<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

                                   FORM 10-K

(Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
     EXCHANGE ACT OF 1934
 
For the fiscal year ended December 28, 1996

                                      OR
 
[_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  
      SECURITIES EXCHANGE ACT OF 1934
                                                   
 
 
For the transition period from___________________to____________________
 
Commission file number           1-8884
                      ------------------------------
 
                             BUSH INDUSTRIES, INC.
--------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)
 

          Delaware                                      16-0837346
-------------------------------------        ---------------------------------
(State or other jurisdiction                (I.R.S. Employer Identification No.)
of incorporation or organization)
 
 One Mason Drive, Jamestown, New York                     14702
-------------------------------------        ---------------------------------
       (Address of principal                            (Zip Code)
       executive offices)     
 
Registrant's telephone number, including area code        (716) 665-2000 
                                                  ----------------------------

Securities registered pursuant to Section 12(b) of the Act:

 
   Title of each class                         Name of each exchange on which
                                                         registered
 
  Class A Common Stock                             New York Stock Exchange
---------------------------                  ---------------------------------

Securities registered pursuant to Section 12(g) of the Act:

                                     None
--------------------------------------------------------------------------------
                                (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.     Yes   X            No 
                                           -----             -----
<PAGE>
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.     [X]

As of December 27, 1996, 9,425,756 Shares of Class A Common Stock were
outstanding and the aggregate market value (based on the closing price on the
New York Stock Exchange on December 27, 1996 which was $19.875 per share) of the
Class A Common Stock held by non-affiliates was approximately $147,365,000.  As
of December 27, 1996, 3,855,365 Shares of Class B Common Stock were outstanding.


                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held on May 1, 1997 are incorporated by
reference into Part III hereof.  Certain exhibits listed in Part IV of this
Annual Report on Form 10-K are incorporated by reference from prior filings made
by the Registrant under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934.


                                       2
<PAGE>
 
                                     PART I
                                     ------

ITEM 1.  BUSINESS
-------  --------
 
(a)  GENERAL DEVELOPMENT OF BUSINESS
     -------------------------------

     Bush Industries, Inc. and its subsidiaries (the "Company" or the
"Registrant") is primarily engaged in the design, manufacture and sale of ready-
to-assemble ("RTA") furniture products for business and consumer use.  The
Company was incorporated under the laws of the State of Delaware on February 5,
1985.  The Company was a successor to a corporation of the same name
incorporated under the laws of the State of New York in 1959.  The Company's
principal place of business is located at One Mason Drive, Jamestown, New York
14702 (716-665-2000).

     In January 1994, the Company expanded its operations with the acquisition
of approximately 450,000 square feet of manufacturing and warehouse space in
Jamestown, New York.  In 1995, the Company began the first phase of a two phase
expansion program which ultimately added a new approximately one million square-
foot manufacturing and distribution facility in Erie County, Pennsylvania, which
is about 50 miles west of  the Company's main manufacturing complex in
Jamestown, New York.  The first phase of this expansion, approximately 500,000
square feet, replaced the Company's leased distribution and warehouse facility
in Saybrook, Ohio in April 1996. Construction of the second phase of the
expansion program, for an additional approximately 500,000 square feet,
commenced in the second quarter of 1996 and was substantially completed in the
fourth quarter of 1996.  Manufacturing capacity, incorporating newly developed
advanced technology, will be added incrementally to this facility as demand
requires, with the first equipment installation currently underway.

     In 1996, the Company acquired 100% ownership of The ColorWorks, Inc., a
North Carolina corporation ("ColorWorks").  ColorWorks, a North Carolina based
finishing and decorating firm, holds the master license to the "HydroGraFix"
film processing technology in North and South America, portions of Central
Europe and South Africa.  For the Company's fiscal year ended December 28, 1996,
the total net sales and the total assets of ColorWorks were approximately 3% and
6% of the Company's consolidated total net sales and total assets, respectively.


(b)  FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
     ---------------------------------------------

     For financial information reporting purposes, the Company may be deemed to
engage in one industry  segment, the design, manufacture and sale of  ready-to-
assemble furniture products.


                                       3
<PAGE>
 
(c)  NARRATIVE DESCRIPTION OF BUSINESS
     ---------------------------------

     The Company is engaged primarily in the design, manufacture and sale of
ready-to assemble ("RTA") furniture products in various price ranges for both
business and consumer use.  The Company's furniture product line includes
audio/video home entertainment centers, home theater furniture systems, audio
cabinets, television/VCR carts, room dividers, wall units, bookcases, bedroom
and kitchen/utility furniture, microwave carts, computer desks and workstations,
hutches, printer stands, double pedestal executive desks, credenzas, storage
armoires and file cabinets.

     The Company's varied RTA furniture product line is designed for ease of
assembly, to ensure that such products can be readily assembled by following
simple, easy to read diagramed instructions, contained with each RTA product
sold.  To enhance customer service, the Company maintains a toll free number to
assist consumers with any questions with respect to the assembly of any product.

     In addition, the Company, through its wholly-owned subsidiary, ColorWorks,
is engaged in the finishing and decoration of  various substrate materials.  The
ColorWorks holds the master license to the "HydroGraFix" film processing
technology in North and South America, portions of Central Europe, and South
Africa.  This process permits the decoration of a variety of geometric shapes,
including complex three-dimensional parts.

Marketing and Distribution
     The Company's furniture products are marketed to a variety of retailers for
sale to both business and consumer end-users.  The Company's customers include
national chains, electronic and computer superstores, catalog showrooms,
discount mass merchants, warehouse clubs, office supply superstores, office
furniture retailers, home furnishings retailers, department stores, home
improvement centers and independent wholesale distributors.  The Company's
furniture products are sold both through independent manufacturers'
representatives and directly by the Company's sales personnel.  The Company's
furniture products are currently sold to approximately 800 customers, and the
Company estimates that its products are currently carried in approximately
15,000 retail outlets.

     ColorWorks offers finishing and decorating processing services to
manufacturers and end-users of various products.  ColorWorks either provides
such services directly or sublicenses the "HydroGraFix" film processing
technology to third parties in varying fields of application and/or geographic
areas.

Sources and Availability of Raw Materials
     The Company purchases the raw materials used in the manufacture of its
furniture product lines from various sources located throughout the United
States and abroad.  The Company believes that none of the materials required for
its furniture manufacturing operations are proprietary in nature and that an
adequate supply of raw materials is available from multiple sources.

                                       4
<PAGE>
 
Trademarks and Design Patents
     The Company either owns or has applied for various trade names and
trademarks in the United States and abroad, for use with its furniture product
lines.  The Company believes that its trade names and trademarks are well
recognized within the furniture industry.  The Company also believes that the
loss of any trade name and/or trademark would not have a material adverse effect
on its business operations.

     In addition, the Company owns a variety of patents with respect to the
design and manufacture of certain furniture products.  The Company believes that
the loss of any of its patents would not have a material adverse effect on its
business.  The Company also relies on trade secrets and confidentiality to
protect the proprietary nature of its technology.

Seasonality
     The nature of the business in which the Company is engaged is not seasonal.


Working Capital Practices
     The Company engages in no unusual practices regarding inventories,
receivables or other items of working capital.

Customers
     For the fiscal year ended December 28, 1996, the Company had one customer
which accounted for approximately 15% of the Company's total gross sales and
another customer which accounted for approximately 12% of the Company's total
gross sales.  No other single customer accounted for more than 10% of the
Company's total gross sales.  While the loss of any substantial customer could
have a material short-term impact on the Company's business, the Company
believes that its diverse furniture distribution channels would minimize the
long-term impact of any such loss.

Backlog
     The Company believes that order backlog at any particular point in time is
not predictive of future sales performance since, as is standard in the
furniture industry, a customer may cancel a product order prior to shipment
without penalty.  The Company has historically filled orders within
approximately one to three weeks of the receipt of a purchase order.

Government Contracts
     No material portion of the Company's business is subject to renegotiation
of profits or termination of contracts or subcontracts at the election of the
Government.

Competition
     The Company believes that, based on information reported in furniture trade
publications, it is the third largest United States-based manufacturer of RTA
furniture products.  The RTA furniture product market is highly competitive, and
includes numerous entities, some of which may have substantially greater
financial and marketing resources than the Company.  The Company believes that


                                       5
<PAGE>
 
the principal competitive factors in the RTA furniture industry marketplace are
price, quality, function, innovative product design, style, prompt delivery, and
the ability to offer customers a full product line.  The Company's varied
product line is designed based on the foregoing factors to achieve customer
satisfaction and, accordingly, the Company believes that its products
effectively compete in such marketplace.

Environmental Compliance
     Environmental aspects of the Company's business are regulated primarily by
federal and state laws and by the ordinances of the localities where the
Company's facilities are located.  See Item 3, "Legal Proceedings", for
additional information regarding environmental compliance.

Employees
     As of December 28, 1996, the Company employed a total of approximately
2,070 employees. There are no collective bargaining agreements covering any of
the Company's employees.  The Company believes it has good employee relations.


(d)  FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS  AND
     ----------------------------------------------------------------
     EXPORT SALES
     ------------

     For the 1996 fiscal year ended December 28, 1996, the Company generated
domestic sales of approximately $245,158,000 (or approximately 95.6%  of total
sales) and foreign sales of approximately $11,174,000 (or approximately 4.4% of
total sales).  For the 1995 fiscal year ended December 30, 1995 and the 1994
fiscal year ended December 31, 1994, the Company generated domestic sales of
approximately $209,274,000 and $203,280,000, respectively (or approximately
95.1% of total sales for the 1995 fiscal year and approximately 95.3% of total
sales for the 1994 fiscal year).  Foreign sales for the fiscal years ended
December 30, 1995 and December 31, 1994, respectively, were approximately
$10,740,000 and $9,936,000 (or approximately 4.9% of total sales for the 1995
fiscal year and approximately 4.7% of total sales for the 1994 fiscal year.)

