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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



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FORM 10-K

|                                                                                                             
|-------------------------------------------------------------------------------------------------------------
|[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)         
|                                                                                                             
|For the fiscal year ended August 31, 2002                                                                    
|                                                                                                             
|[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
|                                                                                                             
|For the transition period from ____________ to ____________                                                  

Commission file number 0-4173

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

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

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

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

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

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

|                             
|-----------------------------
|COMMON STOCK, $0.10 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. [ X ]





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TABLE OF CONTENTS



|                                                               |  |  |  |  |  |  |  | 
|-------------------------------------------------------------- |  |  |  |  |  |  |  | 
|Part I.                                                       
|Part II.                                                      
|RESULTS OF OPERATIONS                                         
|FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES          
|IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS                
|EFFECTS OF INFLATION                                          
|QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK     
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE REPORT
|INDEPENDENT AUDITORS REPORT                                  
|REPORT OF PREVIOUS INDEPENDENT ACCOUNTANTS                    
|Part III.                                                     
|Part IV.                                                      
|SIGNATURES                                                    
|CERTIFICATIONS                                                
|Item 14(a)3. EXHIBITS                                         
|EXT. AND RENEWAL OF EMPLOYMENT AGREEMENT                      
|EXT. AND RENEWAL OF EMPLOYMENT AGREEMENT                      
|FIRST AMEND. TO AMENDED & RESTATED CREDIT AGREEMNT            
|SECOND AMEND. TO AMENDED & RESTATED CREDIT AGRMNT             
|LIST OF SUBSIDIARIES                                          
|INDEPENDENT AUDITORS CONSENT                                  
|CERTIFICATION                                                 
|CERTIFICATION                                                 



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##### Table of Contents



The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $6,182,110 as of August 31, 2002.

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, 2002
|                                        |  |                               
|Common Stock, Par Value $0.10 per Share |  | 4,280,378                     

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Annual Meeting of
Stockholders on December 19, 2002 are incorporated by reference into Part III.





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Part I.

Item 1. BUSINESS.

Preliminary Note Regarding Forward-Looking Statements

The information set forth in Item 1. Business, in Item 7. Managements
Discussion and Analysis of Financial Condition and Results of Operations, and
in the other portions of this report includes forward-looking statements about
the Corporation and its business. The forward-looking statements relate to,
among other things, overall business conditions during the next three months;
estimates relating to the discontinuing of production of promotional bedroom
and the potential for a work stoppage or slow down by dockworkers on the
Pacific coast. For this purpose, the use of words such as believes,
anticipates, plans, expects, and similar expressions are intended to
identify forward-looking statements. Factors that realistically could cause
results to differ materially from those 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; labor actions or other events that disrupt the flow of
goods from off-shore manufacturing sources; merchandising decisions by one or
more of the Companys major customers that adversely affect their decision to
purchase and the dollar volume of their purchases of the Companys furniture
products; changes in fashion or tastes that adversely affect consumer
perception of the Companys furniture products; general conditions in the
capital markets or in the general economy; demographic changes that affect
consumer purchases of furniture; competition; and other factors identified in
Item 1. Business, in Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations, and in other portions of this
report. The forward-looking statements included in this report speak only as
of the date on which they are made. The Company undertakes no obligation to
update any forward-looking statement to reflect events or circumstances
occurring after the date on which such statement is made.

The Company is a marketer and importer of medium-priced bedroom furniture,
dining furniture, occasional and accent furniture, and home office furniture
with manufacturing sources throughout Asia and South America. In addition, the
Company is a vertically integrated manufacturer, importer, and marketer of
commercial office furniture with four company owned manufacturing plants in
Indiana and manufacturing sources in Asia. DMIs four marketing divisions
consist of DMI Commercial Office Furniture, selling primarily commercial office
furniture; DMI Desk Company, selling small office and home office furniture;
WYNWOOD Furniture Company, selling bedroom, dining and occasional furniture and
Home Styles, selling lifestyle furniture for the home.

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 1% of the Companys
sales in fiscal 2002. Approximately 6% of the Companys sales are to wholesale
distributors. The Companys sales are made through independent, commissioned
sales representatives, as well as sales and marketing personnel employed by the
Company. The Company maintains showrooms for furniture markets in High Point,
North Carolina. The Company also participates in the annual NeoCon commercial
office furniture tradeshow in Chicago, Illinois.

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The Companys total sales of imported product during the three prior
fiscal years were 74% for fiscal 2002, 64% for fiscal 2001 and 62% for fiscal
2000. The Company designs the majority of the furniture it purchases from
foreign factories and actively participates in the production and quality
control process. The Company maintains administrative offices in China and
Thailand to manage the quality control, production process and other supply
chain functions. The Company maintains small amounts of finished goods
inventories in China at a vendor provided warehouse. An unanticipated
interruption in the flow of products from one or more of the overseas factories
could have a short-term material adverse effect on the Companys results of
operations.

The Company maintains insurance for all Company owned inventory until
title transfers to the customer. Title transfers to the customer when all
requirements of the sale are complete. The timing of the sale and transfer of
ownership depends on the individual customer and is agreed to before order
acceptance. The three primary points where title transfers are when product
leaves one of the Companys domestic warehouses, when product arrives at the
port of entry into the United States, and when product leaves its country of
origin.

The raw materials essential to the domestic 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 61% of these materials are purchased from independent suppliers,
and the balance of these materials are obtained by the Company by processing
purchased lumber through the Companys and dimension plant, by cutting
various types of board and drawer body parts, and manufacturing high pressure
laminated tops for its office furniture. If, for any reason, the Companys
existing sources of supply for any of its raw materials became unable to
service the Company, the Company believes its furniture manufacturing
operations would not be adversely affected because there are adequate alternate
sources of supply.

The Companys operations as shown in its Selected Financial Data (See Item 6)
and in the Statement of Operations consist of one industry segment  the
manufacture, import, and sale of furniture.

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:

|                                           |  |                  |  |      |      | 
|------------------------------------------ |  | ---------------- |  | ---- | ---- | 
|Trademark                                  |  | Product          |  | Date
|                                           |  |                  |  |     
|TOP GUARD                                  |  | All DMI products |  |      | 2011 | 
|                                          
|                                          
|                                          
|                                          
|Wood Classics Furniture Company            |  | All DMI products |  |      | 2006 | 
|                                          
|                                          
|                                          
|                                          
|Carolina Desk Company                      |  | All DMI products |  |      | 2008 | 
|                                          
|                                          
|                                          
|                                          
|DMI                                        |  | All DMI products |  |      | 2009 | 
|                                          
|                                          
|                                          
|                                          
|DMI Furniture, Inc.                        |  | All DMI products |  |      | 2009 | 
|                                          
|                                          
|                                          
|                                          
|Wood Manor                                 |  | All DMI products |  |      | 2007 | 
|                                          
|                                          
|                                          
|                                          
|Cyber City Furniture Warehouse             |  | All DMI products |  |      | 2007 | 
|                                          
|                                          
|                                          
|                                          
|Carolina Classics Office
Furniture Company |  | All DMI products |  |      | 2010 | 

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|                                                             |  |                  |  |  |         | 
|------------------------------------------------------------ |  | ---------------- |  |  | ------- | 
|Wynwood                                                      |  | All DMI products |  |  | 2009    | 
|                                                            
|                                                            
|                                                            
|                                                            
|Home Styles                                                  |  | All DMI products |  |  | 2011    | 
|                                                            
|                                                            
|                                                            
|                                                            
|Dolly Madison                                                |  | All DMI products |  |  | 2010    | 
|                                                            
|                                                            
|                                                            
|                                                            
|Barrister Oak                                                |  | All DMI products |  |  | 2008    | 
|                                                            
|                                                            
|                                                            
|                                                            
|Barrister Collection                                         |  | All DMI products |  |  | 2008    | 
|                                                            
|                                                            
|                                                            
|                                                            
|Freelance                                                    |  | All DMI products |  |  | Pending | 
|                                                            
|                                                            
|                                                            
|                                                            
|Euroflex                                                     |  | All DMI products |  |  | Pending | 
|                                                            
|                                                            
|                                                            
|                                                            
|Flexcom                                                      |  | All DMI products |  |  | 2012    | 
|                                                            
|                                                            
|                                                            
|                                                            
|Shenandoah Valley Furniture
     Company & Design            |  | All DMI products |  |  | Pending | 
|                                                            
|                                                            
|                                                            
|                                                            
|Locust Grove Furniture Company                               |  | All DMI products |  |  | Pending | 
|                                                            
|                                                            
|                                                            
|                                                            
|Sonoma Collection by Virginia
     County Furniture Classics |  | 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 become more subject to quarterly
fluctuations. See Note 9 to the consolidated financial statements for
quarterly financial data.

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 customers include large furniture chain store retailers,
wholesale clubs, catalog retailers, and independent distributors, as well as
numerous smaller retailers. The five largest customers accounted for
approximately 30% of the Companys total sales in fiscal 2002. One customer,
Sams Wholesale Club, a division of Wal-Mart Stores, Inc., accounted for more
than 10% of the Companys total net sales for fiscal 2002. The loss of one or
more of these customers at the same time could have a materially adverse effect
on the business of the Company. As of August 31, 2002, one customer accounted
for approximately 13% of total accounts receivable.

The furniture industry is extremely competitive. The Company competes in
the national
market for medium-priced furniture. Due to the fragmented nature of the
furniture manufacturing industry and the unavailability of complete financial
reports for all its

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competitors, the Company is unable to accurately state its
rank in the industry. There are, however, a number of furniture manufacturers
with substantially greater sales and greater economic resources than the
Company. The principal methods of competition in the furniture industry are
design, pricing, sales force, customer service, and manufacturing location.

The Company employs approximately 240 employees, of whom approximately 99
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 two operating furniture-manufacturing plants located in
Huntingburg, Indiana (78,910 square feet, and 100,000 square feet); a sawmill
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 two warehousing facilities totaling 335,000 square feet in Huntingburg,
Indiana.

During fiscal 2000 the Company closed and sold its furniture manufacturing
plant located in Ferdinand, Indiana (117,823 square feet). See Note 11 to the
consolidated financial statements for additional information.

All of the Companys properties are encumbered by mortgages held by its
bank. See Note 2 to the consolidated financial statements.

The productive capacity and extent of utilization of each of the Companys
manufacturing facilities for the fiscal year ended August 31, 2002 are set
forth in the table below. 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 2002 (dollars in thousands)
|                                                                                                                                                      |                                   
|Facility                                                                                                                                              |                                    | Capacity                     |  | Production |                              | % Utilized | 
|Huntingburg, IN 5th Street Plant (1)
Huntingburg, IN Chestnut Street Plant (1)
Huntingburg, IN Fabricator Plant
Ferdinand, IN Sawmill/Dimension Plant | $                                  | 23,754
$22,866
$8,319
$8,292 |  | $          | 15,113
$16,884
$3,508
$4,540 |            |  |  | 64%
74%
42%
55% | 



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|(1) |  | On July 31, 2002 the Chestnut Street plant was converted to an assembly
operation and the production was transferred to the 5th Street plant. As a
result, the fiscal 2002 % utilized numbers are not an indication of
production capacity in the future.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Item 3. LEGAL PROCEEDINGS.

The Company is a defendant in various lawsuits arising in the normal
course of business. In managements opinion, these lawsuits are not material
to the results of operations or financial position of the Company, or are
adequately covered by insurance.

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.

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Part II.

Item 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.

As of August 31, 2002, approximately 1,259 stockholders held the Companys
common stock, its only class of outstanding securities.

Price Range of Common Stock

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

|                    |  |          |      |         |  |   |      | 
|------------------- |  | -------- | ---- | ------- |  | - | ---- | 
|                    |  | High Bid |      | Low Bid
|Price               |  | Price    |      | Price  
|                    |  |          |      |        
|1st Quarter of 2001 |  | $        | 2.94 |         |  | $ | 1.63 | 
|                   
|                   
|                   
|                   
|2nd Quarter of 2001 |  | $        | 2.69 |         |  | $ | 1.88 | 
|                   
|                   
|                   
|                   
|3rd Quarter of 2001 |  | $        | 2.13 |         |  | $ | 1.60 | 
|                   
|                   
|                   
|                   
|4th Quarter of 2001 |  | $        | 2.05 |         |  | $ | 1.25 | 
|                   
|                   
|                   
|                   
|1st Quarter of 2002 |  | $        | 1.80 |         |  | $ | 1.23 | 
|                   
|                   
|                   
|                   
|2nd Quarter of 2002 |  | $        | 2.03 |         |  | $ | 1.36 | 
|                   
|                   
|                   
|                   
|3rd Quarter of 2002 |  | $        | 2.00 |         |  | $ | 1.50 | 
|                   
|                   
|                   
|                   
|4th Quarter of 2002 |  | $        | 1.98 |         |  | $ | 1.32 | 

Dividend History

The Company has not paid dividends on its common stock since it was first
issued in November 1977.

Payment of dividends is within the discretion of the Companys Board of
Directors and will depend, among other factors, on earnings, capital
requirements and the operating and financial condition of the Company. At the
present time, the Companys anticipated capital requirements are such that it
intends to follow a policy of retaining earnings in order to finance the
development of its business and the retirement of its debt. In addition, the
Companys present financing agreement prohibits the payment of dividends
without the written consent of the bank. See Note 2 to the consolidated
financial statements.

