<PAGE>


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


                          SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C. 20549
                                           
                                     ___________
                                           
                                      FORM 10-Q
                                           
                                     ___________
                                           
                 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                         THE SECURITIES EXCHANGE ACT OF 1934
                         FOR QUARTER ENDED SEPTEMBER 30, 1997
                                           
                           COMMISSION FILE NUMBER 333-11905
                                           
                       LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
                (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                                           
                                           
                                           
                 DELAWARE                                  56-1977928
         (STATE OF INCORPORATION)                       (I.R.S. EMPLOYER
                                                       IDENTIFICATION NO.)

          1300 NATIONAL HIGHWAY        
       THOMASVILLE, NORTH CAROLINA                            27360
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                   (ZIP CODE)

                                    (910) 476-4777
                                  (TELEPHONE NUMBER)

                                     ___________

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 THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICAL DATE:  100 SHARES OF COMMON STOCK, PAR
                 VALUE $.01 PER SHARE, AS OF NOVEMBER 10, 1997.


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


<PAGE>

                       LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                                        INDEX

                                                                       Page No.
                                                                       --------

Part I.  Financial Information

Item 1.  Financial Statements

         Condensed Balance Sheets - September 30, 1997 and 
         December 31, 1996. . . . . . . . . . . . . . . . . . . . . .         1

         Condensed Statements of Operations for the three months 
         ended September 30, 1997 and the period August 6, 1996 
         to September 30, 1996 and the period July 1, 1996 to 
         August 5, 1996 . . . . . . . . . . . . . . . . . . . . . . .         2

         Condensed Statements of Operations for the nine months 
         ended September 30, 1997 and the period August 6, 1996 
         to September 30, 1996 and the period January 1, 1996 to 
         August 5, 1996 . . . . . . . . . . . . . . . . . . . . . . .         3

         Condensed Statements of Cash Flows for the nine months 
         ended September 30, 1997 and the period August 6, 1996 
         to September 30, 1996 and the period January 1, 1996 to 
         August 5, 1996 . . . . . . . . . . . . . . . . . . . . . . .         4

         Notes to Condensed Financial Statements. . . . . . . . . . .      5-14

Item 2.  Management's Discussion and Analysis of Financial 
         Condition and Results of Operations. . . . . . . . . . . . .     15-17

Part II. Other Information

         Exhibits and Reports on Form 8-K . . . . . . . . . . . . . .        18

         Signature Page . . . . . . . . . . . . . . . . . . . . . . .        19

         Exhibit Index. . . . . . . . . . . . . . . . . . . . . . . .        20

<PAGE>

                       LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
                                           
                               CONDENSED BALANCE SHEETS
                                (DOLLARS IN THOUSANDS)
                                     (UNAUDITED)

                                                    CONSOLIDATED   CONSOLIDATED
                                                      COMPANY        COMPANY   
                                                    -------------  ------------
                                                    September 30,  December 31,
                                                       1997           1996     
                                                    -------------  ------------
ASSETS

Current assets:
    Cash and cash investments . . . . . . . . . .     $   11,870    $   22,400
    Trade receivables . . . . . . . . . . . . . .         82,110        81,810
    Investment in receivables trust . . . . . . .         59,900        51,120
    Other receivables . . . . . . . . . . . . . .         40,080        46,280
    Inventories . . . . . . . . . . . . . . . . .        564,910       526,300
    Prepaid expenses. . . . . . . . . . . . . . .         33,740        22,690
    Deferred income taxes . . . . . . . . . . . .         14,080        14,080
                                                      ----------    ----------
      Total current assets. . . . . . . . . . . .        806,690       764,680

Property and equipment, net . . . . . . . . . . .        355,830       349,330
Notes receivable. . . . . . . . . . . . . . . . .         10,300         7,620
Other assets. . . . . . . . . . . . . . . . . . .         38,870        69,100
                                                      ----------    ----------
      Total assets. . . . . . . . . . . . . . . .     $1,211,690    $1,190,730
                                                      ==========    ==========


      LIABILITIES AND SHAREHOLDER'S EQUITY

Current liabilities:
    Long-term debt, current . . . . . . . . . . .     $    2,320    $   18,970
    Accounts payable. . . . . . . . . . . . . . .        126,150        93,030
    Accrued liabilities . . . . . . . . . . . . .        137,620       153,130
                                                      ----------    ----------
      Total current liabilities . . . . . . . . .        266,090       265,130

