<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 31, 1996


[ ]  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 ofincorporation)                       (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. [ ]


                            (Cover page 1 of 2 pages)

                                                               TOTAL PAGES - 115

<PAGE>

The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $4,883,123 as of August 31, 1996.

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 31, 1996
      -----                                  ------------------------------
Common Stock, Par Value $.10 per Share                 3,051,312




                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders on December 20, 1996 are incorporated by reference into Part III.


                                                                          Page 2

<PAGE>

Part I.

Item 1.  BUSINESS

(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 31, 1996, 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, accent furniture, home and office desk 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 3% of the Company's
sales in fiscal 1996. Approximately 14% of the Company's sales are accounted for
by sale to wholesale distributors. The Company's sales are made principally
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 attends
the annual NeoCon commercial office furniture tradeshow.

     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
46% 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's 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.


                                       I-1                                Page 3

<PAGE>

     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:

                                                    Expiration
Trademark                     Product                  Date
---------                 ----------------          ----------

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
DMI Trading Company       All DMI products             Pending

     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 the Company's liquidity.

     The Company's six largest customers accounted for approximately 34% of the
Company's total sales in fiscal 1996. 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 31, 1996, one
customer accounted for approximately 10% 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 Company's backlog of orders at August 31, 1996 and September 2, 1995
was $12,635,000 and $9,864,000, respectively. The increase in the backlog from
1995 is primarily due to increased demand for the Company's office furniture.
The entire backlog of orders at August 31, 1996 is expected to be filled by
November 30, 1996.

     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.


                                       I-2                                Page 4

<PAGE>

     The Company believes it is the largest manufacturer and marketer of
assembled home desks in the United States and is a leading producer of popular
priced, "promotional" bedroom furniture and popular priced wood office
furniture.

     The Company employs approximately 425 employees, of whom approximately 156
are covered by collective bargaining contracts. 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 closed its Gettysburg, Pennsylvania manufacturing plant and
warehouse 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.


                                       I-3                                Page 5

<PAGE>

     The productive capacity and extent of utilization of each of the Company's
manufacturing facilities for the fiscal year ended August 31, 1996 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.

                                           Fiscal 1996
     Facility(1)                       Capacity       Production   %Utilized
     -----------                       --------       ----------   ---------
                                           (dollars in thousands)

Ferdinand, Ind. Plant                  $14,000        $10,500         75%
Huntingburg, Ind. 5th St. Plant         20,100         15,700         78%
Huntingburg, Ind. Chestnut
 Street Plant                           20,700         16,700         81%
Huntingburg, Ind. Fabricator             9,200          8,900         97%
Ferdinand, Ind. Sawmill/
 Dimension Plant                         7,300          5,900         81%
                                       -------        -------       -----
                                       $71,300        $57,700         81%
                                       -------        -------       -----
                                       -------        -------       -----

(1) Gettysburg, Pennsylvania plant omitted as it was permanently closed during
fiscal 1996.


Item 3.  LEGAL PROCEEDINGS.

     The Company has been identified as a potentially responsible party ("PRP")
by the Environmental Protection Agency ("EPA") or state agencies, or has had
claims asserted against it by other parties, in proceedings relating to six
waste disposal facilities which may be subject to remedial action under
Superfund or similar state statutes, including the action described in the
following paragraph. These proceedings are based on allegations that the Company
had hazardous substances disposed of at these sites. At each site, many other
parties have been named as PRPs or identified as potentially responsible for
remediation, and the group of PRPs undertaking remediation includes many
companies, including "Fortune 500" companies, believed to have substantial
financial resources. The Company has paid a portion of the costs of preliminary
investigation and remediation at three sites, and has agreed to settle claims
against it made by PRPs at two sites. With respect to these sites, the total
amount paid by the Company to date or subject to possible settlement is
approximately $39,000. The Company has recorded a reserve of approximately
$126,000 against potential environmental liabilities, including potential
liabilities in connection with the site described below. The ultimate costs of
the Company's environmental liabilities cannot be estimated with certainty,
primarily due to several uncertain factors at one of the sites subject to legal
proceedings. These factors principally are the level of contamination, the
selection of remedial methods, the stage of investigation at the site, and the
determination of the Company's liability in proportion to owner/operators of the
site and other responsible parties. Due to the limited nature of the Company's
involvement in these 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 Note 4 to the consolidated financial statements.


                                       I-4                                Page 6

<PAGE>

     In 1988, the Company was named out of over one thousand customers at the
Keystone Sanitation Company landfill (the "Keystone Site") in Union Township,
Pennsylvania, as one of 31 PRPs potentially responsible for remediation of this
site. After the Company provided the EPA with information concerning the nature
of the substances allegedly contributed by the Company, which the Company
believes did not include the principal hazardous substances of concern at the
site identified in the remedial investigation, the EPA did not name the Company
in an Administrative Order issued on June 28, 1991, requiring twelve other PRPs
to undertake remedial action at the Keystone Site. On September 27, 1993, the
United States filed a lawsuit in federal court for the Middle District of
Pennsylvania against eleven PRPs, who are challenging the EPA's proposal for
remedial action at the Keystone Site, which was estimated to cost $9,156,950.
The parties have estimated that total site costs will be $17 million. On August
11, 1994, the Company was named, along with over 250 PRPs, as a third-party
defendant by the original PRP defendants. Based on a court-directed production
of information, the Company was assessed a preliminary allocation of liability
among generators of waste of approximately 1.35% by a consultant. The Company
has not paid any amount toward the cost of investigation or remediation at the
Keystone site. The Company is participating with other third-party defendants in
settlement negotiations and in filing a fourth-party complaint joining over 500
additional parties in the litigation. The Company believes it has a reasonable
basis upon which to dispute, and has disputed, both the volume of material
attributed to it, and the allegation that material contributed by the Company
requires any remediation. The Company believes it is likely that a significant
share of the liability will be assigned to the former owners and operators who
have considerable assets. In addition, the federal court has held that a
national waste management company that acquired the Keystone business is liable
as a successor to the former owners and operators.

     The Company is a defendant in various lawsuits arising in the normal course
of business including the environmental matters noted above, and which in
management's opinion, are not material to the results of operations or financial
position of the Company, or are adequately covered by insurance.


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.


