<PAGE>

                         SECURITIES AND EXCHANGE COMMISSION
                              Washington, D.C.  20549
                                    ___________

                                     FORM 10-K

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)

For the fiscal year ended August 29, 1998

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from ____ to ____

                           Commission file number 0-4173

                                DMI FURNITURE, INC.
                                -------------------
               (Exact name of registrant as specified in its charter)

               DELAWARE                      41-0678467
     ---------------------------------------------------------
     (State of incorporation)         (IRS employer ID number)

           One Oxmoor Place, 101 Bullitt Lane, Louisville, Kentucky 40222
           --------------------------------------------------------------
                      (Address of principal executive offices)

           Registrant's telephone number with area code:   (502) 426-4351
                                                           --------------

Securities registered pursuant to Section 12(b) of the Act:  NONE

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

                           COMMON STOCK,  $.10 PAR VALUE
                           -----------------------------
                                  (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       
                                                     ------    -----

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 
amendments to this  Form 10-K.  [  ]


                                                      Total pages - 91
                                                           Page  1


<PAGE>

The aggregate market value of the voting stock held by non-affiliates of the 
Registrant was $10,200,000 as of August 29, 1998.

Indicate the number of shares outstanding of each of the Registrant's classes 
of Common Stock as of the last practicable date.

Class                                            Outstanding at August 29, 1998
-----                                            ------------------------------
Common Stock, Par Value $.10 per Share            3,892,013




                        DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Annual Meeting of 
Stockholders on February 3, 1999 are incorporated by reference into Part 
III. Part I.

                                                           Page  2


<PAGE>

Item 1.  BUSINESS

     The information set forth in "Item 1. Business," in "Item 8. 
Management's Discussion and Analysis of Financial Condition and Results of 
Operations," and in the other portions of this report includes 
forward-looking statements about the Corporation and its business. For this 
purpose, the use of words such as "believes," "anticipates," "plans," 
"expects," and similar expressions are intended to identify forward-looking 
statements. Factors that realistically could cause results to differ 
materially from those projected in the forward-looking statements include the 
cyclical and seasonal nature of the furniture market; the availability and 
cost of raw materials and labor; availability, terms and deployment of 
capital; events that disrupt the flow of goods from off-shore manufacturing 
sources; merchandising decisions by one or more of the Company's major 
customers that adversely affect their purchases of the Company's furniture 
products; changes in fashion or tastes; general conditions in the economy or 
capital markets; demographic changes; competition; and other factors 
identified in "Item 1. Business," in "Item 8. Management's Discussion and 
Analysis of Financial Condition and Results of Operations," and in other 
portions of this report.

(a) GENERAL DEVELOPMENT OF BUSINESS.


     The operations of the Company during the past three years consisted of 
the manufacture, import, and sale of low and medium-priced bedroom furniture, 
accent furniture, home and office desk furniture, conference tables, and 
chairs.   

(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.

     The Company's continuing operations as shown in its Selected Financial 
Data (See Item 6) for the five years ended August 29, 1998, consist of one 
industry segment -- the manufacture, import, and sale of furniture.

(c) NARRATIVE DESCRIPTION OF THE BUSINESS.

     The Company manufactures, imports, and sells low and medium-priced 
bedroom furniture, dining furniture, occasional and accent furniture, home 
office and commercial office furniture, conference tables, and chairs.

     The Company's furniture products are marketed throughout the United 
States, Puerto Rico, Canada, Mexico, Caribbean, and Saudi Arabia, principally 
to furniture retailers.  Export sales totaled approximately 2% of the 
Company's sales in fiscal 1998.  Approximately 14% of the Company's sales are 
accounted for by sale to wholesale distributors. The Company's sales are made 
through independent, commissioned sales representatives, as well as sales and 
marketing personnel employed by the Company. The Company maintains a showroom 
for furniture markets in High Point, North Carolina.  The Company also 
participates in the annual  NeoCon commercial office furniture tradeshow in 
Chicago, Illinois.
                              I-1

                                                           Page  3


<PAGE>

     The raw materials which are essential to the manufacture of furniture 
are wood, board products, fabric, finishing materials, hardware and glass.  
There are a number of sources of supply for wood, board products and fabric.  
Approximately 41% of these materials are purchased from independent 
suppliers, and the balance of these materials are obtained by the Company by 
cutting and hauling wood from purchased stands of timber and further 
processing it in the Company's saw mill and dimension plant, by cutting 
various types of board and drawer body parts, and manufacturing high pressure 
laminated tops for its office furniture.  If, for any  reason, the Company's 
existing sources of supply for any of its raw materials  became unable to 
service the Company, the Company believes its furniture manufacturing  
operations would not be adversely affected because there are adequate 
alternate  sources of supply.  Loss of any one or several sources of supply 
would not have a material adverse effect on the Company as ample alternative 
sources exist.

               The Company  owns or uses the following trademarks in 
connection with its furniture products,  which trademarks are due to expire 
on the dates indicated below:

<TABLE>
<CAPTION>

                                                                 Expiration
     Trademark                          Product                  Date
     ---------                          -------                  ----------
<S>                                     <C>                      <C>
     TOP GUARD                          All DMI products         2002
     Wood Classics 
       Furniture Company                Office Furniture         2006
     Carolina Desk Company              All DMI products         2008
     DMI                                All DMI products         2009
     DMI Furniture, Inc.                All DMI products         2009
     Wood Manor                         All DMI products         2007
     DMI Trading Company                All DMI products         Pending
     Cyber City Furniture Warehouse     All DMI products         2007
     Carolina Classics Office
       Furniture Company                All DMI products         Pending
     Wynwood                            All DMI products         Pending
     Homestyles                         All DMI products         Pending
</TABLE>

     It is not common in the furniture industry to obtain a patent for a 
furniture design.  If a particular design of a furniture manufacturer is well 
accepted in the marketplace, it is common for other manufacturers to imitate 
the same design without recourse by the furniture manufacturer who initially 
introduced the design.  The Company often engages independent designers to 
work in conjunction with its own personnel in designing furniture products.

     The Company's sales have historically not been subject to material 
seasonal fluctuations.  However, as the Company's seasonal promotions of 
imported furniture increase, the sales may be more subject to quarterly 
fluctuations. See Note 10 to the consolidated financial statements.

     It is the furniture industry's and the Company's practice to grant 
extended payment terms from time to time to promote sales of products.  From 
time to time, the Company extends payment terms by 30 to 60 days in an 
attempt to stimulate sales of its products.  The frequency of the special 
payment terms depends upon general business conditions, but generally 
extended terms are offered only once or twice per year and then only on 
certain products.  These special payment terms have not had, nor are they 
expected to have in the future, any material impact on
                              I-2
                                                           Page  4


<PAGE>

the Company's liquidity.

     The Company's six largest customers accounted for approximately 51% of 
the Company's total sales in fiscal 1998.  One customer, Sam's Club division 
of Wal-Mart Stores, Inc., accounted for more than 10% of the Company's total 
net sales for fiscal 1998. The loss of more than one of these customers at 
the same time or one of the largest six could have a materially adverse 
effect on the business of the Company.   As of August 29, 1998, one customer 
accounted for approximately 23% of total accounts receivable. The Company's 
customers include large furniture chain store retailers, wholesale clubs, 
catalog retailers, and independent distributors, as well as numerous smaller 
retailers.

     The furniture industry is extremely competitive.  The Company competes 
in the national  market for low and medium-priced furniture.  Due to the 
fragmented nature of the furniture manufacturing industry and the 
unavailability of complete financial reports for all its competitors, the 
Company is unable to accurately state its rank in the industry.  There are, 
however, a large number of furniture manufacturers with substantially greater 
sales and greater economic resources than the Company, a number of which are 
subsidiaries or divisions of large national companies.  The principal methods 
of competition in the furniture industry are design, pricing, sales force, 
customer service, and manufacturing location.

     The Company believes it is a leading producer and marketer of popular 
priced "promotional" bedroom furniture, home office furniture, and wood 
office furniture.

     The Company employs approximately 441 employees, of whom approximately 
156 are covered by collective bargaining contracts.  One contract covering 77 
employees expires during fiscal 1999.  The Company presently does not 
anticipate a strike or work stoppage at any of its facilities.  However, it 
cannot be assumed that labor difficulties will not be encountered in the 
future.

Item 2.  PROPERTIES.

     The Company's principal offices are located in 10,336 square feet of 
leased office space in Louisville, Kentucky.  

     The Company owns three operating furniture manufacturing plants located 
in: Huntingburg, Indiana (78,910 square feet, and 100,000 square feet); and 
Ferdinand, Indiana (117,823 square feet);   a saw mill and a dimension parts 
plant located in  Ferdinand, Indiana; and a fabrication plant in Huntingburg, 
Indiana (98,000 square feet). 

          In addition, the Company owns a 235,000 square foot warehouse 
located in Huntingburg, Indiana.  

     The Company completed construction during fiscal 1998 of a 100,000 
square foot warehouse in Huntingburg, Indiana on its existing property.  The 
main purpose of this new building is warehousing and distribution of the 
Company's various product lines.

     The Company closed its Gettysburg, Pennsylvania manufacturing plant and 
warehouse 
                              I-3
                                                           Page  5


<PAGE>

during fiscal 1996.   See Note 12 to the financial statements for additional 
information.

     All of the Company's properties are encumbered by mortgages held by its 
bank.  See Note 2 to the consolidated financial statements.
                                    
     The productive capacity and extent of utilization of each of the 
Company's manufacturing facilities for the fiscal year ended August 29, 1998 
are set forth in the table below.  "Productive capacity" is defined for this 
purpose as gross sales dollars produced both for outside sales and internal 
integration, working fifty hours per week on a single shift with the existing 
number of employees and no material investments in machinery and equipment or 
change in product mix. The Company has on occasion operated more than one 
shift at one of its plants and may add shifts to other plants in the future 
to increase capacity. 