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ITEM 6.
SELECTED FINANCIAL DATA (1)

|                                             |  |                   |         |              |  |                                                 |           |            |  |            |         |  |  |   |            |  |  |   |           | 
|-------------------------------------------- |  | ----------------- | ------- | ------------ |  | ----------------------------------------------- | --------- | ---------- |  | ---------- | ------- |  |  | - | ---------- |  |  | - | --------- | 
|                                             |  | Fiscal Year Ended
|                                             |  |                  
|                                             |  | August 31,        |         | September 1, |  | September 2,                                    |           | August 28, |  | August 29,
|                                             |  | 2002              |         | 2001         |  | 2000                                            |           | 1999       |  | 1998      
|                                             |  |                   |         |              |  |                                                 |           |            |  |           
|                                             |  |                   |         |              |  | (Amounts in thousands except per share amounts)
|Net sales (6)                                |  | $                 | 100,856 |              |  | $                                               | 106,328   |            |  | $          | 104,837 |  |  | $ | 80,373     |  |  | $ | 64,727    | 
|                                            
|                                            
|                                            
|                                            
|Net income from continuing operations        |  | $                 | 1,355   |              |  |                                                 | (5) $875  |            |  | $          | 2,565   |  |  |   | (4) $1,088 |  |  | $ | 1,975     | 
|                                            
|                                            
|                                            
|                                            
|Diluted earnings per common share (2)        |  | $                 | 0.31    |              |  |                                                 | (5) $0.20 |            |  | $          | 0.60    |  |  |   | (4) $0.25  |  |  |   | (3) $0.07 | 
|                                            
|                                            
|                                            
|                                            
|Total assets                                 |  | $                 | 46,367  |              |  | $                                               | 46,877    |            |  | $          | 50,949  |  |  | $ | 45,279     |  |  | $ | 41,329    | 
|                                            
|                                            
|                                            
|                                            
|Long-term debt and capital
lease obligations |  | $                 | 20,321  |              |  | $                                               | 24,021    |            |  | $          | 28,001  |  |  | $ | 26,934     |  |  | $ | 22,917    | 
|                                            
|                                            
|                                            
|                                            
|Notes to selected financial data:            |  |                   |         |              |  |                                                 |           |            |  |            |         |  |  |   |            |  |  |   |           | 

|         |  |                                                                                                                                                                                                                                                                                                                                                              
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Note 1 - |  | This summary should be read in conjunction with the related financial
statements and notes.                                                                                                                                                                                                                                                                  
|        
|        
|        
|        
|Note 2 - |  | Diluted earnings per common share are based on the weighted average number
of common and common equivalent shares outstanding during the period.                                                                                                                                                                                                             
|        
|        
|        
|        
|Note 3 - |  | Includes charge from preferred stock redemption of $1,666,000 which impacted diluted
earnings per common share by approximately $0.40.                                                                                                                                                                                                                       
|        
|        
|        
|        
|Note 4 - |  | Includes plant closing reserve which reduced net income and earnings per common share
by approximately $372,000 and $0.08 per share respectively.                                                                                                                                                                                                            
|        
|        
|        
|        
|Note 5 - |  | Includes a pre-tax charge of $775,000 ($481,000 after tax) relating to discontinuing production of the
promotional bedroom product line. The charge reduced diluted earnings per common share by
approximately $0.11 per share. The pre-tax charge consisted of $575,000 for inventory; $80,000 for
anticipated bad debts and $120,000 relating to severance.
|        
|        
|        
|        
|Note 6 - |  | Net sales for fiscal years ended August 31, 2002 and September 1, 2001 include the effects of
EITF 00-10 Accounting for Shipping and Handling Revenues and Costs. All other years exclude the
effects of the adoption of EITF 00-10 because it was impracticable to restate prior years.                                                                   

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Item 7.

MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies, Estimates and Judgments

DMI Furnitures financial statements are prepared in accordance with
accounting principles that are generally accepted in the United States of
America. The preparation of these financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses as well as the disclosure of contingent
assets and liabilities. Management evaluates its estimates and judgments
including those related to revenue recognition, allowances for doubtful
accounts, inventory valuation allowances, useful lives of property, plant and
equipment, derivative contracts, pension benefits and income taxes. Management
bases its estimates and judgments on historical experience and other factors
that are believed to be reasonable under the circumstances. Actual results may
differ from these estimates under different assumptions or conditions. The
Company believes that of its significant accounting policies, the following may
involve a higher degree of judgment or complexity.

Revenue recognitionThe Company recognizes revenue when title transfers to
the customer and all requirements of the sale are complete. The timing of the
sale and transfer of ownership depends on the individual customer and is agreed
to before order acceptance. The three primary points where title transfers
are when product leaves one of the Companys domestic warehouses, when product
arrives at the port of entry into the United States, and when product leaves
its country of origin.

Allowances for doubtful accountsThe Company maintains an allowance for
doubtful accounts for estimated losses that might result from its customers
failing to make required payments. The Company bases its allowances on the
likelihood of recovery of accounts receivable based on past experience and
current collection trends. If economic or specific industry trends worsen
beyond the Companys estimates, the Company would increase its allowance for
doubtful accounts by recording additional expense.

Pension benefitsThe amounts recognized in the financial statements
related to pension benefits are determined on an actuarial basis, the
calculation of which requires many assumptions. A significant assumption used
in determining the Companys net pension cost is the expected long-term rate of
return on plan assets. Based on input from the Companys actuarial firm, the
Company assumed an expected long-term rate of return on plan assets of 8.25%
for fiscal 2002 and 2001. Another significant estimate that affects the
Companys pension cost is the discount rate used in the annual actuarial
valuation of pension benefit. The discount rate represents the interest rate
that is used to determine the present value of future cash flows required to
settle the pension obligations. Based on input from the Companys actuarial
firm, the Company assumed a discount rate of 7% in fiscal 2002 and 2001.

Income taxesThe Company records deferred tax assets and liabilities using
enacted tax rates for the effect of temporary differences between the book and
tax basis of assets and liabilities. If enacted tax rates change, the Company
would adjust its deferred tax assets and

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liabilities through the provision for
income taxes. The Company evaluates the need for a valuation allowance of its
deferred tax assets based on the likelihood of expected future benefits. The
Company does not believe a valuation allowance is necessary; however, if the
expected level of future taxable income changes or certain tax planning
strategies become unavailable, the Company would record a valuation allowance
through income tax expense in the period the valuation allowance is deemed
necessary.




RESULTS OF OPERATIONS

Overview

The Companys sales decreased during the fiscal year ended August 31, 2002
due to a significant shortfall in sales during the Companys first quarter of
fiscal 2002 compared to the first quarter of fiscal 2001. As discussed in the
Companys previous filings, the first quarter shortfall was the result of the
timing of certain orders by a major customer and a change of focus by major
retailers toward furniture products that sell at lower price points than the
products sold in past years, which reduced overall sales. Total sales for the
nine months ended August 31, 2002 were higher than the comparable period in
fiscal 2001. The Companys profitability increased during fiscal 2002 as
compared to the prior fiscal year due to one-time charges taken in fiscal 2001,
resulting from the Companys decision to discontinue production of promotional
bedroom furniture. When the effects of one-time charges are excluded, the
profitability for fiscal 2002 is essentially the same as fiscal 2001.

A majority of the Companys imported merchandise flows through Pacific
coast ports of entry. The contract between the Pacific Maritime Association
and the International Longshore and Warehouse Union expired on July 1, 2002.
Contract negotiations between labor and management came to an impasse in early
October 2002 and the ports were closed for 10 days. The Federal government
sought and received a court ordered injunction to re-open the ports under the
Taft Hartly Act of 1949. The injunction created an 80-day cooling off period
that reopened the ports and started the flow of merchandise through the Pacific
coast ports.

As a result of the port closings, there is currently an imbalance in the
shipping lanes that has slowed the flow of merchandise across the Pacific
Ocean. The disruption in the flow of merchandise created by the closing of the
ports will adversely affect the Companys first quarter operating performance.
Due to multiple unknown variables the Company cannot quantify the negative
effects on the first quarter results of operations. If current labor talks
break down and a strike, work slowdown, or lockout at the Pacific coast cargo
terminals were to occur, the Company could experience a further disruption in
the flow of merchandise that would further affect the results of operations.

Fiscal 2002 compared to Fiscal 2001

Net sales for fiscal 2002 decreased by $5,472,000 or approximately 5% from
fiscal 2001. The decline in sales for fiscal 2002 was due to lower sales at
the Companys DMI Desk and Commercial Office, partially offset by strong
performances at the Companys Wynwood and Home Styles divisions. Sales at
Commercial Office decreased approximately 10% while sales at DMI Desk decreased
approximately 30% when compared to fiscal 2001. The Companys Wynwood and Home
Styles divisions grew by approximately 51% and 42%, respectively, when

II-4





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##### Table of Contents



compared to fiscal 2001.

The Companys gross margin for fiscal 2002 was $17,094,000 or 16.9% of
sales. The gross margin for fiscal 2001 was 17,872,000 or 16.8%. Excluding a
permanent basis adjustment of $575,000 relating to discontinuing production of
promotionally priced bedroom furniture, gross margin was $18,447,000 or 17.3%
of sales for fiscal 2001. The decline in gross profit in fiscal 2002 was the
result of lower shipment volume and lower utilization of the Companys
production facilities.

Selling, general and administrative (S,G&A) expenses were $13,661,000 or
13.5% of sales for fiscal 2002 compared to $14,173,000, or 13.3% of sales for
fiscal 2001. The decrease in S,G&A expenses for the year is the result of
lower commissions and royalty expense due to the lower sales volume, as well as
a decrease in bad debt expense. Bad debt expense was higher during fiscal 2001
due to the bankruptcy filing of a national retailer and the establishment of a
reserve for bad debts relating to discontinuing the production of promotionally
priced bedroom furniture. The increase in S,G&A expenses as a percent of sales
for fiscal 2002 versus fiscal 2001 was due to the lower sales volume in fiscal
2002 and the relatively fixed nature of the S,G&A expenses.

During the fourth quarter of fiscal 2001, the Company committed to
discontinue production of promotional bedroom furniture during the first
quarter of fiscal 2002. The Company believed the decline in aggregate demand
for fully assembled promotional bedroom and excess industry capacity would
prevent this product line from recovering the costs of manufacturing, including
the cost of capital and did not anticipate the trend reversing. As a result,
during the fourth quarter of fiscal 2001, the Company recorded a pre-tax charge
of $775,000 for the expected cost of discontinuing production. The charge
included book provisions of approximately $575,000 for reducing certain
inventory items to net realizable value. The inventory charge represented a
permanent basis reduction and was recorded as a separate component of cost of
sales. An $80,000 charge for expected losses relating to un-collectible
accounts receivable was charged to bad debt expense. A $120,000 charge for
severance pay, which is called for under Company policy, related to the
termination of certain salaried and support staff personnel.

Net interest expense declined to $1,583,000 in fiscal 2002 from $2,073,000
in fiscal 2001. The decrease in interest expense was due to reductions in the
outstanding balance of the Companys revolving line of credit as well as
decreases in the prime and LIBOR interest rates during the fiscal year.

Fiscal 2001 compared to Fiscal 2000

On September 1, 2001 the Company adopted EITF 00-10 Accounting for
Shipping and Handling Revenues and Costs for fiscal 2001. EITF 00-10 requires
that all shipping and handling costs billed to customers be recorded as sales
and the actual costs incurred be recorded as a component of cost of sales.
Before adopting EITF 00-10, the Company netted freight revenue against freight
costs. As a result of adopting EITF 00-10, net sales and cost of sales both
increased by an equal amount to reflect the inclusion of shipping revenues and
costs, but there was no effect on operating income, net income, earnings per
share, or cash flows. The Company did not restate the results of operations
for prior fiscal years, as restatement was impracticable.

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Net sales for fiscal 2001 increased approximately $1,491,000 or 1.4% over
fiscal 2000 due to the adoption of EITF 00-10. The apparent increase was the
result of restating only fiscal 2001 results. Before the restatement, net
sales for fiscal 2001 would have been $7,700,000 or approximately 7% less than
fiscal 2000. The decline in sales for fiscal 2001 was due to lower sales at
DMI Desk, Commercial Office and Dolly Madison Bedroom divisions, partially
offset by strong performances at the Wynwood and Home Styles divisions. Sales
at Commercial Office were down approximately 10% while sales at DMI Desk and
Dolly Madison Bedroom were down approximately 16% and 22% respectively, when
compared to fiscal 2000. The Wynwood and Home Styles divisions each grew by
approximately 20% when compared to fiscal 2000.

The Companys gross margin for fiscal 2001 was $17,872,000 or 16.8%. The
gross margin for fiscal 2000 was $20,438,000 or 19.5% of sales. The decline in
gross profit and margin percent in fiscal 2001 was the result of lower shipment
volume and lower utilization of the Companys production facilities. The
decrease in margin percentage was also affected by the adoption of EITF 00-10
in fiscal 2001. Excluding a permanent inventory basis adjustment of $575,000
relating to discontinuing production of promotionally priced bedroom furniture,
gross margin for fiscal 2001 was $18,447,000 or 17.3% for fiscal 2001.

Selling, general and administrative (S,G&A) expenses were $14,173,000 or
13.3% of sales for fiscal 2001 compared to $14,382,000 or 13.7% of sales for
fiscal 2000. The decrease in S,G&A expenses for the year was the result of
lower commissions and royalty expense due to the lower sales volume, partially
offset by an increase in bad debt expense. S,G&A expenses were 14.6% of sales
in fiscal 2001 before the effects of the adoption of EITF 00-10.

The increase in bad debt expense for fiscal 2001 was due to the bankruptcy
filing a national retailer and the establishment of a reserve for bad debts
relating to discontinuing the production of promotionally priced bedroom
furniture. The increase in S,G&A expenses as a percent of sales for fiscal
2001 was due to the lower sales volume and the relatively fixed nature of the
S,G&A expenses.

Net interest expense declined slightly to $2,073,000 in fiscal 2001 from
$2,239,000 in fiscal 2000. The decrease in interest expense was primarily due
to decreases in the prime and LIBOR interest rates in the second half of fiscal
2001.

During the fourth quarter of fiscal 1999 management committed to
permanently close its Ferdinand, Indiana furniture manufacturing plant during
fiscal 2000. During the fourth quarter of fiscal 1999 the Company recorded a
pre-tax charge of $600,000 for the expected costs of closing the plant, which
was completed in May 2000. During the third quarter of fiscal 2000 the Company
recognized a $166,000 gain on the sale of assets. The Company also recorded a
$125,000 plant closing reserve credit in the second fiscal quarter of fiscal
2000, as plant closing costs were less than anticipated.

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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

The Company has a $20,471,000 credit agreement with Bank One, Indiana N.A.
comprised of a $1,471,000 term loan and a maximum revolving master note loan
commitment of $19,000,000 (outstanding balance $14,600,000 as of August 31,
2002). On August 31, 2002, the Company had $4,400,000 available under the
formula for calculating its available borrowings. See Note 2 to the
consolidated financial statements.

On October 30, 2002, the Company received a commitment from Bank One to
extend the due date of the revolving master credit agreement through December
31, 2004. In addition, the Bank has agreed to restructure certain covenants
contained in the revolving master note payable and to provide increased
borrowing capacity.