                                             High Bid        Low Bid
                  Price                        Price          Price
                  -----                        -----          -----

           1st Quarter of 1995               $  2.06        $  1.50
           2nd Quarter of 1995               $  1.88        $  1.50
           3rd Quarter of 1995               $  1.88        $  1.50
           4th Quarter of 1995               $  1.56        $  1.13
           1st Quarter of 1996               $  1.25        $  1.06
           2nd Quarter of 1996               $  1.69        $  1.13
           3rd Quarter of 1996               $  2.00        $  1.13
           4th Quarter of 1996               $  2.00        $  1.38


(b)  Approximate Number of Equity Security Holders

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

     Approximate Number of Stockholders as of August 31, 1996 - 1,689


(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. The Company's Series
C Preferred Stock agreement restricts payment of cash dividends on the common
stock to 10% of the Company's net income for the immediately preceding fiscal
year, after deduction of dividends paid in that year on the Series C Preferred
Stock. In addition, the Company's present financing agreement with Bank One,
Indianapolis, 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 31,  September 2,     August 27,     August 28,     August 29,
                                          1996          1995           1994           1993           1992
                                          ----          ----           ----           ----           ----

                                                          (Amounts in thousands except per share amounts)
<S>                                    <C>           <C>            <C>            <C>            <C>
Net sales                              $55,563       $67,773        $60,932        $50,719        $48,018

Net income from continuing operations      376           804      (3) 1,101          1,627            917

Earnings per common share                 $.07          $.14           $.19           $.29           $.16
                                          ----          ----           ----           ----           ----
                                          ----          ----           ----           ----           ----

Total assets                           $31,178       $38,512        $40,041        $29,443        $26,679

Long-term debt and capital
 lease obligations                      13,661        21,037         20,352         14,395         13,097
</TABLE>

Notes to selected financial data:

Note 1 - This summary should be read in conjunction with the related financial
     statements and notes.
Note 2 - 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 for change in accounting
     principle, and, $(50,000) or $(.01) charge for extraordinary item.


                                      II-2                                Page 9

<PAGE>

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

     The information set forth in "Management's Discussion and Analysis of
Financial Condition and results of Operations" below and in "Business" includes
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, and is subject to the safe harbor
created by those sections. 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;
changes in fashion or tastes; general conditions in the economy and capital
markets; demographic changes; competition; and other factors identified in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and in "Business" and in the Company's filings with the Securities
and Exchange Commission.


FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES


     The Company has a $17,500,000 credit agreement with Bank One, Indianapolis,
N.A. comprised of a $4,000,000 five-year term loan (outstanding balance
$2,169,000 as of August 31, 1996) and a maximum revolving master note loan
commitment of $13,500,000 (outstanding balance $5,969,619 as of August 31,
1996). On August 31, 1996, the Company had $1,666,000 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, preferred stock dividends, 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 50 days for fiscal 1996, which is a decrease from
the 53 days for fiscal 1995. The Company believes it will be able to generate
enough cash in fiscal 1997 from operations to make scheduled payments on its
long term debt.

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

                                                         1996    1995      1994
                                                         ----    ----      ----

Net cash provided (used) by operating activities       $8,504    $207    (1,002)
Cash provided (used) in investing activities              140    (642)   (4,200)
                                                          ---    -----   -------
Net cash flows from operating and investing
  activities                                            8,644    (435)   (5,202)
Cash provided (used) by financing activities           (8,616)    302     5,362
                                                       -------    ---     -----
Net change in cash and cash equivalents                   $28   $(133)     $160
                                                        -----   ------     ----
                                                        -----   ------     ----


     During fiscal 1996 , the Company provided cash flows from operating
activities of $8,504,000 compared to cash flows provided of $207,000 the
previous year. This improvement is 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. Investing activities provided $140,000 in
fiscal 1996 compared to funds used of $642,000 the previous year. The fiscal
1996 investing funds were provided through the sale of certain idle assets in
Gettysburg, Pennsylvania as well the final payments on an Alabama idle property
sold several years ago. The fiscal 1995 expenditures were primarily for ongoing
plant modernization and in fiscal 1994 expenditures were primarily on its new
warehouse/distribution facility


                                      II-3                               Page 10

<PAGE>

and the purchase and equipping of the new fabrication plant. Funds used for
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. Financing activities in fiscal 1994 provided $5,362,000 in cash
primarily from the Company's $3.4 million Economic Development Revenue Bond used
for the expansion mentioned above.

     During the third quarter of fiscal 1994, the Company called its 1989
Economic Development Revenue Bond for redemption and refinancing into lower
interest rate bonds. This refunding was completed in June, 1994 and resulted in
substantial interest savings for the Company since that date.

     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 1997 budget for capital expenditures is approximately
$523,000. These proposed expenditures are principally to upgrade and modernize
the Company's manufacturing facilities. The Company anticipates that its 1997
internal cash flow and additional borrowings available under its credit
agreement will be sufficient to pay for these expenditures. Inventory turnover
was 3.9 in fiscal 1996 and 4.0 in fiscal 1995. This slight decrease was the
result of lower sales for fiscal 1996.

     The Company has been identified as a potentially responsible party ("PRP")
by the Environmental Protection Agency ("EPA") or state agencies, or has had
claims asserted against it by other parties, in proceedings relating to six
waste disposal facilities which may be subject to remedial action under
Superfund or similar state statutes. These proceedings are based on allegations
that the Company had hazardous substances disposed of at these sites. At each
site, many other parties have been named as PRPs or identified as potentially
responsible for remediation, and the group of PRPs undertaking remediation
includes many companies, including "Fortune 500" companies, believed to have
substantial financial resources. The Company has paid a portion of the costs of
preliminary investigation and remediation at three sites, and has agreed to
settle claims against it made by PRPs at two sites. With respect to these sites,
the total amount paid by the Company to date or subject to possible settlement
is approximately $39,000. The Company has recorded a reserve of approximately
$126,000 against potential environmental liabilities. The ultimate costs of the
Company's environmental liabilities cannot be estimated with certainty,
primarily due to several uncertain factors at one of the sites subject to legal
proceedings. These factors principally are the level of contamination, the
selection of remedial methods, the stage of investigation at the site, and the
determination of the Company's liability in proportion to owner/operators of the
site and other responsible parties. Due to the limited nature of the Company's
involvement in these 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>

                              RESULTS OF OPERATIONS

     Net sales for fiscal 1996 decreased by $12,210,000 or 18% from those of
fiscal 1995. This decrease is primarily a result of a soft residential furniture
retail environment and also because fiscal 1995 included 53 weeks. The sales
change was as follows: office furniture sales increased by 8%; bedroom sales
decreased by 19%; and residential desks and accent furniture sales decreased by
38%. Net sales for fiscal 1995 increased by $6,841,000 or 11% over those of
fiscal 1994. This increase is primarily unit sales increases as follows: office
furniture sales increased by 4%; residential desks and accent furniture sales
increased by 53%; and bedroom furniture sales decreased by 9%. Sales of lumber
and wood parts to outside trade customers by the Company's Sawmill/Dimension
Plant increased 13% over fiscal 1994. The increase in 1995 was the result of the
Company's continued growth with multi-market furniture chains, wholesale clubs,
distributors, catalogers, and the success of the Company's residential desk and
accent furniture import program.

     As a percentage of sales, cost of sales was 80.9% of sales for fiscal 1996.
As a percentage of sales, cost of sales was 82.6% of sales for fiscal 1995 and
81.4% for fiscal 1994. The decrease in cost of sales as a percentage of sales in
fiscal 1996 was the result of the Company's asset consolidation program
initiated in the first quarter 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. The increase in cost of sales as a percentage of sales in fiscal
1995 was the result of higher lumber and other wood material costs partially
offset by selling price increases established in the fourth quarter of fiscal
1994 and the second quarter of fiscal 1995, and a lower margin product and
customer sales mix. (See Effects Of Inflation below.)

