<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 January 3, 1998

                                      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 of                               (I.R.S. Employer
 incorporation or organization)                              Identification No.)

  One Mason Drive, Jamestown, New York                             14702
----------------------------------------                         ----------
(Address of principal executive offices)                         (Zip Code)

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 January 2, 1998, 10,165,997 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 January 2, 1998 which was $26.00 per share) of the
Class A Common Stock held by non-affiliates was approximately $152,268,000.
As of January 2, 1998, 3,555,365 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 14, 1998, 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 majority owned subsidiaries (the "Company" or
the "Registrant"), are primarily engaged in the design, manufacture and sale of
ready-to-assemble ("RTA") and set up 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.

     The Company completed in 1996, a new one million square-foot manufacturing
and distribution facility in Erie, Pennsylvania, which is approximately
50 miles west of  the Company's corporate headquarters 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.  The second phase of the expansion program, consisting of an
approximate 500,000 square foot facility, became operational in 1997.
Additional manufacturing capacity, incorporating newly developed advanced
technology, will be added incrementally to this facility as demand requires.

     In 1996, the Company acquired all of the outstanding and issued capital
stock of The ColorWorks, Inc., a North Carolina corporation ("ColorWorks").
ColorWorks, with headquarters located in Greensboro, North Carolina, is a
finishing, design and decorating company which holds the master license to the
"HydroGraFix" film processing technology in the Western Hemisphere, portions of
Central Europe and South Africa.

     In the first quarter of 1997, the Company formed a wholly-owned German
subsidiary, Bush-Viotechnik GmbH ("Bush-Viotechnik"), to service the global
market for advanced "surface technologies" in diverse applications. These
applications include products associated with the furniture, automotive,
electronics, building and construction industries.  Bush-Viotechnik has
developed an advanced surface technology manufacturing line which is completed
and due to be installed in the Company's Erie, Pennsylvania facility.  Plans
call for a second line to be installed in Germany to service the European
market.   For the Company's 1997 fiscal year, the total net sales and the total
assets of Bush-Viotechnik were approximately 0% and 3.5% of the Company's
consolidated total net sales and total assets, respectively.

     On June 30, 1997, the Company acquired a 51% interest in the Rohr Gruppe, a
German furniture manufacturer.  The Rohr Gruppe consisted of limited
partnerships and corporate entities, which were reorganized into a limited
partnership prior to the Company's acquisition, which name was subsequently
changed to Rohr-Bush GmbH & Co. ("Rohr-Bush").  For the Company's 1997 fiscal
year, the total net sales and the total assets of Rohr-Bush were approximately
7.8% and 28.4% of the Company's consolidated total net sales and total assets,
respectively.

                                       3
<PAGE>

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

     For financial information reporting purposes, the Company is deemed to
engage in one industry  segment, the design, manufacture and sale of  furniture
products.  The Company's geographic operations outside the United States
principally include Germany.


(c)  NARRATIVE DESCRIPTION OF BUSINESS
     ---------------------------------

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

     The Company's diverse 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 in
the United States to assist consumers with any questions with respect to the
assembly of Bush products.  The Company's diverse set up furniture, primarily
produced and sold by Rohr-Bush, is designed to be a high quality product that
appeals to popular price points.  The component parts for the set up furniture
are manufactured using RTA technology and equipment.

     ColorWorks is engaged in the finishing and decoration of  various substrate
materials. ColorWorks holds the master license to the "HydroGraFix" film
processing technology in the Western Hemisphere, portions of Central Europe, and
South Africa.  This process permits the decoration of a variety of geometric
shapes, including complex three-dimensional parts.  Cellular phones, pagers,
firearms, archery equipment and automotive interior components are examples of
major product lines decorated by ColorWorks.

     The objective of Bush-Viotechnik is to service the global market for
advanced "surface technologies" in diverse applications, including the
furniture, automotive, electronics, building and construction industries.  Bush-
Viotechnik has developed an advanced surface technology manufacturing line that
is completed and due to be installed in the Company's Erie, Pennsylvania
facility.  Plans call for a second line to be installed in Germany to service
the European market.  The formation of Bush-Viotechnik  complements the
Company's acquisition of ColorWorks.

                                       4
<PAGE>

MARKETING AND DISTRIBUTION

     The Company's furniture products, inclusive of Rohr-Bush,  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, furniture stores, buying groups in
Germany, and independent wholesale distributors.  The Company's furniture
products, inclusive of Rohr-Bush, are sold both through independent
manufacturers' representatives and directly by the Company's sales personnel.
The Company's furniture products, inclusive of Rohr-Bush, are currently sold to
approximately 3,500 customers, and the Company estimates that its products are
currently carried in approximately 22,000 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 production of its
furniture at each manufacturing location from a variety of sources on a global
basis.  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.

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 surface
technologies and 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.

                                       5
<PAGE>

CUSTOMERS

     For the fiscal year ended January 3, 1998, the Company had one customer
which accounted for approximately 16% of the Company's total gross sales.  No
other single customer accounted for more than 10% of the Company's total gross
sales for the fiscal year ended January 3, 1998.  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 six 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 and that Rohr-Bush is the eighth largest furniture
manufacturer in Germany (excluding kitchen cabinets and upholstered furniture).
The furniture 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 the principal competitive factors in the
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 the 1997 fiscal year end, the Company employed a total of
approximately 3,250 employees.  Since Rohr-Bush is an active member of the
German employers' association for the wood and plastics processing industry, it
is governed by the collective bargaining agreements for this industry.  There
are no other collective bargaining agreements covering any of the Company's
employees.  The Company believes it has good employee relations.

                                       6
<PAGE>

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

     For the 1997 fiscal year ended January 3, 1998, the Company generated
domestic sales of approximately $283,019,000 (or approximately 87.0% of total
sales) and foreign sales of approximately $42,270,000 (or approximately 13.0% of
total sales).  Of the total foreign sales, approximately $16,960,000 (or
approximately 5.2% of total sales) represented products exported by the Company
from the United States.  For the 1996 fiscal year ended December 28, 1996 and
the 1995 fiscal year ended December 30, 1995, the Company generated domestic
sales of approximately $245,158,000 and $209,274,000, respectively (or
approximately 95.6% of total sales for the 1996 fiscal year and approximately
95.1% of total sales for the 1995 fiscal year).  Foreign sales for the fiscal
years ended December 28, 1996 and December 30, 1995, respectively, were
approximately $11,174,000 and $10,740,000 (or approximately 4.4% of total sales
for the 1996 fiscal year and approximately 4.9% of total sales for the 1995
fiscal year.)

