactions
contemplated by this Agreement and the Registration Statement;

(c) as of the date of this Agreement, the time of
purchase and the additional time of purchase the Company's authorized,
issued and outstanding capitalization is as set forth in the section
of the Registration Statement and the Prospectus entitled
"Capitalization"; all of the issued and outstanding shares of capital
stock of the Company, including the Shares, have been duly authorized
and validly issued and are fully paid and
<PAGE> 6
5

nonassessable and free of any preemptive rights; the Company has been
duly organized and is validly existing as a corporation in good
standing under the laws of the State of Delaware with full power and
authority to own or lease its properties and conduct its business as
described in the Registration Statement and the Prospectus and to
execute, deliver and perform this Agreement as contemplated hereby and
thereby; the Company does not own, directly or indirectly, any capital
stock or other equity securities of, or ownership interest in, any
corporation, partnership, joint venture or other association or entity
in excess of 1% of the capital stock or other equity securities or
ownership interests except for the ownership of Charter Stanley
Foreign Sales Corporation, a wholly owned subsidiary of the Company;

(d) the Company and each of its subsidiaries (the
"SUBSIDIARIES") are duly qualified or licensed by, and are in good
standing in, each jurisdiction in which they own or lease property or
conduct their respective business except where the failure,
individually or in the aggregate, to be so qualified or licensed could
have a material adverse effect on the business, results of operations,
condition (financial or otherwise) or assets of the Company and its
Subsidiaries, taken as a whole (a "MATERIAL ADVERSE EFFECT"); and the
Company and each of its Subsidiaries are in compliance in all material
respects with all laws, orders, rules, regulations and directives
issued or administered by such jurisdictions;

(e) the Company owns all of the outstanding capital stock
of its Subsidiaries (other than Qualifying Shares) free and clear of
any pledge, lien, outstanding security interest, preemptive right or
other claim or interest, and there are no securities outstanding which
are convertible into, or exercisable or exchangeable for, shares of
capital stock of its Subsidiaries.

(f) neither the Company nor any of its Subsidiaries are
in violation of the provisions of its respective articles of
incorporation or bylaws or in breach of, or in default under (nor has
any event occurred that with notice, lapse of time or both would
constitute a breach of, or default under), any provision of any lease,
indenture, mortgage, deed of trust, bank loan or credit agreement or
other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which any of them or their respective
properties is bound or to which any property is subject or under any
law, regulation or rule or any decree, judgment or order applicable to
the Company or any of its Subsidiaries, in each case, where the effect
of which could reasonably be expected to have a Material Adverse
Effect; and the execution, delivery and performance of this Agreement
by the Company and the consummation of the transactions contemplated
hereby and thereby do not and will not violate any provision of the
articles of incorporation or bylaws of the Company or any of its
Subsidiaries and will not conflict with, or result in any breach of,
or constitute a default under (or constitute any event that with
notice, lapse of time or both would constitute a breach of, or default
under), any provision of any license, lease, indenture, mortgage, deed
of trust, bank loan or credit agreement or other agreement or
instrument to which the Company or any of its Subsidiaries is a party
or by
<PAGE> 7
6

which any of them or their respective properties may be bound or to
which any property is subject, or under any federal, state, local or
foreign law, regulation or rule or any decree, judgment or order
applicable to the Company or any of its Subsidiaries;

(g) this Agreement has been duly authorized, executed and
delivered by the Company and is a legal, valid and binding agreement
of the Company enforceable in accordance with its respective terms,
subject to applicable laws of bankruptcy, insolvency, or similar laws
relating to creditors' rights generally and to general principles of
equity (whether applied in a proceeding in law or equity) and policy
considerations or court decisions which may limit the rights of any
party to obtain indemnification;

(h) the capital stock of the Company, including the
Shares, conforms in all material respects to the description thereof
contained in the Registration Statement and the Prospectus and the
certificates for the Shares are in due and proper form and the holders
of the Shares will not be subject to personal liability by reason of
being such holders;

(i) no approval, authorization, consent or order of or
filing with any federal, state, local or foreign governmental or
regulatory commission, board, body, authority or agency is required in
connection with the issuance and sale of the Shares as contemplated by
this Agreement other than registration of the Shares under the Act and
any necessary qualifications under the federal securities or blue sky
laws of the various jurisdictions in which the Shares are being
offered by the Underwriters;

(j) no person has the right, contractual or otherwise, to
cause the Company to issue to it, or register pursuant to the Act, any
securities of the Company as a result of the sale of the Shares to the
Underwriters hereunder (other than pursuant to the Registration Rights
Agreement as described in the Prospectus), nor does any person have
preemptive rights, rights of first refusal or other rights to purchase
any of the Shares;

(k) Coopers & Lybrand L.L.P., whose reports on the
financial statements of the Company are filed with or incorporated by
reference in the Registration Statement and the Prospectus, are
independent public accountants with respect to the Company as required
by the Act;

(l) each of the Company and its Subsidiaries has all
necessary licenses, authorizations, consents and approvals, has made
all necessary filings required under any federal, state, local or
foreign law, regulation or rule, and has obtained all necessary
authorizations, consents, licenses and approvals from other persons,
in order to conduct its respective business except where the failure
to have authorizations, consents, licenses and approvals would not
reasonably be expected to have a Material Adverse Effect; and neither
the Company nor any of its Subsidiaries is in violation of, or in
default under, any such license, authorization, consent or approval or
any federal, state, local or foreign law, regulation or rule or any
decree, order or judgment applicable to the Company or any of
<PAGE> 8
7

its Subsidiaries, the effect of which could reasonably be expected to
have a Material Adverse Effect;

(m) all legal or governmental proceedings, contracts or
documents of a character required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement have been so described or filed as required;

(n) there are no actions, suits or proceedings pending
or, to the best knowledge of the Company, threatened against the
Company or any of its Subsidiaries or any of their respective
properties at law or in equity or before or by any federal, state,
local or foreign governmental or regulatory commission, board, body,
authority or agency that if adversely determined, would result in a
judgment, decree or order having a Material Adverse Effect;

(o) the audited and unaudited financial statements
included and incorporated by reference in the Registration Statement
and the Prospectus present fairly the financial position of the
Company as of the dates indicated and the results of operations and
cash flows of the Company for the periods specified; and such
financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis during
the periods involved;

(p) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
and except as may be otherwise stated in the Registration Statement or
the Prospectus, there has not been (i) any material adverse change in
the business, results of operations, condition (financial or
otherwise), assets or prospects of the Company and its Subsidiaries,
(ii) any transaction that is, or the Company reasonably expects could
be, material to the Company and its Subsidiaries, contemplated or
entered into, or approved by the Board of Directors of, by the Company
or any of its Subsidiaries or (iii) any obligation, contingent or
otherwise, directly or indirectly incurred by the Company or any of
its Subsidiaries that is, or the Company reasonably expects could be,
material to the Company and its Subsidiaries;

(q) the Company has obtained the agreement of each of its
directors and executive officers and certain of the Selling
Stockholders as set forth in Section 6 not to offer, pledge, sell,
contract to sell, grant any option to purchase, transfer or otherwise
dispose of, directly or indirectly, any shares of Common Stock or
other securities convertible into or exercisable or exchangeable for
Common Stock or warrants or other rights to purchase Common Stock
without the prior written consent of Dillon, Read & Co. Inc. for a
period of 120 days after the date of the final Prospectus, other than
(i) in the case of the Selling Stockholders, shares sold to the
Company pursuant to the Repurchase Agreement (as defined in the
Prospectus), (ii) in the case of the Company, stock options issued
pursuant to the Company's stock option plans in the existence of the
date of the Preliminary Prospectus or stock issued pursuant to the
Company's Executive Loan Plan (as defined in th Prospectus), and (iii)
in the case of executive officers of the Company other than Albert
Prillaman, shares of Common Stock sold solely in connection with
cashless exercises of currently outstanding stock options held by such
executive officers;
<PAGE> 9
8

(r) the Company and each of its Subsidiaries have filed
all federal or state income or franchise income and franchise tax
returns required to be filed and have paid all taxes shown thereon as
due, and there is no material tax deficiency that has been or may
reasonably be asserted against the Company or any of the
Subsidiaries; and all known tax liabilities are adequately provided
for on the books of the Company and its Subsidiaries;

(s) the business, operations and facilities of the
Company and each of its Subsidiaries have been and are being
conducted in compliance in all material respects with all applicable
laws, ordinances, rules, regulations, licenses, permits, approvals,
plans, authorizations or requirements relating to occupational safety
and health, pollution, protection of health or the environment, or
reclamation (including, without limitation, those relating to
emissions, discharges, releases or threatened releases of pollutants,
contaminants or hazardous or toxic substances, materials or wastes,
whether solid, gaseous or liquid in nature) or otherwise relating to
remediating real property in which the Company has any interest,
whether owned or leased, of any governmental department, commission,
board, bureau, agency or instrumentality of the United States, any
state or political subdivision thereof or any foreign jurisdiction and
all applicable judicial or administrative agency or regulatory
decrees, awards, judgments and orders relating thereto (collectively
"ENVIRONMENTAL REGULATIONS") except such failures to comply as would
not in the aggregate have a Material Adverse Effect; and neither the
Company nor any of its Subsidiaries has received any notice from a
governmental instrumentality or any third party alleging any violation
of any Environmental Regulation or liability thereunder (including,
without limitation, liability for costs of investigating or
remediating sites containing hazardous substances or damages to
natural resources) where such violation or liability could reasonably
be expected to have a Material Adverse Effect; and

(t) the Company is not, will not become as a result of the
transactions contemplated hereby, and does not intend to conduct
its business in a manner that would cause it to become, an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended.

4. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS.
Each Selling Stockholder severally (and not jointly) represents and warrants to
each Underwriter that:

(a) such Selling Stockholder is, and at the time of
delivery of the Shares to be sold by such Selling Stockholder will be,
the owner of the number of Shares to be sold by such Selling
Stockholder pursuant to this Agreement and has and, at the time of
delivery thereof, will have valid title to such Shares, and upon
delivery of and payment for such Shares the Underwriters will acquire
valid title to such Shares free and clear of any claim, lien,
encumbrance, security interest, community property right, restriction
on transfer or other defect in title;
<PAGE> 10
9

(b) such Selling Stockholder has, and at the time of
delivery of such Shares will have, full legal right, power and
capacity, and any authorization or approval required by law (other
than those imposed by the Act and the securities or blue sky laws of
certain jurisdictions) to sell, assign, transfer and deliver such
Shares in the manner provided in this Agreement;

(c) this Agreement, the Powers of Attorney, and the
Custody Agreement among Continental Stock Transfer & Trust Company, as
custodian and the Selling Stockholders (the "CUSTODY AGREEMENT") have
been duly authorized, executed and delivered by such Selling
Stockholder and each is a legal, valid and binding agreement of such
Selling Stockholder enforceable in accordance with its terms, except
as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally and general principles of
equity, whether considered in a proceeding in equity or at law, and
each of the Representatives of the Selling Stockholders, acting alone,
is authorized to execute and deliver this Agreement and the
certificate referred to in Section 8(k) hereof on behalf of such
Selling Stockholder, to determine the purchase price to be paid by the
several Underwriters to such Selling Stockholder as provided in
Section 1 hereof, to authorize the delivery of the Shares to be sold
by such Selling Stockholder under this Agreement and to duly endorse
(in blank or otherwise) the certificate or certificates representing
such Shares or a stock power or powers with respect thereto, to accept
payment therefor, and otherwise to act on behalf of such Selling
Stockholder in connection with this Agreement;

(d) the sale of the Shares by such Selling Stockholder
pursuant to this Agreement is not prompted by any information
concerning the Company which is not set forth in the Prospectus;

(e) the execution, delivery and performance of this
Agreement, the Power of Attorney and the Custody Agreement and the
consummation of the transactions contemplated hereby and thereby will
not conflict with, or result in any breach of or constitute a default
under (or constitute any event which with notice, lapse of time or
both would constitute a breach of, or default under), any provision of
the charter or bylaws or trust agreement (as the case may be), of such
Selling Stockholder or under any provision of any indenture, mortgage,
deed of trust, bank loan or credit agreement, or other agreement or
instrument to which such Selling Stockholder is a party or by which
such Selling Stockholder or any of its properties may be bound or
affected or under any federal, state, local or foreign law, regulation
or rule or any decree, judgment or order applicable to such Selling
Stockholder;

(f) no approval, authorization, consent or order of or
filing with any federal, state, local or foreign governmental or
regulatory commission, board, body, authority or agency is required in
connection with the sale of the Shares contemplated hereby, other than
registration of the Shares under the Act and any necessary
qualifications under the
<PAGE> 11
10

federal securities or "blue sky" laws of the various jurisdictions in
which the Shares are being offered by the Underwriters;

(g) certificates in negotiable form for all Shares to be
sold by such Selling Stockholder under this Agreement, together with a
stock power or powers duly endorsed in blank by such Selling
Stockholder have been placed in custody with the Custodian for the
purpose of effecting delivery hereunder;

(h) such Selling Stockholder has not taken and will not
take, directly or indirectly, any action designed to or that might
reasonably be expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale
or resale of the Shares;

(i) all information furnished or to be furnished to the
Company by or on behalf of such Selling Stockholder for use in
connection with the preparation of the Registration Statement and the
Prospectus, insofar as it relates to such Selling Stockholder, is or
will be true and correct in all respects and, with respect to the
Registration Statement, does not and will not contain an untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, and, with respect to the Prospectus, does not
and will not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; and

(j) nothing has come to such Selling Stockholder's
attention that has caused such Selling Stockholder to believe that (A)
when any Preliminary Prospectus was filed with the Commission it
included any untrue statement of a material fact or omitted to state
any material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, (B) when the Registration Statement or any amendment
thereto was or is declared effective, it did or will include any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading and (C) when
the Prospectus or any amendment or supplement thereto is filed with
the Commission pursuant to Rule 424(b) (or, if the Prospectus or such
amendment or supplement is not required to be so filed, when the
Registration Statement or the amendment thereto containing such
amendment or supplement to the Prospectus was or is declared
effective), and at all times subsequent thereto up to the time of
purchase and the additional time of purchase, as the case may be, the
Prospectus, as amended or supplemented at any such time, did or will
include any untrue statement of material fact or omit to state any
material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; provided, however, that such Selling Stockholder makes no
representation or warranty with respect to information contained in or
omitted from the Registration Statement or the Prospectus in reliance
upon, and in conformity with, written
<PAGE> 12
11

information furnished to the Company by or on behalf of any
Underwriter, directly or through you, specifically for use in the
preparation thereof.

5. CERTAIN COVENANTS OF THE COMPANY. The Company hereby agrees:

(a) to furnish such information as may be required and
otherwise to cooperate in qualifying the Shares for offering and sale
under the securities or blue sky laws of such states as you may
designate and to maintain such qualifications in effect as long as
required for the distribution of the Shares, provided that the Company
shall not be required to qualify as a foreign corporation or to
consent to the service of process under the laws of any such state
(except for service of process with respect to the offering and sale
of the Shares); promptly to advise you of the receipt by the Company
of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose; and to
use every reasonable effort to obtain the withdrawal of any order of
suspension as soon as possible;

(b) to make available to you in New York City, as soon as
practicable after the Registration Statement becomes effective, and
thereafter from time to time to furnish to the Underwriters, as many
copies of the Prospectus (or of the Prospectus as amended or
supplemented if the Company shall have made any amendment or
supplement thereto after the effective date of the Registration
Statement), including any Term Sheet or Integrated Prospectus, as the
Underwriters may request for the purposes contemplated by the Act;

(c) to advise you promptly and (if requested by you) to
confirm such advice in writing, (i) when the Registration Statement
(including any registration statement filed pursuant to Rule 462(b)
under the Act) has become effective and when any post-effective
amendment thereto becomes effective and (ii) when the Prospectus,
including any Term Sheet or Integrated Prospectus, is filed with the
Commission pursuant to Rule 424(b) under the Act, if required under
the Act (which the Company agrees to file in a timely manner under
such Rule);

(d) to advise you promptly, confirming such advice in
writing, of any request by the Commission for amendments or
supplements to the Registration Statement or the Prospectus or for
additional information with respect thereto, or of notice of
institution of proceedings for or the entry of a stop order suspending
the effectiveness of the Registration Statement and, if the Commission
should enter a stop order suspending the effectiveness of the
Registration Statement, to use every reasonable effort to obtain the
lifting or removal of such order as soon as possible; and to advise
you promptly of any proposal to amend or supplement the Registration
Statement or the Prospectus and to file no such amendment or
supplement to which you shall object in writing;

(e) to furnish to you and, upon request, to each of the
other Underwriters for a period of five years from the date of this
Agreement, (i) copies of any reports or other
<PAGE> 13
12

communications that the Company shall send to its stockholders or
shall from time to time publish or publicly disseminate, (ii) copies
of all annual, quarterly and current reports filed with the Commission
on Forms 10-K, 10-Q and 8-K, or such other similar form as may be
designated by the Commission, and (iii) such other information as you
may reasonably request regarding the Company;

(f) to advise the Underwriters promptly of the happening
of any event known to the Company within the time during which a
prospectus relating to the Shares is required to be delivered under
the Act that would require the making of any change in the Prospectus
then being used, so that the Prospectus, as then supplemented, would
not include an untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light
of the circumstances under which they are made, not misleading and,
during such time, promptly to prepare and furnish, at the Company's
expense, to the Underwriters such amendments or supplements to such
Prospectus as may be necessary to reflect any such change in such
quantities as reasonably requested by the Underwriters, and to furnish
to you a copy of such proposed amendment or supplement before filing
any such amendment or supplement with the Commission;