                                       6
<PAGE>
 
ITEM 2.    PROPERTIES
---------  ----------

     The following table summarizes the Company's existing facilities as of
March 1, 1997:
<TABLE>
<CAPTION>
                                                 Approximate    
    Principal Character                            Square          Owned/Leased       
    and Use of Property           Location         Footage    (Lease Expiration Date) 
    -------------------           --------       -----------  -----------------------
<S>                          <C>                 <C>          <C>
Manufacturing, warehouse
 and corporate office        Mason Drive
 facilities                  Jamestown,  NY          440,000  Owned (1)
 
Manufacturing and            Tiffany Street
warehouse facility           Jamestown, NY           145,000  Owned (1)
 
Manufacturing and            Allen Street
warehouse facility           Jamestown, NY           450,000  Owned
 
Manufacturing facility       Little Valley, NY        78,000  Owned
 
Manufacturing and
warehouse facility           Erie, PA              1,035,000  Owned (2)
 
Manufacturing facility       Greensboro, NC           67,000  Owned
 
Manufacturing facility       Rutherfordton, NC        26,000  Owned
 
Regional service center      Erie, PA                  8,000  Leased (June 2001)
 
Regional service center      Oxnard, CA                8,000  Leased (July 2001)
 
Regional service center      Fort Pierce, FL           6,000  Leased (August 2001)
 
Sub-leased (3)               Rancho Cucamonga, CA     50,000  Leased (June 1997) (3)
 
Manufacturing facility       Tijuana, Mexico          88,000  Leased (December 1998)
 
Manufacturing facility       Greensboro, NC          152,000  Leased (December 1997)
 
Office facility              Marietta, GA              1,000  Leased (November 1997)
 
Sales office and
design studio                Ft. Myers, FL             4,000  Leased (February 2002)
 
Showroom                     High Point, NC           13,000  Leased (April 2002)
---------------------------------
</TABLE>
(1)  Legal title to the facility is in the County of Chautauqua Industrial
     Development Agency in accordance with the terms of financing for the
     facility.

(2)  Legal title to the facility is in EIDCO, Inc. in accordance with the terms
     of low interest financing being provided by the Commonwealth of
     Pennsylvania.

(3)  This facility is no longer utilized by the Company and has been sub-leased
     to a third party through the end of the lease term.

                                       7
<PAGE>
 
ITEM 3.   LEGAL PROCEEDINGS
-------   -----------------

     In November 1995, the Company was notified by the New York State Department
of Environmental Conservation ("DEC") of an alleged violation of a certain
environmental regulation concerning the presence of contaminates in the
groundwater, including trichloroethene ("TCE"), beneath the Company's plant
located in Little Valley, New York.  Based on available data, the Company
believes that there is no conclusive evidence that its plant is the source of
such contamination, nor has the Company ever used TCE in its manufacturing
operations.  The Company has proposed to the DEC in a "Statement of Work",
certain monitoring and testing procedures to be undertaken by the Company to
obtain more reliable data as to the source of the TCE contamination. Such
Statement of Work, if acceptable to the DEC, may form the basis of an Order On
Consent with the DEC with respect to those measures to be undertaken by the
Company.  As of the date hereof, the DEC is still reviewing the Company's
proposed "Statement of Work."  On June 17, 1996, an approximate five-mile long
area in Little Valley, New York was added to the federal Superfund national
priorities list, and with respect thereto, no potentially responsible parties
have been identified as of the date hereof.  In December 1996 the Company
responded to a request for information from the United States Environmental
Protection Agency (the "EPA"), relating to the Company's Little Valley, New York
property.  No assurance can be given that the Company's response will be
sufficient for the EPA, or that the EPA will not pursue further inquiries.
Although no assurance can be given, the Company believes that its financial
statements will not be materially adversely affected by the foregoing.

     The Company has also become aware of the possible presence of certain
levels of contaminates on the Greensboro, North Carolina property owned by
ColorWorks, of which the Company became the sole stockholder in September 1996.
The Company has been indemnified to a certain extent by the former shareholders
of ColorWorks, and has procured a $20,000,000 environmental insurance policy
relating thereto.  In the unlikely event any such environmental costs are not
covered by such indemnification or insurance, the Company may be responsible for
certain costs.  However, based on an initial assessment of the situation, the
Company believes, although no assurance can be given, that the Company's
financial statements will not be materially adversely affected by the foregoing.

     As of December 28, 1996, the Company is a party to various other legal
proceedings arising in the ordinary course of business.  The Company believes
that these pending actions would not materially adversely affect the Company's
financial statements.


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------   ---------------------------------------------------

     No matters were submitted to a vote of the stockholders of the Company
during the fourth quarter of the fiscal year ended December 28, 1996.

                                       8
<PAGE>
 
                                    PART II
                                    -------

ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
-------   -----------------------------------------------------
          STOCKHOLDER MATTERS
          -------------------

     (a)  Market Information. The Company's Class A Common Stock is traded on
          ------------------                                                 
the New York Stock Exchange.  The Company's Class B Common Stock is not publicly
traded.

     The following table sets forth the high and low sales prices of the
Company's Class A Common Stock, as reported on the New York Stock Exchange for
the periods indicated, and as adjusted to reflect the June 28, 1996 stock split
effectuated in the form of a fifty percent dividend and the January 20, 1995
stock split effectuated in the form of a twenty-five percent dividend:

<TABLE>
<CAPTION>
 
Quarter                                               High           Low
-----------------------------------                  ------         ------
<S>                                                  <C>            <C>
January 1, 1995 - March 31, 1995                     $11.13         $ 6.75
April 1, 1995 - June 30, 1995                        $ 8.50         $ 7.08
July 1, 1995 - September 30, 1995                    $ 9.75         $ 7.33
October 1, 1995 - December 31, 1995                  $13.25         $ 9.50
                                                  
January 1, 1996 - March 31, 1996                     $17.00         $12.17
April 1, 1996 - June 30, 1996                        $24.25         $16.00
July 1, 1996 - September 30, 1996                    $24.38         $15.75
October 1, 1996 - December 31, 1996                  $20.25         $15.88
</TABLE>

     (b)  Holders.  As of March 1, 1997, the number of holders of record of the
          -------                                                              
Company's Class A Common Stock was approximately 430.  The Company believes that
there are approximately an additional 2,700 holders who own shares of the
Company's Class A Common Stock in street name.  As of the same date, there were
approximately 12 holders of record of the Company's Class B Common Stock.

     (c)  Dividends.     The Company  instituted a quarterly cash dividend for
          ---------                                                           
holders of Class A and Class B Common Stock during the fourth quarter of 1992.
Dividends have been declared and paid for each succeeding quarter.  The Company
declared cash dividends of $0.017 per share, after taking into account the June
28, 1996 stock split effectuated in the form of a fifty percent dividend, for
each of the first two quarters of 1996 and a dividend of $0.035 per share for
each of the last two quarters of 1996.

          Although the Company intends to declare cash dividends on a quarterly
basis in the future, the determination as to the payment and the amount of cash
dividends will depend upon the Company's then current financial condition,
capital requirements, results of operations and other factors deemed relevant by
the Company's Board of Directors.  In addition, a certain loan agreement to
which the Company is a party limits the amount of cash dividends that the
Company can declare, and also imposes certain conditions with respect thereto.
The Company's Certificate of

                                       9
<PAGE>
 
Incorporation, as amended, also provides that any dividends paid on Class A
Common Stock must be at least equal to the dividends paid on the Company's Class
B Common Stock on a per share basis. Moreover, no dividend may be paid to Class
B stockholders without first being paid to Class A stockholders.

                                      10
<PAGE>
 
ITEM 6.   SELECTED FINANCIAL DATA
-------   -----------------------

     The following selected financial data of the Company for the 1992 through
1996 fiscal years has been derived from the Consolidated Financial Statements of
the Company.  This selected financial data should be read in conjunction with
the Consolidated Financial Statements and notes thereto included elsewhere
herein.

<TABLE>
<CAPTION>
 
                               (In Thousands, except share and per share data)
                                ---------------------------------------------
                           1996         1995         1994         1993         1992
                        -----------  -----------  -----------  -----------  -----------
<S>                     <C>          <C>          <C>          <C>          <C> 
Earnings Data (1)
----------------------
Net Sales.............  $   256,332  $   220,014  $   213,216  $   170,285  $   127,990
Earnings Before
Income Taxes..........  $    29,344  $    20,744  $    19,842  $    11,908  $     4,569
 
Net Earnings..........  $    18,487  $    12,550  $    12,004  $     7,145  $     2,771
 
Earnings Per Share
     Primary..........  $      1.31  $      0.95  $      0.86  $      0.55  $      0.21
     Fully Diluted....  $      1.30  $      0.91  $      0.86  $      0.55  $      0.21
 
Number of Weighted
 Average Class A and
 Class B Shares
 Outstanding
     Primary..........   14,073,381   13,270,543   14,012,071   13,021,512   13,041,012
     Fully Diluted....   14,168,691   13,841,191   14,012,071   13,045,116   13,042,845
 
 
Balance Sheet Data
----------------------
Working Capital.......  $    28,213  $    24,018  $    34,421  $    26,903  $    23,634
Total Assets..........  $   152,464  $   102,606  $   100,958  $    83,522  $    72,161
Long-term Debt........  $    36,339  $    15,031  $    16,774  $    16,108  $    18,809
Stockholders' Equity..  $    84,317  $    59,113  $    52,265  $    39,938  $    31,852
</TABLE>
-------------------------
(1)  Earnings per share and the number of weighted average Class A and Class B
     Shares of Common Stock outstanding have been adjusted to reflect the 3-for-
     2 stock split effectuated in the form of a fifty percent dividend paid on
     June 28, 1996 to stockholders of record as of June 14, 1996, the 5-for-4
     stock split effectuated in the form of a twenty-five percent dividend paid
     on January 20, 1995 to stockholders of record as of January 6, 1995, and
     the 3-for-2 stock split effectuated in the form of a fifty percent dividend
     paid on January 7, 1994 to stockholders of record as of December 20, 1993.