     As a percentage of sales, selling, general and administrative expenses were
14.1% of sales for fiscal 1996, 12.6% of sales for fiscal 1995, and 13.7% of
sales for fiscal 1994. The increase in fiscal 1996 was primarily the result of
the sales decrease exceeding the rate at which these expenses decreased most of
which are of a semi-fixed nature. The substantial decrease in fiscal 1995 was
primarily the result of sales growth materially exceeding the rate at which
these expenses increased most of which are of a semi-fixed nature.

     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 and that are 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 relate 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. Net current
assets and liabilities


                                      II-5                               Page 12

<PAGE>

associated with the Gettysburg, Pennsylvania facilities as of August 31, 1996
are immaterial to the financial position of the Company. The carrying amount of
net long-term assets to be disposed of as of August 31, 1996 are approximately
$95,000 and management's expectations are that such assets should be disposed of
within the next 6 months. All severance related payments have been made as of
August 31, 1996. Amounts included in accrued liabilities associated with the
plant closing as of August 31, 1996 total approximately $108,000.

     Interest expense decreased in fiscal 1996 to $1,335,956 from $1,913,231 in
fiscal 1995 because of the pay down of debt with the positive cash flow provided
from success of the Company's asset consolidation program and from operations,
and to a lesser extent a reduction in the interest rate spread charged by the
Company's bank. Interest expense increased in fiscal 1995 to $1,913,231 from
$1,298,790 in fiscal 1994 due to higher prime interest rate as well as higher
average loan balances for working capital to support the growth of the Company.

     Gain On Disposal Of Property, Plant and Equipment - 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.

     Provision For Income Taxes - The Company's effective book tax rate
increased from approximately 8% in fiscal 1993 to 37% in fiscal 1994 and to 38%
in fiscal 1995 and 38% in fiscal 1996. This increase in the effective book tax
rate is primarily due to the adoption of SFAS 109 in the first quarter of fiscal
1994. The Company realized a $1,795,000 credit in the first quarter of fiscal
1994 as a result of this change in accounting principle. See Note 8 to the
consolidated financial statements for more information.

     Extraordinary Item - During the third quarter of fiscal 1994, the Company
called $2,940,000 of its 1989 Economic Development Revenue Bonds for redemption
and refinancing into lower interest rate bonds. The actual redemption and
refinancing took place on June 15, 1994. The Company wrote off the call premium
and unamortized costs on the 1989 bonds totaling approximately $72,000 ($50,000
net of related tax benefits) during the third fiscal quarter. The loss has been
reflected as an extraordinary item in the consolidated statements of income for
fiscal 1994. The new bonds provided an initial interest rate approximately three
hundred basis points lower than the 1989 issue.



                              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. During
fiscal 1995 and 1994 there were substantial increases in the prices of lumber
and other wood materials and this adversely affected the Company's results in
fiscal 1995 and 1994. The Company increased its selling prices during this
period to partially offset these increased costs. 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>

     During fiscal 1994 the Company opened a fabrication facility to supply
certain high volume materials and components to its plants that had previously
been purchased from outside suppliers. This facility has lowered the cost of
those materials from prices paid to outside suppliers thus helping to offset
some of the inflation it has experienced during recent years.

                    ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

      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 plans to adopt the provisions of SFAS No.
121 in the first quarter of fiscal 1997 and does not expect that adoption will
have a material impact on its financial position or results of operations.

     ACCOUNTING FOR STOCK BASED COMPENSATION - Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" (SFAS No.123),
issued in October 1995 and effective for fiscal years beginning after December
15, 1995, encourages, but does not require, a fair value based method of
accounting for employee stock options or similar equity instruments. It also
allows an entity to elect to continue to measure compensation cost under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), but requires pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting had been
applied. The Company expects to adopt Statement No. 123 in fiscal 1997. While
the Company is still evaluating Statement No. 123, it currently expects to elect
to continue to measure compensation cost under APB No. 25 and comply with the
pro forma disclosure requirements.


                                      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 31, 1996 and
  September 2, 1995                                                  F-2, F-3
 Consolidated Statements of Income for the years ended
  August 31, 1996, September 2, 1995 and
  August 27, 1994                                                    F-4
 Consolidated Statements of Stockholders' Equity for
  the years ended August 31, 1996, September 2, 1995,
  and August 27, 1994                                                F-5
 Consolidated Statements of Cash Flows for the years
  ended August 31, 1996, September 2, 1995,
  and August 27, 1994                                                F-6, F-7

Notes to Consolidated Financial Statements                           F-8--F-19


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 31, 1996 and September
2, 1995 and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended August 31, 1996.
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 and schedule based on our
audits.

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

In our opinion, 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 31, 1996 and September 2, 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended August 31, 1996 in conformity with generally accepted accounting
principles.

As explained in Note 1 to the financial statements, effective August 29, 1993,
the Company changed its method of accounting for income taxes.

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 11, 1996
Louisville, Kentucky


                                       F-1                               Page 16

<PAGE>

                               DMI FURNITURE, INC.

                           CONSOLIDATED BALANCE SHEETS
                                      as of
                      August 31, 1996 and September 2, 1995


ASSETS                                                       1996          1995
------                                                       ----          ----

     (Note 2)

Current assets:
 Cash                                                     $96,546       $68,703
 Restricted cash (Note 4)                               1,061,537       225,707
 Accounts receivable, less allowance for
  doubtful accounts of $110,000 in 1996
  and $132,000 in 1995                                  7,458,800    10,748,438
 Inventories (Note 9)                                   9,853,201    13,264,543
 Other current assets                                     259,270       338,332
 Current portion of deferred income taxes (Note 8)        781,973       925,000
                                                       ----------    ----------
  Total current assets                                 19,511,327    25,570,723
                                                       ----------    ----------
Property, plant and equipment, at cost:
 Land                                                     753,572       811,936
 Buildings and improvements                             7,598,223     8,632,172
 Machinery and equipment                               10,784,515    11,475,888
 Leasehold improvements                                   620,308       610,006
 Construction in progress                                       0        43,667
                                                       ----------    ----------
                                                       19,756,618    21,573,669
 Less accumulated depreciation                          8,843,575     9,552,954
                                                       ----------    ----------
  Net property, plant and equipment                    10,913,043    12,020,715
                                                       ----------    ----------

Other assets:
 Intangible pension asset                                 380,106       558,095
 Other                                                    373,287       362,466
                                                       ----------    ----------
 Total other assets                                       753,393       920,561
                                                       ----------    ----------

Total assets                                          $31,177,763   $38,511,999
                                                       ----------    ----------
                                                       ----------    ----------

                             See accompanying notes.


                                       F-2                               Page 17

<PAGE>

                               DMI FURNITURE, INC.