(g) to make generally available to its security holders,
and to deliver to you, an earnings statement of the Company (which
will satisfy the provisions of Section 11(a) of the Act) covering a
period of at least twelve months beginning after the effective date of
the Registration Statement but ending not later than fifteen months
after the effective date of the Registration Statement (as defined in
Rule 158(c) under the Act), as soon as is reasonably practicable after
the termination of such twelve-month period;

(h) to furnish to you three signed copies of the
Registration Statement, as initially filed with the Commission, and of
all amendments thereto (including all exhibits thereto) and a
sufficient number of additional conformed copies of the foregoing
(without exhibits) for distribution of a copy of each to the other
Underwriters;

(i) to furnish to you as early as practicable prior to
the time of purchase and the additional time of purchase, as the case
may be, but not later than two business days prior thereto, a copy of
the latest available unaudited interim financial statements, if any,
of the Company that have been read by the Company's independent
certified public accountants, as stated in their letter to be
furnished pursuant to Section 8(c) of this Agreement;

(j) to pay all expenses, fees and taxes, including any
applicable transfer taxes (other than the fees and disbursements of
counsel for the Underwriters except as set forth under Section 7
hereof and (iii) and (iv) below), in connection with (i) the
preparation and filing of the Registration Statement, each Preliminary
Prospectus, the Prospectus, and any amendments or supplements thereto,
and the printing and furnishing of copies of each thereof to the
Underwriters and to dealers (including costs of mailing and shipment),
<PAGE> 14
13

(ii) the issue, sale and delivery of the Shares, (iii) the printing of
this Agreement, the Agreement Between Underwriters, any dealer
agreement, the Custody Agreement and Powers of Attorney and the
reproduction and/or printing and furnishing of copies of each thereof
to the Underwriters and to dealers (including costs of mailing and
shipment), (iv) the qualification of the Shares for offering and sale
under state laws and the determination of their eligibility for
investment under state law as aforesaid (including the legal fees and
filing fees and other disbursements of counsel for the Underwriters)
and the printing and furnishing of copies of any blue sky surveys or
legal investment surveys to the Underwriters and to dealers, (v) the
listing of the Shares on the Nasdaq National Market and any
registration thereof under the Exchange Act; (vi) any filing for
review of the public offering of the Shares by the National
Association of Securities Dealers, Inc. (the "NASD"); (vii) the "road
show" presentation to potential investors and (viii) the performance
of the Company's and the Selling Stockholders' other obligations
hereunder (it is understood, however, that except as provided in this
subparagraph (j), Section 7 and Section 11 hereof, the Underwriters
will pay all of their own costs and expenses, including the fees and
disbursements of their counsel, transfer taxes on resale of any of the
Shares by them, and any expenses incurred with respect to the
publication of a "tombstone");

(k) to furnish to you, before filing with the Commission
subsequent to the effective date of the Registration Statement and
during the period referred to in paragraph (e) above, a copy of any
document proposed to be filed pursuant to Sections 13, 14 or 15(d) of
the Exchange Act;

(l) not to offer, pledge, sell, contract to sell, grant
any option to purchase, transfer or otherwise dispose of, directly or
indirectly, any shares of Common Stock or other securities
convertible into or exercisable or exchangeable for Common Stock or
warrants or other rights to purchase Common Stock, or permit the
registration under the Act of any shares of Common Stock or any such
substantially similar securities without the prior written consent of
Dillon, Read & Co. Inc. for a period of 120 days after the date of
the final Prospectus, other than (i) the issuance of Common Stock upon
the exercise of outstanding stock options and warrants or pursuant to
the Company's Executive Loan Plan, in each case, to the extent
disclosed in the Registration Statement and the Prospectus and (ii)
the grant of stock options pursuant to stock option plans disclosed in
the Registration Statement and Prospectus;

(m) not to take, directly or indirectly, any action
designated to cause or to result in, or that might constitute the
stabilization or manipulation of the Common Stock to facilitate the
sale or resale of the Shares.

6. COVENANT OF THE SELLING STOCKHOLDERS. Each Selling
Stockholder, severally, and not jointly, agrees with each Underwriter and the
Company that such Selling Stockholder will not offer, pledge, sell, contract to
sell, grant any option to purchase, transfer or otherwise dispose of,
<PAGE> 15
14

directly or indirectly, any shares of Common Stock or securities convertible
into or exercisable or exchangeable for Common Stock or warrants or other
rights to purchase Common Stock without the prior written consent of Dillon,
Read & Co. Inc. for a period of 120 days after the date of the final
Prospectus, other than the sales to you pursuant to this Agreement or the
Repurchase Agreement (as defined in the Prospectus).

7. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the Shares are
not delivered for any reason other than the termination of this Agreement
pursuant to the first two paragraphs of Section 9 hereof, the Company shall
reimburse the Underwriters for all of their out-of-pocket expenses, including
the fees and disbursements of their counsel.

8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters hereunder are subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Stockholders on the date hereof and at the time of purchase (and the several
obligations of the Underwriters at the additional time of purchase are subject
to the accuracy of the representations and warranties on the part of the
Company and the Selling Stockholders on the date hereof and at the time of
purchase and at the additional time of purchase, as the case may be), the
performance by the Company and the Selling Stockholders of its obligations
hereunder and to the following conditions:

(a) The Company shall furnish to you at the time of
purchase and at the additional time of purchase, as the case may be,
an opinion of McGuire, Woods, Battle & Boothe, L.L.P., counsel for the
Company, addressed to the Underwriters, and dated the time of purchase
or the additional time of purchase, as the case may be, with
reproduced copies for each of the other Underwriters and in form
reasonably satisfactory to King & Spalding, counsel for the
Underwriters, stating that:

(i) the Company has been duly organized and is
validly existing as a corporation in good standing under the
laws of the State of Delaware with full corporate power and
authority to own or lease its properties and conduct its
business as described in the Registration Statement and the
Prospectus; and the Company has full corporate power and
authority to execute, deliver and perform this Agreement as
contemplated hereby and thereby;

(ii) each of the Company and its Subsidiaries is
duly qualified or licensed by, and is in good standing in,
each jurisdiction in which it owns or leases property or
conducts its business except where the failure, individually
or in the aggregate, to be so licensed or qualified could
reasonably be expected to have a Material Adverse Effect;

(iii) each of the Subsidiaries has been duly
organized and is validly existing as a corporation in good
standing under the laws of its jurisdiction of
<PAGE> 16
15

incorporation with full corporate power and authority to own
its properties and to conduct its business as a foreign sales
corporation;

(iv) as of the date of this Agreement, the time of
purchase and the additional time of purchase, as the case may
be, the Company's authorized capitalization is as set forth in
the section of the Registration Statement and the Prospectus
entitled "Capitalization";

(v) all of the issued and outstanding shares of
capital stock of the Company, including the Shares, have been
duly authorized and validly issued and are fully paid and
nonassessable and free of statutory and, to the best knowledge
of such counsel, contractual preemptive rights;

(vi) this Agreement has been duly authorized,
executed and delivered by the Company;

(vii) the capital stock of the Company, including
the Shares, conforms in all material respects to the
description thereof contained in the Registration Statement
and the Prospectus; and the certificates for the Shares are
in due and proper form and the holders of the Shares will not
be subject to personal liability under Delaware General
Corporation law by reason of being such holders; immediately
prior to the delivery of the Shares being sold by such Selling
Stockholder, such Selling Stockholder was the sole registered
owner of such Shares;

(viii) the Registration Statement and the Prospectus
(except as to the financial statements and schedules and other
financial and statistical data contained therein, as to which
such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Act;

(ix) the documents incorporated by reference in
the Registration Statement and Prospectus, when they were
filed (or, if an amendment with respect to any such document
was filed, when such amendment was filed), complied as to form
in all material respects with the Exchange Act (except as to
the financial statements and schedules and other financial and
statistical data contained or incorporated by reference
therein, as to which such counsel need express no opinion);

(x) the Registration Statement has become
effective under the Act and, to the best of such counsel's
knowledge, no stop order proceedings with respect thereto are
pending or threatened under the Act;
<PAGE> 17
16

(xi) no approval, authorization, consent or order
of or filing with any federal, state, local or foreign
governmental or regulatory commission, board, body, authority
or agency is required in connection with the issuance and sale
of the Shares as contemplated by this Agreement other than
registration of the Shares under the Act (except such counsel
need express no opinion as to any necessary qualification
under the securities laws of any foreign country or the state
securities or blue sky laws of the various jurisdictions in
which the Shares are being offered by the Underwriters);

(xii) the statements (A) in the Prospectus under
the captions "Risk Factors - Anti-takeover Provisions," and
"Description of Capital Stock" and (B) in the Registration
Statement in Item 15, in each case insofar as such statements
constitute summaries of the legal matters (including statutes
and legal and governmental proceedings), contracts or other
agreements referred to therein, are accurate in all material
respects;