                                       7
<PAGE>

ITEM 2.    PROPERTIES
-------    ----------
     The following table summarizes the Company's existing facilities as of
March 1, 1998:
<TABLE>
<CAPTION>
                                                        Approximate
Principal Character and                                   Square           Owned/Leased
 use of Property                       Location           Footage    (Lease Expiration Date)
-----------------------        ----------------------  -----------  ------------------------
<S>                             <C>                     <C>          <C>
Manufacturing and
 warehouse facility             Erie, PA                  1,035,000  Owned (1)
Manufacturing,
 warehouse and office
 facilities                     Mastholte, Germany          974,000  Owned
Manufacturing and               Allen Street
 warehouse facility             Jamestown, NY               450,000  Owned
Manufacturing,
 warehouse and                  Mason Drive
 corporate office facilities    Jamestown, NY               440,000  Owned (2)
Manufacturing facility          Mantinghausen, Germany      208,000  Owned
Manufacturing and               Tiffany Street
 warehouse facility             Jamestown, NY               145,000  Owned (2)
Manufacturing facility          Tijuana, Mexico             135,000  Leased (September 2002)
Manufacturing facility          Little Valley, NY            78,000  Owned
Manufacturing facility          Greensboro, NC               67,000  Owned
Manufacturing facility          Rutherfordton, NC            26,000  Owned
Showroom                        High Point, NC               13,000  Leased (April 2002)
Manufacturing and
 office facility                Mastholte, Germany           10,000  Leased (December 2000)
Regional service center         Erie, PA                      8,000  Leased (June 2001)
Regional service center         Oxnard, CA                    8,000  Leased (July 2001)
Sales office and
design studio                   Ft. Myers, FL                 4,000  Leased (February 2002)
Offices                         Oldenburg, Germany            3,000  Leased (March 1999)

</TABLE>
------------
(1)  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.

(2)  Legal title to the facility is in the County of Chautauqua Industrial
     Development Agency in accordance with the terms of financing for the
     facility.


                                       8
<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", and during January 1998, the DEC provided certain
limited comments to the Company's environmental consultant.  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, the
Company is not aware of any potentially responsible parties having 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.

     The Company has also become aware of the presence of certain levels of
contaminates on property located in Germany and owned by Rohr-Bush, of which the
Company became a 51% stockholder on June 30, 1997.  The associated liability,
the quantification of which was based on the assessment of outside consultants,
was recorded in the allocation of the purchase price to the acquired assets and
liabilities as of June 30, 1997.  Accordingly, 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 January 3, 1998, 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.

                                       9
<PAGE>

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 January 3, 1998.

                                       10
<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:

<TABLE>
<CAPTION>
Quarter                                 High    Low
-------                                ------  ------

<S>                                    <C>     <C>
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

January 1, 1997 - March 31, 1997       $22.38  $17.25
April 1, 1997 - June 30, 1997          $24.88  $18.88
July 1, 1997 - September 30, 1997      $28.38  $23.38
October 1, 1997 - December 31, 1997    $28.25  $23.50

</TABLE>

     (b)  Holders.  As of March 1, 1998, the number of holders of record of the
          -------
Company's Class A Common Stock was approximately 425. The Company believes that
there are approximately an additional 2,500 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 $0.035 per share for each of the four quarters of
1997.  On February 18, 1998, the Company announced its intent to increase the
quarterly cash dividend from $0.035 to $0.05 per share effective with the May
1998 dividend payment.

          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 Incorporation, as amended, also provides that any
dividends paid on Class A Common Stock must

                                       11
<PAGE>

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.

                                       12
<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA
-------   -----------------------

     The following selected financial data of the Company for the 1993 through
1997 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)
                                 -----------------------------------------------
                           1997         1996         1995         1994         1993
                        -----------  -----------  -----------  -----------  -----------

<S>                     <C>          <C>          <C>          <C>          <C>
Earnings Data (1)
----------------------

Net Sales.............  $   325,289  $   256,332  $   220,014  $   213,216  $   170,285

Earnings Before
Income Taxes..........  $    34,978  $    29,344  $    20,744  $    19,842  $    11,908

Net Earnings..........  $    22,120  $    18,487  $    12,550  $    12,004  $     7,145

Earnings Per Share
     Basic............  $      1.64  $      1.42  $      0.95  $      0.91  $      0.56
     Diluted..........  $      1.52  $      1.31  $      0.95  $      0.86  $      0.55

Number of Weighted
 Average Class A and
 Class B Shares
 Outstanding
     Basic............   13,464,479   13,064,736   13,147,451   13,236,141   12,820,369
     Diluted..........   14,523,356   14,073,381   13,270,544   14,012,070   13,021,512


Balance Sheet Data
----------------------

Working Capital.......  $    28,111  $    28,213  $    24,018  $    34,421  $    26,903
Total Assets..........  $   243,778  $   152,464  $   102,606  $   100,958  $    83,522
Long-term Debt........  $    56,955  $    36,339  $    15,031  $    16,774  $    16,108
Stockholders' Equity..  $   112,430  $    84,317  $    59,113  $    52,265  $    39,938
</TABLE>

--------------------
(1)       Effective for the year ended January 3, 1998, the Company adopted SFAS
          No. 128, "Earnings per Share".  In accordance with SFAS No. 128, the
          basic and diluted EPS and weighted average shares outstanding have
          been restated for all periods presented.  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.

                                       13
<PAGE>

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-------   ---------------------------------------------------------------
          RESULTS OF OPERATIONS
          ---------------------

GENERAL

     The domestic 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 and office 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.

     On June 30, 1997, the Company acquired a 51% interest in the Rohr Gruppe, a
German furniture manufacturer.  The Rohr Gruppe consisted of limited
partnerships and corporate entities, which were reorganized prior to the
Company's acquisition into a limited partnership, which name was subsequently
changed to Rohr-Bush GmbH & Co. ("Rohr-Bush").  For the Company's 1997 fiscal
year, the total net sales and the total assets of Rohr-Bush were approximately
7.8% and 28.4% of the Company's consolidated net sales and total assets,
respectively.

     In 1996, the Company acquired all of the outstanding and issued capital
stock of The ColorWorks, Inc., a North Carolina corporation ("ColorWorks").
ColorWorks, with headquarters located in Greensboro, North Carolina, is a
finishing, design and decorating company which holds the master license to the
"HydroGraFix" film processing technology in the Western Hemisphere, portions of
Central Europe and South Africa.

     In the first quarter of 1997, the Company formed a wholly-owned German
subsidiary, Bush-Viotechnik GmbH ("Bush-Viotechnik"), to service the global
market for advanced "surface technologies" in diverse applications.  These
applications include products associated with the furniture, automotive,
electronics, building and construction industries.  Bush-Viotechnik has
developed an advanced surface technology manufacturing line which is completed
and due to be installed in the Company's Erie, Pennsylvania facility.  Plans
call for a second line to be installed in Germany to service the European
market.  For the Company's 1997 fiscal year, the total net sales and the total
assets of Bush-Viotechnik were approximately 0% and 3.5% of the Company's
consolidated total net sales and total assets, respectively.