<TABLE>
<CAPTION>
                                              Fiscal 1998
Facility                          Capacity     Production   %Utilized
--------                          --------     ----------   ---------
                                         (dollars in thousands)
<S>                               <C>           <C>            <C>
Ferdinand, Ind. Plant             $16,058       $11,671        73%
Huntingburg, Ind. 5th St. Plant    22,612        16,831        74%
Huntingburg, Ind. Chestnut
  Street Plant                     18,780        15,723        84%
Huntingburg, Ind. Fabricator        9,105         8,277        91%
Ferdinand, Ind. Sawmill/
  Dimension Plant                   7,349         7,018        96%
                                  -------       -------        ---
                                  $73,904       $59,520        81%
                                  -------       -------        ---
                                  -------       -------        ---
</TABLE>

Item 3.  LEGAL PROCEEDINGS.

          The Company is currently subject to claims under federal and state 
environmental laws based on allegations that the Company had hazardous 
substances disposed of at three waste disposal sites.  After depositing 
$57,000 in a trust fund under the terms of a tentative settlement of claims 
arising from one site and paying its portion of preliminary investigation and 
remediation costs at the other two sites, the Company retains a reserve of 
approximately $42,000 against potential environmental liabilities.  Due to 
the limited nature of the Company's involvement in these environmental 
proceedings, the availability of certain defenses, and the involvement of 
many other parties with substantial financial resources in the proceedings, 
the Company does not anticipate, based on currently available information, 
that potential environmental liabilities arising from these proceedings are 
likely to exceed the amount of the Company's reserve by an amount that would 
have a material effect on the Company's financial condition, results of 
operations or cash flows.  Expenses for the year to date were not material. 

     The Company is also a defendant in various lawsuits arising in the 
normal course of business, including two other environmental matters.  In 
management's opinion, these lawsuits are not material to the results of 
operations or financial position of the Company, or are  adequately covered 
by insurance.  
                              I-4
                                                           Page  6


<PAGE>

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

     No matters were submitted during the fourth quarter of the fiscal year 
which required a vote of security holders.
                              I-5
                                                           Page  7


<PAGE>

Part II.
Item 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS.

(a)  Price Range of Common Stock

     The Company's Common Stock is traded in the over-the-counter market and 
is quoted on NASDAQ under the trading symbol DMIF.  The following table sets 
forth the high and low bid quotations, as reported by NASDAQ for the 
Company's Common Stock, for each fiscal quarter indicated.  The quotations 
represent prices between dealers, do not include commissions, mark-ups or 
mark-downs and may not represent actual transactions.

<TABLE>
<CAPTION>
                                             High Bid      Low Bid
                   Price                      Price         Price
                   -----                      -----         -----
<S>                                          <C>            <C>
           1st Quarter of  1997              $  2.25        $  1.56
           2nd Quarter of  1997              $  3.31        $  2.13
           3rd Quarter of  1997              $  3.00        $  2.38
           4th Quarter of  1997              $  3.31        $  2.44
           1st Quarter of  1998              $  3.25        $  2.63
           2nd Quarter of  1998              $  3.00        $  2.63
           3rd Quarter of  1998              $  3.75        $  2.50
           4th Quarter of  1998              $  3.63        $  2.82
</TABLE>

(b)  Approximate Number of Equity Security Holders

     Title of Class- Common Stock, $.10 Par Value

     Approximate Number of Stockholders as of August 29, 1998 - 1,594


(c)  Dividend History

     No dividends have been paid on the Registrant's Common Stock since its 
issuance on November 11, 1977.

(d)   Dividend Policy

     Payment of dividends will be within the discretion of the Company's 
Board of Directors and will depend, among other factors, on earnings, capital 
requirements and the operating and financial condition of the Company.  At 
the present time, the Company's anticipated capital requirements are such 
that it intends to follow a policy of retaining earnings in order to finance 
the development of its business and the retirement of its debt. In addition, 
the Company's present financing agreement with Bank One, Indiana, N.A. 
prohibits the payment of dividends on common stock  without the written 
consent of the bank. See Notes 2 and 5 to the consolidated financial 
statements.
                              II-1
                                                           Page  8


<PAGE>

                                       
                                    ITEM 6

                              DMI FURNITURE, INC.

                            SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                Year Ended
                                       --------------------------------------------------------------
                                       August 29,   August 30,  August 31,  September 2,  August 27,
                                          1998        1997        1996        1995          1994
                                       ----------  ----------  ----------  ------------  ------------
                                             (Amounts in thousands except per share amounts)
<S>                                    <C>          <C>         <C>         <C>           <C>

Net sales                                $64,727     $56,434      $56,563      $67,773      $60,932

Net income from continuing operations      1,975       2,416          376(4)       804        1,101(3)

Diluted earnings per common share           $.07(5)     $.40         $.07(4)      $.14         $.19

Total assets                             $41,329     $35,551      $31,178      $38,512      $40,041

Long-term debt and capital
  lease obligations                       22,917      14,857       13,661       21,037       20,352
</TABLE>
Notes to selected financial data:

Note 1 -- This summary should be read in conjunction with the related 
          financial statements and notes.

Note 2 -- Diluted earnings per common share are based on the weighted average 
          number of common and common equivalent shares outstanding during the 
          period.

Note 3 -- Does not include $1,795,000 credit or $.31 per share for change in 
          accounting principle, and $(50,000) or ($.01) per share charge for 
          extraordinary item.

Note 4 -- Includes plant closing reserve which reduced net income and 
          earnings per common share by approximately $538,000 and $.09 per 
          share respectively.

Note 5 -- Includes charge from preferred stock redemption of $1,666,000 which 
          impacted diluted earnings per common share by approximately $.40.

                                       II-2
                                                           Page 9
<PAGE>

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


          FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

     The Company has a $26,800,000 credit agreement with Bank One, 
Indianapolis, N.A. comprised of a $5,300,000 term loan, a $1,500,000 term 
loan, and a maximum revolving master note loan commitment of $20,000,000 
(outstanding balance $11,833,000 as of August 29, 1998).  On August 29, 1998, 
the Company had $4,675,000 additional borrowings available under the formula 
for calculating its available borrowings.  See Note 2 to the consolidated 
financial statements.

     Demands for funds relate to payments for raw materials and other 
operating costs, resale merchandise, debt obligations, and capital 
expenditures.  The Company's ability to generate cash adequate to meet short 
and long-term needs results from the collection of accounts receivable and 
from its ability to borrow funds.  The Company's days of sales outstanding of 
accounts receivable averaged 53 days for fiscal 1998 and 52 days for fiscal 
1997.  Inventory turnover was 3.5 in fiscal 1998 and 3.9 in fiscal 1997.   
The decrease in turnover was primarily a result of initial inventory build-up 
of the Company's new product lines.  The Company believes it will be able to 
generate enough cash in fiscal 1998 from operations to make scheduled 
payments on its long term debt.

     On August 28, 1998 the Company retired its Series C Preferred Stock. Of 
the 1,995,050 Series C shares outstanding, 1,557,593 shares were redeemed for 
$3.00 per share by the Company as stated in its Certificate of Incorporation, 
and 437,457 Series C shares were converted into 722,762 common shares at the 
option of the holders.  The redeeming shareholders were paid a final dividend 
of $75,319 on the date of redemption.  The redemption of the 1,557,593 Series 
C shares resulted in a $1,666,000 charge to income applicable to common stock 
because the $3.00 redemption price exceeded the par value of the Series C 
stock of $2.00, and the Company recognized approximately $109,000 in 
transaction costs.  The redemption was funded through term bank debt and 
cash. This transaction will result in a substantial anti-dilutive effect on 
earnings per common share in future periods.

     Key elements of the Consolidated Statement of Cash Flows (in thousands):

<TABLE>
<CAPTION>
                                                             1998           1997           1996
                                                             ----           ----           ----
<S>                                                       <C>               <C>          <C>
Net cash provided (used) by operating activities          $(1,211)         $  23         $8,504
Cash provided (used) in investing activities               (2,234)          (858)           140
                                                          -------          -----         ------
Net cash flows from operating and investing activities     (3,445)          (835)         8,644
Cash provided (used) by financing activities                4,025          1,251         (8,616)
                                                          -------          -----         ------
Net change in cash and cash equivalents                   $   580          $ 416         $   28
                                                          -------          -----         ------
                                                          -------          -----         ------
</TABLE>

     During fiscal 1998, the Company used cash flows for operations of 
$1,211,000 primarily to finance finished goods inventories for its new 
divisions and new commercial office groups as well as to finance increased 
accounts receivables from substantially increased sales. During fiscal 1997, 
the Company provided cash flows from operations of $23,000 from net income of 
$2.4 million offset primarily by funds used to finance inventories of 
expanding office and home office furniture lines as well as to finance 
seasonal inventories of wood at the Sawmill to
                              II-3
                                                           Page  10


<PAGE>

minimize spot purchase premiums during the fall and winter months.  In 
addition, cash was used to finance accounts receivable resulting from the 
sales increase during the fourth quarter.  During fiscal 1996 , the Company 
provided cash flows from operating activities of $8,504,000.  This positive 
cash flow was due primarily to the success of the Company's asset 
consolidation plan and particularly the inventory reduction as well as the 
reduction in accounts receivable.

      Cash flows of $2,234,000 were used for investing activities during 
fiscal 1998 primarily to build the new warehousing and distribution facility 
as well as to finish a capital project at the Company's sawmill and dimension 
plant. Investing activities used $858,000 during fiscal 1997 primarily to 
finance capital expenditures, in particular the building addition at the 
Dimension Plant to accommodate the lumber yield optimization equipment, to 
finance the sales automation hardware and software, and to finance ongoing 
plant modernization. Funds used for these expenditures were partially offset 
by $193,000 in proceeds from the sale of certain environmental permits. 
Investing activities provided $140,000 in fiscal 1996 through the sale of 
certain idle assets in Gettysburg, Pennsylvania as well as the final payments 
on an Alabama idle property sold several years ago. 

     Net cash flows from financing activities of $4,025,000 for fiscal 1998 
were used to finance the previously mentioned current assets and capital 
expenditures as well as to retire the Series C Preferred Stock. Financing 
activities during fiscal 1997 of $1,251,000 were provided primarily by the 
revolving line of credit.  Financing activities during fiscal 1996 of 
$8,616,000 were primarily used to pay down debt with funds generated by 
operations and investing activities previously described.  