                           CONSOLIDATED BALANCE SHEETS
                                      as of
                      August 31, 1996 and September 2, 1995
                                   (continued)



LIABILITIES AND STOCKHOLDERS' EQUITY                         1996          1995
------------------------------------                         ----          ----
Current liabilities:
 Trade accounts payable                                $3,164,821    $3,134,625
 Accrued liabilities  (Note 9)                          1,990,325     1,882,915
 Accrued dividends on preferred stock (Note 5)                  0       389,416
 Long-term debt due within one year  (Note 2)           2,029,904     1,006,755
                                                        ---------     ---------
  Total current liabilities                             7,185,050     6,413,711
                                                        ---------     ---------
Long-term liabilities:
 Long-term debt (Note 2)                               11,631,514    20,030,649
 Accrued pension costs (Note 7)                           816,598       905,332
 Deferred compensation  (Note 7)                          376,490       434,203
 Deferred income tax (Note 8)                             114,138        71,000
                                                        ---------     ---------
  Total long-term liabilities                          12,938,740    21,441,184
                                                       ----------    ----------
Commitments and contingencies (Notes 3 & 4)

Stockholders' equity:  (Notes 5 & 6)
 Series C convertible preferred stock, $2 par
  value, 1,995,050 (2,020,000 in 1995) shares
  authorized and outstanding, (liquidation
  preference of $2 per share plus unpaid dividends)     3,990,100     4,040,000
 Common stock, $.10 par value, 9,600,000 shares
  authorized, 3,051,312 shares outstanding
  (2,970,026 in 1995)                                     305,131       297,003
 Additional paid-in capital                            15,185,079    15,106,984
 Retained deficit                                      (8,402,337)   (8,762,883)
 Minimum pension liability                                (24,000)      (24,000)
                                                          -------       -------
Total stockholders' equity                             11,053,973    10,657,104
                                                       ----------    ----------


Total liabilities and stockholders' equity            $31,177,763   $38,511,999
                                                      -----------   -----------
                                                      -----------   -----------


                             See accompanying notes.


                                       F-3                               Page 18

<PAGE>

                               DMI FURNITURE, INC.

                        CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>

                                                                    Years Ended
                                                 ----------------------------------------------------
                                                    August 31,      September 2,        August 27,
                                                          1996              1995              1994
                                                          ----              ----              ----
<S>                                                <C>               <C>               <C>

Net sales  (Note 11)                               $55,562,751       $67,773,444       $60,932,235

Cost of sales                                       44,948,772        56,013,705        49,615,124
                                                    ----------        ----------        ----------
                                                    10,613,979        11,759,739        11,317,111
                                                    ----------        ----------        ----------
Selling, general and
 administrative expenses                             7,843,052         8,571,849         8,330,929

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

Other income (expense):
 Interest expense                                   (1,335,956)       (1,913,231)       (1,298,790)
 Interest income                                        12,314            16,878            18,632
 Gain on disposal of property,
  plant and equipment                                   74,685             2,040            16,922
 Other                                                 (45,127)           (3,720)           20,411
                                                        ------             -----            ------
                                                    (1,294,084)       (1,898,033)       (1,242,825)
                                                    ----------        ----------        ----------
Income before provision for income
 taxes, cumulative effect of a change in
 accounting principle and extraordinary item           608,843         1,289,857         1,743,357

Provision for income taxes (Note 8)                   (233,176)         (485,380)         (642,313)
                                                    ----------        ----------        ----------
Income before cumulative effect of a change
 in accounting principle and extraordinary item        375,667           804,477         1,101,044

Cumulative effect of a change in
 accounting for income taxes (Note 8)                      -                 -           1,795,000
                                                    ----------        ----------        ----------
Income before extraordinary item                       375,667           804,477         2,896,044

Extraordinary item--extinguishment of debt
 net of $22,000 tax benefit                                -                 -             (50,000)
                                                    ----------        ----------        ----------
Net income                                            $375,667          $804,477        $2,846,044
                                                    ----------        ----------        ----------
                                                    ----------        ----------        ----------
Income per share before cumulative
 effect of a change in accounting
 principle and extraordinary item                         $.07              $.14              $.19

Cumulative effect per share of a
 change in accounting for income taxes                       -                 -               .31
Extraordinary item                                           -                 -              (.01)
                                                          ----              ----              ----
Earnings per common share (Note 1)                      $  .07            $  .14            $  .49
                                                          ----              ----              ----
                                                          ----              ----              ----
</TABLE>


                             See accompanying notes.


                                       F-4                               Page 19

<PAGE>

                               DMI FURNITURE, INC.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                        Three years ended August 31, 1996
<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      Total
                                   -----  -----------     ----- -----------      -------       ---------     ---------      -----
<S>                           <C>         <C>          <C>      <C>          <C>           <C>               <C>       <C>
BALANCES AT AUGUST 28, 1993   $4,040,000   2,020,000   $293,226  2,932,264   $14,861,010   ($11,720,988)      -        $7,473,248

Net income                         -           -          -          -             -          2,846,044       -         2,846,044
Dividends on preferred stock       -           -          -          -             -           (404,000)      -          (404,000)
Minimum pension liability          -           -          -          -             -              -        ($46,506)      (46,506)
Stock options                      -           -          -          -            95,416          -           -            95,416
Issuance of common stock           -           -          3,016     30,162        49,909          -           -            52,925
                              ----------   ----------     -----     ------        ------       ---------   ---------       ------
BALANCES AT AUGUST 27, 1994   $4,040,000   2,020,000   $296,242  2,962,426   $15,006,335    ($9,278,944)   ($46,506)  $10,017,127

Net income                         -           -          -          -             -            804,477       -           804,477
Dividends on preferred stock       -           -          -          -             -           (288,416)      -          (288,416)
Minimum pension liability          -           -          -          -             -              -         $22,506        22,506
Stock options                      -           -          -          -            87,760          -           -            87,760
Issuance of common stock           -           -            761      7,600        12,889          -           -            13,650
                              ----------   ----------     -----     ------        ------       ---------   ---------       ------
BALANCES AT September 2, 1995 $4,040,000   2,020,000   $297,003  2,970,026   $15,106,984    ($8,762,883)   ($24,000)  $10,657,104

Net income                         -           -          -          -             -            375,667       -           375,667
Dividends on preferred stock       -           -          -          -             -            (15,121)      -           (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          -           -            36,323
                              ----------   ----------     -----     ------        ------       ---------   ---------       ------
BALANCES AT August 31, 1996   $3,990,100   1,995,050   $305,131  3,051,312   $15,185,079    ($8,402,337)   ($24,000)  $11,053,973
                              ----------   ----------  --------  ---------   -----------    ------------   ---------  -----------
                              ----------   ----------  --------  ---------   -----------    ------------   ---------  -----------
</TABLE>

                             See accompanying notes.