                                       14
<PAGE>

     In March 1998, the Company entered into a letter of intent to acquire all
of the issued and outstanding capital stock of Fournier Furniture, Inc., a
manufacturer of RTA furniture, for a purchase price of $7,000,000.  The
consummation of the transaction is subject to numerous contingencies, including
the execution of a definitive purchase agreement.

     The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "year 2000 issue" and has
substantially developed an implementation plan to resolve such issues.  The
"year 2000 issue" is the result of computer programs being written using two
digits rather than four to define the applicable year.  Programs with this
problem may recognize a date using "00" as the year 1900 rather than the year
2000, resulting in system failures or miscalculations.  Although no assurance
can be given, the Company presently believes that with further modifications to
existing software and conversion to new software, the "year 2000 issue" will not
pose significant operational problems for the Company's computer systems as so
modified and converted and that the cost of such modifications and conversions
will not have a material impact on the Company's financial statements.

     In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income",
and No. 131 "Disclosures about Segments of an Enterprise and Related
Information".  Both statements will be adopted as required during the Company's
1998 fiscal year.  Currently, the Company does not expect to have any material
differences between net income as currently reported and comprehensive incomes
as required to be reported under SFAS No. 130.  Management is evaluating
whether or not the Company operates in more than one operating segment as
defined in SFAS No. 131.  Certain financial data in connection with operating
segments, if any, and certain enterprise wide disclosures about foreign and
domestic operations and revenues from major customers will be reported upon
adoption of SFAS No. 131 by the Company.

     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.

                                       15
<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
                                                ------------------------
                                                 1997    1996      1995
                                                ------  ------    ------
<S>                                             <C>      <C>       <C>
Net Sales                                       100.0%   100.0%    100.0%
Cost of Sales                                    70.2%    68.8%     70.1%
                                                -----    -----     -----
     Gross Profit                                29.8%    31.2%     29.9%

Selling, General and Administrative Expenses     17.9%    18.9%     19.6%
                                                -----    -----     -----
     Operating Income                            11.9%    12.3%     10.3%

Interest Expense                                  1.1%     0.8%      0.9%
                                                -----    -----     -----
Earnings Before Income Taxes                     10.8%    11.5%      9.4%

Income Taxes                                      4.0%     4.3%      3.7%
                                                -----    -----     -----
     Net Earnings                                 6.8%     7.2%      5.7%
                                                =====    =====     =====
</TABLE>

     The following paragraphs provide an analysis of the changes in net sales,
selected cost and expense items, and earnings for fiscal years 1995 through
1997.  Effective for the year ended January 3, 1998, the Company adopted SFAS
No. 128, "Earnings per Share".  In accordance with SFAS No. 128, the basic and
diluted EPS and weighted average shares outstanding have been restated for all
periods presented. 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 and
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.

RESULTS OF OPERATIONS: FISCAL 1997 COMPARED TO FISCAL 1996

     The Company's net sales for the 1997 fiscal year compared to the 1996
fiscal year increased $68,957,000, or approximately 26.9%, to a record
$325,289,000.  The increase in net sales was attributable to the inclusion of
$25,310,000 of Rohr-Bush sales in the consolidated financial statements, the
growing domestic market acceptance for ready-to-assemble furniture products at
both the retail and consumer levels and to strong domestic sales in the office
superstore and consumer electronics distribution channels.

     The cost of sales increased by $52,127,000 in 1997 primarily as a result of
higher sales volumes.  The cost of sales as an approximate percentage of net
sales increased by 1.4% from 68.8% in 1996 to 70.2% in 1997.  Higher cost of
sales as a percentage of net sales was primarily the result of the integration
of the European operations.

     For 1997, selling, general and administrative expenses increased by
$9,785,000 compared to 1996.  The increase in selling, general and
administrative expenses was primarily a result of 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

                                       16
<PAGE>

administrative expenses decreased as an approximate percentage of net sales from
18.9% in 1996 to 17.9% in 1997.

     Interest expense increased to $3,542,000 in 1997 (or approximately 1.1% of
net sales) from $2,131,000 in 1996 (or approximately 0.8% of net sales).  The
increase in interest resulted from an increase in average long-term debt.  The
Company's overall effective federal, state and local tax rate decreased from
37.0% in 1996 to 36.8% in 1997.  The exercise of stock options during 1997
resulted in a tax benefit amounting to $1,563,000, which has been credited
directly to paid-in capital and is not reflected in 1997'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 1997, the Company generated net earnings after taxes of $22,120,000 (or
$1.64 basic earnings per share, $1.52 diluted earnings per share), as compared
to $18,487,000 (or $1.42 basic earnings per share and $1.31 diluted earnings per
share) for 1996.  This was an approximate 19.7% increase in net earnings. The
increase in net earnings is primarily due to increased sales.

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 $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 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 in 1996 (or approximately 0.8% of
net sales) from $1,922,000 in 1995 (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.

                                       17
<PAGE>

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
$1.42 basic earnings per share, $1.31 diluted earnings per share), as compared
to $12,550,000 (or $0.95 basic earnings per share and $0.95 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.

LIQUIDITY AND CAPITAL RESOURCES

     As described above, in the first quarter of 1997, the Company formed its
wholly-owned German subsidiary, Bush-Viotechnik, and on June 30, 1997, the
Company acquired a 51% interest in Rohr-Bush, a German furniture manufacturer.
The purchase price of Rohr-Bush consisted of $3.0 million in Bush Industries,
Inc. Class A Common Stock and additional debt capacity was made available. The
acquisition of Rohr-Bush has been accounted for using the purchase method of
accounting.  Both Bush-Viotechnik and Rohr-Bush have a fiscal year end of
October 31.

     Working capital at fiscal year end 1997 was virtually the same as working
capital at fiscal year end 1996, decreasing by $102,000.   Total assets at
fiscal year end 1997 increased $91,314,000 over fiscal year end 1996, primarily
as a result of the inclusion of Rohr-Bush in the consolidated financial
statements and an increase in net property, plant and equipment associated with
the Company's capital expenditures in 1997.  In addition, total liabilities
increased $63,201,000 at fiscal year end 1997, due primarily as a result of the
inclusion of Rohr-Bush in the consolidated financial statements.

     The Company spent $28,474,000 on capital expenditures during 1997 which was
financed primarily with net cash flow from operating activities.   Capital
expenditures in 1998 with respect to the Company's existing facilities are
currently forecasted to be approximately $35 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 1998.

     The cash dividends for each of the quarters of 1997 was $0.035 per share.
On February 18, 1998, the Company announced its intent to increase the quarterly
cash dividend from $0.035 to $0.05 per share effective with the May 1998
dividend payment.  Simultaneously, the Company announced that the Board of
Directors has authorized the repurchase of up to $20 million of the Company's
Class A Common Stock, from time to time, as market conditions permit.