(xiii) the Company is not and will not be as a
result of the consummation of the transactions contemplated by
this Agreement, an "investment company" within the meaning of
the Investment Company Act of 1940, as amended;

(xiv) the execution, delivery and performance of
this Agreement by the Company and the consummation of the
transactions contemplated hereby and thereby do not and will
not violate any provision of the articles of incorporation or
bylaws of the Company or any of its Subsidiaries or conflict
with, result in any breach of, or constitute a default under
(or constitute any event that with notice, lapse of time, or
both, would constitute a breach of or default under), any
provision of any license, lease, indenture, mortgage, deed of
trust, bank loan or credit agreement or other agreement or
instrument filed as an exhibit to a registration statement or
incorporated therein by reference or any other material
agreement or instrument known to such counsel and to which the
Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries or any of their respective
properties may be bound or to which any property is subject,
or to the best of such counsel's knowledge, under any law,
regulation or rule or any decree, judgment or order applicable
to the Company or any of its Subsidiaries;

(xv) the documents incorporated by reference in
the Registration Statement and Prospectus, when they were
filed (or, if an amendment with respect to any such document
was filed when such amendment was filed), complied as to form
in all material respects with the Exchange Act (except as to
the financial statements and schedules and other financial and
statistical data contained or
<PAGE> 18
17

incorporated by reference therein as to which such counsel
need express no opinion);

(xvi) to the best of such counsel's knowledge,
there are no contracts, licenses, agreements, leases or
documents of a character that are required to be filed as
exhibits to the Registration Statement or to be summarized or
described in the Prospectus that have not been so filed,
summarized or described;

(xvii) to the best knowledge of such counsel, there
are no actions, suits or proceedings pending or threatened
against the Company or any of its properties at law or in
equity or before or by any commission, board, body, authority
or agency that are required to be described in the Prospectus
but are not so described;

(xviii) to the best knowledge of such counsel, no
person has the right, contractual or otherwise, to cause the
Company to issue to it, or register pursuant to the Act, any
securities of the Company as a result of the sale of the
Shares to the Underwriters hereunder, nor does any person have
preemptive rights, rights of first refusal or other rights to
purchase any of the Shares;

(xix) such counsel have participated in conferences
with officers and other representatives of the Company,
representatives of the independent public accountants of the
Company and representatives of Underwriters at which the
contents of the Registration Statement and Prospectus were
discussed and, although such counsel is not passing upon and
does not assume responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration
Statement or Prospectus (except as and to the extent stated in
paragraph (xii) above), on the basis of the foregoing nothing
has come to the attention of such counsel that causes them to
believe that the Registration Statement or any amendment
thereto, at the time such Registration Statement or amendment
became effective, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading, or that the Prospectus or any supplement thereto,
at the date of such Prospectus or such supplement, and at all
times up to and including the time of purchase or additional
time of purchase, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not
misleading (it being understood that such counsel need express
no opinion with respect to the financial statements and
schedules and other financial and statistical data included in
the Registration Statement or Prospectus).

(b) You shall have received at the time of purchase and
at the additional time of purchase, as the case may be, an opinion of
Hutchins, Wheeler & Dittmar, a professional corporation, counsel to
the Selling Stockholders, addressed to the
<PAGE> 19
18

Underwriters, and dated the time of purchase or the additional time of
purchase, as the case may be, with reproduced copies for each of the
other Underwriters and in form satisfactory to King & Spalding,
counsel for the Underwriters, stating that:

(i) this Agreement, the Powers of Attorney and
the Custody Agreement have been duly authorized executed and
delivered by or on behalf of each of the Selling Stockholders;
and the Custody Agreement of each Selling Stockholder
constitutes the valid and binding agreement of such Selling
Stockholder enforceable in accordance with its terms except as
the validity, binding effect or enforcement thereof may be
limited by or subject to (i) bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance and similar
laws of general application relating to or affecting the
enforcement of creditors' rights, (ii) the effect of general
principles of equity, including without limitation concepts of
materiality, reasonableness, good faith and fair dealings, and
the possible unavailability of specific performance or
injunctive relief, whether considered in a proceeding in
equity or at law, and (iii) policy considerations or court
decisions which may limit the rights of any party to obtain
indemnification.

(ii) each of the Selling Stockholders has full
legal right, power and authority or capacity, as the case may
be, and to the best of such counsel's knowledge has obtained
any authorization or approval required by law (other than
those imposed by the Act and the securities or blue sky laws
of certain jurisdictions), to sell, assign, transfer and
deliver the Shares to be sold by such Selling Stockholder in
the manner provided in this Agreement;

(iii) upon receipt of payment by the Selling
Stockholders and delivery of the Shares to be sold by the
Selling Stockholders pursuant hereto, title thereto will pass
to the Underwriters severally, free and clear of any claim,
lien, encumbrance, security interest or restrictions on
transfer, assuming the Underwriters purchased such Shares for
value in good faith without notice of any adverse claim;

(iv) each of the Representatives of the Selling
Stockholders has been duly authorized by each Selling
Stockholder to execute and deliver on behalf of such Selling
Stockholder this Agreement and any other document necessary or
desirable in connection with the transactions contemplated
hereby and to deliver the shares to be sold by such Selling
Stockholders;

(v) to the best of such counsel's knowledge, the
execution, delivery and performance of this Agreement and the
Custody Agreement and the consummation of the transactions
contemplated hereby and thereby will not conflict with, or
result in any breach of or constitute a default under (nor
constitute any event which with notice, lapse of time or both
would constitute a breach of, or default under), any
<PAGE> 20
19

provision of the articles of association or bylaws or
constituent documents of such Selling Stockholder or under any
provision of any indenture, mortgage, deed of trust, bank loan
or credit agreement, or other agreement or instrument
specified on Exhibit 8(b)(v) hereto to which such Selling
Stockholder or by which such Selling Stockholder or any of its
properties may be bound or affected or under any federal,
state, local or foreign law, regulation or rule or any decree,
judgment or order applicable to such Selling Stockholder;

(vi) no approval, authorization, consent or order
of or filing with any federal, state, local or foreign
governmental or regulatory commission, board, body, authority
or agency is required in connection with the sale of the
Shares as contemplated hereby other than registration of the
Shares under the Act (except such counsel need express no
opinion as to any necessary qualification under the securities
laws of any foreign country or the state securities or blue
sky laws of the various jurisdictions in which the Shares are
being offered by the Underwriters); and

(vii) the statements in the Prospectus under the
caption "Principal and Selling Stockholders" insofar as such
statements constitute summaries of the legal matters,
documents or proceedings referred to therein, fairly present
the information called for with respect to such legal matters,
documents and proceedings and fairly summarize the matters
referred to therein.

(c) You shall have received from Coopers & Lybrand L.L.P.
a letter or letters dated, respectively, the date of this Agreement
and the time of purchase and additional time of purchase, as the case
may be, and addressed to the Underwriters (with reproduced copies for
each of the Underwriters) in form and substance satisfactory to you.

(d) You shall have received at the time of purchase and
at the additional time of purchase, as the case may be, an opinion of
King & Spalding and dated the time of purchase or the additional time
of purchase, as the case may be, in form and substance satisfactory to
you.

(e) No amendment or supplement to the Registration
Statement or the Prospectus, and any Term Sheet or Integrated
Prospectus shall be filed prior to the time the Registration Statement
becomes effective to which you shall have reasonably objected in
writing.

(f) The Registration Statement shall become effective at
or before 5:00 P.M., New York City time, on the date of this Agreement
and, if Rule 430A or Rule 434 under the Act is used, the Prospectus,
including any Term Sheet constituting a part thereof, shall have been
filed with the Commission pursuant to Rule 424(b) under the Act at or
before 5:00 P.M., New York City time, on the second full business day
after the date of this
<PAGE> 21
20

Agreement; provided, however, that any Integrated Prospectus shall
have been filed on or prior to the date on which a confirmation is
sent or given;

(g) Prior to the time of purchase or the additional time
of purchase, as the case may be: (i) no stop order with respect to the
effectiveness of the Registration Statement shall have been issued
under the Act or proceedings initiated under Section 8(d) or 8(e) of
the Act; (ii) the Registration Statement and all amendments thereto,
or modifications thereof, if any, shall not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading; and (iii) the Prospectus and all amendments or supplements
thereto, or modifications thereof, if any, shall not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.

(h) Between the time of execution of this Agreement and
the time of purchase or the additional time of purchase, as the case
may be, there has not been (i) any material change, present or
prospective, in the business, properties, results of operations,
condition (financial or otherwise), assets or prospects of the Company
other than as described in the Registration Statement and the
Prospectus, (ii) any transaction that is material to the Company
contemplated or entered into by the Company, other than as described
in the Registration Statement and the Prospectus, or (iii) any
obligation, contingent or otherwise, directly or indirectly, incurred
by the Company that is material to the Company other than as described
in the Registration Statement and the Prospectus.