Long-term debt. . . . . . . . . . . . . . . . . .        415,710       425,650
Other long-term liabilities . . . . . . . . . . .         44,530        46,590
                                                      ----------    ----------
      Total liabilities . . . . . . . . . . . . .        726,330       737,370
                                                      ----------    ----------

Common stock, $.01 par value, 3,000 shares 
authorized, 100 shares issued and outstanding . .           _             _   
Additional paid-in capital. . . . . . . . . . . .        421,050       421,050
Retained earnings . . . . . . . . . . . . . . . .         67,620        31,270
Foreign currency translation. . . . . . . . . . .         (3,310)        1,040
                                                      ----------    ----------
      Total shareholder's equity. . . . . . . . .        485,360       453,360
                                                      ----------    ----------

      Total liabilities and shareholder's equity      $1,211,690    $1,190,730
                                                      ==========    ==========


    The accompanying notes are an integral part of the financial statements.


                                          1

<PAGE>

                       LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
                                           
                          CONDENSED STATEMENTS OF OPERATIONS
                                (DOLLARS IN THOUSANDS)
                                     (UNAUDITED)
                                           

<TABLE>
<CAPTION>

                                                                                    Combined
                                                      Consolidated Company         Predecessor
                                               --------------------------------  ---------------
                                                 Period From      Period From      Period From
                                               July 1, 1997 to  Aug. 6, 1996 to  July 1, 1996 to
                                                Sept. 30, 1997   Sept. 30, 1996    Aug. 5, 1996
                                               ---------------  ---------------  ---------------

<S>                                              <C>              <C>              <C>
Net sales. . . . . . . . . . . . . . . . . .      $481,240         $332,260         $166,770 
Cost of sales. . . . . . . . . . . . . . . .       357,890          245,800          128,690 
                                                  --------         --------         -------- 
  Gross profit . . . . . . . . . . . . . . .       123,350           86,460           38,080 
Selling, general and administrative expenses        86,890           55,120           33,100 
                                                  --------         --------         -------- 
  Operating profit . . . . . . . . . . . . .        36,460           31,340            4,980 
                                                  --------         --------         -------- 
Other expense, net:                                                                          
  Interest expense . . . . . . . . . . . . .        10,530            7,960              190 
  Interest expense, Masco Corporation. . . .          _                _               7,990 
  Other, net . . . . . . . . . . . . . . . .         4,600            2,790              550 
                                                  --------         --------         -------- 
                                                     15,130          10,750            8,730 
                                                  --------         --------         -------- 
  Income (loss) before income taxes and                                                      
   extraordinary item. . . . . . . . . . . .        21,330           20,590           (3,750)
Income taxes . . . . . . . . . . . . . . . .         6,380            8,850            1,810 
                                                  --------         --------         -------- 
  Income (loss) before extraordinary item. .        14,950           11,740           (5,560)
                                                                                             
Extraordinary item - loss on early extinguishment                                            
  of debt (net of income taxes of $7,750). .       (11,620)            _                _    
                                                  --------         --------         -------- 
Net income (loss). . . . . . . . . . . . . .      $  3,330         $ 11,740         $ (5,560)
                                                  ========         ========         ======== 

</TABLE>

       The accompanying notes are an integral part of the financial statements.


                                          2

<PAGE>

                       LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
                                           
                          CONDENSED STATEMENTS OF OPERATIONS
                                (DOLLARS IN THOUSANDS)
                                     (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                    Combined
                                                      Consolidated Company         Predecessor
                                               --------------------------------  ---------------
                                                 Period From      Period From      Period From
                                                Jan 1, 1997 to  Aug. 6, 1996 to   Jan 1, 1996 to
                                                Sept. 30, 1997   Sept. 30, 1996    Aug. 5, 1996
                                               ---------------  ---------------  ---------------

<S>                                              <C>              <C>              <C>
Net sales. . . . . . . . . . . . . . . .          $1,450,870       $332,260         $1,147,890 
Cost of sales. . . . . . . . . . . . . .           1,075,610        245,800            870,650 
                                                  ----------       --------         ---------- 
  Gross profit . . . . . . . . . . . . .             375,260         86,460            277,240 
Selling, general and administrative                                                            
  expenses . . . . . . . . . . . . . . .             259,500         55,120            222,230 
                                                  ----------       --------         ---------- 
  Operating profit . . . . . . . . . . .             115,760         31,340             55,010 
                                                  ----------       --------         ---------- 
Other expense, net:                                                                            
  Interest expense . . . . . . . . . . .              32,800          7,960                970 
  Interest expense, Masco Corporation. .                _              _                51,720 
  Other, net . . . . . . . . . . . . . .              10,830          2,790              3,480 
                                                  ----------       --------         ---------- 
                                                      43,630         10,750             56,170 
                                                  ----------       --------         ---------- 
  Income (loss) before income taxes and                                                        
   extraordinary item. . . . . . . . . .              72,130         20,590             (1,160)
Income taxes . . . . . . . . . . . . . .              24,160          8,850              6,830 
                                                  ----------       --------         ---------- 
  Income (loss) before extraordinary item             47,970         11,740             (7,990)
                                                                                               