                                       F-5                               Page 20

<PAGE>

                               DMI FURNITURE, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                   Years Ended
                                                 --------------------------------------------
                                                  August 31,   September 2,      August 27,
                                                        1996           1995           1994
                                                        ----           ----           ----
<S>                                               <C>          <C>              <C>
Cash flows from operating activities:
 Net income                                         $375,667       $804,477     $2,846,044
 Adjustments to reconcile net income to
  net cash provided (used) by
  operating activities:
   Depreciation and amortization                   1,022,938      1,003,802        812,319
   Amortization of loan closing costs                 43,690         43,690         34,399
   Gain on disposal of property,
    plant and equipment                              (73,535)        (2,040)       (16,922)
   Deferred income tax                               186,165        416,000     (1,270,000)
   Pension costs                                      89,255        (66,305)         8,244
   Deferred compensation                             (57,713)       (99,706)       (79,963)
   Changes in assets and liabilities:
    Accounts receivable                            3,179,702       (767,923)    (2,407,439)
    Inventories                                    3,411,342      1,327,674     (2,837,556)
    Other assets                                     152,991         29,672       (152,583)
    Trade accounts payable                            30,196     (2,258,972)     2,072,284
    Accrued liabilities                              143,734       (223,036)       (10,875)
                                                     -------       ---------       --------
   Total adjustments                               8,128,765       (597,144)    (3,848,092)
                                                   ---------       ---------    -----------
 Net cash provided (used) by
  operating activities                             8,504,432        207,333     (1,002,048)
                                                   ---------        -------     -----------
Cash flows from investing activities:
 Capital expenditures                               (537,959)      (655,304)    (4,233,651)
 Payments received on notes receivable               135,750         10,708         16,777
 Proceeds from the disposal of property,
  plant and equipment                                541,974          2,500         17,125
                                                     -------          -----         ------
Net cash provided (used) by investing activities     139,765       (642,096)    (4,199,749)
                                                     -------       ---------    -----------
</TABLE>

                             See accompanying notes.


                                       F-6                               Page 21

<PAGE>

                               DMI FURNITURE, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (continued)



                                                       Years Ended
                                        ----------------------------------------
                                         August 31,  September 2,    August 27,
                                               1996          1995          1994
                                               ----          ----          ----

Cash flows from financing activities:
 Borrowings from line-of-credit          15,898,000    26,172,000    25,150,000
 Payments on line-of-credit             (21,950,000)  (24,600,000)  (21,950,000)
 Additions to long-term debt                 50,380        72,497     6,360,000
 Payment of bonds from new issue                  -             -    (2,940,000)
 Payments of long-term debt              (1,374,366)     (958,746)     (663,337)
 Restricted cash                           (835,830)       18,293      (244,000)
 Cash dividends on preferred stock         (404,537)     (404,000)     (404,000)
 Proceeds from stock options exercised            -         1,650        52,925
                                           ---------     ---------     ---------
 Net cash provided (used) by
  financing activities                   (8,616,353)      301,694     5,361,588
                                         -----------      -------     ---------
Increase (decrease) in cash                  27,844      (133,069)      159,791

Cash, beginning of year                      68,703       201,772        41,981
                                             ------       -------        ------
Cash, end of year                           $96,547       $68,703      $201,772
                                            -------       -------      --------

Cash paid for:
 Interest                                $1,368,703    $1,865,102    $1,334,961
                                         ----------    ----------    ----------

 Income taxes                               $85,863       $76,432      $145,596
                                            -------       -------      --------



                             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 bedroom furniture, commercial and home office
furniture, desks, accent furniture, and tables and chairs. It's principal
distribution channels are multi-market furniture retailers, distributors,
independent retailers, catalogers, and warehouse clubs located primarily
throughout the United States.

     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 - Effective August 29, 1993, the Company adopted Statement of
Financial Accounting Standard No. 109, ACCOUNTING FOR INCOME TAXES ("SFAS 109").
SFAS 109 requires recognition of deferred tax assets and liabilities for 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. In
accordance with this statement, the Company recognized deferred tax assets
reflecting the benefit expected to be realized from the utilization of net
operating loss carryforwards ("NOLs"), alternative minimum tax credits
carryforwards, and deductible temporary differences. (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 (1996- 5,713,277; 1995- 5,707,832; 1994 - 5,791,235), and
assumes the conversion of the Series C Preferred Stock into common stock.

     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 $578,000 and $573,000 in fiscal 1996 and
1995.

     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.


                                       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 plans to adopt the provisions of SFAS No. 121 in the
first quarter of fiscal 1997 and does not expect that adoption will have a
material impact on its financial position or results of operations.

     ACCOUNTING FOR STOCK BASED COMPENSATION - Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" (SFAS No.123),
issued in October 1995 and effective for fiscal years beginning after December
15, 1995, encourages, but does not require, a fair value based method of
accounting for employee stock options or similar equity instruments. It also
allows an entity to elect to continue to measure compensation cost under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), but requires pro forma disclosures of net income and
earnings per share as if the fair value based method of accounting had been
applied. The Company expects to adopt Statement No. 123 in fiscal 1997. While
the Company is still evaluating Statement No. 123, it currently expects to elect
to continue to measure compensation cost under APB No. 25 and comply with the
pro forma disclosure requirements.

2.   LONG-TERM DEBT

Long-term debt consists of the following:
                                                     1996            1995
                                                     ----            ----
Economic Development Revenue
 Bonds; payable in annual increasing
 maturities ($305,000 in 1997) and a final
 maturity on October 1, 2003 of $415,000;
 weekly adjustable coupon interest rate
 (3.73% on 8/31/96) and payable monthly.         $2,850,000      $3,140,000
Economic Development Revenue
 Bonds; payable in annual increasing
 maturities ($240,000 in 1997) and a final
 maturity on June 1, 2004 of $405,000;
 weekly adjustable coupon interest rate
 (3.73% on 8/31/96) and payable monthly.          2,515,000       2,735,000
Term note payable to bank; due
 in monthly principal installments of
 $33,333 and one final installment
 of $2,133,334 in November, 1997;
 interest at prime plus .75%.
 (9% at August 31, 1996)                          2,169,341        2,933,337
$13,500,000 revolving master note
 payable to bank; interest at prime plus
 .5%; expires November, 1997.
 (8.75% at August 31, 1996)                       5,969,619       12,021,619
Capital leases on equipment; payable
 quarterly through December, 1998;
 interest at various rates.                         157,458          207,448
                                                -----------      -----------
                                                 13,661,418       21,037,404
  Less portion due within one year                2,029,904        1,006,755
                                                -----------      -----------
                                                $11,631,514      $20,030,649
                                                -----------      -----------
                                                -----------      -----------


                                       F-9                               Page 24

<PAGE>

     Substantially all assets are pledged to collateralize long-term debt. On
August 31, 1996, the Company had $1,666,000 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:

     1997                             $2,029,904
     1998                              7,352,526
     1999                                625,530
     2000                                653,458
     2001                                685,000
     Thereafter                        2,315,000
                                       ---------
                                      $13,661,418
                                      -----------
                                      -----------

     The Company's bank financing agreement contains restrictive covenants that
require the Company, among other things, to maintain a certain current ratio,
fixed charge ratio, tangible net worth, and ratio of total debt to tangible net
worth 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
(except for dividends on preferred stock); and, acquiring capital assets in
excess of a specific amount.