     The Company does not believe any events are probable which would 
materially change its present liquidity position, which is adequate to 
satisfy known demands for funds for operations and to pay bank and other debt.

     The Company's fiscal 1999 budget for capital expenditures is 
approximately $350,000. The Company anticipates that its 1999 internal cash 
flow and additional borrowings available under its credit agreement will be 
sufficient to pay for these expenditures. 

     The Company is currently subject to claims under federal and state 
environmental laws based on allegations that the Company had hazardous 
substances disposed of at three waste disposal sites.  After depositing 
$57,000 in a trust fund under the terms of a tentative settlement of claims 
arising from one site and paying its portion of preliminary investigation and 
remediation costs at the other two sites, the Company presently retains a 
reserve of approximately $42,000 against potential environmental liabilities. 
 Due to the limited nature of the Company's involvement in these 
environmental proceedings, the availability of certain defenses, and the 
involvement of many other parties with substantial financial resources in the 
proceedings, the Company does not anticipate, based on currently available 
information, that potential environmental liabilities arising from these 
proceedings are likely to exceed the amount of the Company's reserve by an 
amount that would have a material effect on the Company's financial 
condition, results of operations or cash flows.  Expenses for the year to 
date were not material. See "Item 3. Legal Proceedings" and Note 4 of Notes 
to Consolidated Financial Statements.
                              II-4
                                                           Page  11


<PAGE>

     The Company does not believe any events are probable which would 
materially change  its present liquidity position, which is adequate to 
satisfy known demands for funds  for operations and to pay bank and other 
debt.

     The Company has received certifications or representations from the 
vendors of its critical hardware, system software, and application software 
that those products are Year 2000 ready.  The Company employs IBM AS400 
hardware, IBM OS400 operating system, and MAPICS manufacturing and production 
information control system for the large majority of its system needs all of 
which was subject to the above mentioned certifications.  The Company has 
tested this hardware and software and found its Year 2000 readiness to be as 
certified. The Company has not incurred any material costs in its Year 2000 
readiness plans nor does it anticipate any material costs in the future.  The 
Company has received representations or certifications from its largest 
suppliers representing that they are Year 2000 compliant.  In the event that 
any of the Company's larger suppliers are not Year 2000 compliant, the 
Company believes that it has alternative sources for its raw material needs.  
The Company has received representations from customers representing 
approximately 50% of its annual sales that those customers are Year 2000 
compliant.  The Company has received representation from its primary 
depository and lender bank that they are Year 2000 compliant.  Contingency 
plans will be developed during fiscal 1999 for third parties that the Company 
believes have significant Year 2000 operational risks.  Even given best 
efforts and execution of the aforementioned planning and testing, disruptions 
and unexpected business problems may occur as a result of the Year 2000 
issue.


                               RESULTS OF OPERATIONS

     Net sales for fiscal 1998 increased by $8,293,000 or approximately 15% 
over fiscal 1997.  This increase was primarily volume driven and was the 
result of increased home office sales and sales by the Company's new Wynwood 
division. The sales changes were as follows:  Home office, Wynwood, and other 
residential furniture sales excluding promotional bedroom increased by 
approximately 65%; promotional bedroom sales decreased by approximately 9%; 
and commercial office sales were approximately the same as the previous year. 
Net sales for fiscal 1997 increased by $871,000 or 2% over those of fiscal 
1996.  This increase was the result of increased commercial and home office 
furniture sales offset by lower bedroom furniture sales.   The sales change 
was as follows: office furniture sales increased by 13%; Home office and 
other residential furniture sales excluding bedroom increased by 2%; and 
bedroom sales decreased by 11% due to weak retail demand for budget-priced 
bedroom furniture.

     As a percentage of sales, cost of sales was 77.7% of sales for fiscal 
1998, 76.6% of sales for fiscal 1997, and 80.9% of sales for fiscal 1996.  
The increase in cost of sales as a percentage of sales in fiscal 1998 was 
primarily a result of lower utilization of the Company's production 
facilities and a lower margin product sales mix.  The decrease in cost of 
sales as a percentage of sales in fiscal 1997 from fiscal 1996 was the result 
of the Company's asset consolidation program initiated in fiscal 1996 and in 
particular the consolidation of the Gettysburg operations into existing 
Indiana operations, thus significantly lowering the Company's overhead.  Also 
contributing to the improvement was the increased production and favorable 
sales mix towards higher margin products, as well as significant improvement 
in the Company's two internal supplier plant operations.
                              II-5
                                                           Page  12


<PAGE>

     As a percentage of sales, selling, general and administrative expenses 
were 15.9% of sales for fiscal 1998, 15.3% of sales for fiscal 1997, and 
14.1% of sales for fiscal 1996. The slight increase in fiscal 1998 was 
primarily due to the sales and marketing related expenses of the Company's 
new Wynwood and Homestyles divisions.  The increase in fiscal 1997 was 
primarily due to higher sales and marketing expenses, customer service 
expenses, information system expenses, and general administrative expenses.

     The Company permanently closed its Gettysburg, Pennsylvania 
manufacturing plant and warehouse facilities and consolidated the production 
and distribution activities of those operations into its Huntingburg, Indiana 
facilities during the second quarter of fiscal 1996.  The Company recorded a 
pre-tax charge of approximately $995,000 in the first quarter of fiscal 1996 
related to this closing. During the fourth quarter of fiscal 1996 the Company 
sold the Gettysburg, Pennsylvania manufacturing plant and realized gross 
proceeds of approximately $375,000.  Based upon this transaction 
approximately $127,000 of the book provision related to the initial recording 
of property, plant and equipment at net realizable value was not needed.  The 
net plant closing charge included in the consolidated statements of income 
was $868,000 for fiscal 1996. Consolidation of production and warehousing 
into the Indiana facilities resulted in lower manufacturing and warehousing 
overhead and plant administrative costs. During the first quarter of fiscal 
1997 the Company sold the Gettysburg, Pennsylvania warehouse and realized 
gross proceeds of approximately $130,000.  Based upon this transaction 
approximately $118,000 of the book provision related to the initial recording 
of property, plant and equipment was not needed. 

     Net interest expense increased to $1,060,000 in fiscal 1998 from 
$1,005,000 in fiscal 1997 primarily due to higher loan balances to support 
the increased accounts receivable and inventory balances.  Net interest 
expense decreased in fiscal 1997 to $1,005,000 from $1,324,000 in fiscal 1996 
because of lower average debt balances as well as lower borrowing rates.

     Gain On Disposal Of Property, Plant and Equipment - During fiscal 1997 
the Company sold certain State of Pennsylvania environmental permits for 
approximately $192,000 which had no carrying value.  During fiscal 1996, the 
Company sold an idle Gettysburg, Pennsylvania manufacturing plant and house 
and recorded a total gain of approximately $44,000 and also received final 
payment on a note from the sale of an idle manufacturing plant in Alabama 
over five years ago and recorded an approximate gain of $26,000 on the final 
payment.


                         EFFECTS OF INFLATION

     Inflation affects the Company's business principally in the form of cost 
increases for material and wages.  Management has attempted to cover 
increased costs by increasing sales prices to the extent permitted by 
competition. Historically, the Company has not been able to raise sales 
prices enough so as to offset all increased costs during all past years.  The 
Company believes that its competitors also have not been able to raise their 
prices so as to offset all increased costs and therefore does not feel that 
the Company has incurred any material adverse effect on its competitive 
position.  The Company believes that it has been able to minimize the effects 
of general inflation in the past by improving its manufacturing and 
purchasing efficiency and increasing its employee productivity.  There can be 
no assurance that inflation will not have a material effect on the Company's 
business in the future.
                              II-6
                                                           Page  13


<PAGE>

      QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     The Company's primary market risk exposure with regard to financial 
instruments is to changes in interest rates.  Historically, the Company has 
not used derivative financial instrumental to manage exposure to market risk 
associated with interest rate movements.  At August 29, 1998, a hypothetical 
100 basis points increase in short term interest rates would result in a 
reduction of approximately $229,000 in annual pretax earnings.  This estimate 
assumes no change in the volume or composition of debt at August 29, 1998.
















                                      II-7
                                                           Page  14

<PAGE>
                                      
                                DMI FURNITURE, INC.
                                     FORM 10-K
                          ITEMS 8, 14(a) 1 AND 2 AND 14(d)
              INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

The following consolidated financial statements of the registrant required to 
be included in Item 8 are listed below:

                                                                      Page
Consolidated Financial Statements:
 Report of Independent Public Accountants                             F-1
 Consolidated Balance Sheets as of August 29, 1998 and
  August 30, 1997                                                     F-2, F-3
 Consolidated Statements of Income for the years ended
  August 29, 1998, August 30, 1997 and
  August 31, 1996                                                     F-4
 Consolidated Statements of Stockholders' Equity for        
  the years ended August 29, 1998, August 30, 1997,
  and August 31, 1996                                                 F-5
 Consolidated Statements of Cash Flows for the years
  ended August 29, 1998, August 30, 1997, 
  and August 31, 1996                                                 F-6, F-7

Notes to Consolidated Financial Statements                            F-8 - F-20


The following financial statement schedule of the registrant is included in 
Item 14(d):

                                                                      Page
                                                                      ----
II----Valuation and Qualifying Accounts                               S-1

Schedules other than those mentioned above are omitted because the conditions
requiring their filing do not exist or because the required information is
presented in the consolidated financial statements, including the notes thereto.









                              II-8

                                                                     Page 15

<PAGE>

                       REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To DMI Furniture, Inc.:


We have audited the accompanying consolidated balance sheets of DMI 
Furniture, Inc. (a Delaware corporation) and subsidiary as of August 29, 1998 
and August 30, 1997 and the related consolidated statements of income, 
stockholders' equity and cash flows for each of the three years in the period 
ended August 29, 1998. These consolidated financial statements and the 
schedule referred to below are the responsibility of the Company's 
management.  Our responsibility is to express an opinion on these 
consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above 
present fairly, in all material respects, the financial position of DMI 
Furniture, Inc. and subsidiary as of August 29, 1998 and August 30, 1997, and 
the results of their operations and their cash flows for each of the three 
years in the period ended August 29, 1998 in conformity with generally 
accepted accounting principles.