The maximum availability under the revolving master note payable will be
seasonally adjusted through December 31, 2004. The seasonal availability is
reflected in the following table:

|                                    |  |                      |            | 
|----------------------------------- |  | -------------------- | ---------- | 
|Period                              |  | Maximum Availability
|                                    |  |                     
|November 15, 2002- January 31, 2003 |  | $                    | 23,000,000 | 
|                                   
|                                   
|                                   
|                                   
|February 1, 2003-July 31, 2003      |  | $                    | 21,000,000 | 
|                                   
|                                   
|                                   
|                                   
|August 1, 2003-January 31, 2004     |  | $                    | 23,000,000 | 
|                                   
|                                   
|                                   
|                                   
|February 1, 2004-July 31, 2004      |  | $                    | 21,000,000 | 
|                                   
|                                   
|                                   
|                                   
|August 1, 2004-December 31, 2004    |  | $                    | 23,000,000 | 

Demands for funds relate to payments for inventory and other operating
costs, resale merchandise, debt obligations, and capital expenditures. The
Companys ability to generate cash adequate to meet short and long-term needs
depends on the collection of accounts receivable and from its ability to borrow
funds. The Companys days of sales outstanding of accounts receivable averaged
63 days for fiscal 2002 and 65 days for fiscal 2001. This decrease was
primarily due to management reducing extended payment terms granted to certain
customers in previous periods. Inventory turnover was 4.3 in fiscal 2002 and
3.6 in fiscal 2001. The Company believes it will be able to generate
sufficient cash from operations in fiscal 2003 together with available
borrowings under its revolving master note to make scheduled payments on its
long-term debt.

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

|                                                                      |  |      |         |      |  |      |         |   |  |   |         |  
|--------------------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                      |  | 2002 |         | 2001 |  | 2000
|                                                                      |  |      |         |      |  |     
|Net cash provided/(used) for operating activities                     |  | $    | 3,758   |      |  | $    | 4,372   |   |  |   | ($1,476 | )
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Net cash provided/(used) for investing activities                     |  |      | (406    | )    |  |      | (552    | ) |  |   | 298     |  
|                                                                      |  |      |         |      |  |      |         |   |  |   |         |  
|Net cash flows provided/(used) for operating and
investing activities |  | $    | 3,352   |      |  | $    | 3,820   |   |  |   | ($1,178 | )
|                                                                      |  |      |         |      |  |      |         |   |  |   |         |  
|Net cash provided/(used) for financing activities                     |  |      | ($3,700 | )    |  |      | ($3,980 | ) |  | $ | 1,070   |  
|                                                                      |  |      |         |      |  |      |         |   |  |   |         |  
|Net decrease in cash and cash equivalents                             |  |      | ($348   | )    |  |      | ($160   | ) |  |   | ($108   | )
|                                                                      |  |      |         |      |  |      |         |   |  |   |         |  

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Cash flows from operations of $3,758,000 were provided during fiscal 2002
primarily due to increased trade accounts payable and overall cash management.
During fiscal 2001 lower levels of receivables and inventory contributed to the
generation of $4,372,000 of cash flows from operations for the Company. During
fiscal 2000 the Company used cash flows for operations of $1,476,000 primarily
to finance finished goods inventories for its new divisions and new commercial
office groups as well as to finance increased accounts receivables from
substantially increased sales.

Cash flows of $406,000 and $552,000 were used for investing activities in
fiscal 2002 and fiscal 2001, respectively, primarily for plant and equipment
modernization expenditures. Cash flows provided from investing activities were
$298,000 for fiscal 2000. The cash provided in fiscal 2000 was primarily a
result of asset sales related to the closure of the Ferdinand, Indiana plant
partially offset by new equipment purchases.

The Company used $3,700,000 and $3,980,000 of net cash flows during fiscal
2002 and 2001, respectively, to reduce overall debt levels. During fiscal 2000
net cash flows from financing activities of $1,070,000 were used primarily to
finance working capital requirements.

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 2003 budget for capital expenditures is approximately
$706,000. The majority of the budgeted capital expenditures for fiscal 2003
relate to the Companys new showroom space at the High Point furniture market.
The Company anticipates that its 2003 internal cash flow and additional
borrowings available under its credit agreement will be sufficient to pay for
these expenditures.




IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standard Board (FASB) issued
Statement No. 141, Business Combinations; Statement No. 142 Goodwill and
Other Intangible Assets; and Statement No. 143, Accounting for Asset
Retirement Obligations. In August 2001, the FASB issued Statement No. 144
Accounting for the Impairment or Disposal of Long-Lived Assets. In April
2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections. In
June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. The Company does not anticipate the
adoption of these statements will have a significant effect on its results of
operations or financial position.

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EFFECTS OF INFLATION

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




QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Companys primary market risk exposure with regard to financial
instruments is changes in interest rates. At August 31, 2002, a hypothetical
100 basis points increase in short
term interest rates would result in a reduction of approximately $59,000 in
annual pretax earnings. This estimate assumes no change in the volume or
composition of debt at August 31, 2002. The Company has effectively fixed the
interest rates on approximately $14.4 million of its long-term debt through the
use of interest rate swaps, and the above estimated earnings reduction takes
these swaps into account. As of August 31, 2002 the fair market value of these
swaps is approximately ($584,000). (See Note 13)

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##### Table of Contents






DMI FURNITURE, INC.
FORM 10-K

ITEMS 8, 14(a) 1 AND 2 AND 14(d)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

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

|                                   |                                                                                                                              |  |  |            | 
|---------------------------------- | ---------------------------------------------------------------------------------------------------------------------------- |  |  | ---------- | 
|                                   |                                                                                                                              |  |  | Page       | 
|                                   |                                                                                                                              |  |  |            | 
|Consolidated Financial Statements: |                                                                                                                              |  |  |           
|                                  
|                                  
|                                  
|                                  
|                                   | Independent Auditors Report                                                                                                 |  |  | F-1        | 
|                                  
|                                  
|                                  
|                                  
|                                   | Report of Previous Independent Accountants                                                                                   |  |  | F-2        | 
|                                  
|                                  
|                                  
|                                  
|                                   | Consolidated Balance Sheets as of August 31, 2002 and September 1, 2001                                                      |  |  | F-3, F-4   | 
|                                  
|                                  
|                                  
|                                  
|                                   | Consolidated Statements of Operations for the years ended
August 31, 2002, September 1, 2001 and September 2, 2000           |  |  | F-5        | 
|                                  
|                                  
|                                  
|                                  
|                                   | Consolidated Statements of Stockholders Equity for the years ended
August 31, 2002, September 1, 2001 and September 2, 2000 |  |  | F-6        | 
|                                  
|                                  
|                                  
|                                  
|                                   | Consolidated Statements of Cash Flows for the years ended August 31, 2002,
September 1, 2001 and September 2, 2000           |  |  | F-7, F-8   | 
|                                  
|                                  
|                                  
|                                  
|                                   | Notes to Consolidated Financial Statements                                                                                   |  |  | F-9 - F-20 | 

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

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

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

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INDEPENDENT AUDITORS REPORT

To the Shareholders of DMI Furniture, Inc.:

We have audited the accompanying consolidated balance sheets of DMI Furniture,
Inc. and subsidiary (the Company) as of August 31, 2002 and September 1, 2001,
and the related consolidated statements of operations, stockholders equity,
and cash flows for the years then ended. Our audits also included the
financial statement schedules listed in the Index to Consolidated Financial
Statements and Schedule Index at Item 14(d) for the years ended August 31, 2002
and September 1, 2001. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. The
consolidated financial statements of the Company as of September 1, 2001 and
September 2, 2000, and for the years then ended were audited by other auditors
who have ceased operations. Those auditors expressed an unqualified opinion on
those financial statements in their report dated October 5, 2001.

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

In our opinion, such 2002 and 2001 consolidated financial statements present
fairly, in all material respects, the financial position of DMI Furniture, Inc.
and subsidiary as of August 31, 2002 and September 1, 2001, and the results of
their operations and their cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedules for the years ended
August 31, 2002 and September 1, 2001, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.

DELOITTE & TOUCHE LLP

October 22, 2002, except for Note 2, as to which the date is October
30, 2002

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REPORT OF PREVIOUS INDEPENDENT ACCOUNTANTS

THE FOLLOWING REPORT IS A COPY OF A REPORT
PREVIOUSLY ISSUED BY ARTHUR
ANDERSEN LLP, WHICH HAS CEASED OPERATIONS, HAS NOT BEEN REISSUED BY ARTHUR
ANDERSEN LLP.

To The Shareholders of DMI Furniture, Inc.:

We have audited the accompanying consolidated balance sheets of DMI Furniture,
Inc. (a Delaware corporation) and subsidiary as of September 1, 2001 and
September 2, 2000 and the related consolidated statements of operations,
stockholders equity and cash flows for each of the three years in the period
ended September 1, 2001. 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 auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of DMI Furniture, Inc. and
subsidiary as of September 1, 2001 and September 2, 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended September 1, 2001 in conformity with accounting principles generally
accepted in the United States.

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 Schedule is presented for purposes of
complying with the Securities and Exchange Commissions rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

|                                                                                                                                      
|--------------------------------------------------------------------------------------------------------------------------------------
|ARTHUR ANDERSEN LLP                                                                                                                   
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|                                                                                                                                      
|October 5, 2001 (except with respect to the matter
discussed in Note 2, as to which the date is October 23, 2001)
Louisville, Kentucky

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##### Table of Contents



DMI FURNITURE, INC.
CONSOLIDATED BALANCE SHEETS
As of August 31, 2002 and September 1, 2001
(Amounts in thousands)

|                                        |                                                                     |                                   |                       |        |        |   |        |        |        |  | 
|--------------------------------------- | ------------------------------------------------------------------- | --------------------------------- | --------------------- | ------ | ------ | - | ------ | ------ | ------ |  | 
|ASSETS                                  |                                                                     | 2002                              |                       | 2001  
|                                        |                                                                     |                                   |                       |       
|Current assets:                         |                                                                     |                                   |                       |        |        |   |        |       
|                                       
|                                       
|                                       
|                                       
|                                        | Cash                                                                |                                   | $                     | 169    |        |   | $      | 517    |       
|                                       
|                                       
|                                       
|                                       
|                                        | Accounts receivable (net of allowances of $200 on Aug. 31, 2002 and |                                   |                       | 17,530 |        |   |        | 16,864 |       
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                     |                                   | $627 on Sep. 1, 2001) |        |        |   |        |        |        |  | 
|                                       
|                                       
|                                       
|                                       
|                                        | Inventories (note 8)                                                |                                   |                       | 17,477 |        |   |        | 17,645 |       
|                                       
|                                       
|                                       
|                                       
|                                        | Other current assets                                                |                                   |                       | 447    |        |   |        | 424    |       
|                                       
|                                       
|                                       
|                                       
|                                        | Current portion of deferred income taxes (note 7)                   |                                   |                       | 1,058  |        |   |        | 1,467  |       
|                                        |                                                                     |                                   |                       |        |        |   |        |       
|                                        |                                                                     | Total current assets              |                       |        | 36,681 |   |        |        | 36,917 | 
|                                        |                                                                     |                                   |                       |        |        |   |        |       
|Property, plant and equipment, at cost: |                                                                     |                                   |                       |        |        |   |        |       
|                                       
|                                       
|                                       
|                                       
|                                        | Land                                                                |                                   |                       | 655    |        |   |        | 655    |       
|                                       
|                                       
|                                       
|                                       
|                                        | Buildings and improvements                                          |                                   |                       | 8,815  |        |   |        | 8,800  |       
|                                       
|                                       
|                                       
|                                       
|                                        | Machinery and equipment                                             |                                   |                       | 7,404  |        |   |        | 10,417 |       
|                                       
|                                       
|                                       
|                                       
|                                        | Leasehold improvements                                              |                                   |                       | 513    |        |   |        | 990    |       
|                                       
|                                       
|                                       
|                                       
|                                        | Assets held for disposition                                         |                                   |                       | 377    |        |   |        | 10     |       
|                                       
|                                       
|                                       
|                                       
|                                        | Construction in progress                                            |                                   |                       | 45     |        |   |        | 30     |       
|                                        |                                                                     |                                   |                       |        |        |   |        |       
|                                        |                                                                     |                                   | 17,809                |        |        |   | 20,902 |       
|                                       
|                                       
|                                       
|                                       
|                                        | Less accumulated depreciation                                       |                                   |                       | 8,920  |        |   |        | 11,545 |       
|                                        |                                                                     |                                   |                       |        |        |   |        |       
|                                       
|                                       
|                                       
|                                       
|                                        |                                                                     | Net property, plant and equipment |                       |        | 8,889  |   |        |        | 9,357  | 
|                                        |                                                                     |                                   |                       |        |        |   |        |       
|Other assets                            |                                                                     |                                   | 797                   |        |        |   | 603    |       
|                                        |                                                                     |                                   |                       |        |        |   |        |       
|Total assets                            |                                                                     | $                                 | 46,367                |        |        | $ | 46,877 |       
|                                        |                                                                     |                                   |                       |        |        |   |        |       

See accompanying notes.