                                      11
<PAGE>
 
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------   ---------------------------------------------------------------
          RESULTS OF OPERATIONS
          ---------------------

General
     The ready-to-assemble (RTA) furniture market has experienced significant
growth over the past several years and has emerged as a key component of the
overall U.S. home furnishings industry. The growing popularity and acceptance of
RTA furniture products at both the retail and consumer levels are the result, in
the opinion of the Company, of basic structural changes in the retail channels
of distribution and increased demand engendered by fundamental demographic
trends.

     In recent years, the Company has committed substantial resources to the
development and implementation of a diversified sales, marketing, and product
strategy in order to capitalize on growth opportunities presented by emerging
retail channels of distribution and changes in consumer demographics and
preferences.  Accordingly, the Company has structured its business to offer a
wide variety of RTA furniture products through increasingly popular retail
distribution channels, including electronics superstores, office superstores,
discount mass merchants, home improvement centers, home furnishings retailers,
and export sales.  The Company continues to strive towards building long-term
relationships with quality retailers in existing and emerging high-growth
distribution channels to develop and sustain its future growth.

     In 1996, the Company acquired all of the outstanding capital stock of The
ColorWorks, Inc. ("ColorWorks"), a North Carolina based finishing and decorating
firm.  ColorWorks  holds the master license to the "HydroGraFix" film processing
technology in North and South America, portions of Central Europe and South
Africa.  For the Company's fiscal year ended December 28, 1996, the total net
sales and the total assets of ColorWorks were approximately 3% and 6% of the
Company's consolidated total net sales and total assets, respectively.

     Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K are forward-looking statements
which involve risks and uncertainties, including, but not limited to, economic,
competitive, governmental and technological factors affecting the Company's
operations, markets, products, services and prices, and other factors discussed
in the Company's filings with the Securities and Exchange Commission.

                                      12
<PAGE>
 
Results of Operations
     The following table shows the percentage of certain items included in the
Consolidated Statements of Earnings relative to net sales for the fiscal years
indicated:

<TABLE>
<CAPTION>
 
                                               Percentage of Net Sales
                                               -----------------------
                                                 1996    1995    1994
                                                 ----    ----    ---- 
<S>                                             <C>     <C>     <C>
Net Sales                                       100.0%  100.0%  100.0%
Cost of Sales                                    68.8%   70.1%   70.5%
                                                 ----    ----    ----
     Gross Profit                                31.2%   29.9%   29.5%

Selling, General and Administrative Expenses     18.9%   19.6%   19.3%
                                                 ----    ----    ----
     Operating Income                            12.3%   10.3%   10.2%
 
Interest Expense                                  0.8%    0.9%    0.9%
                                                 ----     ---     ---
Earnings Before Income Taxes                     11.5%    9.4%    9.3%
 
Income Taxes                                      4.3%    3.7%    3.7%
                                                  ---     ---     ---
     Net Earnings                                 7.2%    5.7%    5.6%
                                                  ===     ===     ===
</TABLE>

     The following paragraphs provide an analysis of the changes in net sales,
selected cost and expense items, and earnings for fiscal years 1994 through
1996.  All earnings per share data have been retroactively adjusted to reflect
the 3-for-2 stock split effectuated in the form of a fifty percent dividend paid
on June 28, 1996 to stockholders of record as of June 14, 1996, the 5-for-4
stock split effectuated in the form of a twenty-five percent dividend paid on
January 20, 1995 to stockholders of record as of January 6, 1995 and the 3-for-2
stock split effectuated in the form of a fifty percent dividend paid on January
7, 1994 to stockholders of record as of December 20, 1993.

Results of Operations: Fiscal 1996 Compared to Fiscal 1995

     The Company's net sales for the 1996 fiscal year compared to the 1995
fiscal year increased $36,318,000, or approximately 16.5%, to a record
$256,332,000.  The increase in net sales was attributable to a number of
factors, including the growing market acceptance for ready-to-assemble furniture
products at both the retail and consumer levels, strong sales in the office
superstores and consumer electronics distribution channels, strong new product
acceptance by many retailers, an improvement in the overall retail climate, as
compared to the first half of the 1995 fiscal year, and a better balanced
inventory position at several key accounts as compared to the first half of the
1995 fiscal year.

     The cost of sales increased by $22,084,000 in 1996 primarily as a result of
higher sales volumes.  The cost of sales as an approximate percentage of net
sales decreased by 1.3% from 70.1% in 1995 to 68.8% in 1996.  Lower raw material
costs and increased production volume (which results in better absorption of
manufacturing overhead) resulted in lower cost of sales as a percentage of net
sales.

     For 1996, selling, general and administrative expenses increased by
$5,425,000 compared to 1995. The increase in selling, general and administrative
expenses was primarily a result of

                                      13
<PAGE>
 
increased variable selling expenses (such as commissions, marketing and
promotional incentives) and other administrative costs associated with the
Company's higher sales volumes. Selling, general and administrative expenses
decreased as an approximate percentage of net sales from 19.6% in 1995 to 18.9%
in 1996.

     Interest expense increased to $2,131,000 (or approximately 0.8% of net
sales) from $1,922,000 (or approximately 0.9% of net sales).  The increase in
interest resulted from an increase in average long-term debt which was partially
offset by a refinancing of the Company's debt on July 26, 1995, and low interest
financing (3.0%) from the Commonwealth of Pennsylvania, as described below.  As
a result of the refinancing, the applicable margin on LIBOR based borrowings was
lowered and, with the exception of the Industrial Development Revenue Bonds,
substantially all other then existing long-term debt (with generally higher
interest rates), was refinanced in 1995.   The Company's overall effective
federal, state and local tax rate decreased from 39.5% to 37.0%.  The exercise
of stock options during 1996 resulted in a tax benefit amounting to $772,000,
which has been credited directly to paid-in capital and is not reflected in
1996's provision for taxes.  The Company has no material post-retirement or
post-employment benefits as defined in SFAS No. 106, "Employers' Accounting for
Postretirement Other than Pensions", and SFAS No. 112, "Employers' Accounting
for Postemployment Benefits".

     For 1996, the Company generated net earnings after taxes of $18,487,000 (or
$1.31 primary earnings per share, $1.30 fully diluted earnings per share), as
compared to $12,550,000 (or $0.95 primary earnings per share and $0.91 fully
diluted earnings per share) for 1995.  This was an approximate 47.3%  increase
in net earnings. The increase in net earnings is primarily due to increased
sales.

Results of Operations: Fiscal 1995 Compared to Fiscal 1994

     The Company's net sales for the 1995 fiscal year compared to the 1994
fiscal year increased $6,798,000, or approximately 3.2%, to $220,014,000. Sales
in the first half of 1995 were lower than sales in the first half of 1994 and
reflected the widely reported general softness at the retail level and a
temporary over-inventory position at several key accounts.  Sales in the second
half of 1995 were higher than the second half of 1994 and the first half of
1995, and resulted from strong new product acceptance by many customers, an
improvement in the overall retail climate as compared to the first half of the
1995 fiscal year and a better balanced inventory position at the same several
key accounts. The strength of the second half sales in 1995 more than offset the
slower first half sales for 1995.

     The cost of sales increased $3,960,000 in 1995 primarily as a result of
higher sales volumes. The cost of sales as an approximate percentage of net
sales decreased by 0.4% from 70.5% in 1994 to 70.1% in 1995 and correspondingly,
gross profit as an approximate percentage of net sales increased by 0.4% to
29.9% in 1995 from 29.5% in 1994.  In 1995, improved manufacturing performance
and increased production volume (which results in better absorption of
manufacturing overhead) were instrumental in lowering cost of sales as a
percentage of net sales.

     For 1995, selling, general and administrative expenses increased by
$1,919,000 compared to

                                      14
<PAGE>
 
1994.  Selling, general and administrative expenses increased as an approximate
percentage of net sales, from 19.3% in 1994 to 19.6% in 1995.   The increase in
selling, general and administrative expenses was primarily a result of increases
in distribution costs and other operating expenses.

     Interest expense of $1,922,000 in 1995 (or approximately 0.9% of net sales)
was almost unchanged from $1,905,000 (or approximately 0.9% of net sales) in
1994.   The Company's overall effective federal, state and local tax rate
remained constant at 39.5%.  The exercise of stock options during 1995 resulted
in a tax benefit amounting to $53,000, which has been credited directly to paid-
in capital and is not reflected in 1995's provision for taxes.  The Company has
no material post-retirement or post-employment benefits as defined in SFAS No.
106, "Employers' Accounting for Postretirement Other than Pensions", and SFAS
No. 112, "Employers' Accounting for Postemployment Benefits".

     For 1995, the Company generated net earnings after taxes of $12,550,000 (or
$.95 primary earnings per share, $.91 fully diluted earnings per share), as
compared to $12,004,000 (or $.86 both primary and fully diluted earnings per
share) for 1994.  This was an approximate 4.5% increase in net earnings. The
increase in net earnings is primarily due to increased sales.