Our audits were made for the purpose of forming an opinion on the basic 
financial statements taken as a whole.  The schedule listed in the Index To 
Consolidated Financial Statements and Schedules is presented for purposes of 
complying with the Securities and Exchange Commission's rules and is not a 
required part of the basic financial statements.  This schedule has been 
subjected to the auditing procedures applied in our audits of the basic 
financial statements and, in our opinion, is fairly stated in all material 
respects in relation to the basic financial statements taken as a whole.


                                   ARTHUR ANDERSEN LLP

October 16, 1998
Louisville, Kentucky



                         
                                   F-1

                                                                     Page 16

<PAGE>

                                DMI FURNITURE, INC.

                            CONSOLIDATED BALANCE SHEETS

                        August 29, 1998 and August 30, 1997


<TABLE>
<CAPTION>
              ASSETS                                                     1998           1997    
             --------                                                   ------         ------   
<S>                                                                  <C>            <C>         
Current assets:
  Cash                                                                $1,092,531       $512,367 
  Restricted cash                                                         -           1,080,196 
  Accounts receivable, less allowance for
   doubtful accounts of $150,000 in 1998
   and $141,000 in 1997 (Note 11)                                     10,251,735      9,148,551 
  Inventories (Note 9)                                                16,296,457     12,261,761 
  Other current assets                                                   340,599        363,041 
  Current portion of deferred income taxes (Note 8)                      934,837        792,160 
                                                                     -----------    -----------
    Total current assets                                              28,916,159     24,158,076
                                                                     -----------    -----------
Property, plant and equipment, at cost:
  Land                                                                   753,572        753,572 
  Buildings and improvements                                           9,680,651      8,019,589 
  Machinery and equipment                                             11,054,830     10,829,509 
  Leasehold improvements                                                 970,414        656,849 
  Construction in progress                                                -             176,982 
                                                                     -----------    ----------- 
                                                                      22,459,467     20,436,501 
  Less accumulated depreciation                                       10,522,344      9,479,220 
                                                                     -----------    ----------- 
    Net property, plant and equipment                                 11,937,123     10,957,281 
                                                                     -----------    -----------
Other assets:
  Intangible pension asset                                               332,312        296,166 
  Other                                                                  143,744        139,865 
                                                                     -----------    -----------
  Total other assets                                                     476,056        436,031
                                                                     -----------    -----------

Total assets                                                         $41,329,338    $35,551,388 
                                                                     -----------    ----------- 
                                                                     -----------    ----------- 
</TABLE>

                               See accompanying notes.

                                         F-2
                                                                     Page 17

<PAGE>

                                 DMI FURNITURE, INC.

                             CONSOLIDATED BALANCE SHEETS

                         August 29, 1998 and August 30, 1997
                                     (continued)


<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY                                     1998           1997    
------------------------------------                                    ------         ------   
<S>                                                                  <C>            <C>         
Current liabilities:
  Trade accounts payable                                              $3,521,191     $2,890,459 
  Accrued liabilities  (Note 9)                                        3,128,259      2,719,176 
  Accrued dividends on preferred stock (Note 5)                           -             399,010 
  Long-term debt due within one year  (Note 2)                         1,524,113      2,011,860 
                                                                     -----------    -----------
    Total current liabilities                                          8,173,563      8,020,505
                                                                     -----------    -----------
Long-term liabilities:
  Long-term debt (Note 2)                                             21,392,911     12,845,587 
  Accrued pension costs (Note 7)                                         807,100        600,748 
  Deferred compensation  (Note 7)                                        272,810        321,079 
  Deferred income tax (Note 8)                                           425,857        502,471 
                                                                     -----------    -----------
  Total long-term liabilities                                         22,898,678     14,269,885
                                                                     -----------    -----------
Commitments and contingencies (Notes 3 & 4)

Stockholders' equity:  (Notes 5 & 6)
  Series C convertible preferred stock, $2 par value, 1,995,050
   shares outstanding in 1997, none outstanding in 1998                   -           3,990,100 
                                                                          
  Common stock, $.10 par value, 9,600,000 shares
   authorized, 3,892,013 shares outstanding
   (3,152,483 in 1997)                                                   389,201        315,248 
  Additional paid-in capital                                          16,183,216     15,341,172 
  Retained deficit                                                    (6,052,538)    (6,385,522)
  Minimum pension liability                                             (262,782)        -      
                                                                     -----------    -----------
  Total stockholders' equity                                          10,257,097     13,260,998
                                                                     -----------    -----------

Total liabilities and stockholders' equity                           $41,329,338    $35,551,388 
                                                                     -----------    ----------- 
                                                                     -----------    ----------- 
</TABLE>


                               See accompanying notes.


                                         F-3
                                                                     Page 18
<PAGE>

                                 DMI FURNITURE, INC.

                          CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                                   Years Ended
                                                                    ------------------------------------------
                                                                     August 29,     August 30,     August 31,
                                                                        1998           1997           1996
                                                                    ------------   ------------   ------------
<S>                                                                 <C>            <C>            <C>
Net sales  (Note 11)                                                 $64,727,154    $56,434,443    $55,562,751

Cost of sales                                                         50,291,032     43,257,757     44,948,772
                                                                    ------------   ------------   ------------
                                                                      14,436,122     13,176,686     10,613,979
Selling, general and
  administrative expenses                                             10,278,848      8,616,732      7,843,052

Plant closing reserve (Note 12)                                           -            (118,912)       868,000

Other income (expense):
  Interest expense                                                    (1,140,800)    (1,062,556)    (1,335,956)
  Interest income                                                         81,304         58,354         12,314
  Gain on disposal of property,
   plant and equipment                                                     9,378        195,642         74,685
  Other                                                                   24,088          8,544        (45,127)
                                                                    ------------   ------------   ------------
                                                                      (1,026,030)      (800,016)    (1,294,084)
                                                                    ------------   ------------   ------------


Income before provision for income taxes                               3,131,244      3,878,850        608,843

Provision for income taxes (Note 8)                                   (1,156,312)    (1,463,025)      (233,176)
                                                                    ------------   ------------   ------------

Net income                                                            $1,974,932     $2,415,825       $375,667


Net income applicable to common stock (Note 5)                          $308,550     $2,016,815       $375,667


Earnings per common share (Notes 1, 5, and 15):
            Basic                                                          $0.09          $0.65          $0.13

            Diluted                                                        $0.07          $0.40          $0.07
</TABLE>


                               See accompanying notes.


                                         F-4
                                                                     Page 19

<PAGE>
                               DMI FURNITURE, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                         Three years ended August 29, 1998
<TABLE>
<CAPTION>
                                   Series C      Number of                Number of
                                  Convertible    Series C                  Common       Additional    Retained        Minimum
                                   Preferred      Shares       Common      Shares        Paid-In      Earnings        Pension
                                    Stock       Outstanding    Stock     Outstanding     Capital      (Deficit)      Liability
                                 ------------  ------------  ----------  -----------  -------------  ------------  -------------
<S>                              <C>           <C>           <C>         <C>          <C>            <C>           <C>
BALANCES AT SEPTEMBER 2, 1995     $4,040,000     2,020,000    $297,003    2,970,026    $15,106,984   ($8,762,883)    ($24,000)

Net income                            -            -              -            -             -           375,667         -
Dividends on preferred stock          -            -              -            -             -           (15,121)        -
Minimum pension liability             -            -              -            -             -             -             -
Conversion of stock                  (49,900)      (24,950)      4,900       49,000         45,000         -             -
Issuance of common stock              -            -             3,228       32,286         33,095         -             -
                                  ----------     ---------    --------    ---------    -----------   ------------    ---------
BALANCES AT AUGUST 31, 1996       $3,990,100     1,995,050    $305,131    3,051,312    $15,185,079   ($8,402,337)    ($24,000)

Net income                            -            -              -            -             -         2,415,825         -
Dividends on preferred stock          -            -              -            -             -          (399,010)        -
Minimum pension liability             -            -              -            -             -             -           24,000
Issuance of common stock              -            -            10,117      101,171        156,093         -             -
                                  ----------     ---------    --------    ---------    -----------   ------------    ---------
BALANCES AT AUGUST 30, 1997       $3,990,100     1,995,050    $315,248    3,152,483    $15,341,172   ($6,385,522)          $0

Net income                            -            -              -            -             -         1,974,932         -
Redemption of preferred stock     (3,115,186)   (1,557,593)       -            -             -        (1,666,382)        -
Conversion of preferred stock       (874,914)     (437,457)     72,276      722,762        802,638         -             -
Dividends on preferred stock          -            -              -            -             -            24,434         -
Minimum pension liability             -            -              -            -             -             -         (262,782)
Issuance of common stock              -            -             1,677       16,768         39,406         -             -
                                  ----------     ---------    --------    ---------    -----------   ------------    ---------
BALANCES AT AUGUST 29, 1998           -            -          $389,201    3,892,013    $16,183,216   ($6,052,538)   ($262,782)
                                  ----------     ---------    --------    ---------    -----------   ------------    ---------
                                  ----------     ---------    --------    ---------    -----------   ------------    ---------
<CAPTION>
                                     Total
                                 -------------
<S>                              <C>
BALANCES AT SEPTEMBER 2, 1995     $10,657,104

Net income                            375,667
Dividends on preferred stock          (15,121)
Minimum pension liability                -
Conversion of stock                      -
Issuance of common stock               36,323
                                  -----------
BALANCES AT AUGUST 31, 1996       $11,053,973

Net income                          2,415,825
Dividends on preferred stock         (399,010)
Minimum pension liability              24,000
Issuance of common stock              166,210
                                  -----------
BALANCES AT AUGUST 30, 1997       $13,260,998

Net income                          1,974,932
Redemption of preferred stock      (4,781,568)
Conversion of preferred stock               0
Dividends on preferred stock           24,434
Minimum pension liability            (262,782)
Issuance of common stock               41,083
                                  -----------
BALANCES AT AUGUST 29, 1998       $10,257,097
                                  -----------
                                  -----------
</TABLE>
                             See accompanying notes.