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##### Table of Contents



DMI FURNITURE, INC.
CONSOLIDATED BALANCE SHEETS
As of August 31, 2002 and September 1, 2001
(Amounts in thousands, except share data)
(Continued)

|                                           |                                                                                                                      |                             |        |        |        |   |        |        |        | 
|------------------------------------------ | -------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                                                                                                      | 2002                        |        | 2001  
|                                           |                                                                                                                      |                             |        |       
|Current liabilities:                       |                                                                                                                      |                             |        |        |        |   |        |       
|                                          
|                                          
|                                          
|                                          
|                                           | Trade accounts payable                                                                                               |                             | $      | 4,813  |        |   | $      | 2,787  |       
|                                          
|                                          
|                                          
|                                          
|                                           | Accrued liabilities (note 8)                                                                                         |                             |        | 3,007  |        |   |        | 2,973  |       
|                                          
|                                          
|                                          
|                                          
|                                           | Long-term debt due within one year (note 2)                                                                          |                             |        | 930    |        |   |        | 3,501  |       
|                                           |                                                                                                                      |                             |        |        |        |   |        |       
|                                           |                                                                                                                      | Total current liabilities   |        |        | 8,750  |   |        |        | 9,261  | 
|                                           |                                                                                                                      |                             |        |        |        |   |        |       
|Long-term liabilities:                     |                                                                                                                      |                             |        |        |        |   |        |       
|                                          
|                                          
|                                          
|                                          
|                                           | Long-term debt (note 2)                                                                                              |                             |        | 19,391 |        |   |        | 20,520 |       
|                                          
|                                          
|                                          
|                                          
|                                           | Accrued pension costs (note 6)                                                                                       |                             |        | 963    |        |   |        | 743    |       
|                                          
|                                          
|                                          
|                                          
|                                           | Deferred compensation (note 6)                                                                                       |                             |        | 70     |        |   |        | 117    |       
|                                          
|                                          
|                                          
|                                          
|                                           | Deferred income taxes (note 7)                                                                                       |                             |        | 20     |        |   |        | 571    |       
|                                          
|                                          
|                                          
|                                          
|                                           | Other long-term liabilities (note 12)                                                                                |                             |        | 584    |        |   |        | 113    |       
|                                           |                                                                                                                      |                             |        |        |        |   |        |       
|                                           |                                                                                                                      | Total long-term liabilities |        |        | 21,028 |   |        |        | 22,064 | 
|                                           |                                                                                                                      |                             |        |        |        |   |        |       
|Commitments and Contingencies (note 4)     |                                                                                                                      |                             |        |        |        |   |        |       
|                                          
|                                          
|                                          
|                                          
|Stockholders equity:                      |                                                                                                                      |                             |        |        |        |   |        |       
|                                          
|                                          
|                                          
|                                          
|                                           | Common stock, $0.10 par value, 9,600,000 shares
authorized, 4,280,378 shares outstanding (4,262,938 on Sep. 1, 2001) |                             |        | 428    |        |   |        | 426    |       
|                                          
|                                          
|                                          
|                                          
|                                           | Additional paid-in capital                                                                                           |                             |        | 17,090 |        |   |        | 17,066 |       
|                                          
|                                          
|                                          
|                                          
|                                           | Retained deficit                                                                                                     |                             |        | (170   | )      |   |        | (1,525 | )     
|                                          
|                                          
|                                          
|                                          
|                                           | Accumulated other comprehensive loss                                                                                 |                             |        | (759   | )      |   |        | (415   | )     
|                                           |                                                                                                                      |                             |        |        |        |   |        |       
|                                           |                                                                                                                      | Total stockholders equity  |        |        | 16,589 |   |        |        | 15,552 | 
|                                           |                                                                                                                      |                             |        |        |        |   |        |       
|Total liabilities and stockholders equity |                                                                                                                      | $                           | 46,367 |        |        | $ | 46,877 |       
|                                           |                                                                                                                      |                             |        |        |        |   |        |       

See accompanying notes.

F-4



---



##### Table of Contents



DMI FURNITURE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Amounts in thousands (except per share amounts)

|                                                       |  |  |  |   |      |             |         |              |      |              |         |   |      |   |         |  
|------------------------------------------------------ |  |  |  | - | ---- | ----------- | ------- | ------------ | ---- | ------------ | ------- | - | ---- | - | ------- | -
|                                                       |  |  |  |   |      | Years Ended
|                                                       |  |  |  |   |      |            
|                                                       |  |  |  |   |      | August 31,  |         | September 1, |      | September 2,
|                                                       |  |  |  |   |      | 2002        |         | 2001         |      | 2000        
|                                                       |  |  |  |   |      |             |         |              |      |             
|Net sales                                              |  |  |  |   |      | $           | 100,856 |              |      | $            | 106,328 |   |      | $ | 104,837 |  
|                                                      
|                                                      
|                                                      
|                                                      
|Cost of sales                                          |  |  |  |   |      |             | 83,762  |              |      |              | 87,881  |   |      |   | 84,399  |  
|                                                      
|                                                      
|                                                      
|                                                      
|Cost of sales-restructuring (note 11)                  |  |  |  |   |      |             | 0       |              |      |              | 575     |   |      |   | 0       |  
|                                                       |  |  |  |   |      |             |         |              |      |              |         |   |      |   |         |  
|Gross profit                                           |  |  |  |   |      |             | 17,094  |              |      |              | 17,872  |   |      |   | 20,438  |  
|                                                      
|                                                      
|                                                      
|                                                      
|Margin                                                 |  |  |  |   |      |             | 16.9    | %            |      |              | 16.8    | % |      |   | 19.5    | %
|                                                      
|                                                      
|                                                      
|                                                      
|Selling, general and
administrative expenses (note 11) |  |  |  |   |      |             | 13,661  |              |      |              | 14,173  |   |      |   | 14,382  |  
|                                                      
|                                                      
|                                                      
|                                                      
|% of sales                                             |  |  |  |   |      |             | 13.5    | %            |      |              | 13.3    | % |      |   | 13.7    | %
|                                                      
|                                                      
|                                                      
|                                                      
|Restructuring charges (note 11)                        |  |  |  |   |      |             | 0       |              |      |              | 120     |   |      |   | (125    | )
|                                                       |  |  |  |   |      |             |         |              |      |              |         |   |      |   |         |  
|Operating profit                                       |  |  |  |   |      |             | 3,433   |              |      |              | 3,579   |   |      |   | 6,181   |  
|                                                      
|                                                      
|                                                      
|                                                      
|Margin                                                 |  |  |  |   |      |             | 3.4     | %            |      |              | 3.4     | % |      |   | 5.9     | %
|                                                      
|                                                      
|                                                      
|                                                      
|Other income (expense):                                |  |  |  |   |      |             |         |              |      |              |         |   |      |   |         |  
|                                                      
|                                                      
|                                                      
|                                                      
|Interest expense                                       |  |  |  |   |      |             | (1,583  | )            |      |              | (2,073  | ) |      |   | (2,239  | )
|                                                      
|                                                      
|                                                      
|                                                      
|Other income (expense)                                 |  |  |  |   |      |             | (16     | )            |      |              | 43      |   |      |   | 173     |  
|                                                       |  |  |  |   |      |             |         |              |      |              |         |   |      |   |         |  
|                                                       |  |  |  |   |      |             | (1,599  | )            |      |              | (2,030  | ) |      |   | (2,066  | )
|                                                      
|                                                      
|                                                      
|                                                      
|Income before income taxes                             |  |  |  |   |      |             | 1,834   |              |      |              | 1,549   |   |      |   | 4,115   |  
|                                                      
|                                                      
|                                                      
|                                                      
|Provision for income taxes (note 7)                    |  |  |  |   |      |             | (479    | )            |      |              | (674    | ) |      |   | (1,550  | )
|                                                       |  |  |  |   |      |             |         |              |      |              |         |   |      |   |         |  
|Net income                                             |  |  |  |   |      | $           | 1,355   |              |      | $            | 875     |   |      | $ | 2,565   |  
|                                                       |  |  |  |   |      |             |         |              |      |              |         |   |      |   |         |  
|Earnings per common share (note 15):                   |  |  |  |   |      |             |         |              |      |              |         |   |      |   |         |  
|                                                      
|                                                      
|                                                      
|                                                      
|Basic                                                  |  |  |  | $ | 0.32 |             |         | $            | 0.21 |              |         | $ | 0.63 |  
|                                                       |  |  |  |   |      |             |         |              |      |              |         |   |      |   |         |  
|Diluted                                                |  |  |  | $ | 0.31 |             |         | $            | 0.20 |              |         | $ | 0.60 |  
|                                                       |  |  |  |   |      |             |         |              |      |              |         |   |      |   |         |  
|Average common and equivalent
shares outstanding       |  |  |  |   |      |             | 4,337   |              |      |              | 4,365   |   |      |   | 4,274   |  
|                                                       |  |  |  |   |      |             |         |              |      |              |         |   |      |   |         |  

See accompanying notes.

F-5



---



##### Table of Contents



DMI FURNITURE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (2)
(Amounts in thousands)
Three years ended August 31, 2002

|                                                        |                                                |   |        |  |             |  |           |  |            |   |                   |  |       |   |        |   |             |   |      |      |   |   |        |      |  
|------------------------------------------------------- | ---------------------------------------------- | - | ------ |  | ----------- |  | --------- |  | ---------- | - | ----------------- |  | ----- | - | ------ | - | ----------- | - | ---- | ---- | - | - | ------ | ---- | -
|                                                        |                                                |   |        |  |             |  | Number of |  |            |   |                   |  |       |   |        |   | Accumulated |   |      |      |  
|                                                        |                                                |   |        |  |             |  | Common    |  | Additional |   | Retained          |  | Other |   |        |   |            
|                                                        |                                                |   | Common |  | Shares      |  | Paid-In   |  | Earnings   |   | Comprehensive     |  |       |   |       
|                                                        |                                                |   | Stock  |  | Outstanding |  | Capital   |  | (Deficit)  |   | Income/(loss) (3) |  | Total
|                                                        |                                                |   |        |  |             |  |           |  |            |   |                   |  |      
|BALANCES AT AUGUST 28, 1999                             |                                                | $ | 405    |  |             |  | 4,043     |  |            | $ | 16,551            |  |       | $ | (4,965 | ) |             | $ | (251 | )    |   | $ | 11,740 |     
|                                                       
|                                                       
|                                                       
|                                                       
|Net income                                              |                                                |   |        |  |             |  |           |  |            |   |                   |  |       |   | 2,565  |   |             |   |      |      |   |   | 2,565  |     
|                                                       
|                                                       
|                                                       
|                                                       
|Other comprehensive income:                             |                                                |   |        |  |             |  |           |  |            |   |                   |  |       |   |        |   |             |   |      |      |   |   |        |     
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Adjust minimum pension liability, net of tax   |   |        |  |             |  |           |  |            |   |                   |  |       |   |        |   |             |   |      | 251  |   |   |        | 251  |  
|                                                       
|                                                       
|                                                       
|                                                       
|Issuance of common stock                                |                                                |   | 8      |  |             |  | 89        |  |            |   | 202               |  |       |   |        |   |             |   |      |      |   |   | 210    |     
|                                                        |                                                |   |        |  |             |  |           |  |            |   |                   |  |       |   |        |   |             |   |      |      |   |   |        |     
|BALANCES AT SEPTEMBER 2, 2000                           |                                                | $ | 413    |  |             |  | 4,132     |  |            | $ | 16,753            |  |       | $ | (2,400 | ) |             | $ |     |      |   | $ | 14,766 |     
|                                                        |                                                |   |        |  |             |  |           |  |            |   |                   |  |       |   |        |   |             |   |      |      |   |   |        |     
|Net income                                              |                                                |   |        |  |             |  |           |  |            |   |                   |  |       |   | 875    |   |             |   |      |      |   |   | 875    |     
|                                                       
|                                                       
|                                                       
|                                                       
|Cumulative effect of change in
accounting principle (1) |                                                |   |        |  |             |  |           |  |            |   |                   |  |       |   |        |   |             |   | 194  |      |   |   | 194    |     
|                                                       
|                                                       
|                                                       
|                                                       
|Other comprehensive income:                             |                                                |   |        |  |             |  |           |  |            |   |                   |  |       |   |        |   |             |   |      |      |   |   |        |     
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Change in interest rate
derivative, net of tax |   |        |  |             |  |           |  |            |   |                   |  |       |   |        |   |             |   |      | (306 | ) |   |        | (306 | )
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Adjust minimum pension
liability, net of tax   |   |        |  |             |  |           |  |            |   |                   |  |       |   |        |   |             |   |      | (303 | ) |   |        | (303 | )
|                                                       
|                                                       
|                                                       
|                                                       
|Issuance of common stock                                |                                                |   | 13     |  |             |  | 131       |  |            |   | 313               |  |       |   |        |   |             |   |      |      |   |   | 326    |     
|                                                        |                                                |   |        |  |             |  |           |  |            |   |                   |  |       |   |        |   |             |   |      |      |   |   |        |     
|BALANCES AT SEPTEMBER 1, 2001                           |                                                | $ | 426    |  |             |  | 4,263     |  |            | $ | 17,066            |  |       | $ | (1,525 | ) |             | $ | (415 | )    |   | $ | 15,552 |     
|                                                        |                                                |   |        |  |             |  |           |  |            |   |                   |  |       |   |        |   |             |   |      |      |   |   |        |     
|Net income                                              |                                                |   |        |  |             |  |           |  |            |   |                   |  |       |   | 1,355  |   |             |   |      |      |   |   | 1,355  |     
|                                                       
|                                                       
|                                                       
|                                                       
|Other comprehensive income:                             |                                                |   |        |  |             |  |           |  |            |   |                   |  |       |   |        |   |             |   |      |      |   |   |        |     
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Change in interest rate derivative, net of tax |   |        |  |             |  |           |  |            |   |                   |  |       |   |        |   |             |   |      | (238 | ) |   |        | (238 | )
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Adjust minimum pension liability, net of tax   |   |        |  |             |  |           |  |            |   |                   |  |       |   |        |   |             |   |      | (106 | ) |   |        | (106 | )
|                                                       
|                                                       
|                                                       
|                                                       
|Issuance of common stock                                |                                                |   | 2      |  |             |  | 17        |  |            |   | 24                |  |       |   |        |   |             |   |      |      |   |   | 26     |     
|                                                        |                                                |   |        |  |             |  |           |  |            |   |                   |  |       |   |        |   |             |   |      |      |   |   |        |     
|BALANCES AT AUGUST 31, 2002                             |                                                | $ | 428    |  |             |  | 4,280     |  |            | $ | 17,090            |  |       | $ | (170   | ) |             | $ | (759 | )    |   | $ | 16,589 |     
|                                                        |                                                |   |        |  |             |  |           |  |            |   |                   |  |       |   |        |   |             |   |      |      |   |   |        |     



|(1) |  | Adoption of SFAS No. 133
Accounting for Derivative Instruments and Hedging
Activities                                                                                                                                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Total comprehensive income was
$1,011, $460, and $2,816 for the fiscal years 2002, 2001 and 2000, respectively.                                                                                                                                                               
|   
|   
|   
|   
|(3) |  | The components of accumulated other comprehensive income / (loss), net of tax, are as follows:
August 31, 2002  Interest rate derivative ($350) and Minimum Pension Liability ($409)
September 1, 2001  Interest rate derivative ($112) and Minimum Pension Liability ($303)

See accompanying notes.