(i) The Company, at the time of purchase or additional
time of purchase, as the case may be, will deliver to you a
certificate of the Company to the effect that the representations and
warranties of the Company set forth in this Agreement are true and
correct as of each such date and the conditions set forth in Section
8(g) and Section 8(h) have been met.

(j) You shall have received signed letters, dated the
date of this Agreement, from each of the Selling Stockholders and the
directors and executive officers of the Company to the effect that
such persons shall not offer, pledge, sell, contract to sell, grant
any option to purchase, transfer or otherwise dispose of, directly or
indirectly, any shares of Common Stock or other securities convertible
into or exercisable or exchangeable for Common Stock or warrants or
other rights to purchase Common Stock without the prior written
consent of Dillon, Read & Co. Inc., for a period of 120 days after the
date of the final Prospectus other than; (i) in the case of the
Selling Stockholders, shares sold to the Company pursuant to the
Repurchase Agreement (as defined in the Prospectus), (ii) in the case
of the Company, stock options issued pursuant to the Company's stock
option plans in the existence of the date of the Preliminary
Prospectus or stock issued pursuant to the Company's Executive Loan
Plan (as defined in the Prospectus), and (iii) in the case of
executive officers of the Company other than Albert Prillaman, shares
of Common Stock sold solely in connection with cashless exercises of
currently outstanding stock options held by such executive officers.
<PAGE> 22
21

(k) The Selling Stockholders will at the time of purchase
and the additional time of purchase, as the case my be, deliver to you
a certificate of the Representatives of the Selling Stockholders to
the effect that the representations and warranties of the Selling
Stockholders as set forth in this Agreement are true and correct as of
each such date.

(l) The Company and the Selling Stockholders shall have
furnished to you such other documents and certificates as to the
accuracy and completeness of any statement in the Registration
Statement or the Prospectus as of the time of purchase and the
additional time of purchase, as the case may be, as you reasonably may
request.

(m) The Company and the Selling Stockholders shall have
performed such of their respective obligations under this Agreement as
are to be performed by the terms hereof at or before the time of
purchase and at or before the additional time of purchase, as the case
may be.

9. EFFECTIVE DATE OF AGREEMENT; TERMINATION. This Agreement
shall become effective (i) if neither Rule 430A nor Rule 434 under the Act is
used, when you shall have received notification of the effectiveness of the
Registration Statement, or (ii) if either Rule 430A or Rule 434 under the Act
is used, when the parties hereto have executed and delivered this Agreement.

The obligations of the several Underwriters hereunder shall be subject
to termination in your absolute discretion if, at any time prior to the time of
purchase or, with respect to the purchase of any Additional Shares, the
additional time of purchase, as the case may be, trading in securities
generally on the New York Stock Exchange shall have been suspended or minimum
prices shall have been established on the New York Stock Exchange, or if a
general banking moratorium shall have been declared either by the United States
or New York State authorities, or if the United States shall have declared war
in accordance with its constitutional processes or there shall have occurred
any material outbreak or escalation of hostilities or other national or
international calamity or crisis of such magnitude in its effect on, or any
material adverse change in, any financial market which, in each case, in your
judgment makes it impracticable to market the Shares.

If you elect to terminate this Agreement as provided in this Section
9, the Company, the Selling Stockholders and each other Underwriter shall be
notified promptly by written notice transmitted by facsimile and confirmed by
written notice sent by registered mail, return receipt requested.

If the sale to the Underwriters of the Shares, as contemplated by this
Agreement, is not carried out by the Underwriters for any reason permitted
under this Agreement or if such sale is not carried out because the Company or
the Selling Stockholders, as the case may be, shall be unable to comply with
any of the terms of this Agreement, neither the Company nor the Selling
Stockholders shall be under any obligation or liability under this Agreement
(except to the extent
<PAGE> 23
22

provided in Sections 6(b), 7 and 11), and the Underwriters shall be under no
obligation or liability to the Company and the Selling Stockholders under this
Agreement (except to the extent provided in Section 11) .

10. INCREASE IN UNDERWRITERS' COMMITMENTS. If any Underwriter
shall default in its obligation to take up and pay for the Firm Shares to be
purchased by it hereunder and if the number of Firm Shares that all
Underwriters so defaulting shall have agreed but failed to take up and pay for
does not exceed 10% of the total number of Firm Shares, the non-defaulting
Underwriters shall take up and pay for (in addition to the aggregate principal
amount of Firm Shares they are obligated to purchase pursuant to Section 1) the
number of Firm Shares agreed to be purchased by all such defaulting
Underwriters as hereinafter provided. Such Shares shall be taken up and paid
for by such non-defaulting Underwriter or Underwriters in such amount or
amounts as you may designate with the consent of each Underwriter so designated
or, in the event no such designation is made, such Shares shall be taken up and
paid for by all nondefaulting Underwriters pro rata in proportion to the
aggregate number of Firm Shares set forth opposite the names of such
non-defaulting Underwriters in Schedule A.

Without relieving any defaulting Underwriter from its obligations
hereunder, the Selling Stockholders agree with the non-defaulting Underwriters
that it will not sell any Firm Shares hereunder unless all of the Firm Shares
are purchased by the Underwriters (or by substituted underwriters selected by
you with the approval of the Selling Stockholders or selected by the Selling
Stockholders with your approval).

If a new Underwriter or Underwriters are substituted by the
Underwriters or by the Selling Stockholders for a defaulting Underwriter or
Underwriters, in accordance with the foregoing provision, the Company or you
shall have the right to postpone the time of purchase for a period not
exceeding five business days in order that any necessary change in the
Registration Statement and the Prospectus and other documents may be effected.

The term Underwriter as used in this Agreement shall refer to and
include any Underwriter substituted under this Section 10 with like effect as
if such substituted Underwriter had originally been named in Schedule A.

11. INDEMNITY BY THE COMPANY, THE SELLING STOCKHOLDERS AND THE
UNDERWRITERS.

(a) The Company and the Selling Stockholders, jointly and
severally, agree to indemnify, defend and hold harmless each Underwriter, each
person that controls any Underwriter within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act, and each Underwriter's agents,
employees, officers and directors and the agents, employees, officers and
directors of any such controlling person (collectively, the "UNDERWRITER
INDEMNIFIED PARTIES") from and against any and all losses, claims, damages,
judgments, liabilities and expenses (including the fees and expenses of counsel
and other expenses in connection with investigating, defending or settling any
such action or claim) as they are incurred (and regardless of whether the
<PAGE> 24
23

Underwriter indemnified party is a party to the litigation, if any) which,
jointly or severally, any such Underwriter indemnified party may incur under
the Act, the Exchange Act or otherwise arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or the Prospectus or any Preliminary Prospectus, or
arising out of or based upon any omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, judgments, liabilities or expenses arise out of or are based upon any
such untrue statement or omission or alleged untrue statement or omission
contained in and in conformity with information with respect to any Underwriter
furnished in writing by or on behalf of any Underwriter through you to the
Company expressly for use therein with reference to such Underwriter provided,
however, that a Selling Stockholder shall be liable under this Section 11(a)
for any such loss, claim, damage, judgment, liability and expense arising out
of any such statement or omission only to the extent of the total net proceeds
from the offering received by such Selling Stockholder from the Underwriters
for the Shares sold by such Selling Stockholder hereunder. This indemnity
agreement will be in addition to any liability the Company or the Selling
Stockholders otherwise may have.

(b) If any action or proceeding (including any governmental or
regulatory investigation or proceeding) shall be brought or asserted against
any Underwriter indemnified party with respect to which indemnity may be sought
against the Company or Selling Stockholders, as the case may be, pursuant to
this Section 11, such Underwriter indemnified party shall promptly notify the
Company and the Representatives of Selling Stockholders, in writing, and the
Company or the Selling Stockholders or if a majority in interest thereof so
choose, the Represtntatives of the Selling Shareholders, as the case may be,
shall assume the defense thereof, including the employment of counsel
reasonably satisfactory to the Underwriter indemnified party and payment of all
fees and expenses; provided that the omission to notify the Company or the
Selling Stockholders shall not relieve them from any liability that they may
have to any Underwriter indemnified party. An Underwriter indemnified party
shall have the right to employ separate counsel in any such action or
proceeding and to assume the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Underwriter indemnified party unless
(i) the employment of such counsel has been authorized in writing by the
Company or the Selling Stockholders, as the case may be, (ii) the Company or
the Selling Stockholders, as the case may be, has failed promptly to assume the
defense and employ counsel satisfactory to the Underwriter indemnified party or
(iii) the named parties to any such action or proceeding (including any
impleaded parties) include both one or more Underwriter indemnified parties and
the Company or the Selling Stockholders, as the case may be, and such
Underwriter indemnified parties shall have reasonably concluded that there may
be one or more legal defenses available to them that are different from or
additional to those available to the Company or the Selling Stockholders (in
which case the Company or the Selling Stockholders shall not have the right to
assume the defense of such action on behalf of such Underwriter indemnified
parties), in any of which events such fees and expenses shall be borne by the
Company or the Selling Stockholders, as the case may be, and reimbursed as they
are incurred. None of the Company or the Selling Stockholders shall be liable
for any settlement of any such action effected without the written consent of
the Company or the Selling Stockholders, as the case may be (which consent
shall not be unreasonably withheld
<PAGE> 25
24

or delayed), but if settled with the written consent of the Company or the
Selling Stockholders, as the case may be, or if there is a final judgment with
respect thereto, the Company agrees to indemnify and hold harmless each
Underwriter indemnified party from and against any loss or liability by reason
of such settlement or judgment.