                                       F-5
                                                                     Page 20

<PAGE>

                                 DMI FURNITURE, INC.

                        CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                    Years Ended
                                                                      ----------------------------------------
                                                                      August 29,     August 30,     August 31,
                                                                         1998           1997           1996
                                                                      ----------     ----------     ----------
<S>                                                                   <C>            <C>            <C>
Cash flows from operating activities:
  Net income                                                          $1,974,932     $2,415,825       $375,667
  Adjustments to reconcile net income to
   net cash provided (used) by
   operating activities:
    Depreciation and amortization                                      1,244,108      1,009,736      1,022,938
    Amortization of loan closing costs                                    22,130         35,243         43,690
   (Gain) loss on disposal of property,
     plant and equipment                                                   9,378       (195,642)       (73,535)
    Deferred income tax                                                 (219,291)       378,146        186,165
    Changes in assets and liabilities:
      Accounts receivable                                             (1,103,184)    (1,689,751)     3,179,702
      Inventories                                                     (4,034,696)    (2,408,560)     3,411,342
      Other assets                                                        (3,567)        94,408        152,990
      Trade accounts payable                                             630,732       (274,362)        30,196
      Accrued pension costs                                              (92,576)      (107,910)        89,255
      Deferred compensation                                              (48,269)       (55,411)       (57,713)
      Accrued liabilities                                                409,083        821,724        143,734
                                                                      ----------     ----------     ----------
     Total adjustments                                                (3,186,152)    (2,392,379)     8,128,764
                                                                      ----------     ----------     ----------

  Net cash provided (used) by operating activities                    (1,211,220)        23,446      8,504,431
                                                                      ----------     ----------     ----------
Cash flows from investing activities:
  Capital expenditures                                                (2,292,252)    (1,072,115)      (537,959)
  Payments received on notes receivable                                  -              -              135,750
  Proceeds from the disposal of property,
   plant and equipment                                                    58,924        213,783        541,974
                                                                      ----------     ----------     ----------
  Net cash provided (used) by investing activities                    (2,233,328)      (858,332)       139,765
                                                                      ----------     ----------     ----------
</TABLE>


                               See accompanying notes.

                                         F-6
                                                                     Page 21

<PAGE>

                                 DMI FURNITURE, INC.

                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                     (continued)

<TABLE>
<CAPTION>
                                                                                    Years Ended
                                                                     -----------------------------------------
                                                                      August 29,     August 30,     August 31,
                                                                         1998           1997           1996
                                                                     -----------    -----------    -----------
<S>                                                                  <C>            <C>            <C>
Cash flows from financing activities:

  Borrowings from line-of-credit                                      24,671,660     23,000,000     15,898,000
  Payments on line-of-credit                                         (21,157,860)   (20,650,000)   (21,950,000)
  Additions to long-term debt                                          5,726,584        -               50,380
  Payments of long-term debt                                          (1,180,807)    (1,153,971)    (1,374,366)
  Restricted cash                                                      1,080,196        (18,659)      (835,830)
  Cash dividends on preferred stock                                     (374,576)       -             (404,537)
  Proceeds from stock options exercised                                   41,083         73,337        -
  Retirement of preferred stock                                       (4,781,568)       -              -
                                                                      ----------     ----------     ----------
  Net cash provided (used) by financing
   activities                                                          4,024,712      1,250,707     (8,616,353)
                                                                      ----------     ----------     ----------

Increase in cash                                                         580,164        415,821         27,843


Cash, beginning of year                                                  512,367         96,546         68,703
                                                                      ----------     ----------     ----------

Cash, end of year                                                     $1,092,531       $512,367        $96,546
                                                                      ----------     ----------     ----------
                                                                      ----------     ----------     ----------

Cash paid for:
  Interest (net of amounts capitalized)                               $1,013,539     $1,069,502     $1,368,703
                                                                      ----------     ----------     ----------
                                                                      ----------     ----------     ----------

  Income taxes                                                        $1,164,290       $701,597        $85,863
                                                                      ----------     ----------     ----------
                                                                      ----------     ----------     ----------
</TABLE>


                               See accompanying notes.

                                         F-7
                                                                     Page 22


<PAGE>

DMI FURNITURE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   
1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    THE COMPANY - The consolidated financial statements include DMI 
Furniture, Inc. and its wholly owned subsidiary, DMI Management, Inc. (DMI or 
Company). All significant inter-company accounts and transactions have been 
eliminated. DMI Furniture, Inc. operates in one industry - the Company 
manufactures, imports, and sells low to medium priced residential furniture, 
commercial and home office furniture, desks, accent furniture, and tables and 
chairs. Its principal distribution channels are multi-market furniture 
retailers, distributors, independent retailers, catalogers, and warehouse 
clubs located primarily throughout the United States.  The Company's fiscal 
year consists of a fifty-two week period ending on the last Saturday in 
August.  Approximately every seven years the Company's fiscal year consists 
of fifty-three weeks.  The fiscal years presented in this report all consist 
of fifty-two weeks.

    INVENTORIES - Inventories are valued at the lower of cost (first-in, 
first-out method) or market.

    DEPRECIATION - Depreciation is provided on the basis of estimated useful 
lives of the property, plant and equipment, using the straight-line method.  
The useful lives of property, plant and equipment are as follows: Building 
and leasehold improvements, 8-35 years; and machinery and equipment, 3-13 
years.

    INCOME TAXES - The Company recognizes deferred tax assets and liabilities 
based upon the expected future tax consequences of events that have been 
included in the financial statements or tax returns.  Under this method, 
deferred tax assets and liabilities are determined based on the difference 
between the financial statement and tax bases of assets and liabilities using 
enacted tax rates in effect for the year in which the differences are 
expected to reverse.   (See Note 8 for additional information). 

    EARNINGS PER COMMON SHARE - Earnings per common share are based on the 
weighted average number of common and common equivalent shares outstanding 
during the period   (1998- 4,214,781; 1997 - 6,006,353; 1996 - 5,704,628), 
and assumes the conversion of the Series C Preferred Stock into common stock. 
(See Note 15 for additional information)

    CONSOLIDATED STATEMENTS OF CASH FLOWS - For purposes of the Consolidated 
Statements of Cash Flows the Company considers all highly liquid debt 
instruments with an initial maturity of three months or less at the date of 
purchase to be cash equivalents.

    ADVERTISING - The Company expenses advertising-type costs as incurred. 
Advertising expense was approximately $1,211,000, $857,000 and $578,000 in 
fiscal 1998, 1997 and 1996 respectively.
          
    ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.


                                       F-8

                                                                     Page 23

<PAGE>


    LONG-LIVED ASSETS -   In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" (SFAS No. 121).  This standard establishes accounting standards for
evaluating the potential impairment of long-lived assets, certain identifiable
intangibles and goodwill.  The Company adopted the provisions of SFAS No. 121 in
the first quarter of fiscal 1997 and the application of the standard has not
resulted in an impairment loss.

   REVENUE RECOGNITION - The Company recognizes sales of its products when the
products are shipped to customers.

2.  LONG-TERM DEBT
Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                    1998              1997
<S>                                              <C>                <C>
Economic Development Revenue
  Bonds; payable in twelve equal monthly
  payments beginning in fiscal 2002;
  weekly adjustable coupon interest rate 
  (3.6% on 8/29/98) and payable monthly.         $2,230,000         $2,545,000

Economic Development Revenue
  Bonds; payable in twelve equal monthly
  payments beginning in fiscal 2003;
  weekly adjustable coupon interest rate 
  (3.6% on 8/29/98) and payable monthly.           2,020,000         2,275,000

Term note payable to bank; due in
  45 monthly principal installments of
  $116,666.67 through 5/31/02;
  interest at prime+.25% (8.5%)
  or LIBOR+2.5% (7.5%).                            5,300,000                 0

Term note payable to bank; due in
  60 monthly principal installments of
  $8,333.33 and final payment of $1 million
  on 8/31/03; interest at prime+.25%
  (8.5%) or LIBOR+2.5% (7.5%).                     1,500,000                 0

Term note payable to bank; due
  in monthly principal installments of  
  $33,333;  interest at prime (8.5%) 
  or LIBOR+1.75% (7.625%).                                 0         1,645,445

$20,000,000 revolving master note  
  payable to bank; interest at  prime+.25%
 (8.5%) or LIBOR+2.5% (7.50%);
  expires December, 2000.                         11,833,419         8,319,619

Capital leases on equipment; payable
  quarterly through March, 2000; 
  interest at various rates.                         33,605             72,383
                                                -----------        -----------
                                                 22,917,024         14,857,447
  Less portion due within one year                1,524,113          2,011,860
                                                -----------        -----------
                                                $21,392,911        $12,845,587
                                                -----------        -----------
                                                -----------        -----------
</TABLE>


                                      F-9

                                                                     Page 24
<PAGE>

     With respect to the term notes and revolving loan above, the Company has 
the option of borrowing based on prime rate + .25% or London Interbank 
Offered Rate (LIBOR) + 2.50%.  As of August 29, 1998, $11 million of the 
revolver note balance and $3 million of the term loan were LIBOR priced.

     Substantially all assets are pledged to collateralize long-term debt.  
On August 29, 1998, the Company had $4,675,000 additional borrowings 
available under the formula for calculating its available borrowings.
                                   
     With respect to the Economic Development Revenue Bonds (Bonds), the 
Company has the option to establish the Bonds' interest rate form (variable 
or fixed interest rate).  When the Bonds are in the variable rate form, or at 
the end of a fixed interest rate period, the Bondholders reserve the right to 
demand payment on the Bonds.  In the event that any of the Bondholders 
exercise their rights, a remarketing agent is responsible for remarketing the 
Bonds on a best efforts basis for not less than the outstanding principal and 
accrued interest. In the event the Bonds are not able to be remarketed the 
lender is committed to providing financing for up to 372 days.  The letters 
of credit expire in 1999 unless earlier extended by the bank.  As a result of 
these bank commitments, the Bonds are classified as long-term debt in the 
accompanying balance sheet.
  