Liquidity and Capital Resources
     On May 30, 1996, the Company acquired a majority equity interest in
ColorWorks for approximately $5.4 million, paid principally in Bush Industries,
Inc.'s Class A Common Stock.  On September 25, 1996, the Company acquired the
remaining equity interest in ColorWorks (resulting in ColorWorks becoming  a
wholly-owned subsidiary of the Company), for approximately $2.7 million, paid
principally in Bush Industries, Inc.'s Class A Common Stock.   The acquisition
of ColorWorks has been accounted for using the purchase method of accounting and
accordingly, the financial statements of ColorWorks have been included in the
condensed consolidated financial statements of the Company since the May 30,
1996 acquisition.

     Increased sales volume in 1996 and the consolidation of ColorWorks into the
financial statements of the Company resulted in working capital at year-end 1996
increasing by $4,195,000, as compared to working capital at year-end 1995. Such
increased working capital was due, in part, to an increase in inventories and
accounts receivable, and a decrease in income taxes payable. Partially
offsetting these factors was an increase in other accrued liabilities and
accounts payable. Total assets at year-end 1996 increased $49,858,000 over year-
end 1995, primarily as a result of an increase in net property, plant and
equipment (primarily due to the Company's investment in the Company's Erie, PA
facility and equipment), current assets, including inventory and accounts
receivable (as described above), and other assets (due to the intangible assets
recorded as the result of the ColorWorks acquisition).  In addition, total
liabilities increased $24,654,000 at year-end 1996, due mostly to an increase in
long-term debt, other accrued liabilities and accounts payable, partially offset
by a decrease in income taxes payable.

     The Company spent $35,640,000 on capital expenditures during 1996 which was
financed


                                      15
<PAGE>
 
primarily with increased long-term debt and net cash flow from operating
activities.  Capital expenditures for the 1996 fiscal year included the cost of
substantially completing the construction of the new manufacturing and
distribution facility located in Erie, Pennsylvania.  The first phase of this
expansion, approximately 500,000 square feet, replaced the Company's leased
distribution and warehouse facility in Saybrook, Ohio in April 1996.
Construction of the second phase of the expansion program, for an additional
approximately 500,000 square feet, commenced in the second quarter of 1996 and
was substantially completed in the fourth quarter of 1996.  Manufacturing
capacity, incorporating newly developed advanced technology, will be added
incrementally to this facility as demand requires, with the first equipment
installation currently underway.  Capital expenditures in 1997 with respect to
the Company's existing facilities are currently forecasted to be approximately
$25 million.  The Company believes that current unused balances available under
the existing credit agreements, along with net cash flow generated from
operating activities, will be adequate to fund these capital expenditures in
1997.

     In 1996, the Company repurchased $1,488,000 of the Company's Class A Common
Stock, received $1,783,000 from the exercise of stock options by employees and
paid four quarterly dividends totaling $1,352,000 to its stockholders.  The cash
dividends for each of the first two quarters of 1996 were $0.017 per share,
after taking into account the June 28, 1996 stock split effectuated in the form
of a fifty percent dividend, and $0.035 per share for each of the last two
quarters of 1996.

     In 1996, the Company obtained low interest rate financing from the
Commonwealth of Pennsylvania in the aggregate principal amount of  $4,500,000.
Such loan bears interest at the annual rate of 3%, and was used to partially
finance the first phase of the new Erie facility and to partially finance the
purchase of equipment.  In addition, during the first quarter of 1997, the
Company secured low interest rate  financing from the Commonwealth of
Pennsylvania in the aggregate principal amount of $2,000,000, which loan bears
interest at the annual rate of 3.75%, and which loan was used to partially
finance the second phase of the new Erie facility.

     The Company has an unsecured $85,000,000 revolving credit facility, as
amended, with Mellon Bank, N.A. and other lending institutions.  The loan is due
July 31, 2000 with a balloon payment of the then remaining principal and accrued
interest.  The Company has classified all of this line of credit as long-term
debt, as there are no required principal payments due within the next 12 months.
At the Company's option, borrowings may be effectuated, subject to certain
conditions, on a base rate or Euro-Rate option.  Base rate loans bear interest
at the prime rate as announced by Mellon Bank, N.A. from time to time, and Euro-
Rate loans bear interest at the then current LIBOR rate, plus an applicable
margin.  The applicable margin, which pertains only to LIBOR rate loans, varies
from .50% to .95%, depending upon the Company's ability to satisfy certain
quarterly financial tests.  In addition, the credit agreement permits the
Company to request the issuance of up to a maximum of $15,000,000 in letters of
credit, which issuance will be deemed part of the $85,000,000 maximum amount of
borrowing permitted under the unsecured credit facility.

     The revolving credit facility agreement provides for achieving certain
ratios, including total


                                      16
<PAGE>
 
funded debt (net of cash) to capital and total funded debt (net of cash) to
earnings before interest and tax ratios, prescribes minimum tangible net worth
requirements, limits capital expenditures and new leases and provides for
certain other affirmative and restrictive covenants.  The Company is in
compliance with all of these requirements.  The Company believes that current
unused balances available under the existing credit agreements, along with net
cash flow generated from operating activities, will be adequate to fund the
Company's current operations and capital expenditures with respect to its
existing facilities in 1997.

     Inflation affects the Company's business principally in the form of cost
increases from materials and wages.  Historically, the Company has generally
been able to offset these cost increases by improved productivity, cost and
waste reduction, more effective purchasing practices, and to a lesser extent,
price increases.


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------   -------------------------------------------

     The financial information required by Item 8 is included elsewhere in this
Report (see Part IV, Item 14).

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-------   ---------------------------------------------------------------
          FINANCIAL DISCLOSURE
          --------------------

     None.


                                      17
<PAGE>
 
                                    PART III
                                    --------

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------  --------------------------------------------------

     The information required by Item 10 is hereby incorporated by reference
from the Registrant's definitive Proxy Statement for the Annual Meeting
scheduled to be held on May 1, 1997, under the caption, "Election of Directors",
to be filed by the Registrant.


ITEM 11.  EXECUTIVE COMPENSATION
--------  ----------------------

     The information required by Item 11 is hereby incorporated by reference
from the Registrant's definitive Proxy Statement for the Annual Meeting
scheduled to be held on May 1, 1997, under the caption, "Executive
Compensation", to be filed by the Registrant.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------  --------------------------------------------------------------

     The information required by Item 12 is hereby incorporated by reference
from the Registrant's definitive Proxy Statement for the Annual Meeting
scheduled to be held on May 1, 1997, under the caption, "Security Ownership of
Management and Principal Stockholders", to be filed by the Registrant.


ITEM 13.  CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
--------  ---------------------------------------------

     The information required by Item 13 is hereby incorporated by reference
from the Registrant's definitive Proxy Statement for the Annual Meeting
scheduled to be held on May 1, 1997, under the caption "Certain Transactions",
to be filed by the Registrant.


                                      18
<PAGE>
 
                                    PART IV
                                    -------


ITEM 14.         EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
--------         --------------------------------------------
                 REPORTS ON FORM 8-K
                 -------------------

(A)  The consolidated balance sheets as of  December 28, 1996 and December 30,
     1995 and the related consolidated statements of earnings, stockholders'
     equity, cash flows and financial statement schedule for each of the three
     years in the period ended December 28, 1996 are filed as part of this
     report:

<TABLE>
<CAPTION>

(1)  Financial Statements                          Page
     --------------------                          ----
<S>                                                <C>
Independent Auditors' Report...................... F-1
Consolidated Balance Sheets....................... F-2
Consolidated Statements of Earnings............... F-3
Consolidated Statements of Stockholders' Equity... F-4
Consolidated Statements of Cash Flows............. F-5
Notes to Consolidated Financial Statements........ F-6

<CAPTION>

(2)  Consolidated Financial Statement Schedules
     ------------------------------------------
<S>............................................... <C>
Schedule II - Valuation and Qualifying Accounts... S-1
</TABLE>

     All other schedules are omitted because they are not applicable, or not
required because the required information is included in the Consolidated
Financial Statements or notes thereto.

(3)  Exhibits
     --------

3.1  Certificate of Incorporation. (2)

3.2  Amendment to Certificate of Incorporation, dated June 30, 1994. (8)

3.3  Amendment to Certificate of Incorporation, dated July 9, 1993.  (6)

3.4  By-Laws. (1)

10.1 The Registrant's 1985 Stock Plan, as amended. (6)

10.2 The Registrant's 1985 Incentive Stock Option Plan, as amended. (6)
 
10.3 Lease Agreement between County of Chautauqua Industrial Development Agency
     and the Registrant dated January 1, 1990.  (3)

                                      19
<PAGE>
 
10.4  Lease Agreement between Rafael Carrillo-Barron and Bush Industries
      de Mexico, S.A., DEC.V. and the Registrant dated May 20, 1991.  (4)

10.5  Lease Agreement between 24 Mission Vista Partnership L.P. and the
      Registrant dated October 1, 1991.  (4)

10.6  Employment Agreement between the Registrant and Paul S. Bush dated July
      29, 1992, as amended. (5)

10.7  Employment Agreement between the Registrant and Robert L. Ayres
      dated July 29, 1992, as amended. (5)

10.8  Employment Agreement between the Registrant and Lewis H. Aronson
      dated July 29, 1992, as amended. (5)

10.9  Employment Agreement between the Registrant and David G. Messinger dated
      July 29, 1992, as amended. (5)

10.10 Employment Agreement between the Registrant and Donald F. Hauck dated
      February 8, 1993. (5)

10.11 Second Supplemental Indenture of Trust between the County of Chautauqua
      Industrial Development Agency and the Trustee, with the consent of Marine
      Midland Bank, N.A., Mellon Bank, N.A. and the Registrant dated June 23,
      1992. (5)

10.12 Split Dollar Insurance Agreements between the Registrant and Paul Bush
      dated November 1, 1990 and March 15, 1991 and related Collateral
      Assignment Agreements of same dates. (5)

10.13 Split Dollar Insurance Agreement between the Registrant and Robert L.
      Ayres dated December 19, 1991 and related Collateral Assignment Agreement.
      (5)

10.14 Split Dollar Insurance Agreement between the Registrant and Donald F.
      Hauck dated June 29, 1992 and related Collateral Assignment Agreement. (5)

10.15 Performance Bonus Plan. (7)

10.16 Credit Agreement, dated as of July 26, 1995, by and among the Registrant,
      as Borrower, the Lenders party thereto from time to time, the Issuing Bank
      referred to therein, and Mellon Bank, N.A., as agent. (9)

                                      20
<PAGE>
 
10.17 First Amendment to Credit Agreement dated September 1, 1995 by and among
      the Registrant, as Borrower, the Lenders party thereto from time to time,
      the Issuing Bank referred to therein, and Mellon Bank, N.A., as agent.
      (10)

10.18 Second Amendment to Credit Agreement dated January 1, 1996 by and among
      the Registrant, as Borrower, the Lenders party thereto from time to time,
      the Issuing Bank referred to therein, and Mellon Bank, N.A., as agent.
      (10)

10.19 Third Amendment to Credit Agreement dated September 27, 1996 by and among
      the Registrant, as Borrower, the Lenders party thereto from time to time,
      the Issuing Bank referred to therein, and Mellon Bank, N.A., as agent.