                                       18
<PAGE>

     On June 27, 1997, the Company replaced its then existing $85,000,000 credit
facility with a new $155,000,000 credit facility with The Chase Manhattan Bank,
Mellon Bank, N.A. and other lending institutions.  The credit facility provides
for revolving credit loans, swing line loans and multicurrency loans, within the
parameters described below.  The loan is due June 25, 2002 with a balloon
payment of the then remaining principal and accrued interest.  The Company has
classified all of the 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 NYBOR rate, a
eurocurrency rate for dollars, an applicable eurocurrency rate for certain
foreign currencies, a money market rate, or an alternative base rate.
Eurocurrency loans bear interest at the then current applicable LIBOR rate,
plus an applicable margin. The applicable margin, which pertains only to LIBOR
and NYBOR rate loans, varies from 0.375% to 1.00%, 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
$20,000,000 in letters of credit, which issuance will be deemed part of the
$155,000,000 maximum amount of borrowing permitted under the credit facility.

     The line of credit agreement provides for achieving certain consolidated
cash flow coverage and leverage 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 1998.

     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.

                                       19
<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 14, 1998, 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 14, 1998, 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 14, 1998, 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 14, 1998, under the caption "Certain Transactions",
to be filed by the Registrant.

                                       20
<PAGE>

                                    PART IV
                                    -------


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

(A)  The consolidated balance sheets as of January 3, 1998 and December 28, 1996
     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 January 3, 1998 are filed as part of this report:

(1)  Financial Statements                         Page
     ------------------------------               ----

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


(2)  Consolidated Financial Statement Schedules
     ------------------------------------------

Schedule II - Valuation and Qualifying Accounts    S-1

     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. (7)

3.3  Amendment to Certificate of Incorporation, dated July 9, 1993.  (5)

3.4  By-Laws. (1)

10.1 The Registrant's 1985 Stock Plan, as amended. (5)

10.2 The Registrant's 1985 Incentive Stock Option Plan, as amended. (5)

10.3 Lease Agreement between County of Chautauqua Industrial Development Agency
     and the Registrant dated January 1, 1990.  (3)

                                       21
<PAGE>

10.4  Employment Agreement between the Registrant and Paul S. Bush dated July
      29, 1992, as amended. (4)

10.5  Employment Agreement between the Registrant and Robert L. Ayres
      dated July 29, 1992, as amended. (4)

10.6  Employment Agreement between the Registrant and Lewis H. Aronson
      dated July 29, 1992, as amended. (4)

10.7  Employment Agreement between the Registrant and David G. Messinger
      dated July 29, 1992, as amended.  (4)

10.8  Employment Agreement between the Registrant and Donald F. Hauck dated
      February 8, 1993.  (4)

10.9  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.  (4)

10.10 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. (4)

10.11 Split Dollar Insurance Agreement between the Registrant and Robert
      L. Ayres dated December 19, 1991 and related Collateral Assignment
      Agreement.  (4)

10.12 Split Dollar Insurance Agreement between the Registrant and Donald
      F. Hauck dated June 29, 1992 and related Collateral Assignment
      Agreement.  (4)

10.13 Performance Bonus Plan. (6)

10.14 Stock Redemption Agreement between the Registrant and Paul S. Bush
      dated July 10, 1997. (8)

10.15 Credit Agreement, dated as of June 26, 1997 by and among the
      Registrant, as Borrower, the Lenders party thereto from time to time,
      The Chase Manhattan Bank as administrative agent and Mellon Bank, N.A.,
      as co-agent. (8)

21.1  List of Subsidiaries of Registrant.

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

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

                                       22
<PAGE>

(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 January 2, 1993.
(5)     Incorporated by reference to the Registrant's Annual Report on Form 10-K
        for the fiscal year ended January 1, 1994.
(6)     Incorporated by reference to the Registrant's definitive Proxy
        Statement, dated May 16, 1994.
(7)     Incorporated by reference to the Registrant's Annual Report on Form 10-K
        for the fiscal year ended December 31, 1994.
(8)     Incorporated by reference to the Registrant's Current Report on Form 8-
        K, filed September 10, 1997.

(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 January 3, 1998.

                                       23
<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 January 3, 1998 and December 28, 1996, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended January 3, 1998. 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 these 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 Bush Industries, Inc. and
subsidiaries as of January 3, 1998 and December 28, 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended January 3, 1998 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.



Deloitte & Touche LLP
Buffalo, New York
February 12, 1998

                                      F-1
<PAGE>

BUSH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JANUARY 3, 1998 AND DECEMBER 28, 1996
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                    (IN THOUSANDS)
                                                                                   1997             1996
ASSETS

CURRENT ASSETS:
<S>                                                                        <C>              <C>
  Cash and cash equivalents                                                      $  3,399         $  2,810
  Accounts receivable (less allowance for doubtful accounts of $1,329,000
    on January 3, 1998 and $2,036,000 on December 28, 1996)                        40,387           24,863
  Inventories  (Note 2)                                                            31,822           26,300
  Prepaid expenses and other current assets  (Note 7)                               9,909            4,141
                                                                                 --------         --------
          Total current assets                                                     85,517           58,114

PROPERTY, PLANT AND EQUIPMENT, NET  (Notes 3 and 5)                               142,710           84,355

OTHER ASSETS                                                                       15,551            9,995
                                                                                 --------         --------

TOTAL ASSETS                                                                     $243,778         $152,464
                                                                                 ========         ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
  Accounts payable                                                               $ 22,940         $  9,377
  Income taxes  (Note 7)                                                                0            1,017
  Other accrued liabilities  (Note 4)                                              33,748           18,844
  Current portion of long-term debt  (Note 5)                                         718              663
                                                                                 --------         --------
           Total current liabilities                                               57,406           29,901

DEFERRED INCOME TAXES  (Note 7)                                                     8,976            1,907
OTHER LONG-TERM LIABILITIES (Note 10)                                               8,011                0
LONG-TERM DEBT  (Note 5)                                                           56,955           36,339
                                                                                 --------         --------
          Total liabilities                                                       131,348           68,147
                                                                                 --------         --------

COMMITMENTS AND CONTINGENCIES  (Note 6)

STOCKHOLDERS' EQUITY  (Notes 8 and 9):
  Common Stock - Class A                                                            1,023              965
  Common Stock - Class B                                                              356              386
  Paid-in capital                                                                  18,276           12,311
  Retained earnings                                                                93,708           73,476
  Foreign currency translation adjustment                                            (137)               0
                                                                                 --------         --------
                                                                                  113,226           87,138
  Less treasury stock                                                                 796            2,821
                                                                                 --------         --------
          Total stockholders' equity                                              112,430           84,317
                                                                                 --------         --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                       $243,778         $152,464
                                                                                 ========         ========
</TABLE>

See notes to consolidated financial statements.