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.


     Future minimum lease payments at August 31, 1996 under these leases are as
follows:

     1997                          $481,697
     1998                           373,699
     1999                           298,624
     2000                           137,731
     2001                            13,759
                                  ---------
     Total minimum payments      $1,305,510
                                 ----------
                                 ----------

     Rent expense under operating leases charged to operations during fiscal
years 1996, 1995 and 1994 was $747,412, $815,273 and $760,794, respectively.


                                      F-10                               Page 25

<PAGE>

4.  COMMITMENTS AND CONTINGENCIES

     The Company has been identified as a potentially responsible party ("PRP")
by the Environmental Protection Agency ("EPA") or state agencies, or has had
claims asserted against it by other parties, in proceedings relating to six
waste disposal facilities which may be subject to remedial action under
Superfund or similar state statutes. These proceedings are based on allegations
that the Company had hazardous substances disposed of at these sites. At each
site, many other parties have been named as PRPs or identified as potentially
responsible for remediation, and the group of PRPs undertaking remediation
includes many companies, including "Fortune 500" companies, believed to have
substantial financial resources. The Company has paid a portion of the costs of
preliminary investigation and remediation at three sites, and has agreed to
settle claims against it made by PRPs at two sites. With respect to these sites,
the total amount paid by the Company to date or subject to possible settlement
is approximately $39,000. The Company has established a reserve reflecting its
estimate of probable environmental liabilities in connection with the
proceedings based on presently available information provided by steering
committees of participants or regulatory authorities with respect to each site.
As of August 31, 1996 the Company has accrued approximately $126,000 for these
potential environmental liabilities. The ultimate costs of the Company's
environmental liabilities cannot be estimated with certainty, primarily due to
several uncertain factors at one of the sites subject to legal proceedings.
These factors principally are the level of contamination, the selection of
remedial methods, the stage of investigation at the site, and the determination
of the Company's liability in proportion to owner/operators of the site and
other responsible parties. Due to the limited nature of the Company's
involvement in these 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 during fiscal 1996 were not
material. See Management's Discussion and Analysis of Financial Condition and
Results of Operations beginning on page II-3.

     The Company has entered into individual employment agreements with certain
of its officers which expire at various times through December 31, 1998. 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. The Company has funded $1,000,000 in escrow agreements to provide
for partial funding of any payments that may be required under the agreements.

     The Company had letters of credit outstanding totaling $1,521,000 at August
31, 1996, and $1,408,000 at September 2, 1995. These letters of credit were
issued for the purchase of inventory from foreign sources.


5.   CONVERTIBLE PREFERRED STOCK

     Annual dividends on each share of Series C will be the lower of (i) twenty
cents or (ii) the Company's net income in excess of $500,000 for the previous
fiscal year divided by the number of shares of Series C outstanding on the last
day of the previous fiscal year. The liquidation value of the Series C is the
sum of $2.00 per share plus any unpaid dividends on such share. The Company is
not required to redeem the Series C. If it is redeemed, however, the redemption
price is $3.00 per share. The Company has the right to negotiate a redemption
price other than the prices stated above with willing Series C


                                      F-11                               Page 26

<PAGE>

stockholders. For any future conversion of the Series C into the Company's
common stock, the purchase price to be paid for the common stock is fixed at
$1.63 per share of common stock for approximately 87% of the outstanding Series
C, and $1.00 per share of common stock for the remaining shares.

     Holders of Series C will have the right, upon request by holders of ten
percent of the Series C, to elect a majority of the Board of Directors upon the
accumulation of dividends in arrears of at least $269,500 or if the Company
fails to earn annual net income of at least $769,500, or the occurrence of an
event of noncompliance. A majority of the Series C stockholders must be present
at the special meeting to constitute a quorum. Holders of a majority of the
Series C have waived their right to elect a majority of the directors during
fiscal 1997 as a result of the Company's failure to earn at least $769,500 in
net income during fiscal 1996.


     The Company's Certificate of Incorporation restricts payment of cash
dividends on the common stock to 10% of the Company's net income for the
immediately preceding fiscal year, after deduction of dividends paid in that
year on the Series C preferred stock.

     In liquidation, the Series C shares are entitled to receive their
liquidation value before a distribution to common stockholders.

6.   STOCK OPTIONS

     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 31, 1996 follows:


                                      F-12                               Page 27

<PAGE>

                                                          Option Price
                                                          ------------
                                   Shares           Per Share       Total
                                  --------         -----------      -----
Options outstanding
 at August 28, 1993                267,560        $1.375-$2.625    $480,395
Granted in 1994                    170,377             $1.69        287,937
Exercised in 1994                  (17,162)       $1.375-$2.625     (24,550)
Granted in 1995                    186,724             $1.405       262,347
Exercised in 1995                   (1,200)            $1.375        (1,650)
Granted in 1996                     96,500             $1.625       156,813
Expired in 1996                    (47,500)       $1.375-$2.625     (74,688)
                                  ---------                        ---------
Options outstanding
 at August 31, 1996                655,299        $1.375-$2.625   $1,086,604
                                  ---------                      -----------
                                  ---------                      -----------
Options exercisable
 at August 28, 1993                178,560        $1.375-$1.625    $246,770
Became exercisable
 in 1994                           199,947         $1.69-$2.625     365,033
Exercised in 1994                  (17,162)       $1.375-$2.625     (24,550)
Became exercisable
 in 1995                           216,984         $1.405-$2.625    341,780
Exercised in 1995                   (1,200)            $1.375        (1,650)
Became exercisable
 in 1996                            29,370             $2.625        77,096
Expired in 1996                    (47,500)        $1.375-$2.625    (74,688)
                                   --------                         --------
Options exercisable
 at August 31, 1996                558,999         $1.375-$2.625   $929,791
                                  ---------                        ---------
                                  ---------                        ---------

     In addition to the above, the Company has granted 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. 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 31, 1996 follows:


                                      F-13                               Page 28


<PAGE>

                                                           Option Price
                                                           ------------
                                    Shares           Per Share        Total
                                    ------           ---------        -----
Options outstanding at
 August 28, 1993                    92,000         $1.19-$2.875    $196,885
Options granted in 1994              4,000                $3.50      14,000
Exercised in 1994                  (13,000)        $1.50-$2.625     (28,375)
Granted in 1995                      4,000               $1.625       6,500
Granted in 1996                      3,000              $1.5625       4,688
                                    ------                          --------
Options outstanding at
 August 31, 1996                    90,000          $1.19-$3.50    $193,698
                                    ------                         ---------
                                    ------                         ---------
Options exercisable
 at August 28, 1993                 86,000         $1.19-$2.625    $182,635
Became exercisable
 in 1994                             4,000        $1.375-$2.875       8,500
Exercised in 1994                  (13,000)        $1.50-$2.625     (28,375)
Became exercisable in 1995           4,000         $2.875-$3.50      12,750
Became exercisable in 1996           4,000         $1.625-$3.50      10,250
                                    ------                          -------
Options exercisable
 at August 31, 1996                 85,000          $1.19-$3.50    $185,760
                                    ------                         --------
                                    ------                         --------