10.20 Fourth Amendment to Credit Agreement dated January 3, 1997 by and among
      the Registrant, as Borrower, the Lenders party thereto from time to time,
      the Issuing Bank referred to therein, and Mellon Bank, N.A., as agent.

21.1  List of Subsidiaries of Registrant.

23.1  Consent of Deloitte & Touche LLP, independent public auditors.

----------------------------
(1)   Incorporated by reference to the Registrant's Registration Statement on
      Form S-1 dated March 14, 1985 (File No. 2-96428).
(2)   Incorporated by reference to the Registrant's Quarterly Report on 
      Form 10-Q for the quarter ended September 26, 1987.
(3)   Incorporated by reference to Registrant's Annual Report on Form 10-K for
      the fiscal year ended December 29, 1989.
(4)   Incorporated by reference to the Registrant's Annual Report on Form 10-K
      for the fiscal year ended December 28, 1991.
(5)   Incorporated by reference to the Registrant's Annual Report on Form 10-K
      for the fiscal year ended January 2, 1993.
(6)   Incorporated by reference to the Registrant's Annual Report on Form 10-K
      for the fiscal year ended January 1, 1994.
(7)   Incorporated by reference to the Registrant's definitive Proxy Statement,
      dated May 16, 1994.
(8)   Incorporated by reference to the Registrant's Annual Report on Form 10-K
      for the fiscal year ended December 31, 1994.
(9)   Incorporated by reference to the Registrant's Current Report on Form 8-K,
      filed August 4, 1995.
(10)  Incorporated by reference to the Registrant's Annual Report on Form 10-K
      for the fiscal year ended December 30, 1995.

(B)   Reports on Form 8-K.  No Reports on Form 8-K were filed by the Registrant
      -------------------
      during the fourth quarter of the Registrant's fiscal year ended December
      28, 1996.

                                      21
<PAGE>
 
INDEPENDENT AUDITORS' REPORT


Board of Directors and Stockholders
Bush Industries, Inc.


We have audited the accompanying consolidated balance sheets of Bush Industries,
Inc. and subsidiaries as of December 28, 1996 and December 30, 1995, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended December 28, 1996.  Our
audits also included the financial statement schedule listed in the Index at
Item 14 (A)(2). These financial statements and financial statement schedule are
the responsibility of the Company's management.  Our responsibility is to
express an opinion on the financial statements and financial statement schedule
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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and subsidiaries as of
December 28, 1996 and December 30, 1995, and the results of their operations and
their cash flows for each of the three years in the period ended December 28,
1996 in conformity with generally accepted accounting principles. Also, in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.



February 7, 1997
Buffalo, New York

                                      F-1
<PAGE>

BUSH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
DECEMBER 28, 1996 AND DECEMBER 30, 1995
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 
                                                                                           (In Thousands)
ASSETS                                                                                   1996           1995
<S>                                                                                   <C>            <C> 
CURRENT ASSETS:
 Cash and cash equivalents                                                            $   2,810      $   2,929
 Accounts receivable (less allowance for doubtful accounts of $2,036,000
  on December 28, 1996 and $1,011,000 on December 30, 1995)                              24,863         22,321
 Inventories (Note 2)                                                                    26,300         21,582
 Prepaid expenses and other current assets (Note 6)                                       4,141          3,697
                                                                                      ---------      ---------
       Total current assets                                                              58,114         50,529
                                                                                      ---------      ---------

PROPERTY, PLANT AND EQUIPMENT (Note 4):
 Land                                                                                     2,607          2,379
 Building and improvements                                                               48,711         29,228
 Machinery and equipment                                                                 66,403         46,394
 Transportation equipment                                                                   431            394
 Office equipment                                                                         6,999          6,184
 Leasehold improvements                                                                   1,104          1,216
                                                                                      ---------      ---------
                                                                                        126,255         85,795
 Accumulated depreciation                                                                41,900         36,179
                                                                                      ---------      ---------
                                                                                         84,355         49,616
                                                                                      ---------      ---------
OTHER ASSETS                                                                              9,995          2,461
                                                                                      ---------      ---------
TOTAL ASSETS                                                                          $ 152,464      $ 102,606
                                                                                      =========      =========
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
 Accounts payable                                                                     $   9,377      $   7,567
 Income Taxes (Note 6)                                                                    1,017          2,124
 Other accrued liabilities (Note 3)                                                      18,844         16,419
 Current portion of long-term debt (Note 4)                                                 663            401
                                                                                      ---------      ---------
       Total current liabilities                                                         29,901         26,511

DEFERRED INCOME TAXES (Note 6)                                                            1,907          1,951
LONG-TERM DEBT (Note 4)                                                                  36,339         15,031
                                                                                      ---------      ---------
       Total liabilities                                                                 68,147         43,493
                                                                                      ---------      ---------

COMMITMENTS AND CONTINGENCIES (Note 5)

STOCKHOLDERS' EQUITY (Notes 7 and 8):
 Common Stock  - Class A                                                                    965            629
 Common Stock  - Class B                                                                    386            257
 Paid-in capital                                                                         12,311          7,146
 Retained earnings                                                                       73,476         56,341
                                                                                      ---------      ---------
                                                                                         87,138         64,373
 Less: treasury stock                                                                     2,821          5,260 
                                                                                      ---------      ---------
       Total stockholders' equity                                                        84,317         59,113
                                                                                      ---------      ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                            $ 152,464      $ 102,606
                                                                                      =========      =========
</TABLE> 

See notes to consolidated financial statements.

                                      F-2
<PAGE>


BUSH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EARNINGS
YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31, 1994
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 

                                                (In Thousands, except share and per share data)

                                                       1996            1995            1994
<S>                                                <C>            <C>             <C> 
NET SALES                                           $ 256,332      $  220,014      $  213,216

COSTS AND EXPENSES
  Cost of sales                                       176,378         154,294         150,334
  Selling, general and administrative                  48,479          43,054          41,135
  Interest expense                                      2,131           1,922           1,905
                                                    ---------      ----------      ----------
                                                      226,988         199,270         193,374

EARNINGS BEFORE INCOME TAXES                           29,344          20,744          19,842

INCOME TAXES (Note 6)                                  10,857           8,194           7,838
                                                    ---------      ----------      ----------

NET INCOME                                          $  18,487      $   12,550      $   12,004
                                                    =========      ==========      ==========

EARNINGS PER SHARE (Note 7):
  Primary                                           $    1.31      $     0.95      $     0.86
  Fully diluted                                     $    1.30      $     0.91      $     0.86

WEIGHTED AVERAGE SHARES
  OUTSTANDING (Note 7):
  Primary                                          14,073,381      13,270,543      14,012,071
  Fully diluted                                    14,168,691      13,841,191      14,012,071
</TABLE> 

See notes to consolidated financial statements.

                                      F-3
<PAGE>

BUSH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 28, 1996,  DECEMBER 30, 1995 AND DECEMBER 31, 1994
--------------------------------------------------------------------------------

<TABLE> 
<CAPTION> 

                                                             Common Stock -  Par Value $.10
                                                        ---------------------------------------
                                                              Class A              Class B                         
                                                        ---------------------------------------  Paid-in   Retained
                                                         Shares    Amount     Shares    Amount   Capital   Earnings
                                                         ------    ------     ------    ------   -------   --------
<S>                                                     <C>         <C>       <C>        <C>      <C>       <C> 
BALANCE, JANUARY 1, 1994                               4,859,594  $  486    2,176,203  $  218    $6,269    $33,229
   Conversion of Class B stock to Class A                120,000      12     (120,000)    (12)        -          -
   Exercise of stock options by employees                 32,290       3            -       -       179          -
   Amortization of deferred compensation                       -       -            -       -         -          -
   Received from employees                                     -       -            -       -         -          -
   Tax benefit from exercise of stock options
      and vesting of restricted stock                          -       -            -       -       443          -
   Dividends declared                                          -       -            -       -         -       (565)
   Net earnings                                                -       -            -       -         -     12,004
   Five-for-four stock split                           1,252,826     125      514,044      51      (177)         -
                                                      ----------  ------    ---------  ------   -------    -------
BALANCE, DECEMBER 31, 1994                             6,264,710     626    2,570,247     257     6,714     44,668

