Every two weeks, Susie Cutright would wait at her home in Ritchie County for the woman from the Rural Arts and Crafts Association here to deliver materials and pick up the stuffed animals, calico potholders and diaper bags she would make.

The handicrafts would bring Cutright about $1,000 a year, an important supplement to the $533.29 a month that her husband, a retired school bus driver, receives. She used to work in a sewing factory, but a few years ago her husband developed a heart condition, diabetes and cataracts, so she had to stay home with him.

But the extra money stopped this summer, when Rural Arts Director Sharlene Heinselman reluctantly shut down the program. It had been hit with a Labor Department ruling that the program violated federal minimum-wage standards and then with the bankruptcy of the organization that created Rural Arts in 1971.

"It hurts. It seems before we just never had enough," says Cutright. "I felt the government didn't have any business sticking its neck in. I felt if that's what we wanted to do, we should be allowed."

As late as 1982, the Rural Arts and Crafts Association seemed on the way to becoming one of the success stories of the federal government's War on Poverty. But in the end, Rural Arts, like many of the Great Society antipoverty programs, found success elusive, as efforts to develop a program fashioned around local skills and needs ran up against national concerns. In this case, the national concerns were minimum-wage laws that were designed to protect the most vulnerable workers from exploitation.

Rural Arts also found itself pulled down by the bankruptcy of the West Central West Virginia Community Action Association, the latest in a long line of community action agencies across the nation beset with financial problems.

Rural Arts had its headquarters in a century-old house here. On the first floor, there was a tiny retail shop called Hills-N-Hollows. ("We thought that said it all, because everyone here either lives in a hill or a hollow," Heinselman said.)

Upstairs the rooms were overflowing with calico material and other quilting supplies. Stuffed bears, frogs, alligators and Raggedy Ann dolls hung next to colorful quilts throughout the house. The building is closed now and nothing can be sold from it without bankruptcy court approval.

Rural Arts was established in 1971 by West Central to provide extra income for poor women in areas where jobs were hard to find. Every two weeks, one of three Rural Arts staff members would climb into the association's van and drive the 300-mile circuit through 10 rural mountainous counties, dropping off materials and equipment for workers and picking up finished products.

Normally they would stop at some central location, but for some elderly women like Thelma Hardbarger, who does not drive, the staff would deliver material to her house.

Until 1984, people had to be at or below the poverty level in order to participate in the Rural Arts program. The poverty line is $4,980 for a single person, $6,720 for a couple and $10,200 for a family of four. Last year that limit was raised to 125 percent of the poverty level.

Rural Arts' problems started in 1983, when the Labor Department said it would be investigating the program for minimum-wage violations. The women received an average of $90 to piece a quilt, which involved cutting and sewing the pieces together, and $100 to quilt or handstitch the product.

Labor Department spokesman Jack Hord said an investigation by the office in Charleston, W.Va., found that the wages divided by the hours worked were substantially below the $3.35 an hour minimum wage. Heinselman said she was told that the wages calculated were closer to $1.10 an hour.

However, she said she could not afford to raise the payments because that would boost the prices of the quilts too high to make them competitive. They sold for $250 to $400 each.

Deirdre Bonifaz, executive director of Artisans Cooperative Inc., a Pennsylvania-based nonprofit group that helped sell Rural Arts products through its mail order catalogue, agreed. Bonifaz said that boosting the prices high enough to pay minimum wages would hurt sales. She said that American-made quilts must now compete with cheaper duplicates made abroad.

Earlier this year, the Labor Department ruled that Rural Arts was violating federal minimum-wage laws and owed $44,870 in back pay for the past two years. It was ordered to begin immediately paying minimum wages, and warned of possible future fines.

Then in May, West Central voted to file for bankruptcy. Although Rural Arts had stopped accepting community action money about three years ago, it had never legally severed ties with the agency. So Heinselman, who made $13,000 a year, said she was told the bankruptcy meant she could be personally liable for any future debts that Rural Arts incurred.

Heinselman says that, faced with the Labor Department ruling, the group decided to close its doors on June 14. "It was sad," said Heinselman.

She said that a businessman has expressed interest in purchasing the operation and running it as a profit-making business, but the women who worked for Rural Arts are uncertain if that would help them.

Some women who are expert quilters, such as Hardbarger, said they have been able to continue earning extra money by taking on work that Rural Arts staff members pass on to them.

Others, such as Cutright, are not so lucky. Cutright did sewing and never developed quilting skills. She has not had any work since Rural Arts closed. She said she is making stuffed animals and hopes they will sell at Christmas time in a local gift shop.

"Before, we could just barely make out on what he her husband drew. I was just tickled to death when I found Rural Arts," Cutright said. "I felt if I didn't make as much as I did in the garment factory, I didn't care. I could be at home with my husband," and did not have to buy work clothes or spend money on commuting.

Hord, however, said it is very difficult to take such things into account when calculating minimum wage. The Labor Department, he noted, must follow federal law.

Miriam Pertsman, assistant to the president of the International Ladies Garment Workers Union, said the union generally opposes exceptions in the law because it opens up the process to too many serious abuses. The question of rural workers, she adds, is "a slippery slope to get onto."

Bonifaz noted, "Labor laws are meant to protect against exploitation, but they also, unfortunately, affect efforts like this. They're having a negative impact on bootstrap operations like this that have been beneficial to people. Federal tax dollars went into setting this up, and now the federal government is shutting them down. It doesn't make a whole lot of sense."

Meanwhile, Rebecca Suck of Jackson County, who earned about $1,500 a year through Rural Arts, said she would like the Labor Department to quit trying to help her.

She said that when an investigator called her, "I told him I thought it was none of his business. There's no way they could have afforded to pay us by the hour. This is America, and it's a free country, and we should be allowed to do whatever we want in our own homes, on our own times and at our own speed."

Suck said she's puzzled by the federal government. "If they're helping us, I don't know how. They're putting us out of work."