     The aggregate maturities of long-term debt and capital leases for the 
next five fiscal years and thereafter are as follows:

<TABLE>
<CAPTION>
<S>                                        <C>
         1999                              $1,524,113
         2000                               1,509,485
         2001                              13,333,419
         2002                               1,571,666
         2003                               2,295,001
         Thereafter                         2,683,340
                                          -----------
                                          $22,917,024
                                          -----------
</TABLE>

     The Company's bank financing agreement contains restrictive covenants 
that require the Company, among other things, to maintain a fixed charge 
ratio, tangible net worth, and ratio of total funded debt to EBITDA, all as 
defined in the bank financing agreement.  The financing agreement further 
restricts the Company from, among other things, without prior written 
consent, redeeming or purchasing any of its outstanding capital stock; 
acquiring, merging or consolidating with any other business; paying 
dividends; and, acquiring capital assets in excess of the annual 
depreciation. 

3.  LEASE COMMITMENTS

     The Company leases certain of its facilities and equipment under operating
leases.  The leases generally require the Company to pay taxes, insurance,
maintenance and utilities. Some of the leases contain renewal options.  



                                       F-10

                                                                     Page 25

<PAGE>

     Future minimum lease payments at August 29, 1998 under these leases are as
follows:

<TABLE>
<CAPTION>
<S>                                         <C>
         1999                                 $684,416
         2000                                  480,504
         2001                                  269,824
         2002                                  214,678
         2003                                    7,966
                                            ----------
         Total minimum payments             $1,657,388
                                            ----------
                                            ----------
</TABLE>
                                                             
     Rent expense under operating leases charged to operations during fiscal 
years 1998, 1997 and 1996 was $784,525, $593,949 and $747,412, respectively.

4.  COMMITMENTS AND CONTINGENCIES

     The Company is currently subject to claims under federal and state 
environmental laws based on allegations that the Company had hazardous 
substances disposed of at three waste disposal sites.  After depositing 
$57,000 in a trust fund under the terms of a tentative settlement of claims 
arising from one site and paying its portion of preliminary investigation and 
remediation costs at the other two sites, the Company retains a reserve of 
approximately $42,000 against potential environmental liabilities.  Due to 
the limited nature of the Company's involvement in these environmental 
proceedings, the availability of certain defenses, and the involvement of 
many other parties with substantial financial resources in the proceedings, 
the Company does not anticipate, based on currently available information, 
that potential environmental liabilities arising from these proceedings are 
likely to exceed the amount of the Company's reserve by an amount that would 
have a material effect on the Company's financial condition, results of 
operations or cash flows.  Expenses for the three years presented were not 
material.
     
     The Company has entered into individual employment agreements with 
certain of its officers which expire at various times through August 31, 
2000.  Certain of these agreements provide for lump sum payments in the event 
employment is terminated as a result of a change in ownership of the Company 
as defined in the agreements.

                              
5.  CONVERTIBLE PREFERRED STOCK

     On August 28, 1998 the Company retired its Series C Preferred Stock. Of 
the 1,995,050 Series C shares outstanding, 1,557,593 shares were redeemed for 
$3.00 per share by the Company as stated in its Certificate of Incorporation, 
and 437,457 Series C shares were converted into 722,762 common shares at the 
option of the holders.  The redeeming shareholders were paid a final dividend 
of $75,319 on the date of redemption.  The redemption of the 1,557,593 Series 
C shares caused a $1,666,000 charge to income applicable to common stock 
because the $3.00 redemption price exceeded the par value of the Series C 
stock of $2.00, and the Company recognized approximately $109,000 in 
transaction costs. The redemption was funded through term bank debt and cash. 
There were $399,010 of preferred dividends accrued in fiscal 1997 of which 
$374,576 were paid in fiscal 1998.


                                       F-11
                                                                     Page 26


<PAGE>

6.  STOCK OPTIONS

     The Company has elected to follow Accounting Principles Board Opinion 
No. 25, "Accounting for Stock Issued To Employees" (APB 25) and related 
Interpretations in accounting for its employee stock options because the 
alternative fair value accounting provided for under FASB Statement No. 123, 
"Accounting for Stock-Based Compensation," requires use of option valuation 
models that were not developed for use in valuing employee stock options.  
Under APB 25, because the exercise price of the Company's employee stock 
options equals the market price of the underlying stock on the date of grant, 
no compensation expense is recognized.

     Had compensation cost for all option grants to employees and directors 
been determined consistent with FASB Statement No. 123, the Company's net 
income and earnings per share would have affected as follows.  Because the 
method of accounting required by SFAS No. 123 has not been applied to options 
granted prior to January 1, 1995, the resulting pro forma compensation cost 
may not be representative of that to be expected in future years.

<TABLE>
<CAPTION>


                                                1998          1997             1996
                                             ----------    ----------        --------
<S>                                          <C>           <C>               <C>
Net income:    As reported                   $1,975,000    $2,416,000        $376,000
               Proforma                       1,907,000     2,386,000         369,000

Diluted earnings per common share:
               As reported                      $.07 (1)         $.40            $.07
               Proforma                          .06 (1)          .40             .06
</TABLE>


(1) Net income applicable to common stock was used to compute fiscal 1998 
diluted earnings per common share.  See Note 5 for additional information. 

     Stock options granted prior to February 22, 1994 were granted pursuant 
to the Amended Employee Incentive Stock Option Plan approved by stockholders 
February, 1989.  In February, 1994 the stockholders approved the 1993 Long 
Term Incentive Stock Plan For Employees under which the Company is authorized 
to issue options to selected key employees to acquire a maximum of 600,000 
shares of its common stock in addition to option shares outstanding at the 
time of its adoption. The option price cannot be less than  100% of the fair 
market value of the stock at date of grant for Incentive Stock Options (or 
110% for a 10% beneficial owner), and not less than 50% of the fair market 
value at date of grant for Non-Qualified Stock Options.  Options vest at the 
cumulative rate of 33%, 67%, and 100% on the first three anniversaries of the 
date of grant and expire ten years from date of grant.  A summary of the 
option transactions during the three years ended August 29, 1998 follows:


                              F-12

                                                                     Page 27

<PAGE>

<TABLE>
<CAPTION>
                                       1998                     1997                     1996
                                       ----                     ----                     ----
                                          Weighted                 Weighted                 Weighted
                                           Average                  Average                  Average
                                 Options  Exercise        Options  Exercise        Options  Exercise
                                    (000)    Price           (000)    Price           (000)    Price
                                 -------  --------        -------  --------        -------  --------
<S>                              <C>       <C>             <C>      <C>              <C>     <C>
Outstanding-beginning
  of year                          707     $1.80            655     $1.66            606     $1.66
Granted                            100      2.88             85      2.77             97      1.63
Exercised                           (2)     1.38            (33)     1.38              -         -
Expired                              -         -              -         -            (48)     1.57
                                   ---                      ---                      ---
Outstanding-end of 
  year                             805     $1.92            707     $1.80            655     $1.66
                                   ---                      ---                      ---
Exercisable at end of
  year                             616     $1.71            557     $1.68            559     $1.66
Weighted-average fair
  value of options granted
  during the year                          $1.64                    $1.66                    $ .89
</TABLE>


    Exercise prices for options outstanding as of August 29, 1998 ranged from 
$1.38 to $3.00.  The weighted-average remaining contractual life of those 
options is 6.1 years.

    Included in the above are non-qualified options for 180,000 shares of 
common stock for $1.38 to $2.50 per share to certain employees/directors 
which have a total option price of approximately $390,000.  The options are 
immediately exercisable for up to ten years after the date of grant.

    The Company has a stock option plan under which the Company is authorized 
to issue options to non-employee directors to acquire a maximum of 160,000 
shares of its common stock for options granted prior to March 15, 1998.  A 
new plan was adopted effective March 15, 1998 authorizing the Company to 
issue options to non-employee directors to acquire a maximum of 100,000 
shares of its common stock. The option price is the closing bid price for 
shares on NASDAQ on the date of grant.  Options vest at the cumulative rate 
of 50% and 100% on the first two anniversaries of the date of grant and 
expire ten years from date of grant.  A summary of the option transactions 
during the three years ended August 29, 1998 follows: 

<TABLE>
<CAPTION>
                                       1998                     1997                    1996
                                       ----                     ----                    ----
                                          Weighted                 Weighted                 Weighted
                                           Average                  Average                  Average
                                 Options  Exercise         Options  Exercise        Options  Exercise
                                    (000)    Price           (000)    Price           (000)    Price
                                 ------- ---------         -------  --------        -------  --------
<S>                                  <C>     <C>              <C>     <C>              <C>     <C>
Outstanding-beginning
  of year                           52     $2.15             90     $2.15              87     $2.17
Granted                              6      2.81             21      2.81               3      1.56
Exercised                           (3)     1.98            (14)     1.98               -         -
Expired                              -      2.25            (45)     2.25               -         -
                                 -----                      ---                        --
Outstanding-end of 
  year                              55     $2.38             52     $2.38              90     $2.15
                                 -----                      ---                        --
                                 -----                      ---                        --

Exercisable at end of
  year                              39     $2.12             30     $2.12              85     $2.19

Weighted-average fair
  value of options granted
  during the year                          $1.73                    $1.70                     $ .94

</TABLE>

                              F-13

                                                                     Page 28


<PAGE>


     Exercise prices for options outstanding as of August 29, 1998 ranged from
$1.19 to $3.50.  The weighted-average remaining contractual life of those
options is 6.3 years.

     The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 1998, 1997, and 1996:  expected volatility
of 41.7 percent; risk-free interest rate of 4.62 percent; expected lives for
options of 10 years; and expected dividend yield of 0 percent based on the
Company's history of no dividend payments on common stock.  

7.  PENSION PLANS

     The Company has a defined benefit pension plan which covers substantially
all hourly employees.  Pension costs charged to operations were approximately
$116,000 in fiscal 1998, $142,000 in fiscal 1997, and $169,000 in fiscal 1996. 
Retirement benefits are based on years of credited service multiplied by a
dollar amount negotiated under collective bargaining agreements.  The Company's
policy is to fund normal costs and amortization of prior service costs at a
level which is equal to or greater than the minimum required under ERISA.