7.   PENSION PLANS

     The Company has a defined benefit pension plan which covers substantially
all hourly employees. Pension costs charged to operations were approximately
$169,000 in fiscal 1996, $180,000 in fiscal 1995, and $170,000 in fiscal 1994.
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 1996, fiscal 1995
and fiscal 1994 was computed as follows:

                                   1996        1995      1994
                                   ----        ----      ----
    Service cost-benefits
     earned                        $70,598     $71,090   $67,106
    Interest cost on projected
     benefit obligation            191,020     180,937   170,178
    Actual return on plan assets  (126,034)   (105,366)  (31,487)
    Amortization of transition
     obligation                     13,686      13,686    13,686
    Amortization of unrecognized
     prior service cost             19,327      19,327    16,505
    Net deferred asset gain(loss)        -           -   (65,601)
                                   -------     -------   -------
     Net pension expense          $168,597    $179,674  $170,387
                                  --------    --------  --------
                                  --------    --------  --------


                                      F-14                               Page 29

<PAGE>

     The funded status of the defined benefit plan at August 31, 1996 and
September 2, 1995  is shown below:

Actuarial present value of
accumulated plan benefits:
                                                     1996           1995
                                                     ----           ----
Vested                                           $(2,366,236)   $(2,323,918)
Non-vested                                           (37,459)       (58,710)
                                                 -----------    -----------
Accumulated/projected benefit obligation          (2,403,695)    (2,382,628)
Plan assets at fair market value                   1,587,097      1,477,296
                                                 -----------    -----------
Projected benefit obligation
 in excess of plan assets                           (816,598)      (905,332)
Unrecognized transition liability                    138,692        205,285
Unrecognized net (gain)/loss                         (55,257)        37,976
Unrecognized prior service cost                      241,414        352,834
Adjustment required to
 recognize minimum liability                        (324,849)      (596,095)
                                                 -----------    -----------

Accrued pension liability                          $(816,598)     $(905,332)
                                                 -----------    -----------
                                                 -----------    -----------

     The projected benefit obligation for service rendered was determined using
an assumed discount rate of 8.25% 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 which
covers substantially all salaried employees. Costs charged to operations in
fiscal 1996, fiscal 1995 and fiscal 1994 were $57,000, $65,400 and $63,700,
respectively.

     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 31, 1996 and
September 2, 1995 is $376,490 and $434,203, respectively. Plan costs charged to
operations were approximately $40,000 in fiscal 1996, $27,000 in fiscal 1995,
and approximately $37,000 in fiscal 1994.


8. INCOME TAXES

     In adopting SFAS No. 109, as of August 29, 1993, the Company recorded
approximately $1,931,000 of deferred tax assets and $136,000 of deferred tax
liabilities, resulting in a net deferred tax asset of $1,795,000. Such amount
has been reflected in the Consolidated Statements of Income as the cumulative
effect of an accounting change.


                                      F-15                               Page 30
<PAGE>

     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 31, 1996 and September 2, 1995 are as follows (in thousands):


                                                        1996           1995
                                                        ----           ----

Net operating loss carryforwards                        $130           $143
Alternative minimum tax credit carryforward              187            187
Accumulated tax depreciation of property and
  equipment in excess of accumulated book
  depreciation and other related items                  (435)          (359)
Various accruals and reserves                            788            716
Inventory                                                106            142
Other                                                   (109)            25
                                                        ----           ----
Net deferred tax asset                                  $667           $854
                                                        ----           ----
                                                        ----           ----


      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 including the benefits of the
NOLs before they begin to expire. As a result, no valuation allowance was
required as of August 31, 1996 and September 2, 1995. 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):

                                                 Twelve Months Ended
                                        Aug. 31       Sept. 2,       Aug. 27,
                                         1996           1995           1994
                                         ----           ----           ----
Currently payable                         $47            $55            $68

Deferred                                  186            430            574
                                         ----           ----           ----
Total                                    $233           $485           $642
                                         ----           ----           ----
                                         ----           ----           ----

     The deferred tax provision for the twelve months ended August 31, 1996 and
September 2, 1995, and August 27, 1994 consisted of the following (in
thousands):

                                                   1996      1995      1994
                                                   ----      ----      ----

Utilization of net operating loss carryforwards     $13      $209      $441
Excess tax over book depreciation                    76       138        85
Other                                                97        83        48
                                                   ----      ----      ----
                                                   $186      $430      $574
                                                   ----      ----      ----
                                                   ----      ----      ----


                                      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):


                                                 Twelve Months Ended
                                        Aug. 31       Sept. 2,       Aug. 27,
                                         1996           1995           1994
                                         ----           ----           ----
Tax at 34% statutory rate                $207           $438           $593
State income taxes, net of
 federal benefit                           26             47             49
                                         ----           ----           ----
Income Taxes                             $233           $485           $642
                                         ----           ----           ----
                                         ----           ----           ----

     At August 31, 1996, the Company had the following NOLs available for income
tax purposes (in thousands):

                    Expiration
                       Date                      Amount
                    ----------                   ------

                       2002                       $255
                       2004                         10
                       2006                        120
                                                  ----
                                                  $385
                                                  ----
                                                  ----

     The Company has alternative minimum tax credit carryforwards at August 31,
1996 of approximately $187,000 which have an unlimited carryforward period.


9. OTHER INFORMATION

Inventories - Inventories are summarized below:

                                                     1996           1995
                                                     ----           ----

Finished product                                  $4,794,000     $7,115,000
Work in process                                      521,000        785,000
Raw material                                       4,538,000      5,365,000
                                                  ----------    -----------
                                                  $9,853,000    $13,265,000
                                                  ----------    -----------
                                                  ----------    -----------

Accrued liabilities - Accrued liabilities are summarized below:


                                                     1996           1995
                                                     ----           ----

Property, payroll and other taxes                   $563,669       $457,936
Payroll, bonuses and commissions                     858,492        958,265
Interest                                              83,825        128,886
Other                                                499,882        337,828
                                                  ----------     ----------
                                                  $2,005,868     $1,882,915
                                                  ----------     ----------
                                                  ----------     ----------


                                      F-17                               Page 32
<PAGE>

10.  QUARTERLY FINANCIAL DATA


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


FISCAL 1996

                             First    Second     Third    Fourth
                            Quarter   Quarter   Quarter   Quarter    Year
                            -------   -------   -------   -------   -------

Net sales                   $17,729   $12,502   $12,397   $12,935   $55,563
Gross profit                  3,223     2,024     2,490     2,877    10,614

Net income (loss)              (184)     (151)      205       506       376

Income (loss) per
 common share (1)             $(.06)    $(.05)     $.04      $.09      $.07


FISCAL 1995

                             First    Second     Third    Fourth
                            Quarter   Quarter   Quarter   Quarter    Year
                            -------   -------   -------   -------   -------

Net sales                   $18,723   $17,451   $14,775   $16,824   $67,773
Gross profit                  3,566     2,942     2,529     2,723    11,760

Net income                      538       153        19        94       804

Income per common
 share (1)                     $.09      $.03         -      $.02      $.14

(1) Income 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 when net loss in period common equivalent shares are
omitted) (See Note 1).