F-6



---



##### Table of Contents



DMI FURNITURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)

|                                                    |                                                                                          |                                                   |                                                  |                        |     |             |       |              |      |              |       |       |       |        |        |  
|--------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------------- | ------------------------------------------------ | ---------------------- | --- | ----------- | ----- | ------------ | ---- | ------------ | ----- | ----- | ----- | ------ | ------ | -
|                                                    |                                                                                          |                                                   |                                                  |                        |     | Years Ended
|                                                    |                                                                                          |                                                   |                                                  |                        |     |            
|                                                    |                                                                                          |                                                   |                                                  |                        |     | August 31,  |       | September 1, |      | September 2,
|                                                    |                                                                                          |                                                   |                                                  |                        |     | 2002        |       | 2001         |      | 2000        
|                                                    |                                                                                          |                                                   |                                                  |                        |     |             |       |              |      |             
|Cash flows from operating activities:               |                                                                                          |                                                   |                                                  |                        |     |             |       |              |      |              |       |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Net income                                                                               |                                                   | $                                                | 1,355                  |     |             | $     | 875          |      |              | $     | 2,565 |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Adjustments to reconcile net income to
net cash provided (used) by operating activities: |                                                   |                                                  |                        |     |             |       |              |      |              |       |       |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                          | Depreciation and amortization                     |                                                  |                        | 875 |             |       |              | 986  |              |       |       | 1,096 |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                          | Gain on disposal of property, plant and equipment |                                                  |                        |    |             |       |              | (14  | )            |       |       | (173  | )     
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                          | Deferred income taxes                             |                                                  |                        | 209 |             |       |              | (174 | )            |       |       | (11   | )     
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                          | Changes in assets and liabilities:                |                                                  |                        |     |             |       |              |      |              |       |       |       |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                          |                                                   |                                                  | Accounts receivable    |     |             | (666  | )            |      |              | 1,027 |       |       |        | (5,205 | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                          |                                                   |                                                  | Inventories            |     |             | 168   |              |      |              | 3,166 |       |       |        | (1,906 | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                          |                                                   |                                                  | Other assets           |     |             | (217  | )            |      |              | (474  | )     |       |        | (5     | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                          |                                                   |                                                  | Trade accounts payable |     |             | 2,025 |              |      |              | (789  | )     |       |        | 1,049  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                          |                                                   |                                                  | Accrued liabilities    |     |             | (164  | )            |      |              | (915  | )     |       |        | 1,296  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                          |                                                   |                                                  | Accrued pension costs  |     |             | 220   |              |      |              | 743   |       |       |        | (130   | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                                                          |                                                   |                                                  | Deferred compensation  |     |             | (47   | )            |      |              | (59   | )     |       |        | (52    | )
|                                                    |                                                                                          |                                                   |                                                  |                        |     |             |       |              |      |              |       |      
|                                                    |                                                                                          |                                                   | Total adjustments                                |                        |     | 2,403       |       |              |      | 3,497        |       |       |       | (4,041 | )     
|                                                    |                                                                                          |                                                   |                                                  |                        |     |             |       |              |      |              |       |      
|                                                    |                                                                                          |                                                   | Net cash provided/(used) by operating activities |                        |     | 3,758       |       |              |      | 4,372        |       |       |       | (1,476 | )     
|                                                    |                                                                                          |                                                   |                                                  |                        |     |             |       |              |      |              |       |      
|Cash flows provided/(used) by investing activities: |                                                                                          |                                                   |                                                  |                        |     |             |       |              |      |              |       |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Capital expenditures                                                                     |                                                   |                                                  | (406                   | )   |             |       | (566         | )    |              |       | (479  | )    
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Proceeds from the disposal of property, plant and equipment                              |                                                   |                                                  |                       |     |             |       | 14           |      |              |       | 777   |      
|                                                    |                                                                                          |                                                   |                                                  |                        |     |             |       |              |      |              |       |      
|                                                    | Net cash provided/(used) by investing activities                                         |                                                   |                                                  | (406                   | )   |             |       | (552         | )    |              |       | 298   |      
|                                                    |                                                                                          |                                                   |                                                  |                        |     |             |       |              |      |              |       |      

See accompanying notes.

F-7



---



##### Table of Contents



DMI FURNITURE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Continued)

|                                                    |                                                  |   |             |         |              |   |              |         |   |   |      |         |  
|--------------------------------------------------- | ------------------------------------------------ | - | ----------- | ------- | ------------ | - | ------------ | ------- | - | - | ---- | ------- | -
|                                                    |                                                  |   | Years Ended
|                                                    |                                                  |   |            
|                                                    |                                                  |   | August 31,  |         | September 1, |   | September 2,
|                                                    |                                                  |   | 2002        |         | 2001         |   | 2000        
|                                                    |                                                  |   |             |         |              |   |             
|Cash flows provided/(used) by financing activities: |                                                  |   |             |         |              |   |              |         |   |   |      |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Borrowings from line-of-credit                   |   | $           | 30,100  |              |   | $            | 25,800  |   |   | $    | 32,950  |  
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Payments on line-of-credit                       |   |             | (32,900 | )            |   |              | (28,350 | ) |   |      | (30,250 | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Payments on long-term debt                       |   |             | (900    | )            |   |              | (1,430  | ) |   |      | (1,633  | )
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Proceeds from stock options exercised            |   |             |        |              |   |              |        |   |   |      | 3       |  
|                                                    |                                                  |   |             |         |              |   |              |         |   |   |      |        
|                                                    | Net cash (used)/provided by financing activities |   |             | (3,700  | )            |   |              | (3,980  | ) |   |      | 1,070   |  
|                                                    |                                                  |   |             |         |              |   |              |         |   |   |      |        
|Decrease in cash                                    |                                                  |   | (348        | )       |              |   | (160         | )       |   |   | (108 | )      
|                                                   
|                                                   
|                                                   
|                                                   
|Cash  beginning of period                          |                                                  |   | 517         |         |              |   | 677          |         |   |   | 785  |        
|                                                    |                                                  |   |             |         |              |   |              |         |   |   |      |        
|Cash  end of period                                |                                                  | $ | 169         |         |              | $ | 517          |         |   | $ | 677  |        
|                                                    |                                                  |   |             |         |              |   |              |         |   |   |      |        
|Cash paid for:                                      |                                                  |   |             |         |              |   |              |         |   |   |      |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Interest                                         |   | $           | 1,609   |              |   | $            | 2,118   |   |   | $    | 2,205   |  
|                                                    |                                                  |   |             |         |              |   |              |         |   |   |      |        
|                                                    | Income taxes                                     |   | $           | 126     |              |   | $            | 1,243   |   |   | $    | 1,274   |  
|                                                    |                                                  |   |             |         |              |   |              |         |   |   |      |        
|Non cash Items:                                     |                                                  |   |             |         |              |   |              |         |   |   |      |        
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Minimum pension liability                        |   | $           | 106     |              |   | $            | 303     |   |   | $    | 251     |  
|                                                    |                                                  |   |             |         |              |   |              |         |   |   |      |        
|                                                    | Interest rate derivatives                        |   | $           | 471     |              |   | $            | 113     |   |   | $    |        |  
|                                                    |                                                  |   |             |         |              |   |              |         |   |   |      |        
|                                                    | Stock grants                                     |   | $           | 26      |              |   | $            | 326     |   |   | $    | 207     |  
|                                                    |                                                  |   |             |         |              |   |              |         |   |   |      |        

See accompanying notes.

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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 residential, home office, and commercial office furniture.
The Company has more than one operating segment which are aggregated into one
reportable segment, in accordance with Financial Accounting Standards Board
Statement No. 131, Disclosures About Segments of an Enterprise and Related
Information. Its principal distribution channels are multi-market furniture
retailers, distributors, independent retailers, catalogers, and warehouse clubs
located primarily throughout the United States. Fiscal year 2000 consists of a
fifty-three week period ending the first Saturday in September. Fiscal years
2002 and 2001 presented in this report consist of fifty-two weeks.

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

Depreciation- Depreciation is provided on the basis of estimated useful
lives of the property, plant and equipment, using the straight-line method.
The useful lives of property, plant and equipment are as follows: Building and
leasehold improvements, 8-35 years; and machinery and equipment, 3-15 years.

Income taxes- The Company recognizes deferred tax assets and liabilities
based upon the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. (See Note 7 for additional information.)

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

Advertising- The Company expenses advertising-type costs as incurred as a
component of selling, general and administrative expenses on the accompanying
statements of operations. Advertising expense was approximately $1,175,000,
$1,482,000 and $1,672,000 in fiscal 2002, 2001 and 2000 respectively.

Accounting Estimates- The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
of America 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

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reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

Long-lived assets- Long-lived assets and intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of the
assets to the expected future net cash flows generated by the asset. If such
assets are considered to be impaired, the impairment is measured by the amount
by which the carrying amount of the assets exceeds the fair value of the
assets. The Company has not recorded an impairment loss in the accompanying
statements of operations relating to long lived assets under Statement of
Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of.

Revenue
recognition- The Company recognizes sales of its products when
the products are shipped to customers and title passes.

Impact of Recently
Issued Accounting Standards- In June 2001, the
Financial Accounting Standard Boards (FASB) issued Statement No. 141, Business
Combinations; Statement No. 142 Goodwill and Other Intangible Assets; and
Statement No. 143, Accounting for Asset Retirement Obligations. In August
2001, the FASB issued Statement No. 144 Accounting for the Impairment or
Disposal of Long-Lived Assets. In April 2002, the FASB issued Statement No.
145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections. In June 2002, the FASB issued
Statement No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. The Company does not anticipate the adoption of these statements
will have a significant effect on its results of operations or financial
position.

Reclassifications
of 2001 and 2000 Financial Statements- Certain
reclassifications have been made to the September 1, 2001 and September 2, 2000
financial statements to conform to the August 31, 2002 classifications. These
reclassifications had no effect on previously reported operations.

2. Long-term debt

Long-term debt consists of the following:

|                                                                                                                                        |  |   |           |  |      |   |           |  | 
|--------------------------------------------------------------------------------------------------------------------------------------- |  | - | --------- |  | ---- | - | --------- |  | 
|                                                                                                                                        |  |   | 2002      |  | 2001
|                                                                                                                                        |  |   |           |  |     
|Economic Development Revenue
Bonds; payable May 2003;
weekly adjustable coupon interest rate
(1.70% on 8/31/02) and payable monthly     |  | $ | 2,230,000 |  |      | $ | 2,230,000 | 
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|                                                                                                                                       
|Economic Development Revenue
Bonds; payable October 2004;
weekly adjustable coupon interest rate
(1.70% on 8/31/02) and payable monthly |  |   | 2,020,000 |  |      |   | 2,020,000 | 

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|                                                                                                                                                      |  |   |            |  |      |   |            |  | 
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ---------- |  | ---- | - | ---------- |  | 
|                                                                                                                                                      |  |   | 2002       |  | 2001
|                                                                                                                                                      |  |   |            |  |     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|Term note payable to bank; due in
52 monthly principal installments of
$77,500 through 12/31/06;interest at
prime+.50% (5.25%) or LIBOR+3.25%
(5.00%) |  |   | 1,471,000  |  |      |   | 1,171,000  | 
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|Term note payable to bank
refinanced into existing credit
agreement October 23, 2001                                                                  |  |   |            |  |      |   | 1,200,000  | 
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|$19,000,000 revolving master note
payable to bank; interest at prime
+.50% (5.25%) or LIBOR+3.25%
(5.00%); expires December, 2002                     |  |   | 14,600,000 |  |      |   | 17,400,000 | 
|                                                                                                                                                      |  |   |            |  |      |   |            | 
|                                                                                                                                                      |  |   | 20,321,000 |  |      |   | 24,021,000 | 
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|                                                                                                                                                     
|Less portion due within one-year                                                                                                                      |  |   | 930,000    |  |      |   | 3,501,000  | 
|                                                                                                                                                      |  |   |            |  |      |   |            | 
|                                                                                                                                                      |  | $ | 19,391,000 |  |      | $ | 20,520,000 | 
|                                                                                                                                                      |  |   |            |  |      |   |            | 

With respect to the term notes and revolving loan above, the Company has
the option of
borrowing based on prime rate + .50% or London Interbank Offered Rate (LIBOR) +
3.25%. As
of August 31, 2002, $14 million of the revolving master note balance and $1.4
million of the term note were LIBOR priced.

Substantially all assets are pledged to collateralize long-term debt. On
August 31, 2002, the Company had $4,400,000 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. If 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. If the
Bonds cannot be remarketed, the lender is committed to providing financing for
up to 372 days. As a result of these written commitments, the Bonds are
classified as long-term debt in the accompanying balance sheet.

The Companys bank financing agreement contains restrictive covenants that
require the Company, among other things, to maintain a fixed charge ratio, tangible net
worth, and ratio of total funded debt to EBITDA, all as defined in the bank
financing agreement. The financing agreement restricts the Company from,
without prior written consent, redeeming or purchasing any of its outstanding
capital stock; acquiring, merging or consolidating with any other business;
paying dividends; and, acquiring capital assets in excess of the prior year
depreciation. As of August 31, 2002 the Company is in compliance with each the
aforementioned covenants.

On October 30, 2002, the Company received a commitment from Bank One to
extend the due date of the revolving master credit agreement through December
31, 2004. In addition, the

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Bank has agreed to restructure certain covenants contained in the revolving master note payable and to provide increased
borrowing capacity.

The maximum availability under the revolving master note payable will be
seasonally adjusted through December 31, 2004. The seasonal availability is
reflected in the following tables.

|                                    |  |                      |            | 
|----------------------------------- |  | -------------------- | ---------- | 
|Period                              |  | Maximum Availability
|                                    |  |                     
|November 15, 2002- January 31, 2003 |  | $                    | 23,000,000 | 
|                                   
|                                   
|                                   
|                                   
|February 1, 2003-July 31, 2003      |  | $                    | 21,000,000 | 
|                                   
|                                   
|                                   
|                                   
|August 1, 2003-January 31, 2004     |  | $                    | 23,000,000 | 
|                                   
|                                   
|                                   
|                                   
|February 1, 2004-July 31, 2004      |  | $                    | 21,000,000 | 
|                                   
|                                   
|                                   
|                                   
|August 1, 2004-December 31, 2004    |  | $                    | 23,000,000 | 

The aggregate maturities of long-term debt, after the restructuring
discussed above, for the next five fiscal years and thereafter are as follows:

|           |  |   |            | 
|---------- |  | - | ---------- | 
|2003       |  | $ | 930,000    | 
|          
|          
|          
|          
|2004       |  | $ | 19,391,000 | 
|          
|          
|          
|          
|2005       |  |   |            | 
|          
|          
|          
|          
|2006       |  |   |            | 
|          
|          
|          
|          
|2007       |  |   |            | 
|          
|          
|          
|          
|Thereafter |  |   |            | 
|           |  |   |            | 
|          
|          
|          
|          
|           |  | $ | 20,321,000 | 
|           |  |   |            | 

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, 2002 under these leases for
fiscal years are as follows:

|           |  |   |           | 
|---------- |  | - | --------- | 
|2003       |  | $ | 611,000   | 
|          
|          
|          
|          
|2004       |  |   | 304,000   | 
|          
|          
|          
|          
|2005       |  |   | 239,000   | 
|          
|          
|          
|          
|2006       |  |   | 105,000   | 
|          
|          
|          
|          
|2007       |  |   |           | 
|          
|          
|          
|          
|Thereafter |  |   |           | 
|           |  |   |           | 
|          
|          
|          
|          
|           |  | $ | 1,259,000 | 
|           |  |   |           | 

Rent expense under operating leases charged to operations during fiscal
years 2002, 2001 and 2000 was $1,250,000, $1,038,000 and $1,114,000
respectively.