     Net pension costs for the defined benefit plan in fiscal 1998, fiscal 1997
and fiscal 1996 was computed as follows:

<TABLE>
<CAPTION>


                                            1998         1997           1996
                                            ----         ----           ----
<S>                                        <C>          <C>           <C>
     Service cost-benefits  
       earned                              $59,554      $56,352       $ 70,598
     Interest cost on projected
       benefit obligation                  205,198      197,872        191,020
     Actual return on plan assets         (172,984)    (135,773)      (126,034)
     Amortization of transition
       obligation                            9,907        9,907         13,686
     Amortization of unrecognized
       prior service cost                   13,990       13,990         19,327
                                          --------     --------       --------
         Net pension expense              $115,665     $142,348       $168,597
                                          --------     --------       --------
</TABLE>

     The funded status of the defined benefit plan at August 29, 1998 and August
30, 1997 is shown below:












                                       F-14

                                                                     Page 29


<PAGE>

<TABLE>
<CAPTION>

      Actuarial present value of
       accumulated plan benefits:

                                                   1998               1997
                                                  ------             ------
<S>                                            <C>                <C>
     Vested                                    $(3,020,550)       $(2,481,792)
     Non-vested                                    (53,109)           (99,171)
                                               -----------        -----------
     Accumulated/projected benefit
       obligation                               (3,073,659)        (2,580,963)
     Plan assets at fair market
       value                                     2,266,559          1,980,215
                                               -----------        -----------
     Projected benefit obligation
       in excess of plan assets                   (807,100)          (600,748)
     Unrecognized transition
       liability                                   118,878            128,785
     Unrecognized net (gain)/loss                  398,154            (60,073)
     Unrecognized prior service cost               213,434            227,454
     Adjustment required to 
       recognize minimum liability                (730,466)          (296,166)
                                               -----------        -----------
     Accrued pension liability                 $  (807,100)       $  (600,748)
                                               -----------        -----------
</TABLE>

     The projected benefit obligation for service rendered was determined 
using an assumed discount rate of 7.25% and an assumed rate of return on plan 
assets of 8.25%.  The assets of the plan are invested in equity and fixed 
income securities.
                         
     The Company has a defined contribution 401(k) type retirement plan for 
salaried personnel and one for hourly personnel.   Costs charged to 
operations in fiscal 1998, fiscal 1997 and fiscal 1996 for the salaried plan 
were $62,600, $68,800 and $57,000, respectively.  Costs charged to operations 
in fiscal 1998 and fiscal 1997 for the hourly plan were $89,100 and $69,900. 

     The Company had a non-qualified deferred compensation plan that was 
terminated for all non-retired executive participants during fiscal 1989.  
The present value of future payments under the plan accrued at August 29, 
1998 and August 30, 1997 is approximately $273,000 and $321,000, 
respectively.  Plan costs charged to operations were approximately $29,000 in 
fiscal 1998, $35,000 in fiscal 1997, and approximately $40,000 in fiscal 1996.





                              F-15

                                                                     Page 30





<PAGE>

 8. Income taxes

     The tax effect of each temporary timing difference and carryforward that 
gives rise to significant deferred tax assets and deferred tax liabilities as 
of August 29, 1998 and August 30, 1997 are as follows (in thousands):

<TABLE>
<CAPTION>

                                                          1998           1997
                                                         -----          ------
<S>                                                      <C>            <C>
Accumulated tax depreciation of property and equipment
  in excess of accumulated book depreciation and other
  related items                                          $(595)         $(617)
Various accruals and reserves                              885            722
Inventory                                                  175            131
Other                                                       44             53
                                                         -----          ------
Net deferred tax asset                                    $509           $289
                                                         -----          ------
</TABLE>

      A valuation allowance is provided when it is more likely than not that 
some portion of the deferred tax asset will not be realized.  Management 
believes the existing net deductible temporary differences will reverse 
during the periods in which the Company generates net taxable income.  Based 
on this belief and the Company's historical and current pre-tax earnings as 
well as its expectations for the future, management believes it is more 
likely than not that the Company will realize its deferred tax assets.   As a 
result, no valuation allowance was required as of August 29, 1998 and August 
30, 1997.  Further, except for the effects of the reversal of net deductible 
temporary differences, the Company is not currently aware of any factors that 
would cause significant differences between taxable income and pre-tax book 
income in future years.
     
     Income tax expense consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                               Twelve Months Ended

                                      Aug. 29,       Aug. 30,       Aug. 31,
                                        1998          1997            1996
                                      --------       --------       --------
<S>                                   <C>            <C>            <C>
Currently payable                      $1,376         $1,085            $47

Deferred                                 (220)           378            186
                                      --------       --------       --------
     Total                             $1,156         $1,463           $233
                                      --------       --------       --------
                                      --------       --------       --------
</TABLE>

     The deferred tax provision for the twelve months ended August 29, 1998 
and August 30, 1997, and August 31, 1996 consisted of the following (in 
thousands):

<TABLE>
<CAPTION>
                                                         1998           1997           1996
                                                        ------         ------         ------
<S>                                                    <C>             <C>          <C>
Utilization of net operating loss carryforwards          $   -           $130            $13
Utilization of AMT credit carryforwards                      -            187              -
Excess tax over book depreciation                          (22)            32             76
Other                                                     (198)            29             97
                                                        ------         ------         ------
                                                         $(220)         $ 378           $186
                                                        ------         ------         ------
                                                        ------         ------         ------
</TABLE>

                                       F-16
                                                                     Page 31
<PAGE>

     The provision for income taxes differs from that computed at the federal
statutory corporate tax rate as follows (in thousands):

<TABLE>
<CAPTION>
                                              Twelve Months Ended
                                       Aug.29,       Aug. 30,       Aug. 31,
                                        1998           1997           1996
                                       ------        -------        --------
<S>                                    <C>          <C>             <C>
Tax at 34% statutory  
     rate                              $1,073         $1,319           $207
State income taxes,
     net of federal 
     benefit                               83            144             26 
                                       ------        -------        --------
Income Taxes                           $1,156         $1,463           $233
                                       ------        -------        --------
                                       ------        -------        --------
</TABLE>

9. OTHER INFORMATION

    Inventories - Inventories are summarized below:

<TABLE>
<CAPTION>
                                      1998           1997
                                  -----------     ----------
<S>                              <C>              <C>
     Finished goods               $10,898,000     $6,789,000
     Work in process                  512,000        514,000
     Raw material                   4,886,000      4,959,000
                                  -----------     ----------
                                  $16,296,000    $12,262,000
                                  -----------     ----------
</TABLE>

Accrued liabilities - Accrued liabilities are summarized below:

<TABLE>
<CAPTION>
                                         1998           1997
                                  -----------     ----------
<S>                               <C>             <C>
     Property, payroll and 
     other taxes                   $1,032,776     $1,028,533
     Payroll, bonuses and
     commissions                    1,750,909      1,439,146
     Interest                         122,836         76,879
     Other                            222,008        174,618
                                  -----------     ----------
                                   $3,128,259     $2,719,176
                                  -----------     ----------
                                  -----------     ----------
</TABLE>

                              F-17
                                                                     Page 32
<PAGE>


 10.  QUARTERLY FINANCIAL DATA

     Quarterly financial data (unaudited - in thousands of dollars except per
share amounts)

<TABLE>
<CAPTION>

                           First          Second           Third         Fourth
Fiscal 1998                Quarter        Quarter         Quarter        Quarter         Year
-----------                -------        -------         -------        -------       -------
<S>                        <C>            <C>             <C>            <C>           <C>
Net sales                  $17,439        $12,785         $16,008        $18,495       $64,727
Gross profit                 4,135          2,629           3,757          3,915        14,436

Net income                     810            116             549            500         1,975

Diluted earnings per 
 common share (1)             $.13           $.02            $.09          $(.25)         $.07
</TABLE>

<TABLE>
<CAPTION>
                            First         Second           Third         Fourth
Fiscal 1997                Quarter        Quarter         Quarter        Quarter        Year
-----------                -------        -------         -------        -------       -------
<S>                       <C>             <C>             <C>            <C>           <C>
Net sales                  $15,789        $13,867         $12,530        $14,248       $56,434
Gross profit                 3,778          3,057           3,191          3,151        13,177

Net income (loss)              861            435             570            550         2,416

Diluted earnings per 
 common share (1)             $.15           $.07            $.09           $.09          $.40
</TABLE>

(1)  Diluted earnings per common share was calculated by dividing net income by
     the weighted average number of common and common equivalent shares
     outstanding during the period. (Except in the fourth quarter of fiscal 1998
     in which the loss on redemption of preferred stock was deducted from net
     income in the computation). (See Notes 1,5, and 15).  Diluted earnings per
     share are computed independently for each of the quarters presented. 
     Therefore, the sum of the quarterly per common share information may not
     equal the annual diluted earnings per common share.

11. Major customers

     The Company's six largest customers accounted for approximately 51% of 
the Company's total sales in fiscal 1998. One customer, Sam's Club division 
of Wal-Mart Stores, Inc., accounted for more than 10% of the Company's total 
net sales for fiscal 1998. Six customers accounted for 42% of sales in fiscal 
1997 and four customers accounted for 34% of sales in fiscal 1996, one of 
which accounted for approximately 13% of sales. The loss of more than one of 
these customers at the same time or one of the largest six could have a 
material effect on the business of the Company.   As of August 29, 1998, one 
customer accounted for approximately 23% of total accounts receivable. The 
Company's customers include large furniture chain store retailers, wholesale 
clubs, catalog retailers, and independent distributors, as well as numerous 
smaller retailers.