                                      F-2
<PAGE>

BUSH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED JANUARY 3, 1998, DECEMBER 28, 1996 AND DECEMBER 30, 1995
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                          (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

                                                               1997              1996               1995
                                                            (53 Weeks)        (52 Weeks)         (52 Weeks)
<S>                                                       <C>                <C>                <C>
NET SALES                                                  $   325,289        $   256,332        $   220,014

COSTS AND EXPENSES:
  Cost of sales                                                228,505            176,378            154,294
  Selling, general and administrative                           58,264             48,479             43,054
  Interest expense                                               3,542              2,131              1,922
                                                           -----------        -----------        -----------
                                                               290,311            226,988            199,270

EARNINGS BEFORE INCOME TAXES                                    34,978             29,344             20,744

INCOME TAXES (Note 7)                                           12,858             10,857              8,194
                                                           -----------        -----------        -----------

NET INCOME                                                 $    22,120        $    18,487        $    12,550
                                                           ===========        ===========        ===========

EARNINGS PER SHARE  (Note 8)
  Basic                                                    $      1.64        $      1.42        $      0.95
  Diluted                                                  $      1.52        $      1.31        $      0.95

WEIGHTED AVERAGE SHARES
  OUTSTANDING  (Note 8)
  Basic                                                     13,464,479         13,064,736         13,147,451
  Diluted                                                   14,523,356         14,073,381         13,270,544

</TABLE>
See notes to consolidated financial statements.

                                      F-3
<PAGE>

BUSH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JANUARY 3, 1998, DECEMBER 28, 1996 AND DECEMBER 30, 1995
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                      (IN THOUSANDS, EXCEPT SHARE DATA)

                                               COMMON STOCK - PAR VALUE $.10
                                         ---------------------------------------                      FOREIGN
                                                  CLASS A           CLASS B                           CURRENCY     TREASURY STOCK
                                         ------------------- ------------------- PAID-IN  RETAINED  TRANSLATION ------------------
                                           SHARES    AMOUNT   SHARES     AMOUNT  CAPITAL  EARNINGS   ADJUSTMENT    SHARES    AMOUNT
<S>                                       <C>        <C>     <C>         <C>     <C>       <C>       <C>          <C>       <C>
BALANCE, DECEMBER 31, 1994                6,264,710  $  626  2,570,247    $257   $ 6,714   $44,668      $   -           -   $     -
  Purchase of treasury stock                      -       -          -       -         -         -          -     320,000     5,260
  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          -     320,000     5,260
  Purchase of treasury stock                      -       -          -       -         -         -          -      83,032     1,488
  Issuance of shares for acquisition              -       -          -       -     3,075         -          -    (338,067)   (3,927)
  Three-for-two stock split               3,146,952     315  1,285,118     129      (444)        -          -     160,000         -
  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          -     224,965     2,821
  Issuance of shares to pay loan                  -       -          -       -       171         -          -     (13,411)     (168)
  Issuance of shares for acquisition              -       -          -       -     1,456         -          -    (123,075)   (1,544)
  Issuance of shares for patent rights            -       -          -       -       308         -          -     (25,000)     (313)
  Conversion of Class B stock to Class A    300,000      30   (300,000)    (30)        -         -          -           -         -
  Exercise of stock options by employees    278,755      28          -       -     2,467         -          -           -         -
  Tax benefit from exercise of stock
   options                                        -       -          -       -     1,563         -          -           -         -
  Dividends declared                              -       -          -       -         -    (1,888)         -           -         -
  Translation adjustments                         -       -          -       -         -         -       (137)          -         -
  Net earnings                                    -       -          -       -         -    22,120          -           -         -
                                         ----------  ------  ---------  ------   -------   -------   --------    --------   -------

BALANCE, JANUARY 3, 1998                 10,229,476  $1,023  3,555,365    $356   $18,276   $93,708      $(137)     63,479   $   796
                                         ==========  ======  =========  ======   =======   =======   ========    ========   =======


See notes to consolidated financial statements.
</TABLE>

                                      F-4
<PAGE>

BUSH INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED JANUARY 3, 1998, DECEMBER 28, 1996 AND DECEMBER 30, 1995
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                                    (In Thousands)
                                                                             1997            1996            1995
<S>                                                                      <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net earnings                                                             $ 22,120        $ 18,487         $ 12,550
  Adjustment to reconcile:
    Depreciation and amortization                                             7,787           6,040            6,010
    Deferred income taxes                                                       406            (195)            (422)
  Changes in assets and liabilities affecting cash flows:
    Accounts receivable                                                         291            (720)           5,646
    Inventories                                                               4,209          (3,695)           7,283
    Prepaid expenses and other current assets                                (1,295)           (595)             403
    Accounts payable                                                          1,993            (103)          (1,864)
    Income taxes                                                                515             182            2,365
    Other accrued liabilities                                                (3,039)          1,454            1,983
                                                                           --------        --------         --------
Net cash provided by operating activities                                    32,987          20,855           33,954
                                                                           --------        --------         --------

CASH FLOWS USED FOR INVESTING ACTIVITIES:
  Capital expenditures                                                      (28,474)        (35,640)         (20,989)
  Investment in subsidiaries                                                      0            (827)               0
  Increase in other assets                                                   (2,676)           (860)            (852)
                                                                           --------        --------         --------
Net cash used in investing activities                                       (31,150)        (37,327)         (21,841)
                                                                           --------        --------         --------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net paydown on line of credit                                                   0               0           (2,595)
  Repayments of long-term debt                                              (47,444)         (3,379)         (12,050)
  Proceeds from long-term debt                                               45,656          20,789            7,065
  Purchase of Class A Stock for treasury                                          0          (1,488)          (5,260)
  Exercise of stock options by employees                                      2,495           1,783              382
  Dividends paid (per share $.140 - 1997; $.103 - 1996; - $.067 -            (1,888)         (1,352)            (877)
  1995)
                                                                           --------        --------         --------
Net cash provided by (used in) financing activities                          (1,181)         16,353          (13,335)
                                                                           --------        --------         --------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                         (67)              0                0
                                                                           --------        --------         --------

NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                                                          589            (119)          (1,222)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                  2,810           2,929            4,151
                                                                           --------        --------         --------

CASH AND CASH EQUIVALENTS, END OF YEAR                                     $  3,399        $  2,810         $  2,929
                                                                           ========        ========         ========
</TABLE>

See notes to consolidated financial statements.