(c) Each Underwriter severally agrees to indemnify and hold
harmless the Company, its directors, its officers who sign the Registration
Statement, and any person that controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act (collectively, the
"COMPANY INDEMNIFIED PARTIES") and each Selling Stockholder and any person that
controls such Selling Stockholder within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act (collectively, the "SELLING STOCKHOLDER
INDEMNIFIED PARTIES") from and against any losses, claims, damages, judgements,
liabilities and expenses to the same extent as the foregoing indemnity from the
Company and the Selling Stockholders to the Underwriter indemnified parties,
but only with respect to information concerning such Underwriter furnished in
writing by or on behalf of such Underwriter through you to the Company
expressly for use with respect to such Underwriter in the Registration
Statement, any Preliminary Prospectus or the Prospectus. In case any action
shall be brought against any Company indemnified party or Selling Stockholder
indemnified party based on the Registration Statement, any Preliminary
Prospectus or the Prospectus and in respect of which indemnity may be sought
against any Underwriter pursuant to this Section 11(c), such Underwriter shall
have the rights and duties given to the Company by Section 11(b) (except that
if the Company or Selling Stockholders shall have assumed the defense thereof,
such Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof, provided that the fees
and expenses of such separate counsel shall be at the expense of such
Underwriter), and the Company indemnified parties and the Selling Stockholder
indemnified parties shall have the rights and duties given to the Underwriter
indemnified parties by Section 11(b).

(d) If the indemnification provided for in this Section 11 is
unavailable to or insufficient to hold harmless any Underwriter indemnified
party or any Company indemnified party or any Selling Stockholder indemnified
party, then the party required to indemnify such indemnified party under this
Section 11, in lieu of indemnifying such indemnified party, shall contribute to
the amount paid or payable by such indemnified party as a result of such
losses, claims, damages, judgments, liabilities and expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Stockholders on the one hand and the Underwriters on
the other hand from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company and the
Selling Stockholders on the one hand and the Underwriters on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages, judgments, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the
Company and the Selling Stockholders on the one hand and the Underwriters on
the other hand shall be deemed to be in the same proportion as the total
proceeds from the offering of the Shares (net of underwriting discounts and
<PAGE> 26
25

commissions but before deducting expenses) received by the Selling Stockholders
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company and the Selling Stockholders on
the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue statement or alleged
untrue statement of a material fact or the omission or alleged omission to
state a material fact relates to information supplied by the Company, by the
Selling Stockholders or by the Underwriters, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a result of
the losses, claims, damages, judgments, liabilities and expenses referred to
above shall be deemed to include any legal or other fees or expenses reasonably
incurred by such party in connection with investigating or defending any claim
or action.

The Company, the Selling Stockholders and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section
11(d) were determined by pro rata allocation or by any other method of
allocation (even if the Underwriters were treated as one entity for such
purpose) that does not take account of the equitable considerations referred to
in this Section 11(d). Notwithstanding the provisions of this Section 11(d),
(i) no Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by such
Underwriter and distributed to the public were offered to the public exceeds
the amount of any damages that such Underwriter otherwise has been required to
pay by reason of such untrue statement or alleged untrue statement or omission
or alleged omission and (ii) no Selling Shareholder shall be required to
contribute any amount in excess of the amount by which the total net proceeds
from the offering received by such Selling Stockholder from the Underwriters
for the Shares sold by such Selling Stockholder hereunder exceeds the amount of
any damages that such Selling Shareholder otherwise has been required to pay by
reason of such untrue statement or alleged untrue statement or omission or
alleged omission. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 11 are several
in proportion to their respective underwriting commitments and are not joint.

The Company hereby acknowledges and agrees with the Underwriters that
the statements set forth in (i) the last paragraph on the cover page of the
Prospectus, (ii) the paragraph in boldface type on the inside cover page of the
Prospectus relating to stabilization, (iii) the list of Underwriters under the
caption "Underwriting" in the Prospectus and (iv) the statements relating to
the selling concession and reallowance in the third paragraph below the tables
under the caption "Underwriting" in the Prospectus constitute the only
information furnished to the Company in writing by the Underwriters expressly
for use in the Registration statement, any Preliminary Prospectus or the
Prospectus.

(e) The indemnity and contribution agreements contained in this
Section 11 and the representations, warranties and covenants of the Company and
the Selling Stockholders contained
<PAGE> 27
26

in this Agreement shall remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter indemnified party or by
or on behalf of any Company indemnified party or any Selling Stockholder
indemnified party and shall survive any termination of this Agreement or the
issuance and delivery of the Shares. Subject to the provisions of Section
11(b) and Section 11(c), the Company, each Selling Stockholder and each
Underwriter agree promptly to notify the other of the commencement of any
litigation or proceeding against it in connection with the issuance and sale of
the Shares or in connection with the Registration Statement or the Prospectus.

12. NOTICES. Except as otherwise herein provided, all statements,
requests, notices and agreements shall be in writing or by telegram and, if to
the Underwriters, shall be sufficient in all respects if delivered or sent to
Dillon, Read & Co., 535 Madison Avenue, New York, New York 10022, Attention:
Syndicate Department; and Raymond James & Associates, Inc., P.O. Box 12749, 880
Carillon Parkway, St. Petersburg, Florida 33733-2746, Attention: Syndicate
Department and Wheat, First Securities, Inc., Riverfront Plaza, 901 East Byrd
Street, Richmond, Virginia 23219, Attention: Syndicate Department; and if to
the Selling Stockholders, shall be sufficient in all respects, if delivered or
sent to ____________________________________, Attention: __________________;
and if to the Company, shall be sufficient in all respects if delivered or sent
to the Company, at the offices of the Company at Stanley Furniture Company,
Inc., P.O. Box 30, Highway 57 West, Stanleytown, Virginia 24168, Attention:
Douglas I. Payne.

13. CONSTRUCTION. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAW. THE SECTION HEADINGS IN THIS AGREEMENT HAVE
BEEN INSERTED AS A MATTER OF CONVENIENCE OF REFERENCE AND ARE NOT A PART OF
THIS AGREEMENT.

14. PARTIES AT INTEREST. The agreement herein set forth has been
and is made solely for the benefit of the Underwriters, the Company, the
Selling Stockholders, the Underwriter indemnified parties, the Selling
Stockholder indemnified parties and the Company indemnified parties, and their
respective successors, assigns, executors and administrators. No other person,
partnership, association or corporation (including a purchaser, as such
purchaser, from any of the Underwriters) shall acquire or have any right under
or by virtue of this Agreement.

15. COUNTERPARTS. This Agreement may be signed by the parties in
counterparts, which together shall constitute one and the same agreement among
the parties.
<PAGE> 28
27

If the foregoing correctly sets forth the understanding among the
Company, the Selling Stockholders and the Underwriters, please so indicate in
the space provided below for such purpose, whereupon this letter and your
acceptance shall constitute a binding agreement among the Company, the Selling
Stockholders and the Underwriters, severally.

Very truly yours,

STANLEY FURNITURE COMPANY, INC.

By:
---------------------------

By:
---------------------------
Attorney-in-Fact

By:
---------------------------
Name:
Title:

ML-LEE ACQUISITION FUND, L.P.

By: Mezzanine Investments, L.P.
Its Managing General Partner

By: ML Mezzanine, Inc.
Its General Partner

By:
-----------------------
Name:
Title:

ML-LEE ACQUISITION FUND II, L.P.

By: Mezzanine Investments II, L.P.
Its Managing General Partner

By: ML Mezzanine II, Inc.
Its General Partner

By:
-----------------------
Name:
Title:

ML-LEE ACQUISITION FUND, L.P.
(RETIREMENT ACCOUNTS) II, L.P.

By: Mezzanine Investments II, L.P.
Its Managing General Partner

By: ML Mezzanine II, Inc.
Its General Partner

By:
-----------------------
Name:
Title:

STATE STREET BANK AND TRUST
COMPANY OF CONNECTICUT, N.A., NOT
INDIVIDUALLY, BUT AS TRUSTEE FOR
THE 1989 THOMAS H. LEE NOMINEE
TRUST, DATED 9/29/89*

PAXMAN & CO.*

C. HUNTER BOLL*

JOHN W. CHILDS*

DAVID V. HARKINS*

DAVID V. HARKING C/F JESSICA
HARKINS*

DAVID V. HARKING C/F JASON HARKINS*

GLENN W. HUTCHINS*

SCOTT A. SCHOEN*

THOMAS R. SHEPHERD*

ANTHONY J. DINOVI*

By:
---------------------------
Name: C. Hunter Boll
Attorney-in-Fact

Accepted and agreed to as of the date first
above written, on behalf of themselves
and the other several Underwriters
named in Schedule A

DILLON, READ & CO., INC.
RAYMOND JAMES & ASSOCIATES, INC.
WHEAT, FIRST SECURITIES, INC.