4. Commitments and contingencies

The Company has entered into individual employment agreements with certain
of its officers, which expire at various times through August 31, 2004.
Certain of these agreements

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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 is subject to various environmental laws of federal, state and
local governments. Compliance by the Company with existing laws has not had a
material adverse effect on the Companys financial condition and results of
operations. However, the Company cannot predict the impact of new or changed
laws or regulations on its current properties or on properties that it may
acquire in the future.

The Company does not believe there is any litigation threatened against
the Company, other than routine litigation arising out of the ordinary course
of business, which is not expected to have a material effect on the financial
position, results of operations and cash flows of the Company.

5. Stock options

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

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

|                                   |  |             |  |      |           |      |  |      |         |  |  |   |           | 
|---------------------------------- |  | ----------- |  | ---- | --------- | ---- |  | ---- | ------- |  |  | - | --------- | 
|                                   |  |             |  | 2002 |           | 2001 |  | 2000
|                                   |  |             |  |      |           |      |  |     
|Net Income:                        |  | As reported |  | $    | 1,355,000 |      |  | $    | 875,000 |  |  | $ | 2,565,000 | 
|                                  
|                                  
|                                  
|                                  
|                                   |  | Proforma    |  |      | 1,305,000 |      |  |      | 730,000 |  |  |   | 2,504,000 | 
|                                  
|                                  
|                                  
|                                  
|Diluted earnings per common share: |  |             |  |      |           |      |  |      |         |  |  |  
|                                  
|                                  
|                                  
|                                  
|                                   |  | As reported |  | $    | 0.31      |      |  | $    | 0.20    |  |  | $ | 0.60      | 
|                                  
|                                  
|                                  
|                                  
|                                   |  | Proforma    |  |      | 0.30      |      |  |      | 0.17    |  |  |   | 0.59      | 

Stock options granted prior to February 22, 1994 were granted pursuant to
the Amended Employee Incentive Stock Option Plan approved by stockholders in
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. On February 15, 2000 the maximum shares of common stock allowed to
be issued was increased to 800,000 shares for the 1993 Long Term Incentive
Stock Plan for Employees. 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

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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, 2002 follows:

|                                                           |  |         |       |                  |  |         |      |                  |  |         |       |                  |  |   |      |  |  |  |     |  |  |   |      | 
|---------------------------------------------------------- |  | ------- | ----- | ---------------- |  | ------- | ---- | ---------------- |  | ------- | ----- | ---------------- |  | - | ---- |  |  |  | --- |  |  | - | ---- | 
|                                                           |  | 2002    |       | 2001             |  | 2000   
|                                                           |  |         |       |                  |  |        
|                                                           |  | Options |       | Weighted Average |  | Options |      | Weighted Average |  | Options |       | Weighted Average
|                                                           |  | (000)   |       | Exercise Price   |  | (000)   |      | Exercise Price   |  | (000)   |       | Exercise Price  
|                                                           |  |         |       |                  |  |         |      |                  |  |         |       |                 
|Outstanding-beginning of
year                              |  |         | 1,010 |                  |  | $       | 2.05 |                  |  |         | 927   |                  |  | $ | 1.98 |  |  |  | 922 |  |  | $ | 1.98 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Granted                                                    |  |         |      |                  |  |         |     |                  |  |         | 91    |                  |  | $ | 2.75 |  |  |  | 5   |  |  | $ | 1.75 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Expired                                                    |  |         | (72   | )                |  | $       | 2.38 |                  |  |         | (8    | )                |  | $ | 2.00 |  |  |  |    |  |  |   |     | 
|                                                           |  |         |       |                  |  |         |      |                  |  |         |       |                  |  |   |      |  |  |  |     |  |  |   |      | 
|Outstanding-end of year                                    |  |         | 938   |                  |  | $       | 2.03 |                  |  |         | 1,010 |                  |  | $ | 2.05 |  |  |  | 927 |  |  | $ | 1.98 | 
|                                                           |  |         |       |                  |  |         |      |                  |  |         |       |                  |  |   |      |  |  |  |     |  |  |   |      | 
|Exercisable at end of year                                 |  |         | 881   |                  |  | $       | 1.98 |                  |  |         | 911   |                  |  | $ | 1.97 |  |  |  | 885 |  |  | $ | 1.93 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Weighted-average fair
value of options granted
during year |  |         |       |                  |  |         |     |                  |  |         |       |                  |  | $ | 1.48 |  |  |  |     |  |  | $ | 1.41 | 

Exercise prices for options outstanding as of August 31, 2002 ranged from
$1.38 to $3.63. The weighted-average remaining contractual life of those
options is 3.4 years.

Included in the above option table are non-qualified options for 366,724
shares of common stock for $1.38 to $2.50 per share to certain
employees/directors, which have a total option price of approximately $652,000.
The options are immediately exercisable for up to ten years after the date of
grant.

The Company has a stock option plan under which the Company is authorized
to issue options to non-employee directors to acquire a maximum of 160,000
shares of its common stock for options granted prior to March 15, 1998. A new
plan was adopted effective March 15, 1998 authorizing the Company to issue
options to non-employee directors to acquire a maximum of 100,000 shares of its
common stock. The option price is the closing bid price for shares on
NASDAQ on the date of grant. Options vest at the cumulative rate of 50% and
100% on the first two anniversaries of the date of grant and expire ten years
from date of grant. A summary of the option transactions during the three
years ended August 31, 2002 follows:

|                                                           |  |         |    |                  |  |         |      |                  |  |         |    |                  |  |   |      |  |  |  |    |   |  |   |      | 
|---------------------------------------------------------- |  | ------- | -- | ---------------- |  | ------- | ---- | ---------------- |  | ------- | -- | ---------------- |  | - | ---- |  |  |  | -- | - |  | - | ---- | 
|                                                           |  | 2002    |    | 2001             |  | 2000   
|                                                           |  |         |    |                  |  |        
|                                                           |  | Options |    | Weighted Average |  | Options |      | Weighted Average |  | Options |    | Weighted Average
|                                                           |  | (000)   |    | Exercise Price   |  | (000)   |      | Exercise Price   |  | (000)   |    | Exercise Price  
|                                                           |  |         |    |                  |  |         |      |                  |  |         |    |                 
|Outstanding-beginning of
year                              |  |         | 56 |                  |  | $       | 2.75 |                  |  |         | 48 |                  |  | $ | 2.85 |  |  |  | 41 |   |  | $ | 2.84 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Granted                                                    |  |         | 4  |                  |  | $       | 1.59 |                  |  |         | 9  |                  |  | $ | 2.00 |  |  |  | 9  |   |  | $ | 2.69 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Exercised                                                  |  |         | (1 | )                |  | $       | 1.38 |                  |  |         |   |                  |  |   |     |  |  |  |   |   |  |   |     | 
|                                                          
|                                                          
|                                                          
|                                                          
|Expired                                                    |  |         | (2 | )                |  | $       | 1.38 |                  |  |         | (1 | )                |  | $ | 1.19 |  |  |  | (2 | ) |  | $ | 1.75 | 
|                                                           |  |         |    |                  |  |         |      |                  |  |         |    |                  |  |   |      |  |  |  |    |   |  |   |      | 
|Outstanding-end of year                                    |  |         | 59 |                  |  | $       | 2.69 |                  |  |         | 56 |                  |  | $ | 2.75 |  |  |  | 48 |   |  | $ | 2.85 | 
|                                                           |  |         |    |                  |  |         |      |                  |  |         |    |                  |  |   |      |  |  |  |    |   |  |   |      | 
|Exercisable at end of year                                 |  |         | 46 |                  |  | $       | 2.88 |                  |  |         | 38 |                  |  | $ | 2.84 |  |  |  | 32 |   |  | $ | 2.71 | 
|                                                          
|                                                          
|                                                          
|                                                          
|Weighted-average fair
value of options granted
during year |  |         |    |                  |  | $       | 0.79 |                  |  |         |    |                  |  | $ | 1.07 |  |  |  |    |   |  | $ | 2.17 | 

Exercise prices for options outstanding as of August 31, 2002 ranged from
$1.56 to $4.00. The weighted-average remaining contractual life of those
options is 6.3 years.

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The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal 2002, 2001 and 2000: expected volatility
of 46%; risk-free interest rate of 2% for 2002 and 5% for fiscal 2001 and 2000;
expected lives for options of 7 years; and expected dividend yield of zero
percent based on the Companys history of no dividend payments on common stock.

6. Pension plans

The Company has a defined benefit pension plan that covers substantially
all hourly employees. 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 that is equal to or greater than the minimum
required under ERISA.

Net pension costs for the defined benefit plan in fiscal 2002, fiscal 2001
and fiscal 2000 were computed as follows:

|                                                |  |      |          |      |  |      |          |   |  |   |          |  
|----------------------------------------------- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                                |  | 2002 |          | 2001 |  | 2000
|                                                |  |      |          |      |  |     
|Service cost-benefits earned                    |  | $    | 56,646   |      |  | $    | 48,837   |   |  | $ | 77,623   |  
|                                               
|                                               
|                                               
|                                               
|Interest costs of projected benefit
obligation  |  |      | 244,522  |      |  |      | 238,597  |   |  |   | 230,881  |  
|                                               
|                                               
|                                               
|                                               
|Expected return on plan assets                  |  |      | (240,571 | )    |  |      | (260,949 | ) |  |   | (224,024 | )
|                                               
|                                               
|                                               
|                                               
|Amortization of transition obligation           |  |      | 9,907    |      |  |      | 9,907    |   |  |   | 9,907    |  
|                                               
|                                               
|                                               
|                                               
|Amortization of unrecognized prior service
cost |  |      | 16,649   |      |  |      | 15,326   |   |  |   | 15,326   |  
|                                               
|                                               
|                                               
|                                               
|Recognized actuarial (gain)/loss                |  |      | 15,209   |      |  |      | (1,189   | ) |  |   | 3,535    |  
|                                                |  |      |          |      |  |      |          |   |  |   |          |  
|Net pension expense                             |  | $    | 102,362  |      |  | $    | 50,529   |   |  | $ | 113,248  |  
|                                                |  |      |          |      |  |      |          |   |  |   |          |  

The funded status of the defined benefit plan at August 31, 2002 and
September 1, 2001 is shown below:

|                                        |  |      |           |      |  |   |           |  
|--------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | -
|                                        |  | 2002 |           | 2001
|                                        |  |      |           |     
|Change in benefit obligation:           |  |      |           |      |  |   |           |  
|                                       
|                                       
|                                       
|                                       
|Benefit obligation at beginning of year |  | $    | 3,642,758 |      |  | $ | 3,006,349 |  
|                                       
|                                       
|                                       
|                                       
|Service cost                            |  |      | 56,646    |      |  |   | 48,837    |  
|                                       
|                                       
|                                       
|                                       
|Interest cost                           |  |      | 244,522   |      |  |   | 238,597   |  
|                                       
|                                       
|                                       
|                                       
|Benefits paid                           |  |      | (303,594  | )    |  |   | (194,917  | )
|                                       
|                                       
|                                       
|                                       
|Actuarial (gain)/loss                   |  |      | (72,661   | )    |  |   | 543,892   |  
|                                       
|                                       
|                                       
|                                       
|Plan amendments                         |  |      | 24,238    |      |  |   |          |  
|                                        |  |      |           |      |  |   |           |  
|Benefit obligation at end of year       |  | $    | 3,591,909 |      |  | $ | 3,642,758 |  
|                                        |  |      |           |      |  |   |           |  

F-15



---



##### Table of Contents



|                                               |  |      |           |      |  |   |           |  
|---------------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | -
|                                               |  | 2002 |           | 2001
|                                               |  |      |           |     
|Change in plan assets:                         |  |      |           |      |  |   |           |  
|                                              
|                                              
|                                              
|                                              
|Fair value of plan assets at beginning of year |  | $    | 2,900,061 |      |  | $ | 3,199,306 |  
|                                              
|                                              
|                                              
|                                              
|Actual loss on plan assets                     |  |      | (218,030  | )    |  |   | (324,328  | )
|                                              
|                                              
|                                              
|                                              
|Employer contributions                         |  |      | 250,000   |      |  |   | 220,000   |  
|                                              
|                                              
|                                              
|                                              
|Benefits paid                                  |  |      | (303,594  | )    |  |   | (194,917  | )
|                                               |  |      |           |      |  |   |           |  
|Fair value of plan assets at end of year       |  | $    | 2,628,437 |      |  | $ | 2,900,061 |  
|                                               |  |      |           |      |  |   |           |  

|                                           |  |      |           |      |  |   |           |  
|------------------------------------------ |  | ---- | --------- | ---- |  | - | --------- | -
|                                           |  | 2002 |           | 2001
|                                           |  |      |           |     
|Reconciliation of funded status:           |  |      |           |      |  |   |           |  
|                                          
|                                          
|                                          
|                                          
|Funded status                              |  |      | ($963,472 | )    |  |   | ($742,697 | )
|                                          
|                                          
|                                          
|                                          
|Unrecognized actuarial (gain)/loss         |  |      | 1,077,722 |      |  |   | 706,991   |  
|                                          
|                                          
|                                          
|                                          
|Unrecognized transition (asset)/obligation |  |      | 79,250    |      |  |   | 89,157    |  
|                                          
|                                          
|                                          
|                                          
|Unrecognized prior service cost            |  |      | 202,170   |      |  |   | 194,581   |  
|                                           |  |      |           |      |  |   |           |  
|Net amount recognized at year-end          |  | $    | 395,670   |      |  | $ | 248,032   |  
|                                           |  |      |           |      |  |   |           |  

|                                                                                              |  |      |          |      |  |   |          |  
|--------------------------------------------------------------------------------------------- |  | ---- | -------- | ---- |  | - | -------- | -
|                                                                                              |  | 2002 |          | 2001
|                                                                                              |  |      |          |     
|Amounts recognized in the statement of financial
position consist of:                         |  |      |          |      |  |   |          |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Prepaid benefit cost                                                                          |  | $    | 395,670  |      |  | $ | 248,032  |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Accrued benefit liability                                                                     |  |      | (963,472 | )    |  |   | (742,697 | )
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Intangible asset                                                                              |  |      | 281,420  |      |  |   | 283,738  |  
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Accumulated other comprehensive income                                                        |  |      | 682,052  |      |  |   | 458,959  |  
|                                                                                              |  |      |          |      |  |   |          |  
|Net amount recognized at year end                                                             |  | $    | 395,670  |      |  | $ | 248,032  |  
|                                                                                              |  |      |          |      |  |   |          |  
|Other comprehensive income attributable to change in
additional minimum liability recognition |  | $    | 223,093  |      |  | $ | 458,959  |  

|                                                 |  |           |          |   |  |  |      |  
|------------------------------------------------ |  | --------- | -------- | - |  |  | ---- | -
|Weighted-average assumption as of:               |  | 8/31/2002 | 9/1/2001
|                                                 |  |           |         
|Discount rate                                    |  |           | 7.00     | % |  |  | 7.00 | %
|                                                
|                                                
|                                                
|                                                
|Expected long-term rate of return on plan assets |  |           | 8.25     | % |  |  | 8.25 | %

The Company has defined contribution 401(k) retirement plans for salaried
and hourly personnel. Costs charged to operations in fiscal 2002, fiscal 2001
and fiscal 2000 for these plans were approximately $162,000, $179,000 and
$173,000, 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, 2002 and September 1, 2001
is approximately $70,000 and $117,000, respectively. Plan costs charged to
operations were approximately $6,000 in fiscal 2002, $12,000 in fiscal 2001,
and approximately $24,000 in fiscal 2000.