                                      F-5
<PAGE>

BUSH INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 3, 1998, DECEMBER 28, 1996 AND DECEMBER 30, 1995
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   THE COMPANY - The consolidated financial statements consist of Bush
   Industries, Inc. and its majority-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 both RTA (ready to
   assemble) and set-up furniture for the home and office. Revenues are
   recognized when products are shipped. The Company's geographic operations
   outside of the United States principally include Germany. The Company's
   operations in Germany for the year ended January 3, 1998 include net sales of
   approximately $25,310,000 and identifiable assets of approximately
   $77,689,000. The Company's net loss from its operations in Germany was not
   significant. There were no significant segment operations by geographic area
   prior to 1997. Electronic and office product superstores and mass
   merchandisers, throughout the United States and furniture stores in Europe,
   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 customers is
   affected by conditions or occurrences within the retail industry, the
   majority of trades receivables were current at January 3, 1998. The Company
   has one domestic customer that accounted for total gross sales of
   approximately 16% in 1997, 15% in 1996 and 14% in 1995, and approximately 15%
   and 18% of accounts receivable at January 3, 1998 and December 28, 1996,
   respectively. The Company has a second domestic customer that accounted for
   total gross sales of approximately 9% in 1997, 12% in 1996 and 9% in 1995,
   and approximately 4% and 12% of accounts receivable at January 3, 1998 and
   December 28, 1996, respectively.

   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 3-20 years; transportation equipment 3-7
   years; office equipment 3-10 years; and leasehold improvements 3-10 years.
   Construction in progress is recorded in property, plant and equipment and
   amounted to $15,703,000 and $23,121,000 at January 3, 1998 and December 28,
   1996, respectively. Interest associated with construction indebtedness is
   capitalized. Interest amounting to approximately $258,000 and $252,000
   associated with construction in process was capitalized for 1997 and 1996,
   respectively.

   The cost of repairs and maintenance is charged to expense as incurred.
   Renewals and betterment's 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 and cash value of
   officer's life insurance policies. 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 and
   interest rates which approximate current rates available for similar
   instruments.

   FOREIGN CURRENCY TRANSLATION - Essentially all assets and liabilities are
   translated into U.S. dollars at year-end exchange rates, while elements of
   the income statement and cash flow statement are translated at average
   exchange rates in effect during the year. Adjustments arising from the
   translation of most net assets located outside the United States are recorded
   as a component of stockholders' equity.

   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
   January 3, 1998, December 28, 1996 and December 30, 1995.

   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.

                                      F-7
<PAGE>

   EARNINGS PER SHARE - Effective for the quarter and year ended January 3,
   1998, the Company adopted Financial Accounting Standards Board Statement
   No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 replaces prior earnings
   per share ("EPS") reporting requirements and requires the dual presentation
   of basic and diluted EPS. Basic EPS excludes dilution and is computed by
   dividing net income by the weighted average number of shares outstanding
   for the period. Diluted EPS reflects the potential dilution that could
   occur if securities or other contracts to issue common stock were exercised
   or converted into common stock. The dilutive effect of outstanding options
   issued by the Company are reflected in diluted EPS using the treasury stock
   method. Under the treasury stock method, options will only have a dilutive
   effect when the average market price of common stock during the period
   exceeds the exercise price of the options. In accordance with SFAS No. 128,
   the basic and diluted EPS and average weighted shares outstanding have been
   restated for all periods presented.

   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.

   STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS - In June 1997, the Financial
   Accounting Standards Board issued Statement of Financial Accounting Standards
   (SFAS) No. 130, "Reporting Comprehensive Income" and No. 131, "Disclosures
   about Segments of an Enterprise and Related Information." SFAS No. 130
   establishes standards for reporting and display of comprehensive income and
   its components (revenues, expenses, gains, and losses) in a full set of
   general-purpose financial statements. SFAS 131 establishes standards for the
   way that public business enterprises report information about operating
   segments in annual financial statements and requires that those enterprises
   report selected information about operating segments in interim financial
   reports issued to shareholders. The Company will adopt SFAS No. 130 and No.
   131 for fiscal year 1998. Implementation of SFAS No. 130 and No. 131 is not
   expected to have a material effect on the financial statements.

   FINANCIAL STATEMENT YEAR END - The Company's year end is the closest Saturday
   to December 31.

2. INVENTORIES

   Inventories consist of (in thousands):

<TABLE>
<CAPTION>
                                           JANUARY 3,          DECEMBER 28,
                                              1998                 1996
<S>                                       <C>                  <C>
Raw materials                               $ 9,762              $ 6,313
Work in progress                              7,362                2,745
Finished goods                               14,698               17,242
                                            -------              -------
Total                                       $31,822              $26,300
                                            =======              =======
</TABLE>


                                      F-8
<PAGE>

3. PROPERTY, PLANT AND EQUIPMENT, NET

   Property, plant and equipment consist of (in thousands):

<TABLE>
<CAPTION>
                                                     JANUARY 3,     DECEMBER 28,
                                                        1998           1996

<S>                                                <C>              <C>
Land                                                  $  6,233       $  2,607
Building and improvements                               85,371         48,711
Machinery and equipment                                126,092         66,403
Transportation equipment                                 1,460            431
Office equipment                                         7,630          6,999
Leasehold improvements                                   1,146          1,104
                                                      --------       --------
                                                       227,932        126,255
Less accumulated depreciation                          (85,222)       (41,900)
                                                      --------       --------

Total                                                 $142,710       $ 84,355
                                                      ========       ========
</TABLE>

4. OTHER ACCRUED LIABILITIES

   Other accrued liabilities consist of (in thousands):

<TABLE>
<CAPTION>
                                                     JANUARY 3,     DECEMBER 28,
                                                        1998            1996

<S>                                                <C>             <C>
Payroll, profit sharing and related liabilities        $12,486        $ 6,160
Commissions and sales related expenses                  14,487         11,312
Restructuring charges                                    3,533              0
Other                                                    3,242          1,372
                                                       -------        -------
Total                                                  $33,748        $18,844
                                                       =======        =======
</TABLE>


                                      F-9
<PAGE>

5.   LONG-TERM DEBT

     Long-term debt consists of:

<TABLE>
<CAPTION>
                                                                             JANUARY 3,          DECEMBER 28,
                                                                                1998                 1996
     <S>                                                                   <C>                   <C>
                                                                                      (in thousands)
     Revolving credit facility with first contractual principal payment
       due June 2002.                                                            $50,736               $31,243

     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.             600                   975

     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.                          1,884                 1,982

     Pennsylvania Industrial Development Authority loan, issued
       February 26, 1997, interest at a rate of 3.75%. Monthly
       principal and interest payments of $14,544 are due through 2012.            1,924                     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.                                            1,847                 1,956

     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.                         435                   500

     Other                                                                           247                   346
                                                                                 -------               -------
     Total debt                                                                   57,673                37,002
     Less current portion                                                            718                   663
                                                                                 -------               -------
     Total long-term debt                                                        $56,955               $36,339
                                                                                 =======               =======
</TABLE>

     The Company finances operations through a revolving credit facility.
     Effective June 26, 1997, the Company entered into a new revolving credit
     facility agreement with a consortium of banks increasing its maximum
     borrowing capacity from $85,000,000 to $155,000,000. The revolving credit
     facility is available through June 25, 2002. Interest is payable on the
     average daily balance of loans outstanding on a NYBOR based rate (7.5% at
     January 3, 1998) or a FIBOR based rate (4.625% at January 3, 1998) option.
     As part of this revolving line, the Company may also issue letters of
     credit, not to exceed $20,000,000, which issuance will be deemed part of
     the $155,000,000 maximum amount of borrowing permitted. As of January 3,
     1998, letters of credit amounting to $5,006,500 were outstanding.