BY: DILLON, READ & CO. INC.

By:
-------------------------------
Name:
Title:
<PAGE> 29
SCHEDULE A

<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF FIRM SHARES
- ------------ ---------------------
<S> <C>
Dillon, Read & Co. Inc. . . . . . . . . . . . . . . . . .
Raymond James & Associates, Inc. . . . . . . . . . . . .
Wheat, First Securities, Inc. . . . . . . . . . . . . . .
</TABLE>
<PAGE> 30
SCHEDULE B

Selling Stockholders

Number of Firm Number of Additional
Name Shares to Be Sold Shares to be Sold

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to:

(1) the inclusion in this registration statement of Stanley Furniture
Companys, Inc. on Form S-3 of our report dated January 26, 1996, on our
audits of the financial statements of Stanley Furniture Company, Inc. as of
December 31, 1994 and 1995, and for each of the three years in the period
ended December 31, 1995, and on our audits of the information as of and
for the five years ended December 31, 1995, set forth in the Selected
Financial Data under the captions "Income Statement Data," "Supplementary
Income Per Common Share Data" and "Balance Sheet Data," and

(2) the incorporation by reference in this registration statement of
our report dated January 26, 1996, on our audits of the financial
statements and financial statement schedule of Stanley Furniture Company,
Inc. as of December 31, 1995 and 1994, and for each of the three years in
the period ended December 31, 1995, which report is included in the 1995
Annual Report on Form 10-K.

We also consent to the reference to our firm under the caption "Experts."

COOPERS & LYBRAND L.L.P.

Richmond, Virginia
November 11, 1996

<PAGE> 1
EXHIBIT 99.1

STOCK PURCHASE AGREEMENT

This STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of November
__, 1996, is among Stanley Furniture Company, Inc., a Delaware corporation (the
"Company") and the Selling Stockholders listed on Schedule 1 hereto.

A. The Selling Stockholders own an aggregate of 2,758,902 shares
of common stock, $.02 par value, of the Company (the
"Common Stock");

B. The Selling Stockholders desire to sell 1,150,000 shares of
Common Stock in a registered public offering pursuant to an
Underwriting Agreement (the "Underwriting Agreement") to be
executed among the Company, the Selling Stockholders and
Dillon, Read & Co. Inc., Raymond James & Associates, Inc. and
Wheat, First Securities, Inc. (the "Managing Underwriters") as
representatives of the several Underwriters named therein.

C. In the event that the Managing Underwriters do not exercise,
or do not exercise in full, the over-allotment option pursuant
to the Underwriting Agreement, the Company desires to purchase
the Shares (as hereinafter defined) on the terms and
conditions hereinafter set forth.

In consideration of the mutual promises, representations, warranties,
covenants and conditions set forth in this Agreement, the parties to this
Agreement mutually agree as follows:

1. Purchase and Sale of Shares. Subject to the terms and
conditions herein provided, the Company hereby agrees to purchase and pay for,
and each of the Selling Stockholders hereby agrees to sell and transfer the
number of shares of Common Stock set forth opposite the
<PAGE> 2
name of such Selling Stockholder on Schedule 1 hereto (the "Shares") to the
extent such Shares are not acquired by the Underwriters pursuant to the
Underwriting Agreement upon exercise of the over-allotment option thereunder.
The consideration for the sale and transfer of the Shares shall be $
____________ per Share. The closing of the foregoing transactions (the
"Closing") shall occur on the third business day following the period specified
in the Underwriting Agreement for the exercise of the over-allotment option
thereunder at such location as is mutually agreable to the parties or at such
other time and location as are mutually agreeable to the parties. The Selling
Stockholders shall make delivery of the Shares to the Company at the Closing by
delivering to the Company, or its authorized representative, the certificates
representing the Shares duly endorsed or with stock powers attached thereto
duly signed, against payment of the purchase price in cash, check or by wire
transfer.

2. Representations and Warranties of the Selling Stockholders.

(A) Each of the Selling Stockholders represents and warrants to the Company as
follows:

a. The execution and delivery of this Agreement and the
performance by such Selling Stockholder of such Selling Stockholder's
obligations hereunder have been duly authorized by all necessary
action by such Selling Stockholder and this Agreement is a legal,
valid and binding agreement of such Selling Stockholder, enforceable
against such Selling Stockholder in accordance with its terms.

b. The Shares set forth opposite such Selling
Stockholder in Schedule 1 hereto are owned beneficially and of record
by such Selling Stockholder, there exist no liens, options, charges,
adverse claims or encumbrances of any kind, including any margin
loans, affecting such Shares and upon delivery of such Shares, the
Company

2
<PAGE> 3
will own such Shares free and clear of any lien, option, charge,
adverse claim or encumbrance of any kind..

c. The consummation by such Selling Stockholder of the
transactions contemplated by this Agreement will not, as applicable,
violate any provision of the charter or governing documents of such
Selling Stockholder, or violate any provision of, or constitute a
default under, any mortgage, deed of trust, indenture, or other
agreement or instrument, to which such Selling Stockholder is a party
or by which any of its assets are bound, or violate or conflict with
any existing law, order, rule, regulation, writ, injunction, judgment
or decree of any government, governmental instrumentality, agency or
body, arbitration tribunal, or court, domestic or foregin, having
jurisdiction over such Selling Stockholder or such Selling
Stockholder's property.

(B) Each of the ML-Lee Acquisition Fund, L.P., ML-Lee Acquistion Fund
II, L.P. and ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. represents
that it has elected to operate as a "Business Development Company" within the
meaning of the Investment Company Act of 1940, as amended

3. Representations and Warranties of the Company. The Company
represents and warrants to the Selling Stockholders as follows:

a. The execution and delivery of this Agreement and the
performance by the Company of its obligations hereunder have been duly
authorized by all necessary action by the Company and this Agreement
is a legal, valid and binding agreement of the Company, enforceable
against it in accordance with its terms.

b. The consummation by the Company of the transactions
contemplated by this Agreement will not violate any provision of the
Certificate of Incorporation or Bylaws of the Company, or violate any
provision of, or constitute a default under, any mortgage, deed of
trust, indenture, or other agreement or instrument, to which the
Company is a party or by which any of its assets are bound, or violate
or conflict with any existing law, order, rule, regulation, writ,
injunction, judgement or decree of any government, governmental
instrumentality, agency or body, arbitration tribunal, or court,
domestic or foreign, having juridiction over the Company or the
Company's property.

4. Conditions. In addition to the other conditions contained
herein, the obligation of the Selling Stockholders to sell and transfer, and
the obligation of the Company to

3
<PAGE> 4
purchase and pay for, the Shares is subject to the meeting of each of the
following conditions at or prior to the Closing:

a. With respect to the obligations of the Company, each
of the representations and warranties of the Selling Stockholders
contained in this Agreement shall be true and correct in all respects
as of the date of this Agreement and as of the Closing.

b. With respect to the obligations of the Selling
Stockholders, each of the representations and warranties of the
Company contained in this Agreement shall be true and correct in all
respects as of the date of this Agreement and as of the Closing.

c. The Underwriting Agreement shall have been duly
executed and delivered.

d. The consummation and closing of the purchase of the
Firm Shares (as detailed in the Underwriting Agreement) shall have
occurred.

e. The Managing Underwriters shall have failed to
exercise, or failed to exercise in full, the over-allotment option
pursuant to the Underwriting Agreement by the date specified for such
exercise in the Underwriting Agreement.

f. Neither the Company nor the Selling Stockholders
shall be prohibited by any action, order, judgment or injunction of a
court of competent jurisdiction from purchasing or selling the Shares
under this Agreement.

4
<PAGE> 5
5. Termination. This Agreement shall terminate upon exercise in
full by the Underwriters of the over-allotment option under the Underwriting
Agreement. After expiration of the period specified in the Underwriting
Agreement for the exercise of the over-allotment option thereunder, this
Agreement may be terminated at any time prior to the Closing:

a. by the Company if any of the conditions specified in
Section 4 (except for the condition specified in Section 4(b)) of this
Agreement have not been met or waived by it pursuant to the terms of
this Agreement; or

b. by the Selling Stockholders if any of the conditions
specified in Section 4 (except for the condition specified in Section
4(a)) of this Agreement have not been met or waived by it pursuant to
the terms of this Agreement; provided, however, this Agreement may not
be terminated by virtue of the condition in Section 4(f) not being met
until any action, order, judgment or injunction referred to therein
becomes final and non-appealable.