F-16



---



##### Table of Contents



7. Income taxes

The tax effect of each temporary basis difference and carry forward that
gives rise to significant deferred tax assets and deferred tax liabilities as
of August 31, 2002 and September 1, 2001 is as follows (in thousands):

|                                                                                      |  |      |       |      |  |   |       |  
|------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                                                                                      |  | 2002 |       | 2001
|                                                                                      |  |      |       |     
|Accumulated tax depreciation of property and equipment in
excess of book depreciation |  |      | ($457 | )    |  |   | ($633 | )
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Net operating loss carry forward                                                      |  |      | 101   |      |  |   |      |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Various accruals and reserves                                                         |  |      | 1,181 |      |  |   | 1,309 |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Inventory                                                                             |  |      | 210   |      |  |   | 199   |  
|                                                                                     
|                                                                                     
|                                                                                     
|                                                                                     
|Other                                                                                 |  |      | 3     |      |  |   | 21    |  
|                                                                                      |  |      |       |      |  |   |       |  
|Net deferred tax asset                                                                |  | $    | 1,038 |      |  | $ | 896   |  
|                                                                                      |  |      |       |      |  |   |       |  

A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. Management
believes the existing net deductible temporary differences will reverse during
the periods in which the Company generates net taxable income. Based on this
belief and the Companys historical and current pre-tax earnings as well as its
expectations for the future, management believes it is more likely than not
that the Company will realize its deferred tax assets. As a result, no
valuation allowance was required as of August 31, 2002 and September 1, 2001.
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, 2002       |     | Sep. 1, 2001 |  | Sep. 2, 2000
|                           |  |                     |     |              |  |             
|Currently payable, federal |  | $                   | 216 |              |  | $            | 848  |   |  | $ | 1,561 |  
|                          
|                          
|                          
|                          
|Currently payable, state   |  |                     | 54  |              |  |              | 0    |   |  |   | 0     |  
|                          
|                          
|                          
|                          
|Deferred                   |  |                     | 209 |              |  |              | (174 | ) |  |   | (11   | )
|                           |  |                     |     |              |  |              |      |   |  |   |       |  
|Total                      |  | $                   | 479 |              |  | $            | 674  |   |  | $ | 1,550 |  
|                           |  |                     |     |              |  |              |      |   |  |   |       |  

The deferred tax provision excludes the impact of deferred taxes associated
with the minimum pension liability. The minimum pension liability is charged
directly to equity net of tax.

F-17



---



##### Table of Contents



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, 2002       |      | Sep. 1, 2001 |  | Sep. 2, 2000
|                                            |  |                     |      |              |  |             
|Tax at 34% statutory rate                   |  | $                   | 642  |              |  | $            | 527 |  |  | $ | 1,409 | 
|                                           
|                                           
|                                           
|                                           
|State income taxes (net of federal
benefit) |  |                     | (143 | )            |  |              | 105 |  |  |   | 141   | 
|                                           
|                                           
|                                           
|                                           
|Other                                       |  |                     | (20  | )            |  |              | 42  |  |  |   | 0     | 
|                                            |  |                     |      |              |  |              |     |  |  |   |       | 
|Income Taxes                                |  | $                   | 479  |              |  | $            | 674 |  |  | $ | 1,550 | 
|                                            |  |                     |      |              |  |              |     |  |  |   |       | 

8. Other information

Inventories  Inventories are summarized below (in thousands):

|                  |  |      |        |      |  |   |        | 
|----------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                  |  | 2002 |        | 2001
|                  |  |      |        |     
|Finished Products |  | $    | 14,669 |      |  | $ | 13,301 | 
|                 
|                 
|                 
|                 
|Work in Process   |  |      | 428    |      |  |   | 576    | 
|                 
|                 
|                 
|                 
|Raw Materials     |  |      | 2,380  |      |  |   | 3,768  | 
|                  |  |      |        |      |  |   |        | 
|Total             |  | $    | 17,477 |      |  | $ | 17,645 | 
|                  |  |      |        |      |  |   |        | 

Accrued liabilities  Accrued liabilities are summarized below (in
thousands):

|                                  |  |      |       |      |  |   |       | 
|--------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|Description                       |  | 2002 |       | 2001
|                                  |  |      |       |     
|Property, payroll and other taxes |  | $    | 886   |      |  | $ | 683   | 
|                                 
|                                 
|                                 
|                                 
|Payroll, bonuses and commissions  |  |      | 1,802 |      |  |   | 1,773 | 
|                                 
|                                 
|                                 
|                                 
|Plant closing reserve (note 11)   |  |      |      |      |  |   | 120   | 
|                                 
|                                 
|                                 
|                                 
|Interest                          |  |      | 64    |      |  |   |      | 
|                                 
|                                 
|                                 
|                                 
|Other                             |  |      | 255   |      |  |   | 397   | 
|                                  |  |      |       |      |  |   |       | 
|Total                             |  | $    | 3,007 |      |  | $ | 2,973 | 
|                                  |  |      |       |      |  |   |       | 

F-18



---



##### Table of Contents



9. Quarterly financial data (unaudited)

|                                                   |  |         |        |         |  |         |        |         |  |      |        |  |  |   |        |  |  |   |         | 
|-------------------------------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------- | 
|(in thousands of dollars except per share amounts)
|                                                   |  | First   |        | Second  |  | Third   |        | Fourth  |  |      |        | 
|Fiscal 2002                                        |  | Quarter |        | Quarter |  | Quarter |        | Quarter |  | Year
|                                                   |  |         |        |         |  |         |        |         |  |     
|Net Sales                                          |  | $       | 25,266 |         |  | $       | 22,205 |         |  | $    | 25,154 |  |  | $ | 28,231 |  |  | $ | 100,856 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Gross Profit                                       |  |         | 4,337  |         |  |         | 3,724  |         |  |      | 4,498  |  |  |   | 4,535  |  |  |   | 17,094  | 
|                                                  
|                                                  
|                                                  
|                                                  
|Net Income                                         |  |         | 327    |         |  |         | 67     |         |  |      | 373    |  |  |   | 588    |  |  |   | 1,355   | 
|                                                  
|                                                  
|                                                  
|                                                  
|Diluted earnings
per common Share
(1)              |  | $       | 0.08   |         |  | $       | 0.02   |         |  | $    | 0.09   |  |  | $ | 0.14   |  |  | $ | 0.31    | 

|                                      |  |         |        |         |  |         |        |            |  |      |        |  |  |   |        |   |  |   |         | 
|------------------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ---------- |  | ---- | ------ |  |  | - | ------ | - |  | - | ------- | 
|                                      |  | First   |        | Second  |  | Third   |        | Fourth     |  |      |        | 
|Fiscal 2001                           |  | Quarter |        | Quarter |  | Quarter |        | Quarter(2) |  | Year
|                                      |  |         |        |         |  |         |        |            |  |     
|Net Sales                             |  | $       | 34,162 |         |  | $       | 22,810 |            |  | $    | 24,810 |  |  | $ | 24,546 |   |  | $ | 106,328 | 
|                                     
|                                     
|                                     
|                                     
|Gross Profit                          |  |         | 6,706  |         |  |         | 3,495  |            |  |      | 4,264  |  |  |   | 3,407  |   |  |   | 17,872  | 
|                                     
|                                     
|                                     
|                                     
|Net Income/(loss)                     |  |         | 1,128  |         |  |         | 46     |            |  |      | 82     |  |  |   | (381   | ) |  |   | 875     | 
|                                     
|                                     
|                                     
|                                     
|Diluted earnings
per common Share
(1) |  | $       | 0.26   |         |  | $       | 0.01   |            |  | $    | 0.02   |  |  |   | ($0.09 | ) |  | $ | 0.20    | 

(1)  Diluted earnings per common share are calculated by dividing net income by
the weighted average number of common and common equivalent shares outstanding
during the period. Diluted earnings per share are computed independently for
each of the quarters presented. Therefore, the sum of the quarterly diluted
earnings per common share information may not equal the annual diluted earnings
per common share.

(2)  See Note 11.

10. Major customers and sources of supply

The Companys five largest customers accounted for approximately 30%, 44%
and 49% of the Companys total sales in fiscal 2002, fiscal 2001 and fiscal
2000 respectively. One customer accounted for approximately 15%, 28% and 32%
of the Companys total net sales in fiscal 2002, fiscal 2001 and fiscal 2000
respectively. The loss of one or more of these customers could have a
materially adverse effect on the business. As of August 31, 2002 and
September 1, 2001, one customer accounted for approximately 13% and 30%
respectively, 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 total sales of imported product were 74%, 64% and 62% for
fiscal 2002, fiscal 2001 and fiscal 2000 respectively. The Company designs the
majority of the furniture it purchases from foreign factories and actively
participates in the production and quality control process. The Company
maintains administrative offices in China and Thailand to manage the quality
control, production process and other supply chain functions. The Company
maintains small amounts of finished goods inventories in China at a vendor
provided warehouse. An unanticipated interruption in the flow of products from
one or more of the overseas factories could have a short-term material adverse
effect on the Companys results of operations.

F-19



---



##### Table of Contents



11. Plant closing and restructuring

During the fourth quarter of fiscal 2001, the Company committed to
discontinue the manufacturing of promotional bedroom furniture during the first
quarter of fiscal 2002. The Company believes the decline in aggregate demand
for fully assembled promotional bedroom furniture and excess industry capacity
prevent this product line from recovering the costs of manufacturing, including
the cost of capital. The Company does not anticipate the trend reversing. As
a result, the Company, during the fourth quarter of fiscal 2001, recorded a
pre-tax charge of $775,000 for the expected cost of discontinuing the
production of promotionally priced bedroom furniture. The charge included book
provisions of approximately $575,000 for reducing certain inventory items to
estimated net realizable value. The inventory charge representing a permanent
inventory basis reduction was recorded as a separate component of cost of
sales. An $80,000 charge for expected losses relating to un-collectible
accounts receivable was charged to bad debt expense, a component of selling,
general, and administrative expenses. A $120,000 charge for severance pay,
which is called for under Company policy, relates to the termination of certain
salaried and support staff personnel, and was charged to restructuring costs in
the statements of operations.

During the fourth quarter of fiscal 1999, management committed to
permanently close its Ferdinand, Indiana furniture manufacturing plant during
fiscal 2000. During the fourth quarter of fiscal 1999, the Company recorded a
pre-tax charge of $600,000 for the expected costs of closing the
above-mentioned plant. As of May 27, 2000 the Company had completed the shut
down of the Ferdinand, Indiana plant. During the third quarter of fiscal 2000,
the Company recognized a $166,000 gain on the sales of assets. The Company
also recorded a $125,000 plant closing reserve credit in the second fiscal
quarter of fiscal 2000, as plant-closing costs were less than anticipated.

12.     Derivative & Hedging Activities

The Company utilizes interest rate swaps to hedge against adverse changes
in interest rates relative to the Companys variable rate debt. The interest
rate swaps are not utilized to take speculative positions. The Companys
policies with regards to activities involving derivative instruments were
established and those policies along with actual derivative related results are
periodically reviewed with the Companys Board of Directors.

In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities. The
Company adopted the new Statement effective September 3, 2000 and recorded
$194,000 as a cumulative effect of a change in accounting principle. As a
result, the Company has recorded the fair market value of its interest rate
swaps as cash flow hedges on its balance sheet and has marked them to fair
value through other comprehensive income. The fair market values of the swaps
are approximately ($584,000) as of August 31, 2002 and are reflected as other
long-term liabilities on the accompanying balance sheet.

F-20



---



##### Table of Contents



13. Fair Value of Financial Instruments

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

The Company as of August 31, 2002 has interest rate swaps in the nominal
amount of approximately $14.4 million, which are used to reduce the risk of
interest rate movements for a portion of its long-term debt. The market value
of the swaps is approximately a $584,000 liability.

14. Source and Supply of Labor

The Company employs approximately 240 employees, of whom approximately 99
are covered by a collective bargaining contract, which expires March 31, 2004.

15. Earnings Per Common Share

|                                                                                                              |  |                                    |       |      |  |      |       |  |  |   |       | 
|------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                                                              |  | (Amounts in thousands             
|                                                                                                              |  | except earnings per share amounts)
|                                                                                                              |  |                                   
|                                                                                                              |  | 2002                               |       | 2001 |  | 2000
|                                                                                                              |  |                                    |       |      |  |     
|Net Income                                                                                                    |  | $                                  | 1,355 |      |  | $    | 875   |  |  | $ | 2,565 | 
|                                                                                                              |  |                                    |       |      |  |      |       |  |  |   |       | 
|Average common shares outstanding                                                                             |  |                                    | 4,279 |      |  |      | 4,221 |  |  |   | 4,103 | 
|                                                                                                             
|                                                                                                             
|                                                                                                             
|                                                                                                             
|Common stock equivalents-dilutive options                                                                     |  |                                    | 58    |      |  |      | 144   |  |  |   | 171   | 
|                                                                                                              |  |                                    |       |      |  |      |       |  |  |   |       | 
|Average shares of common stock and equivalents
outstanding                                                    |  |                                    | 4,337 |      |  |      | 4,365 |  |  |   | 4,274 | 
|                                                                                                              |  |                                    |       |      |  |      |       |  |  |   |       | 
|Basic earnings per share
(Net income divided by average common shares
outstanding)                            |  | $                                  | 0.32  |      |  | $    | 0.21  |  |  | $ | 0.63  | 
|                                                                                                              |  |                                    |       |      |  |      |       |  |  |   |       | 
|Diluted earnings per share
(Net income divided by average shares of common
stock and equivalents outstanding) |  | $                                  | 0.31  |      |  | $    | 0.20  |  |  | $ | 0.60  | 
|                                                                                                              |  |                                    |       |      |  |      |       |  |  |   |       | 

F-21



---



##### Table of Contents



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

None.