                              F-18
                                                                     Page 33
<PAGE>

12.   PLANT CLOSING

     The Company permanently closed its Gettysburg, Pennsylvania 
manufacturing plant and warehouse facilities and consolidated the production 
and distribution activities of those  operations into its Huntingburg, 
Indiana facilities during the second quarter of fiscal 1996.  Consolidation 
of production and warehousing into the Indiana facilities resulted in lower 
manufacturing and warehousing overhead and plant administrative costs.  The 
Company recorded a pre-tax charge of approximately $995,000 in the first 
quarter of fiscal 1996 related to this closing.  The charge included book 
provisions of approximately: $160,000 related to the recording of property, 
plant, and equipment at net realizable value; $100,000 for recording certain 
inventory items at net realizable value; $145,000 for a pension curtailment 
loss; $125,000 for severance pay; and approximately $465,000 for costs to be 
incurred after operations cease  associated with the closing as well as 
expected future occupancy related costs.  The severance pay accrual related 
to the termination of certain salaried and support staff personnel.  None of 
the above referenced costs related to the relocation or consolidation of 
production into the Company's Huntingburg, Indiana facility.  During the 
fourth quarter of fiscal 1996 the Company sold the Gettysburg, Pennsylvania 
manufacturing plant and realized gross proceeds of approximately $375,000. 
Based upon this transaction approximately $127,000 of the book provision 
related to the initial recording of property, plant and equipment at net 
realizable value was not needed.  The net plant closing charge included in 
the consolidated statements of income was $868,000 for fiscal 1996.  As of 
August 29, 1998 the only Gettysburg related asset carried is a parcel of 
unimproved land at cost of $10,000 and there are no Gettysburg plant closing 
related liabilities.  During fiscal 1997 it was determined that the remaining 
$119,000 of the book provision related to the initial recording of property, 
plant and equipment at net realizable value was not needed.

13.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The book values of cash and cash equivalents, trade receivable and trade 
payables are considered to be representative of their respective fair values 
because of the immediate or short-term maturities of these financial 
instruments.  The fair value of the Company's debt instruments approximated 
the book value because a substantial portion of the underlying instruments 
are variable rate notes which reprice frequently.

14.  SOURCE AND SUPPLY OF LABOR

     Approximately 156 of the Company's 441 employees are covered by 2 
collective bargaining agreements.  One contract with the union representing 
77 employees is due to expire in fiscal 1999.

15.  EARNINGS PER COMMON SHARE

     In March 1997, the Financial Accounting Standards Board issued Statement 
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 
128"). This standard modifies disclosure requirements for companies required 
to report earnings per share ("EPS") to include presentations of Basic EPS 
(which includes no dilution of common stock equivalents) and, if applicable, 
Diluted EPS (which reflects the potential dilution of common stock 
equivalents).  

                              F-19
                                                                     Page 34
<PAGE>

The standard was effective for the Company with the completion of its fiscal 
1998 second quarter.


<TABLE>
<CAPTION>
                                                  (Thousands except per share amounts)
                                                  1998           1997           1996
                                                --------       -------        -------
<S>                                             <C>            <C>            <C>
Net income                                      $ 1,975        $ 2,416        $   376
Less: preferred stock dividends                       -           (399)             -
Less: loss on preferred redemption (1)           (1,666)             -              -
                                                -------        -------        -------
Net income applicable to common stock           $   309        $ 2,017        $   376
                                                -------        -------        -------
                                                -------        -------        -------

Average common shares outstanding                 3,261          3,114          2,999
Common stock equivalents-dilutive
  options and convertible preferred
  stock                                             954          2,892          2,706
                                                -------        -------        -------
Average shares of common stock
  and equivalents outstanding                     4,215          6,006          5,705
                                                -------        -------        -------
                                                -------        -------        -------

Basic earnings per share                        $   .09        $   .65        $   .13
                                                -------        -------        -------
(Net income applicable to common stock
  divided by average common shares
  outstanding)
Diluted earnings per share (2)                  $   .07        $   .40        $   .07
                                                -------        -------        -------
(Net income divided by average shares
  of common stock and equivalents
  outstanding)
</TABLE>

(1)  On August 28, 1998 the Company redeemed its Series C Preferred Stock which
     caused a $1,666,000 charge to net income applicable to common stock. See
     Note 5 for more information.

(2)  For fiscal 1998, the loss on redemption of preferred stock is deducted from
     net income in computing diluted earnings per share because not deducting it
     would be anti-dilutive. 




                              F-20
                                                                     Page 35
<PAGE>


Item 9.        CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURES.


               None.













                                      II-8
                                                                     Page 36

                                      
<PAGE>

Part III.

Items 10, 11, 12 and 13.

     The information called for by this part (Items 10, 11, 12 and 13) is
incorporated by reference from the Company's definitive proxy statement to be
filed with the Securities and Exchange Commission not later than December 28,
1998.













                                   III-1
                                                                     Page 37

                                      
<PAGE>

Part IV.

Item 14.     EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON 
             FORM 8-K.

             The financial statements required by Sections 14(a) 1 and 2 and
             14(d) are included under Item 8.

             The exhibits required by Item 14(a) 3 are listed on the index to
             Exhibits.

             Schedules required by Item 14(d) follow the signature pages.

Item 14(b).  REPORTS ON FORM 8-K

             The Company filed no reports on Form 8-K during the fiscal 
             quarter ended August 29, 1998.  The Company filed a report 
             pursuant to Item 5 on Form 8-K dated August 31, 1998 relating to 
             the retirement of its Series C Preferred Stock.





                              IV-1
                                                                     Page 38
<PAGE>


                                     SIGNATURES

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


DATED:  October 27, 1998            DMI FURNITURE, INC.


                                    By:/S/Donald D. Dreher 
                                    ------------------------
                                    President, Chairman of the Board and Chief
                                    Executive Officer and Director


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

                             Vice President, Finance,
                             Chief Financial Officer
                             and Principal Accounting
/S/Joseph G. Hill            Officer and Director             October 27, 1998
---------------------
Joseph G. Hill


/S/Joseph L. Ponce           Director                         October 27, 1998
---------------------
Joseph L. Ponce


/S/Thomas M. Levine.         Director                         October 27, 1998
---------------------
Thomas M. Levine


/S/David Martin              Director                         October 27, 1998
---------------------
David Martin

                             President, Chief
                             Executive Officer, Chairman
/S/Donald D. Dreher          of the Board and Director        October 27, 1998
---------------------
Donald D. Dreher


                                   IV-2
                                                                     Page 39
<PAGE>


                             DMI FURNITURE, INC.

                                SCHEDULE II


<TABLE>
<CAPTION>

                                               Additions
                                  Balance at    Charged                      Balance
                                  Beginning     to Costs                      at End
        Description               of period   and Expenses   Deductions (A)  of Period

<S>                               <C>           <C>            <C>            <C>
Allowance for Doubtful Accounts:

Year ended August 31, 1996        $132,177      $ 82,913       $105,099       $109,991
                                  --------      --------       --------       --------

Year ended August 30, 1997        $109,991      $125,200       $ 93,778       $141,413
                                  --------      --------       --------       --------

Year ended August 29, 1998        $141,413      $ 96,992       $ 88,529       $149,876
                                  --------      --------       --------       --------

</TABLE>

(A) Charge-offs net of recoveries.



                                     S-1

                                                                     Page 40
<PAGE>


Item 14(a)3.   EXHIBITS

                                                                       10-K
                                                                     Page No.  

***********  (3)(a)   Restated Certificate of Incorporation
*            (b)      Bylaws

***********  (4)(a)   Restated Certificate of Incorporation
*            (b)      Bylaws

*******      (10)(a)  1988 Stock Option Plan for Employees
*********    (b)      Non-employee Director Stock Option Program
**********   (c)      Form of Indemnification Agreement
**********   (d)      Amendment of Employment Agreement and Officer
                      Severance Agreement dated as of May 19, 1988
                      between Joseph G. Hill and DMI Furniture, Inc.
             (e)      First Amendment to Amended and Restated Credit
                      Agreement between DMI Furniture, Inc. and Bank
                      One,  Indiana, National Association dated July
                      2, 1998.                                          E1 -E17
             (f)      Extension and Renewal of Employment Agreement
                      as of October 9, 1997 between DMI Furniture,
                      Inc. and Donald D. Dreher.                        E18-E24
             (g)      Second  Amendment to Amended and Restated
                      Credit Agreement between DMI Furniture, Inc.
                      and Bank One, Indiana, National Association
                      dated August 27, 1998.                            E25-E38
**********   (h)      Amendment of Employment Agreement and Officer
                      Severance Agreement dated as of May 19, 1988
                      between Donald D. Dreher and DMI Furniture,
                      Inc.
**           (i)      Amended and Restated Credit Agreement between
                      Bank One, Indianapolis, National Association,
                      and DMI Furniture, Inc. dated October 3, 1997.
********     (j)      Loan Agreement between City of Huntingburg,
                      Indiana and DMI Furniture, Inc. dated June 1,
                      1994.
*********    (k)      1993 Long Term Incentive Stock Plan for
                      Employees
*********    (l)      Stock Compensation and Deferral Plan for
                      Outside Directors.
*********    (m)      Loan  Agreement between City of Huntingburg,
                      Indiana and DMI Furniture, Inc. dated as of
                      October 1, 1993.
             (n)      Extension and Renewal of Employment Agreement
                      as of October 9, 1997 between DMI Furniture,
                      Inc. and Joseph G. Hill.                          E39-E45
*****        (o)      1998 Stock Option Plan For Independent
                      Directors

                                                                     Page 41

<PAGE>

             (21)     List of subsidiaries                     E-46

             (23)     Consent of Arthur Andersen LLP to
                      incorporation of audit report into
                      S-8 registration statements.             E-47

             (27)     Financial Data Schedule                  E-48

             (99)     Undertakings                             E-49
-------------------------------------------------------------------------------
*               Incorporated by reference to annual report on Form 10-K for
                the fiscal year ended August 27, 1994 
**              Incorporated by reference to report on Form 10-Q for the
                fiscal quarter ended November 29, 1997
*****           Incorporated by reference to Proxy Statement dated February
                20, 1998.
******          Incorporated by reference to Exhibit 10 to report on Form 10-Q 
                for the second quarter of fiscal year ended August 28, 1993.
*******         Incorporated by reference to Registration Number 33-64188
********        Incorporated by reference to Form 10-Q for the fiscal quarter
                ended May 28, 1994.  
*********       Incorporated by reference to Form 10-Q for the fiscal quarter
                ended February 26, 1994.
**********      Incorporated by reference to Form 10-K for the fiscal year
                ended August 28, 1993.
***********     Incorporated by reference to Form 10-K for the fiscal year
                ended August 31,1996




                                                                     Page 42