   Purchase of treasury stock                                  -       -            -       -         -          -
   Exercise of stock options by employees                 29,458       3            -       -       379          -
   Tax benefit from exercise of stock options                  -       -            -       -        53          -
   Dividends declared                                          -       -            -       -         -       (877)
   Net earnings                                                -       -            -       -         -     12,550
                                                      ----------  ------    ---------  ------   -------    -------
BALANCE, DECEMBER 30, 1995                             6,294,168     629    2,570,247     257     7,146     56,341

   Purchase of treasury stock                                  -       -            -       -         -          -
   Issuance of shares for acquisitions                         -       -            -       -     3,075          -
   Three-for-two stock split                           3,146,952     315    1,285,118     129      (444)         -
   Exercise of stock options by employees                209,601      21            -       -     1,762          -
   Tax benefit from exercise of stock options                  -       -            -       -       772          -
   Dividends declared                                          -       -            -       -         -     (1,352)
   Net earnings                                                -       -            -       -         -     18,487
                                                      ----------  ------    ---------  ------   -------    -------
BALANCE, DECEMBER 28, 1996                             9,650,721  $  965    3,855,365  $  386   $12,311    $73,476
                                                      ==========  ======    =========  ======   =======    =======
</TABLE> 

<TABLE> 
<CAPTION> 

                                                                               Notes Receivable
                                                                                 and Deferred  
                                                         Treasury stock          Compensation  
                                                      --------------------        related to   
                                                        Shares     Amount        Common Stock
                                                       --------   --------     ----------------
<S>                                                    <C>        <C>              <C> 
BALANCE, JANUARY 1, 1994                                      -   $      -         $    264
   Conversion of Class B stock to Class A                     -          -                -
   Exercise of stock options by employees                     -          -                -
   Amortization of deferred compensation                      -          -             (120)
   Received from employees                                    -          -             (144)
   Tax benefit from exercise of stock options
      and vesting of restricted stock                         -          -                -
   Dividends declared                                         -          -                -
   Net earnings                                               -          -                -
   Five-for-four stock split                                  -          -                -
                                                       --------   --------         -------- 
BALANCE, DECEMBER 31, 1994                                    -          -                -

   Purchase of treasury stock                           320,000      5,260                -
   Exercise of stock options by employees                     -          -                -
   Tax benefit from exercise of stock options                 -          -                -
   Dividends declared                                         -          -                -
   Net earnings                                               -          -                -
                                                       --------   --------         --------
BALANCE, DECEMBER 30, 1995                              320,000      5,260                -

   Purchase of treasury stock                            83,032      1,488                -
   Issuance of shares for acquisitions                 (338,067)    (3,927)               -
   Three-for-two stock split                            160,000          -                -
   Exercise of stock options by employees                     -          -                -
   Tax benefit from exercise of stock options                 -          -                -
   Dividends declared                                         -          -                -
   Net earnings                                               -          -                -
                                                       --------   --------         --------
BALANCE, DECEMBER 28, 1996                              224,965   $  2,821         $      -
                                                       ========   ========         ========
</TABLE> 

See notes to consolidated financial statements

                                      F-4
<PAGE>
 
<TABLE> 
<CAPTION> 

BUSH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 28, 1996,  DECEMBER 30, 1995 AND DECEMBER 31, 1994
---------------------------------------------------------------------------------------------------------

                                                                                  (In Thousands)
                                                                           1996         1995        1994
                                                                         --------     --------    --------
<S>                                                                     <C>         <C>          <C> 
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net earnings                                                           $18,487     $12,550     $12,004
   Adjustment to reconcile:
      Depreciation and amortization                                         6,040       6,010       5,807
      Deferred income taxes                                                  (195)       (422)        549
   Changes in assets and liabilities affecting cash flows:
      Accounts receivable                                                    (720)      5,646      (9,203)
      Inventories                                                          (3,695)      7,283      (8,595)
      Prepaid expenses and other current assets                              (595)        403        (123)
      Accounts payable                                                       (103)     (1,864)      2,333
      Income taxes                                                            182       2,365        (547)
      Other accrued liabilities                                             1,454       1,983         375
                                                                          -------     -------     -------
   Net cash provided by operating activities                               20,855      33,954       2,600
                                                                          -------     -------     -------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
   Capital expenditures                                                   (35,640)    (20,989)    (10,851)
   Investment in subsidiaries                                                (827)          0           0
   Increase in other assets                                                  (860)       (852)       (181)
                                                                          -------     -------     -------
   Net cash used in investing activities                                  (37,327)    (21,841)    (11,032)
                                                                          -------     -------     -------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net borrowings (paydown) on line of credit                                   0      (2,595)      2,595
   Repayments of long-term debt                                            (3,379)    (12,050)     (3,886)
   Proceeds from long-term debt                                            20,789       7,065       4,732
   Purchase of Class A Stock for treasury                                  (1,488)     (5,260)          0
   Exercise of stock options by employees                                   1,783         382         182
   Dividends paid (per share - $.103 - 1996; $.067 - 1995;
     .043 - 1994)                                                          (1,352)       (877)       (565)
   Decrease in notes receivable                                                 0           0         144
                                                                          -------     -------     -------
   Net cash provided by (used in) financing activities                     16,353     (13,335)      3,202
                                                                          -------     -------     -------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                    (119)     (1,222)     (5,230)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                2,929       4,151       9,381
                                                                          -------     -------     -------
CASH AND CASH EQUIVALENTS, END OF YEAR                                      2,810       2,929       4,151
                                                                          =======     =======     =======
</TABLE> 

See notes to consolidated financial statements

                                      F-5

<PAGE>
 
BUSH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 28, 1996, DECEMBER 30, 1995 AND DECEMBER 31 ,1994
--------------------------------------------------------------------------------

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        The Company - The consolidated financial statements consist of Bush
        Industries, Inc. and its wholly-owned subsidiaries. All significant
        intercompany accounts and transactions have been eliminated.

        Business Segment - The Company's operations are conducted primarily in
        one business segment - the design, manufacture and sale of RTA 
        (ready-to-assemble) furniture for the home and office. Revenues are
        recognized when products are shipped. There are no material foreign
        operations or export sales. Electronic and office product superstores
        and mass merchandisers, throughout the United States, comprise a
        significant portion of the Company's customer base. The Company performs
        ongoing credit evaluations of its customers' financial condition and,
        generally, requires no collateral from its customers. Although the
        Company's exposure to credit risk associated with nonpayment by mass
        merchandisers is affected by conditions or occurrences within the retail
        industry, the majority of trade receivables from mass merchandisers
        were current at December 28, 1996. The Company has one customer that
        accounted for total gross sales of approximately 15% in 1996, 14% in
        1995 and 13% in 1994, and approximately 18% and 11% of accounts
        receivable at December 28, 1996 and December 30, 1995, respectively. The
        Company has a second customer that accounted for total gross sales of
        approximately 12% in 1996, 9% in 1995 and 6% in 1994, and approximately
        12% and 13% of accounts receivable at December 28, 1996 and December 30,
        1995, respectively. The majority of the Company's sales and the related
        accounts receivable for all years presented are to mass merchandisers
        and discount retailers.

        Inventories - Inventories, consisting of raw materials, work-in-progress
        and finished goods, have been stated at the lower of cost or market as
        determined by the first-in, first-out method.
        
        Property, Plant and Equipment - Property, plant and equipment is carried
        at cost. Depreciation is computed by the straight-line method over the
        estimated useful lives of the assets, which are as follows: buildings
        and improvements 10-50 years; machinery and equipment 3-15 years;
        transportation equipment 3-7 years; office equipment 3-10 years; and
        leasehold improvements 3-10 years. Construction of building and
        equipment in progress is recorded in property, plant and equipment and
        amounted to $23,121,000 and $14,226,000 at December 28, 1996 and
        December 30, 1995, respectively. Interest associated with construction
        indebtedness is capitalized. Interest amounting to approximately
        $252,000 and $150,000 associated with construction in process was
        capitalized for 1996 and 1995, respectively.

        The cost of repairs and maintenance is charged to expense as incurred.
        Renewals and betterments are capitalized. Upon retirement or sale of an
        asset, its cost and related accumulated depreciation or amortization are
        removed from the accounts and any gain or loss is recorded in income or
        expense.
 
        The Company continually reviews plant and equipment to determine that
        the carrying values have not been impaired. 

                                      F-6
<PAGE>
 
        Other Assets - Other assets consist primarily of goodwill, the cash
        value of officer's life insurance policies and unamortized finance
        costs. The Company continually reviews these assets to determine that
        the carrying value has not been impaired.

        Postretirement and Postemployment Benefits - The Company has no material
        postretirement or postemployment benefits as defined in Statement of
        Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting
        for Postretirement Other Than Pensions", or SFAS No. 112, "Employers'
        Accounting for Postemployment Benefits".

        Fair Value of Financial Instruments - The fair value of financial
        instruments is determined by reference to various market data and other
        valuation techniques, as appropriate. Unless otherwise disclosed, the
        fair value of short-term instruments approximates their recorded values
        due to the nature of the instruments. The fair value of long-term debt
        instruments approximates their recorded values due primarily to their
        recent issuance.

        Stock-Based Compensation - The Company adopted SFAS No. 123, "Accounting
        for Stock-Based Compensation," effective December 31, 1995. As permitted
        in that standard, the Company has elected to continue to follow
        Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
        to Employees," and related interpretations in accounting for employee
        stock-based compensation. No employee stock-based compensation expense
        was recorded for the years ended December 28, 1996, December 30, 1995
        and December 31, 1994.

        Income Taxes - Deferred taxes are recorded for temporary differences
        between the financial statement and tax basis of assets and liabilities
        using the anticipated tax rate when taxes are expected to be paid or
        recovered.