II-11



---



##### Table of Contents






Part III.

Item 10. DIRECTORS AND EXCUTIVE OFFICERS OF THE PARTICIPANT

The information under the heading Election of Directors is incorporated
by reference from the Companys definitive proxy statement on Schedule 14A for
its annual meeting of stockholders scheduled for December 19, 2002 (the Proxy
Statement).

Item 11. EXECUTIVE COMPENSATION

The information under the heading Executive Compensation is incorporated
by reference from the Proxy Statement.

The following table sets forth information relating to the Companys
equity compensation plan and arrangements.

|                                                               |  |                          |         |                     |  |                         |      |                     |  |                         |         | 
|-------------------------------------------------------------- |  | ------------------------ | ------- | ------------------- |  | ----------------------- | ---- | ------------------- |  | ----------------------- | ------- | 
|                                                               |  | Equity Compensation Plan
|                                                               |  | A                        |         | b                   |  | c                      
|                                                               |  |                          |         |                     |  | Number of Securities   
|                                                               |  |                          |         |                     |  |                         |      |                     |  | remaining available for
|                                                               |  |                          |         |                     |  |                         |      |                     |  | future issuance under  
|                                                               |  | Number of securities     |         |                     |  |                         |      | equity compensation
|                                                               |  | to be issued upon        |         | Weighted-average    |  | plans (excluding       
|                                                               |  | exercise of              |         | exercise price of   |  | securities reflected in
|                                                               |  | outstanding options      |         | outstanding options |  | column (a))            
|                                                               |  |                          |         |                     | 
|Equity compensation plans approved by stockholders:            |  |                          |         |                    
|                                                              
|                                                              
|                                                              
|                                                              
|Employee plans (1)                                             |  |                          | 667,437 |                     |  | $                       | 2.18 |                     |  |                         | 314,123 | 
|                                                              
|                                                              
|                                                              
|                                                              
|Plan for independent
directors (2)                             |  |                          | 59,000  |                     |  | $                       | 2.69 |                     |  |                         | 64,000  | 
|                                                              
|                                                              
|                                                              
|                                                              
|Equity compensation arrangements not approved by stockholders: |  |                          |         |                    
|                                                              
|                                                              
|                                                              
|                                                              
|Equity compensation
for executive
officers (3)                 |  |                          | 366,724 |                     |  | $                       | 1.78 |                     |  |                         | 0       | 



---

|(1) |  | 1993 Long Term Incentive Stock Plan for Employees and 1988 Stock
Option Plan for Employees.                                                                                                                                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | 1998 Stock Option Plan for Independent Directors and 1988 Non
Employee Director Stock Option Program.                                                                                                                                                                                                                                                                   
|   
|   
|   
|   
|(3) |  | These stock options were issued to executive officers in lieu of stock
grants that were earned under the terms of prior employment agreements.
None of the Companys current employment agreements with executive
officers provide for grants of stock or stock options. The options
granted under this arrangement expire at various times during the next
three years.

III-1



---



##### Table of Contents



Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information under the heading Principal Holders of Voting Securities
is incorporated by reference from the Proxy Statement.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

Item 14. DISCLOSURE CONTROLS AND PROCEDURES

The Companys management has evaluated the effectiveness of the design and
operation of disclosure controls and procedures within 90 days of the filing
date of this annual report. Based on the results of the evaluation, the
Companys chief executive officer and its chief financial officer have
concluded that these controls and procedures are effective. In addition, there
were no significant changes in the Companys internal controls or in other
factors that could significantly affect the controls subsequent to the date of
their evaluation.

Disclosure controls and procedures are the Companys controls and other
procedures that are designed to ensure that information required to be
disclosed in the reports that are filed or submitted under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commissions rules and forms. Disclosure
controls and procedures include controls and procedures designed to ensure that
information required to be disclosed by the Company, under the Exchange Act, is
accumulated and communicated to the Companys management, including our chief
executive officer and chief financial officer, as appropriate to allow timely
decisions regarding required disclosure.

III-2



---



##### Table of Contents






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 certification pages.                                

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



| |  |  | None.
| |  |  | -----

IV-1



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##### Table of Contents






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: |  | November 7, 2002 |  | DMI FURNITURE, INC.                                                                            
|      
|       |  |                  |  | By:/s/Donald D. DreherPresident, 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.

|                                            |  |                                                                                               |  |                 
|------------------------------------------- |  | --------------------------------------------------------------------------------------------- |  | ----------------
|/S/Joseph G. HillJoseph G. Hill             |  | Executive Vice President,
Operations and Director                                             |  | November 7, 2002
|                                           
|/S/Phillip J. KellerPhillip J. Keller       |  | Vice President, Finance,
Chief Financial Officer,
Treasurer, and Principal
Accounting Officer |  | November 7, 2002
|                                           
|/S/Thomas M. Levine.Thomas M. Levine        |  | Director                                                                                      |  | November 7, 2002
|                                           
|/S/David MartinDavid Martin                 |  | Director                                                                                      |  | November 7, 2002
|                                           
|/S/W. Howard ArmisteadW. Howard Armistead   |  | Director                                                                                      |  | November 7, 2002
|                                           
|/S/Daniel H. AbramowitzDaniel H. Abramowitz |  | Director                                                                                      |  | November 7, 2002
|                                           
|/S/Donald D. DreherDonald D. Dreher         |  | President, Chief
Executive Officer, Chairman
of the Board and Director                        |  | November 7, 2002

IV-2



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##### Table of Contents






CERTIFICATIONS

Certification of Chief Executive Officer

I, Donald D. Dreher, certify that:

1.     I have reviewed this annual report on Form 10-K of DMI Furniture, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a)     designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: November 7, 2002



| | /s/Donald D. Dreher
President, Chief
Executive Officer, Chairman
of the Board and Director
| | ------------------------------------------------------------------------------------------





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##### Table of Contents



Certification of Chief Financial Officer

I, Phillip J. Keller, certify that:

1.     I have reviewed this annual report on Form 10-K of DMI Furniture, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: November 7, 2002



| | /s/Phillip J. Keller
Vice President, Finance,
Chief Financial Officer,
Treasurer, and Principal
Accounting Officer
| | ------------------------------------------------------------------------------------------------------------------





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##### Table of Contents



DMI FURNITURE, INC.
SCHEDULE II

|                                 |  |            |         |              |  |             |          |           |  |   |         |  |  |   |         | 
|-------------------------------- |  | ---------- | ------- | ------------ |  | ----------- | -------- | --------- |  | - | ------- |  |  | - | ------- | 
|                                 |  |            |         |              |  | Additions   |          |           |  |   |         |  |  |  
|                                 |  |            |         |              |  | Charged/    |          |           |  |   |         |  |  |  
|                                 |  | Balance at |         | (credited)   |  | Charge-offs |          | Balance  
|                                 |  | Beginning  |         | to Costs and |  | Net of      |          | at End   
|Description                      |  | of Period  |         | Expenses     |  | Recoveries  |          | of Period
|                                 |  |            |         |              |  |             |          |          
|Allowance for doubtful accounts: |  |            |         |              |  |             |          |           |  |   |         |  |  |   |         | 
|                                
|                                
|                                
|                                
|Year ended September 2, 2000     |  | $          | 175,000 |              |  | $           | 207,000  |           |  | $ | 181,000 |  |  | $ | 201,000 | 
|                                 |  |            |         |              |  |             |          |           |  |   |         |  |  |   |         | 
|Year ended September 1, 2001     |  | $          | 201,000 |              |  | $           | 614,000  |           |  | $ | 188,000 |  |  | $ | 627,000 | 
|                                 |  |            |         |              |  |             |          |           |  |   |         |  |  |   |         | 
|Year ended August 31, 2002       |  | $          | 627,000 |              |  | $           | 510,000  |           |  | $ | 937,000 |  |  | $ | 200,000 | 
|                                 |  |            |         |              |  |             |          |           |  |   |         |  |  |   |         | 
|Restructuring Charges:           |  |            |         |              |  |             |          |           |  |   |         |  |  |   |         | 
|                                
|                                
|                                
|                                
|Year ended September 2, 2000     |  | $          | 600,000 |              |  | $           | (125,000 | )         |  | $ | 475,000 |  |  | $ |        | 
|                                 |  |            |         |              |  |             |          |           |  |   |         |  |  |   |         | 
|Year ended September 1, 2001     |  | $          |        |              |  | $           | 120,000  |           |  | $ |        |  |  | $ | 120,000 | 
|                                 |  |            |         |              |  |             |          |           |  |   |         |  |  |   |         | 
|Year ended August 31, 2002       |  | $          | 120,000 |              |  | $           |         |           |  | $ | 120,000 |  |  | $ |        | 
|                                 |  |            |         |              |  |             |          |           |  |   |         |  |  |   |         | 





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##### Table of Contents






Item 14(a)3. EXHIBITS

| |          |  |  |  |     |      |  |                                                                                                                            |  |          |          | 
| | -------- |  |  |  | --- | ---- |  | -------------------------------------------------------------------------------------------------------------------------- |  | -------- | -------- | 
| |          |  |  |  |     |      |  |                                                                                                                            |  | 10-K    
| |          |  |  |  |     |      |  |                                                                                                                            |  | Page No.
| |          |  |  |  |     |      |  |                                                                                                                            |  |         
| | *        |  |  |  | (3  | )(a) |  | Restated Certificate of Incorporation                                                                                      |  |          |          | 
|
|
|
|
| | *******  |  |  |  |     | (b)  |  | Bylaws                                                                                                                     |  |          |          | 
|
|
|
|
| | *        |  |  |  | (4  | )(a) |  | Restated Certificate of Incorporation                                                                                      |  |          |          | 
|
|
|
|
| | *******  |  |  |  |     | (b)  |  | Bylaws                                                                                                                     |  |          |          | 
|
|
|
|
| | ******** |  |  |  | (10 | )(a) |  | 1988 Stock Option Plan for Employees                                                                                       |  |          |          | 
|
|
|
|
| | *****    |  |  |  |     | (b)  |  | Non-employee Director Stock Option
Program                                                                                 |  |          |          | 
|
|
|
|
| | *****    |  |  |  |     | (c)  |  | Form of Indemnification Agreement                                                                                          |  |          |          | 
|
|
|
|
| |          |  |  |  |     | (d)  |  | Extension and Renewal of Employment Agreement dated
April 26, 2000 between DMI Furniture, Inc. and
Donald D. Dreher        |  |          | E-1-E-6  | 
|
|
|
|
| |          |  |  |  |     |      |  | DMI Furniture, Inc.                                                                                                        |  |          |          | 
|
|
|
|
| | *****    |  |  |  |     | (e)  |  | Loan Agreement between City of Huntingburg, Indiana
and DMI Furniture, Inc. dated June 1, 1994                             |  |          |          | 
|
|
|
|
| | *****    |  |  |  |     | (f)  |  | 1993 Long Term Incentive Stock Plan for Employees                                                                          |  |          |          | 
|
|
|
|
| | *****    |  |  |  |     | (g)  |  | Stock Compensation and Deferral Plan for Outside Directors                                                                 |  |          |          | 
|
|
|
|
| | *****    |  |  |  |     | (h)  |  | Loan Agreement between City of Huntingburg, Indiana and
DMI Furniture, Inc. dated as of October 1, 1993                    |  |          |          | 
|
|
|
|
| |          |  |  |  |     | (i)  |  | Extension and Renewal of Employment Agreement
as of September 1, 2001 between DMI Furniture, Inc.
and Joseph G. Hill       |  |          | E-7-E-11 | 
|
|
|
|
| | *****    |  |  |  |     | (j)  |  | 1998 Stock Option Plan For Independent Directors                                                                           |  |          |          | 
|
|
|
|
| | ****     |  |  |  |     | (k)  |  | Amended and Restated Credit Agreement dated October 23, 2001 between Bank One,
NA and DMI Furniture, Inc.                  |  |          |          | 
|
|
|
|
| |          |  |  |  |     | (l)  |  | First Amendment to Amended and Restated Credit Agreement dated January 3, 2002 between Bank One, NA and
DMI Furniture, Inc |  |          | E-12-E17 | 
|
|
|
|
| |          |  |  |  |     | (m)  |  | Second Amendment to Amended and Restated Credit Agreement dated March 29, 2002 between Bank One, NA and
DMI Furniture, Inc |  |          | E-18-E23 | 
|
|
|
|
| |          |  |  |  | (21 | )    |  | List of subsidiaries                                                                                                       |  |          | E-24     | 
|
|
|
|
| |          |  |  |  | (23 | )    |  | Consent of Deloitte & Touche LLP to incorporation of
audit report into S-8 registration statements                         |  |          | E-25     | 
|
|
|
|
| |          |  |  |  | 99  | (a)  |  | Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002                         |  |          | E-26     | 
|
|
|
|
| |          |  |  |  | 99  | (b)  |  | Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002                         |  |          | E-27     | 

|     |  |                                                                                     
|---- |  | ------------------------------------------------------------------------------------
|*    |  | Incorporated by reference to Registration No. 333-5246                              
|    
|    
|    
|    
|***  |  | Incorporated by reference to Proxy Statement dated February 20, 1998.               
|    
|    
|    
|    
|**** |  | Incorporated by reference to Form 10-Q for the fiscal quarter ended December 1, 2001





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##### Table of Contents



|          |  |                                                                                       
|--------- |  | --------------------------------------------------------------------------------------
|         
|         
|         
|         
|*****     |  | Incorporated by reference to Form 10-Q for the fiscal quarter ended November 30, 1999.
|         
|         
|         
|         
|******    |  | Incorporated by reference to Form 10-Q for the fiscal quarter ended May 27, 2000.     
|         
|         
|         
|         
|*******   |  | Incorporated by reference to Form 8-K dated September 6, 2000.                        
|         
|         
|         
|         
|********  |  | Incorporated by reference to Registration Number 33-64188                             
|         
|         
|         
|         
|********* |  | Incorporated by reference to Form 10-K for the fiscal year ended September 2, 2000.