11. MAJOR CUSTOMERS


     The Company's six largest customers accounted for approximately 34% of the
Company's total sales in fiscal 1996. Four customers accounted for 34% of sales
for the year ended September 2, 1995, 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 31, 1996, one customer accounted for approximately 10% 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.


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


                                      F-18                               Page 33
<PAGE>

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. This 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 and that are 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 relate to the relocation or consolidation of production into
the Company's Huntingburg, Indiana facility.

     Net current assets and liabilities associated with the Gettysburg,
Pennsylvania facilities as of August 31, 1996 are immaterial to the financial
position of the Company. The carrying amount of net long-term assets to be
disposed of as of August 31, 1996 are approximately $95,000 and management's
expectations are that such assets should be disposed of within the next 6
months. All severance related payments have been made as of August 31, 1996.
Amounts included in accrued liabilities associated with the plant closing as of
August 31, 1996 total approximately $108,000.

     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. The Company
recorded a gain on disposition of this manufacturing plant totaling
approximately $44,000 which is included in other income (expense) on the
accompanying consolidated statements of income.


13.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The book values of cash and cash equivalents, trade receivables 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 425 employees are covered by 2
collective bargaining agreements. Neither of the contracts with the union
representing the Company's labor force are due to expire prior to April 1998.


                                      F-19                               Page 34
<PAGE>


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

     None.


                                      II-9                               Page 35
<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 27,
1996.


                                      III-1                              Page 36
<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


               None.


                                  OTHER MATTERS

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


                                      IV-1                               Page 37
<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 18, 1996                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 18, 1996
-------------------------
Joseph G. Hill


/S/Thomas M. Levine           Director                      October 18, 1996
-------------------------
Thomas M. Levine


/S/Alexander N. Rubin, Jr.    Director                      October 18, 1996
-------------------------
Alexander N. Rubin, Jr.


/S/Joseph L. Ponce            Director                      October 18, 1996
-------------------------
Joseph L. Ponce


                              President, Chief
                              Executive Officer, Chairman
/S/Donald D. Dreher           of the Board and Director     October 18, 1996
-------------------------
Donald D. Dreher


                                      IV-2
<PAGE>

                               DMI FURNITURE, INC.
                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS

<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 27, 1994               $141,409          $24,409          $64,649        $101,169
                                         --------         --------         --------        --------
                                         --------         --------         --------        --------

Year ended September 2, 1995             $101,169         $237,004         $205,996        $132,177
                                         --------         --------         --------        --------
                                         --------         --------         --------        --------

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

     (A)  Charge-offs net of recoveries.


                                       S-1                               Page 39
<PAGE>

Item 14(a)3.   EXHIBITS


                                                                         10-K
               No.                                                     Page No.
             ------                                                    --------

             (3)(a)   Restated Certificate of Incorporation            E1 - E38
*               (b)   Bylaws

             (4)(a)   Restated Certificate of Incorporation            E1 - E38
*               (b)   Bylaws

*******     (10)(a)   1988 Stock Option Plan for Employees
*********       (b)   Nonemployee 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 Bank One, Indianapolis, N.A.
                      and DMI Furniture, Inc. dated October, 1994
****            (f)   Extension and Renewal of Employment Agreement
                      as of January 1, 1996 between DMI Furniture,
                      Inc. and Donald D. Dreher.
******          (g)   Credit Agreement with Bank One,
                      Indianapolis, N.A. dated December 4, 1993.
**********      (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 June 9, 1994.
********        (l)   Loan Agreement between City of Huntingburg,
                      Indiana and DMI Furniture, Inc. dated June 1,
                      1994.
*********       (j)   1993 Long Term Incentive Stock Plan for
                      Employees
*********       (k)   Stock Compensation and Deferral Plan for
                      Outside Directors.
**              (n)   Second Amendment To Amended And Restated Credit
                      Agreement between Bank One, Indianapolis, N.A.
                      and DMI Furniture, Inc. dated January, 1995.
**              (o)   Third Amendment To Amended And Restated Credit
                      Agreement between Bank One, Indianapolis, N.A.
                      and DMI Furniture, Inc. dated March, 1995.
**              (p)   Fourth Amendment To Amended And Restated Credit
                      Agreement between Bank One, Indianapolis, N.A.
                      and DMI Furniture, Inc. dated September 20,
                      1995.
                (q)   Fifth Amendment To Amended And Restated Credit   E39 - E42
                      Agreement between Bank One, Indianapolis, N.A.
                      and DMI Furniture, Inc. dated November 1, 1995.


                                                                         Page 40
<PAGE>

                (r)   Sixth Amendment To Amended And Restated Credit   E43 - E46
                      Agreement between Bank One, Indianapolis, N.A.
                      and DMI Furniture, Inc. dated January 11, 1996.
                (s)   Seventh Amendment To Amended And Restated Credit E47 - E53
                      Agreement between Bank One, Indianapolis, N.A.
                      and DMI Furniture, Inc. dated July 17, 1996.
*********       (t)   Loan  Agreement between City of Huntingburg,
                      Indiana and DMI Furniture, Inc. dated as of
                      October 1, 1993.
                (u)   Escrow Agreements between DMI Furniture, Inc.,   E54 - E63
                      Bank One, Indianapolis, N.A., The Fifth Third
                      Bank of Kentucky, and Donald D. Dreher and
                      Joseph G. Hill.
                (v)   Extension and Renewal of Employment Agreement    E64 - E70
                      as of September 11, 1996 between DMI Furniture,
                      Inc. and Joseph G. Hill.

              (11)    Statement re:  Computations of earnings
                      per share                                        E71

               (21)   List of subsidiaries                             E72

               (23)   Consent of Arthur Andersen LLP to incorporation  E73
                      of audit report into S-8 registration.

               (27)   Financial Data Schedule                           E74

--------------------------------------------------------------------------------
*                Incorporated by reference to annual report on Form 10-K
                  for the fiscal year ended August 27, 1994

**               Incorporated by reference to annual report on Form 10-K
                  for the fiscal year ended August 31, 1996

***              Incorporated by reference to annual report on Form 10-Q
                  for the fiscal quarter ended March 4, 1995

****             Incorporated by reference to Form 8-K dated April 22, 1996.

*****            Incorporated by reference to annual report on Form 10-K
                  for the fiscal year ended August 29, 1992

******           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.