        Environmental Compliance - Environmental compliance expenditures that
        relate to current operations are expensed or capitalized, as
        appropriate. Expenditures that relate to an existing condition caused by
        past operations and that do not contribute to current or future revenue
        generations are expensed. Liabilities are recorded when environmental
        assessments and/or remedial efforts are probable and costs can be
        reasonably estimated.

        Earnings Per Share - Earnings per share are based on the weighted
        average number of shares of capital stock outstanding during the
        respective years. Outstanding stock options have been considered in the
        earnings per share calculation when their effect is dilutive.

        Use of Estimates - The preparation of financial statements in conformity
        with generally accepted accounting principles requires management to
        make estimates and assumptions that effect the reported amounts of
        revenues and expenses during the reported period and the reported
        amounts of assets and liabilities and disclosure of contingent assets
        and liabilities at the date of the financial statements. Actual results
        could differ from those estimates.

        Financial Statement Year End - The Company's year end is the closest
        Saturday to December 31.

                                      F-7
<PAGE>
 
2.      INVENTORIES

        Inventories consist of the following 
         (in thousands):
<TABLE>
<CAPTION>
                                                      December 28,  December 30,
                                                          1996          1995
           <S>                                        <C>           <C>
           Raw materials                                $ 6,313       $ 4,459
           Work-in-progress                               2,745         2,324
           Finished goods                                17,242        14,799
                                                      ---------     ---------
           Total                                        $26,300       $21,582
                                                      =========     =========
 
3.      OTHER ACCRUED LIABILITIES

        Other accrued liabilities consist of 
         (in thousands):
<CAPTION> 
                                                      December 28,  December 30,
                                                         1996          1995
           <S>                                        <C>           <C>
           Payroll, profit sharing                     $ 6,160       $ 5,538
            and related liabilities                    
           Commissions and sales                        11,312         9,829
            related expenses                           
           Other                                         1,372         1,052
                                                      ---------     ---------
           Total                                       $18,844       $16,419
                                                      =========     =========

4.      LONG-TERM DEBT

        Long-term debt consists of (in
         thousands):
                                                                December 28,  December 30,
                                                                   1996          1995
           <S>                                                    <C>           <C>
           Revolving credit facility with first
            contractual principal payment due 
            July 31, 2000                                         $31,243       $14,056
           
           Industrial Development Revenue Bonds,
            issued December 27, 1984, interest at 
            rate of short-term, tax exempt 
            obligations (TENR rate) plus 1/2% to 
            2%, depending on market.  Future
            principal payments due in quarterly
            installments of $75,000 through 
            January 1, 2000.                                          975         1,275
           
           Pennsylvania Industrial Development
            Authority loan, issued October 3, 1996, 
            interest at a rate of 3%.  Monthly 
            principal and interest payments of 
            $13,812 are due through 2011.                           1,982             0
                              
           
           Pennsylvania Sunny Day Loan Fund loan,
            issued June 27, 1996, interest at a rate 
            of 3%.  Monthly principal and interest
            payments of $13,812 are due through 2011.               1,956             0
             
           
           Pennsylvania Machinery & Equipment Loan
            Fund loan, issued November 6, 1996, 
            interest at a rate of 3%.  Monthly 
            principal and interest payments of $6,707 
            are due through 2003.                                     500             0
             
           
           Other                                                      346           101
                                                                 ---------     ---------
           Total debt                                              37,002        15,432
           Less current portion                                       663           401
                                                                 ---------     ---------
           Total long-term debt                                   $36,339       $15,031
                                                                 =========     =========
</TABLE>

                                      F-8
<PAGE>
 
     The Company finances operations through a revolving credit facility with a
     consortium of banks which is available through July 31, 2000. The maximum
     loan available under this facility is $85,000,000, on an unsecured basis.
     Interest is payable on the average daily balance of loans outstanding on a
     base rate (8.25% at December 28, 1996) or euro rate (6.75% at December 28,
     1996) option. As part of this revolving line, the Company may also issue
     letters of credit, not to exceed $15,000,000, which issuance will be deemed
     part of the $85,000,000 maximum amount of borrowing permitted. As of
     December 28, 1996, letters of credit amounting to $5,334,000 were
     outstanding.

     The revolving credit facility provides for achieving total funded debt (net
     of cash) to capital and total funded debt (net of cash) to earnings before
     interest and tax ratios, prescribes minimum tangible net worth
     requirements, limits capital expenditures and new leases and provides for
     certain other affirmative and restrictive covenants. The Company is in
     compliance with all these covenants as of December 28, 1996. The Company
     classifies this facility as long-term because there are no contractual
     requirements for repayment of principal until the year 2000.

     The Industrial Development Revenue Bonds are supported by a $1,310,000
     letter of credit (which is included in the total letters of credit
     outstanding of $5,334,000 as discussed above) expiring June 1997. The bonds
     are further collateralized by land, building and certain equipment acquired
     with the proceeds.

     A five-year summary of aggregate principal payments on outstanding long-
     term debt is (in thousands):
<TABLE>
     <S>                                                             <C>
     1997                                                            $   663
     1998                                                                688
     1999                                                                694
     2000                                                             31,687
     2001                                                                317
     Thereafter                                                        2,953
                                                                    --------
                                                                    $ 37,002
                                                                    ========
</TABLE>

5.   COMMITMENTS AND CONTINGENCIES

     The Company has incurred rental expense for manufacturing and warehouse
     space and transportation and other equipment. Certain real property leases
     have renewal and purchase options. A summary of rent expense follows (in
     thousands):

<TABLE>
<CAPTION>
                                                  1996      1995      1994
     <S>                                        <C>        <C>       <C>
     Real estate                                 $ 1,374   $ 1,855   $ 1,737
     Equipment                                     1,277     1,236     1,171
</TABLE>

     Minimum future obligations over the next five years under all operating
     leases are summarized as follows (in thousands):
<TABLE>
     <S>                                                              <C>
     1997                                                             $3,005
     1998                                                              1,527
     1999                                                                765
     2000                                                                396
     2001                                                                 82
</TABLE>

     The Company is a party to various legal actions arising in the normal
     course of business. The Company does not believe that any such pending
     activities should have a material adverse effect on its financial
     statements.

                                      F-9
<PAGE>
 
6.      INCOME TAXES

        The provision for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
                                                 1996        1995      1994
         <S>                                    <C>        <C>       <C>
         Current:                     
          Federal                               $ 10,240   $ 7,698   $ 6,310
          State                                      812       918       979
         Deferred                                   (195)     (422)      549
                                                ---------  --------  --------
          Total                                  $10,857    $8,194    $7,838
                                                =========  ========  ========

        The tax effects of the principal temporary differences resulting in
        deferred taxes are as follows (in thousands):

                                                   1996      1995      1994
         <S>                                    <C>        <C>       <C>
          Depreciation                           $   410    $   84    $ (179)
          Accrued expenses                          (197)     (369)      493
          Accounts receivable and inventories       (408)     (137)      235
                                                ---------  --------  --------
          Total                                  $  (195)   $ (422)   $  549
                                                =========  ========  ========
</TABLE>
        The types and tax effects of temporary differences that cause
        significant portions of deferred tax assets and liabilities are as
        follows: 
<TABLE>
<CAPTION>
                                                             1996      1995
          <S>                                              <C>       <C>
          Deferred Tax Assets:                         
           Accounts receivable                             $   748   $   373
           Accrued expenses                                  1,807     1,596
           Inventories                                         532       533
           State investment tax credit                       
            carryforward                                     3,428     2,242
           Subsidiary net operating loss                     
            carryforward                                     1,184         0
                                                           --------  --------
                                                             7,699     4,744
          Deferred Tax Liabilities:                    
           Property, plant and equipment                    (2,734)   (2,044)
                                                           --------  --------
           Subtotal                                          4,965     2,700
                                                       
          Total valuation allowance                         (4,638)   (2,242)
                                                           --------  --------
          Net deferred tax asset                           $   327   $   458
                                                           ========  ========

                                                              1996      1995
          Reported as:                                 
           Current asset (included in prepaid          
             expenses and other current assets)            $ 2,234   $ 2,409
           Long-term liability                              (1,907)   (1,951)
                                                           --------  --------
          Total net                                        $   327   $   458
                                                           ========  ======== 
</TABLE>

        The Company has recorded a valuation allowance primarily in anticipation
that New York State investment tax credits and subsidiary net operating loss
carryforward will expire prior to their usage.

                                     F-10
<PAGE>
 
        The provision for income taxes differs in each of the years from the
        federal statutory rate due to the following: 

<TABLE>
<CAPTION>
                                               1996      1995      1994
          <S>                                 <C>       <C>       <C>
          Statutory rate                      35.0 %    35.0 %    35.0 %
          State taxes                          1.8       2.8       3.6
          Effect of non-deductible costs       0.4       0.6       0.7
          Other, net                          (0.2)      1.1       0.2
                                            --------   -------   -------  
          Effective tax rate                  37.0 %    39.5 %    39.5 %
                                            ========   =======   =======
</TABLE>

        The Company realized tax benefits amounting to $772,000, $53,000 and
        $443,000 as the result of restricted stock and stock option transactions
        during 1996, 1995, and 1994, respectively. The benefit has been credited
        to paid-in capital and is not reflected in the current year provision
        for taxes.

7.      CAPITAL STOCK

        The authorized capital stock of the Company consists of 20,000,000
        shares of Class A Common Stock, $.10 par value, and 6,000,000 shares of
        Class B Common Stock, $.10 par value. Dividends may be declared and paid
        on Class A Common Stock without being paid on Class B Common Stock. No
        dividend may be paid on Class B Common Stock without equal amounts paid
        concurrently on Class A Common Stock. Holders of Class A Common Stock
        have one-tenth vote per share and are entitled to elect at least 25% of
        the Board of Directors as long as the number of outstanding shares of
        Class A Common Stock is at least 10% of the total of all Common Stock
        outstanding. Holders of Class B Common Stock have one vote per share.