6. Amendment. This Agreement may be amended at any time prior to
the Closing provided that any such amendment is approved in writing by each of
the parties. All representations and warranties of the Company and the Selling
Stockholders which are true and correct as modified and approved shall be
deemed true and correct for the purposes of Sections 2 and 3.

7. Extension; Waiver. At any time prior to the Closing either
party to this Agreement may (i) extend the time for the performance of any of
the obligations of the other party, (ii) waive a breach of a representation or
warranty of the other party, or (iii) waive compliance by the other party with
any of the agreements or conditions contained herein. Any such extension or
waiver shall be valid if set forth in a written instrument signed by the party
giving the extension or waiver.

8. Notices. All notices and other communications given hereunder
shall be in writing. Notices shall be effective when delivered, if delivered
personally. Otherwise, they shall be effective when sent to the parties at the
addresses or numbers listed below, as

5
<PAGE> 6
follows: (i) on the business day delivered (or the next business day following
delivery if not delivered on a business day) if sent by a local or long
distance courier, prepaid telegram, telefax or other facsimile means, or (ii)
three days after mailing if mailed by registered or certified U.S. mail,
postage prepaid and return receipt requested.

If to the Company to:

Stanley Furniture Company
P. O. Box 30
Highway 57 West
Stanleytown, Virginia 24168
Attention: Albert L. Prillaman
Telefax No.: (540) 627-5114

with a copy to:

David W. Robertson, Esquire
McGuire, Woods, Battle & Boothe, L.L.P.
One James Center
901 East Cary Street
Richmond, Virginia 23219-4030
Telefax No.: (804) 775-1061

If to a Selling Stockholder to:

the address set forth for such Selling Stockholder
in Schedule 1 hereto,

with a copy to:

Charles W. Robins, Esquire
Hutchins, Wheeler & Dittmar
101 Federal Street
Boston, Massachusetts 02110
Telefax No.: (617) 951-1295

or to such other address or number as a party may designate by giving notice of
the change in the manner set forth above.

6
<PAGE> 7
9. Miscellaneous. This Agreement (i) constitutes the entire
agreement and supersedes all other prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof;
(ii) is not intended to and shall not confer upon any person or entity, other
than the parties hereto, any rights or remedies with respect to the subject
matter hereof; and (iii) shall not be assigned by operation of law or
otherwise.

10. Section Headings. Section headings are included solely for
convenience and are not to be considered to be part of this Agreement and are
not intended to be accurate descriptions of the contents thereof.

11. Assignment. This Agreement shall be binding upon and inure to
the benefit of the parties thereto and their respective transferees, successors
and assigns; provided, however, no party may assign this Agreement without the
written consent of the other parties to this Agreement.

12. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one instrument.

13. Choice of Law. All questions as to the interpretation and
effect of this Agreement shall be determined under the laws of the State of
Delaware, excluding the choice of law principles thereof.

7
<PAGE> 8
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be
executed on and as of the date first written above.

STANLEY FURNITURE COMPANY, INC.

------------------------------
Albert L. Prillaman
President

ML-LEE ACQUISITION FUND, L.P.

By: Mezzanine Investments, L.P.
Its Managing General Partner

By: ML Mezzanine Inc.
Its General Partner

------------------------------
Name
Title

ML-LEE ACQUISITION FUND II, L.P.

By: Mezzanine Investments II, L.P.
Its Managing General Partner

By: ML Mezzanine II Inc.
Its General Partner

------------------------------
Name
Title

8
<PAGE> 9

ML-LEE ACQUISITION FUND
(RETIREMENT ACCOUNTS) II, L.P.

By: Mezzanine Investments II, L.P.
Its Managing General Partner

By: ML Mezzanine II Inc.
Its General Partner

--------------------------------------
Name
Title

STATE STREET BANK AND TRUST
COMPANY OF CONNECTICUT, N.A., NOT
INDIVIDUALLY, BUT AS TRUSTEE FOR THE
1989 THOMAS H. LEE NOMINEE TRUST,
DATED 9/29/89*

PAXMAN & CO.*

C. HUNTER BOLL*

JOHN W. CHILDS*

DAVID V. HARKINS*

<PAGE> 10

DAVID V. HARKINS C/F JESSICA HARKINS*

DAVID V. HARKINS C/F JASON HARKINS*

GLENN W. HUTCHINS*

SCOTT A. SCHOEN*

THOMAS R. SHEPHERD*

ANTHONY J. DINOVI*

*By:
---------------------------------
Name:
Attorney-in-Fact

<PAGE> 11
Schedule 1
<TABLE>
<CAPTION>
Number of
Name and Address of Selling Stockholders Shares
- ---------------------------------------- ---------

<S> <C>
ML-Lee Acquisition Fund, L.P. . . . . . . . . . . . . . . . . . . . . . . . 145,468

ML-Lee Acquisition Fund II, L.P. . . . . . . . . . . . . . . . . . . . . . 1,256

ML-Lee Acquisition Fund (Retirement Accounts) II, L.P. . . . . . . . . . . 1,006

C. Hunter Boll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

John W. Childs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105

David V. Harkins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

David V. Harkins C/F Jessica Harkins . . . . . . . . . . . . . . . . . . . 54

David V. Harkins C/F Jason Harkins . . . . . . . . . . . . . . . . . . . . 54

State Street Bank and Trust Company of Connecticut, N.A.,
Not Individually, But as Trustee for the 1989 Thomas H. Lee
Nominee Trust, Dated 9/29/89 . . . . . . . . . . . . . . . . . . . . . . . 1,653

Glenn W. Hutchins . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Scott A. Schoen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Thomas R. Shepherd . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Paxman & Co. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

Anthony J. DiNovi . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
</TABLE>

<PAGE> 1
EXHIBIT 99.2

AMENDMENT NO. 2 TO MANAGEMENT AGREEMENT

AMENDMENT NO. 2 (the "Amendment") to the MANAGEMENT AGREEMENT, dated
as of September 29, 1988 (the "Agreement"), made by and among the Thomas H. Lee
Company, a Massachusetts sole proprietorship owned by Thomas H. Lee with its
principal place of business at One Boston Place, Boston, Massachusetts (the
"Consultant"), and Stanley Holding Corporation, a Delaware corporation
("Holding"), Stanley Acquisition Corporation, a Delaware corporation
("Acquisition") and Interiors Acquisition Corporation, a Delaware corporation
("Interiors") as amended by Amendment No. 1 thereto dated as of November 1, 1996
is entered into as of November 13, 1996 between the Consultant and Stanley
Furniture Company, Inc., a Delaware corporation and successor to Holding,
Acquisition and Interiors (the "Company").

The Fund and certain other stockholders of the Company (the "Selling
Stockholders") desire to sell shares of common stock, $.02 par value, of the
Company (the "Shares") in a registered public offering pursuant to an
Underwriting Agreement (the "Underwriting Agreement") to be executed among the
Company, the Selling Stockholders and Dillon Read & Co. Inc., Raymond James &
Associates, Inc. and Wheat First Butcher Singer (the "Managing Underwriters")
as representatives of the several Underwriters named therein. The Consultant
and the Company desire to amend the Agreement as set forth below in connection
with the execution of the Underwriting Agreement and the transactions
contemplated thereby.

The parties hereby agree to amend the Agreement as follows:

1. Effective as of the date of this Amendment, the last sentence of
Section 2 of the Agreement shall be deleted in its entirety and the following
sentence inserted in its place:

In the event that the Selling Stockholders sell all of the
shares of Common Stock of the Company beneficially owned by
them, this Agreement shall terminate upon the completion of
such sale; provided, however, that (i) the Company shall
reimburse Consultant for any expenses incurred pursuant to
Section 5(c) of this Agreement before termination of this
Agreement and not previously reimbursed and (ii) Consultant
shall pay to the Company an amount equal to the Management Fee
for the month of termination pro rated for the number of days
in such month following termination.

2. Effective as of the Closing Date pursuant to the Underwriting
Agreement (the "Closing Date"), Section 5(b) of the Agreement shall be amended
by deleting "Two Hundred Fifty Thousand Dollars ($250,000)" and by inserting
"One Hundred Eighty Thousand Dollars ($180,000)" in its place. The Management
Fee to
<PAGE> 2
be paid by the Company to the Consultant on the first day of December 1996
pursuant to the Agreement shall equal (i) 15,000 minus (ii) the product of (a)
$194.44 times (b) the number of days from and including the Closing Date to and
including November 30, 1996.

3. Except as expressly set forth in this Amendment, all other terms and
conditions of the Agreement shall remain in full force and effect. Capitalized
terms used herein and not otherwise defined shall have the meaning assigned to
such terms in the Agreement.

4. This Amendment may be executed in any number of counterparts, each of
which shall be deemed an original but all of which together shall constitute
one instrument.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their duly authorized officers as of the day and year first
above written.

THOMAS H. LEE COMPANY

By:
-------------------------------------
Name:
Title:

STANLEY FURNITURE COMPANY, INC.

By:
-------------------------------------
Albert L. Prillaman
President