                                      F-10
<PAGE>

     The revolving credit facility provides for achieving certain consolidated
     cash flow coverage and leverage 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 January 3, 1998. The Company
     classifies this facility as long-term because there are no contractual
     requirements for repayment of principal until the year 2002.

     The Industrial Development Revenue Bonds are supported by a $982,500 letter
     of credit (which is included in the total letters of credit outstanding of
     $5,006,500 as discussed above) expiring in February 1998. 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>
     1998                                                             $   718
     1999                                                                 801
     2000                                                                 546
     2001                                                                 436
     2002                                                              51,183
     Thereafter                                                         3,989
                                                                      -------
     Total                                                            $57,673
                                                                      =======
</TABLE>

6.   COMMITMENTS AND CONTINGENCIES

     The Company has incurred rental expense for manufacturing and warehouse
     space and equipment. A summary of rent expense follows (in thousands):

<TABLE>
<CAPTION>
                                              1997         1996         1995

     <S>                                    <C>          <C>          <C>
     Real estate                             $  769       $1,374       $1,855
     Equipment                                1,451        1,277        1,236
</TABLE>

     Minimum future obligations over the next five years under all operating
     leases are summarized as follows (in thousands):

<TABLE>
     <S>                                                              <C>
     1998                                                              $2,536
     1999                                                               1,546
     2000                                                               1,183
     2001                                                                 946
     2002                                                                 818
</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-11
<PAGE>

7.   INCOME TAXES

     The provision for income taxes is as follows (in thousands):

<TABLE>
<CAPTION>
                                                1997       1996        1995
     <S>                                    <C>        <C>          <C>
     Current:
       Federal                                $11,662     $10,240      $7,698
       State                                      790         812         918
     Deferred                                     406        (195)       (422)
                                              -------     -------      ------
     Total                                    $12,858     $10,857      $8,194
                                              =======     =======      ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                1997       1996        1995

     <S>                                       <C>        <C>          <C>
     Depreciation                               $ 718       $ 410       $  84
     Accrued expenses                             421        (197)       (369)
     Accounts receivable and inventories          246        (408)       (137)
     Subsidiary net operating loss               (979)          0           0
                                                -----       -----       -----
     Total                                      $ 406       $(195)      $(422)
                                                =====       =====       =====
</TABLE>
     The types and tax effects of temporary differences that cause significant
     portions of deferred tax assets and liabilities are as follows (in
     thousands):

<TABLE>
<CAPTION>
                                                        1997         1996

     <S>                                             <C>         <C>
     Deferred Tax Assets:
       Accounts receivable                            $    457      $   748
       Accrued expenses                                  3,508        1,807
       Inventories                                       2,019          532
       Deferred income                                     613            0
       State investment tax credit carryforward          3,423        3,428
       Subsidiary net operating loss carryforward        1,937        1,184
                                                      --------      -------
                                                        11,957        7,699

     Deferred Tax Liabilities:
       Property, plant and equipment                   (10,903)      (2,734)
                                                      --------      -------

       Subtotal                                          1,054        4,965

     Total valuation allowance                          (3,423)      (4,638)
                                                      --------      -------

     Net deferred tax asset (liability)               $ (2,369)     $   327
                                                      ========      =======
</TABLE>
                                      F-12
<PAGE>

<TABLE>
<CAPTION>
                                                        1997           1996
<S>                                                  <C>             <C>
     Reported as:
       Current asset (included in prepaid expenses
        and other current assets)                     $ 6,607       $ 2,234
       Long-term liability                             (8,976)       (1,907)
                                                      -------       -------

     Total net                                        $(2,369)      $   327
                                                      =======       =======
</TABLE>

     The Company has recorded a valuation allowance primarily in anticipation
     that certain state investment tax credits will expire prior to their usage.

     The provision for income taxes differs in each of the years from the
     federal statutory rate due to the following:

<TABLE>
<CAPTION>
                                            1997          1996          1995
     <S>                                   <C>           <C>           <C>
     Statutory rate                        35.0 %        35.0 %        35.0 %
     State taxes                            1.6           1.8           2.8
     Effect of non-deductible costs         0.7           0.4           0.6
     Other, net                            (0.5)         (0.2)          1.1
                                          -----         -----         -----

     Effective tax rate                    36.8 %        37.0 %        39.5 %
                                          =====         =====         =====
</TABLE>

     The Company realized tax benefits amounting to $1,563,000, $772,000 and
     $53,000 as the result of stock option transactions during 1997, 1996, and
     1995, respectively. The benefit has been credited to paid-in capital and is
     not reflected in the current year provision for taxes.

8.   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 July 10, 1997, the Company entered into a stock redemption agreement
     with the principal shareholder, which provides that upon his death the
     Company may be required to redeem a portion of the Company's stock then
     owned by the shareholder's estate. The redemption price per share shall be
     determined at the then market price based upon a thirty day average prior
     to the closing of any such stock redemption. The amount of the redemption
     is limited to approximately $21.4 million which will be funded by the
     proceeds from life insurance policies maintained on the life of the
     principal shareholder. The shareholder's estate can request the Company to
     redeem shares under the agreement until the maximum time period permitted
     to pay estate taxes.

                                      F-13
<PAGE>

9.   STOCK OPTION PLANS

     The Company currently has one open stock option plan with 375,000 shares of
     Class A Common Stock available for issuance subsequent to the 3-for-2 stock
     split effective June 28, 1996. As of January 3, 1998, there were 314,500
     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 January 3, 1998, there were options to purchase 981,265 shares of
     Class A Common Stock under the current and prior plans at prices ranging
     from $1.69 to $21.05 that could be exercised, as adjusted for stock splits
     effectuated in the form of stock dividends.

     The following is a summary of option transactions:

<TABLE>
<CAPTION>
                                                  1997        1996        1995

     <S>                                       <C>         <C>         <C>
     Options outstanding, beginning of year    1,857,506   1,363,248   1,463,019
     Options granted                              51,000      13,720           0
     Options forfeited                                 0           0     (70,313)
     Options exercised                          (268,755)   (201,101)    (29,458)
     Effect of stock splits (Note 8)                   0     681,639           0
                                               ---------   ---------   ---------

     Options outstanding, end of year          1,639,751   1,857,506   1,363,248
                                               =========   =========   =========
</TABLE>

     All of the options outstanding expire at various dates from 1998 through
     2007. The option price of the shares subject to options exercised in 1997
     ranged from $2.80 to $14.53.