        On May 21, 1996, the Board of Directors declared a 3-for-2 stock split
        payable in the form of a dividend to all holders of Class A and Class B
        Common Stock of record on June 14, 1996, paid on June 28, 1996. All
        earnings per share calculations and weighted average shares outstanding
        have been retroactively restated to reflect the stock split.

        On November 29, 1994, the Board of Directors declared a 5-for-4 stock
        split payable in the form of a dividend to all holders of Class A and
        Class B Common Stock of record on January 6, 1995, paid on January 20,
        1995.

8.      STOCK OPTION PLANS

        The Company currently has one open stock option plan with 375,000 shares
        of Class A Common Stock authorized for issuance subsequent to the 3-for-
        2 stock split effective June 28, 1996. As of December 28, 1996, there
        were 365,500 shares available for issuance under the plan. Incentive
        Stock Options granted under the plan must have an option price of at
        least 100% (110% for stockholders with more than 10% of the total
        combined voting power) of the fair market value of the Class A Common
        Stock on the date of the grant. The option price of the Non-Qualified
        Stock Options granted pursuant to the plan shall be determined by the
        Compensation Committee of the Board of Directors, in its sole
        discretion. No option can be exercised within one year after the date of
        grant.

        As of December 28, 1996, there were options to purchase 880,215 shares
        of Class A Common Stock under the current and prior plans at prices
        ranging from $1.69 to $14.53 that could be exercised, as adjusted for
        stock splits effectuated in the form of stock dividends.

                                     F-11
<PAGE>
 
        The following is a summary of option transactions:
<TABLE>
<CAPTION>
                                               1996        1995        1994
 
          <S>                                <C>         <C>         <C>
          Options outstanding, beginning  
           of year                           1,363,248   1,463,019      52,571
          Options granted                       13,720           0   1,170,000
          Options forfeited                          0     (70,313)    (19,872)
          Options exercised                   (201,101)    (29,458)    (32,290)
          Effect of stock splits (Note 7)      681,639           0     292,610
                                            ----------- ----------- -----------
          Options outstanding, end of year   1,857,506   1,363,248   1,463,019
                                            =========== =========== ===========
</TABLE>

        All of the options outstanding expire at various dates from 1997 through
        2006. The option price of the shares subject to options exercised in
        1996 ranged from $1.51 to $8.91.

        In addition to the options granted under the aforementioned plans, the
        Company has outstanding 75,876 shares subject to non-qualifying options
        granted to certain key individuals which can be exercised through 2003
        at an exercise price of $8.91, as adjusted for stock splits effectuated
        in the form of stock dividends.

        Pro forma information regarding net income and earnings per common share
        is required by SFAS No. 123 and has been determined as if the Company
        had accounted for its employee stock options and awards under the fair
        value method of that standard. The fair value of those options were
        estimated at the date of grant using a Black-Scholes option pricing
        model with the following weighted-average assumptions for the year ended
        December 28, 1996: a risk free interest rate of 6.3%; dividend yield of
        .75%; volatility factors of the expected market price of the Company's
        common stock of 43%; and a weighted-average expected life of 7 years.
        There were no options granted in 1995.

        For purposes of pro forma disclosures, the estimated fair value of the
        options is amortized to expense over the options' vesting period. The
        Company's pro forma net earnings and primary earnings per common share
        for the year ended December 28, 1996 were $18,482 and $1.30.

9.      SAVINGS AND RETIREMENT PLAN

        The Company has a profit sharing plan with both direct employer
        contributions and a salary reduction feature under Section 40l(K).
        Employer contributions can be paid in cash or in shares of Class A
        Common Stock at the discretion of the Board of Directors. Total expense
        related to the plan was $877,000, $722,000 and $688,000 for the years
        ended December 28, 1996, December 30, 1995 and December 31, 1994,
        respectively.

10.     SUPPLEMENTAL CASH FLOW INFORMATION

        Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
                                                  1996     1995     1994
         <S>                                    <C>      <C>      <C>
         Cash paid during the years for: 
          Interest                              $ 2,579   $2,069   $1,827
          Income taxes                           10,389    6,251    7,835
</TABLE>
        Summary of non-cash investing and financing activities:

        In 1996, the Company acquired 100% of the stock of The ColorWorks, Inc.
        (see Note 12) for 338,067 shares of treasury stock valued at
        approximately $7,002,000 and equipment and other assets valued at
        approximately $231,000.

                                     F-12
<PAGE>
 
<TABLE> 
<CAPTION> 
11.     QUARTERLY SALES AND EARNINGS DATA - UNAUDITED

                                    (In Thousands, except per share data)
                                 4th Qtr.    3rd Qtr.    2nd Qtr.    1st Qtr.
        <S>                      <C>         <C>         <C>         <C> 
        1996

        Net sales                $ 72,462    $ 63,638    $ 55,199    $ 65,033
        Gross profit               22,163      19,205      18,278      20,308
        Income taxes                2,944       2,338       2,570       3,005
        Net earnings                5,431       3,979       4,276       4,801
        Earnings per share -     $   0.38    $   0.28    $   0.30    $   0.35
         primary*               
 
        1995

        Net sales                $ 65,312    $ 59,521    $ 45,008    $ 50,173
        Gross profit               19,928      17,487      13,415      14,890
        Income taxes                3,209       2,056       1,208       1,721
        Net earnings                4,913       3,156       1,848       2,633
        Earnings per share -     $   0.36    $   0.24    $   0.14    $   0.20
         primary*
 
        1994

        Net sales                $ 55,478    $ 55,273    $ 51,451    $ 51,014
        Gross profit               16,046      16,251      15,187      15,398
        Income taxes                2,118       2,031       1,858       1,831
        Net earnings                3,258       3,133       2,868       2,745
        Earnings per share -     $   0.23    $   0.22    $   0.20    $   0.20
         primary*
</TABLE>

        * Restated for the 3-for-2 stock split declared May 21, 1996 and the 5-
        for-4 stock split declared November 29, 1994.

12.     ACQUISITION

        During 1996, the Company acquired all of the outstanding stock of The
        ColorWorks, Inc. (ColorWorks) for 338,067 shares of the Company's Class
        A Common Stock, approximately $231,000 in equipment and other assets and
        approximately $827,000 in cash. The acquisition was recorded under the
        purchase method of accounting and accordingly, ColorWorks financial
        statements are included in the accompanying consolidated financial
        statements. The majority of the purchase price has been assigned to
        goodwill which is being amortized over 15 years (see Note 1).
                                *  *  *  *  *  *

                                     F-13
<PAGE>

Schedule II


                       VALUATION AND QUALIFYING ACCOUNTS
                                (In Thousands)
<TABLE> 
<CAPTION> 
                                                                                                
                                        Col. B                                             
                                       Balance at                                                   Col. D             Col. E  
            Col. A                     Beginning                      Col. C                       Deductions -       Balance at
          Description                  of Period                    Additions                      Describe (1)      End of Period
                                                     ------------------------------------------ 
                                                                                Charged to         
                                                         Charged to           Other Accounts -     
                                                      Costs & Expenses           Describe          
                                                                                                   
<S>                                    <C>           <C>                      <C>                  <C>               <C> 
Allowance for doubtful accounts                                                                    

                                                                                                   
Fiscal 1996                              $1,011             $1,022                  $0                  ($3)             $2,036

                                                                                                                     
Fiscal 1995                                 635                713                   0                  337               1,011

                                                                                                                     
Fiscal 1994                                 732                (50)                  0                   47                 635
</TABLE> 



(1) Accounts written off, net of collections on accounts receivable previously
    written off

                                      S-1
<PAGE>
 
                                 SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                              REGISTRANT:

                                              BUSH INDUSTRIES, INC.


March 21, 1997                                By /s/Paul S. Bush
                                                 --------------------
                                                 Paul S. Bush, President

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.

<TABLE> 
<CAPTION> 

       SIGNATURE                      TITLE                     DATE
       ---------                      -----                     ----
<S>                             <C>                        <C> 
/s/Paul S. Bush
------------------------
Paul S. Bush                    President, Chief
                                Executive Officer, and
                                Chairman of the Board
                                of Directors               March 21, 1997
  

/s/Robert L. Ayres
------------------------
Robert L. Ayres                 Executive Vice President,
                                Chief Operating Officer,
                                Chief Financial Officer,
                                and Director               March 21, 1997


/s/Lewis H. Aronson
------------------------
Lewis H. Aronson                Senior Vice President of
                                International Business and
                                Corporate Development
                                and Director               March 21, 1997
</TABLE> 
<PAGE>
 
<TABLE> 
<S>                             <C>                        <C> 
/s/Douglas S. Bush
------------------------
Douglas S. Bush                 Vice President of
                                Merchandising and
                                Director                   March 21, 1997


/s/Gregory P. Bush
------------------------
Gregory P. Bush                 Vice President of
                                Administration and
                                New Business Development
                                and Director               March 21, 1997


/s/Donald F. Hauck
------------------------
Donald F. Hauck                 Senior Vice President
                                and Director               March 21, 1997


/s/David G. Messinger
------------------------
David G. Messinger              Senior Vice President of
                                Sales and Marketing and
                                Director                   March 21, 1997
 

/s/Paul A. Benke
------------------------
Paul A. Benke                   Director                   March 21, 1997


/s/Jerald D. Bidlack
------------------------
Jerald D. Bidlack               Director                   March 21, 1997


/s/Robert E. Hallagan
------------------------
Robert E. Hallagan              Director                   March 21, 1997
</TABLE>