     In addition to the options granted under the aforementioned plans, the
     Company has outstanding 65,876 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 years ended January 3, 1998
     and December 28, 1996, respectively: risk free interest rate of 5.5% and
     6.3%; dividend yield of .60% and .75%; volatility factors of the expected
     market price of the Company's common stock of 30% and 45%; and a weighed-
     average expected life of 7 years for both 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, basic and diluted earnings per common
     share for the years ended January 3, 1998 and December 28, 1996 were
     $22,092,000, $1.64 and $1.52 and $18,482,000, $1.42 and $1.31,
     respectively.

                                      F-14
<PAGE>

10.  PENSIONS

     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 $1,259,000, $877,000 and $722,000 for the years ended January 3, 1998,
     December 28, 1996 and December 30, 1995, respectively.

     The Company also sponsors a defined benefit pension plan for eligible non-
     U.S. employees at its German facility.

     Net pension cost for the year ended January 3, 1998, includes the following
     components (in thousands):

<TABLE>
       <S>                                                            <C>
       Service cost                                                    $113
       Interest cost                                                    331
       Actual return on plan assets                                       0
       Net amortization and deferral                                      0
                                                                       ----
       Net pension cost                                                $444
                                                                       ====
</TABLE>

     The following table sets forth the defined benefit pension plan's unfunded
     status and the liability recognized in the Company's consolidated balance
     sheet as of January 3, 1998 (in thousands):

<TABLE>
<CAPTION>
     <S>                                                              <C>
     Actuarial present value of benefit obligations:
       Vested benefit obligations                                      $4,886
                                                                       ------
       Accumulated benefit obligations                                 $5,553
                                                                       ------
       Projected benefit obligations                                   $5,925
     Plan assets at fair value                                              0
                                                                       ------
     Projected benefit obligations in excess of plan assets
      (included in other long-term liabilities)                        $5,925
                                                                       ======
</TABLE>

     The projected benefit obligation was determined using a discount rate of
     7.25% and an annual salary increase rate of 3.0%.

11.  SUPPLEMENTAL CASH FLOW INFORMATION

     Supplemental disclosure of cash flow information (in thousands):

<TABLE>
<CAPTION>
                                             1997          1996         1995
       <S>                                  <C>          <C>           <C>
       Cash paid during the years for:
         Interest                           $ 3,824      $ 2,579       $2,069
         Income taxes                        12,814       10,389        6,251
</TABLE>

                                      F-15
<PAGE>

12.  ACQUISITIONS

     On June 30, 1997, the Company acquired a 51% interest in Rohr Gruppe
     (Rohr), a German furniture manufacturer by issuing 123,075 shares of Class
     A Common Stock (approximate market value on June 30, 1997 of $3,000,000).
     Rohr is included within the Company's industry segment. The transaction has
     been recorded under the purchase method of accounting, and accordingly, the
     results of operations of Rohr for the period from June 30, 1997 are
     included in the accompanying consolidated financial statements. The
     purchase price has been allocated to the assets acquired and liabilities
     assumed based on fair market value at the date of acquisition. The excess
     of purchase price over fair value of the net tangible assets acquired
     resulted in an allocation to goodwill of approximately $2.5 million which
     is being amortized over 15 years. All of the Company shares issued in
     connection with this transaction are being held in escrow for three years
     to secure any indemnification claims under the Purchase Agreement.

     Unaudited pro forma consolidated results of operations had Rohr been
     acquired at the beginning of fiscal 1997 and 1996 is not practicable to
     disclose. Management has concluded that it is not feasible to collect the
     necessary information to disclose such pro forma consolidated results as
     the former structure of Rohr Gruppe was complex, tax driven and not
     indicative of the entity currently operated by the Company.

     During 1996, the Company acquired all of the outstanding stock of The
     ColorWorks, Inc. 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, The ColorWorks, Inc. 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.

                                      F-16
<PAGE>

13.  QUARTERLY SALES AND EARNINGS DATA - UNAUDITED

<TABLE>
<CAPTION>
                                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                           4TH QTR.       3rd Qtr.       2ND QTR.       1ST QTR.

     <S>                                                  <C>             <C>            <C>            <C>
     1997

     Net sales                                             $105,476        $76,517        $72,429        $70,867
     Gross profit                                            28,127         22,412         23,724         22,521
     Income taxes                                             2,657          3,369          3,448          3,384
     Net earnings                                             6,393          5,279          5,170          5,278
     Earnings per share - basic *                              0.47           0.39           0.39           0.40
     Earnings per share - diluted*                             0.43           0.36           0.36           0.37

     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 - basic *                              0.41           0.30           0.33           0.37
     Earnings per share - diluted*                             0.38           0.28           0.30           0.35

     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 - basic *                              0.38           0.24           0.14           0.20
     Earnings per share - diluted*                             0.36           0.24           0.14           0.20
</TABLE>

     * Restated in accordance with SFAS No. 128, "Earnings Per Share," and for
       the 3-for-2 stock split declared May 21, 1996.

                                      F-17
<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
                                              COSTS &  EXPENSES          ACCOUNTS-DESCRIBE
<S>                          <C>             <C>                         <C>                  <C>                <C>
Allowance for doubtful
 accounts

FISCAL 1997                    $2,036             $   90                           -               $797             $1,329

FISCAL 1996                     1,011              1,022                           -                 (3)             2,036

FISCAL 1995                       635                713                           -                337              1,011

</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 26, 1998                                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                                   President, Chief
---------------------------------------            Executive Officer, and
Paul S. Bush                                       Chairman of the Board
                                                   of Directors                     March 26, 1998

/s/ Robert L. Ayres                                Executive Vice President,
-------------------------------------              Chief Operating Officer,
Robert L. Ayres                                    Chief Financial Officer,
                                                   and Director                     March 26, 1998

/s/ Lewis H. Aronson                               Senior Vice President of
-----------------------------------                Strategic Planning  and
Lewis H. Aronson                                   Business Development
                                                   and Director                     March 26, 1998

</TABLE>

                                      24
<PAGE>
<TABLE>
<CAPTION>
<S>                                        <C>                              <C>
/s/ Douglas S. Bush                        Vice President of
-----------------------------------        Merchandising and
Douglas S. Bush                            Director                         March 26, 1998


/s/ Gregory P. Bush                        Vice President of
-----------------------------------        ColorWorks Operations,
Gregory P. Bush                            Vice President of
                                           Information Technology
                                           and Director                     March 26, 1998

/s/ Donald F. Hauck                        Senior Vice President
-----------------------------------        and Director                     March 26, 1998
Donald F. Hauck

/s/ David G. Messinger                     Senior Vice President of
-----------------------------------        Sales and Marketing and
David G. Messinger                         Director                         March 26, 1998

/s/ Paul A. Benke                          Director                         March 26, 1998
-----------------------------------
Paul A. Benke

/s/ Jerald D. Bidlack                      Director                         March 26, 1998
-----------------------------------
Jerald D. Bidlack

/s/ Robert E. Hallagan                     Director                         March 26, 1998
-----------------------------------
Robert E. Hallagan

</TABLE>

                                      25