Extraordinary item - loss on early                                                             
  extinguishment of debt (net of income                                                        
  taxes of $7,750) . . . . . . . . . . .             (11,620)          _                  _    
                                                  ----------       --------         ---------- 
                                                                                               
Net income (loss). . . . . . . . . . . .          $   36,350       $ 11,740         $   (7,990)
                                                  ==========       ========         ========== 

</TABLE>

      The accompanying notes are an integral part of the financial statements.


                                          3

<PAGE>

                        LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
                                           
                          CONDENSED STATEMENTS OF CASH FLOWS
                                (DOLLARS IN THOUSANDS)
                                     (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                    Combined
                                                      Consolidated Company         Predecessor
                                               --------------------------------  ---------------
                                                 Period From      Period From      Period From
                                                Jan 1, 1997 to  Aug. 6, 1996 to   Jan 1, 1996 to
                                                Sept. 30, 1997   Sept. 30, 1996    Aug. 5, 1996
                                               ---------------  ---------------  ---------------

<S>                                              <C>              <C>              <C>
OPERATING ACTIVITIES:
Net income (loss). . . . . . . . . . . .          $  36,350        $  11,740        $ (7,990)
Adjustments to reconcile net income to                                                       
  net cash provided by operating                                                             
  activities:                                                                                
    Depreciation and amortization. . . .             18,980            3,490          29,510 
    Fabric sample book amortization. . .             11,680            2,620           9,750 
    Bad debt provision, net. . . . . . .              5,370              680           2,250 
    Deferred income taxes. . . . . . . .               _                _             (2,610)
    Extraordinary loss on early                                                              
     extinguishment of debt. . . . . . .             11,620             _               _    
Changes in operating assets and liabilities:                                                 
  Receivables. . . . . . . . . . . . . .              6,430           (9,780)         39,550 
  Inventories. . . . . . . . . . . . . .            (38,610)           5,890         (17,480)
  Prepaid expenses and other assets. . .             (4,240)          (5,230)          1,660 
  Accounts payable . . . . . . . . . . .             33,120           12,620          (1,890)
  Other liabilities. . . . . . . . . . .            (10,130)          26,910          (4,720)
                                                   ---------       ---------        -------- 
    Net cash provided by operating                                                           
     activities. . . . . . . . . . . . .             70,570           48,940          48,030 
                                                   ---------       ---------        -------- 
                                                                                             
INVESTING ACTIVITIES:                                                                        
Capital expenditures . . . . . . . . . .            (23,920)          (2,770)        (16,520)
Fabric sample book expenditures. . . . .            (10,160)            (950)         (8,380)
Net investments in receivables trust . .             (8,780)         (62,770)           _    
Issuance of notes receivable . . . . . .             (2,950)            _               _    
Collection of notes receivable . . . . .             11,370             _              2,790 
Acquisition of businesses, net of cash                                                       
  acquired . . . . . . . . . . . . . . .               _            (645,430)           _    
Receivable from acquisition of businesses              _             (41,260)           _    
Other, net . . . . . . . . . . . . . . .             (2,280)           6,490          (2,640)
                                                   ---------       ---------        -------- 
    Net cash used for investing activities          (36,720)        (746,690)        (24,750)
                                                   ---------       ---------        -------- 
FINANCING ACTIVITIES:                                                                        
Proceeds from long-term debt . . . . . .            234,000          525,000          87,760 
Repayments of long-term debt . . . . . .           (261,000)            _               _    
Net proceeds (repayments) of short-term                                                      
 debt. . . . . . . . . . . . . . . . . .                410          (27,210)        (87,090)
Net proceeds (repayments) from accounts                                                      
 receivable transactions . . . . . . . .            (17,000)         167,000            _    
Capital contribution . . . . . . . . . .               _              76,400            _    
Deferred financing costs . . . . . . . .               (790)         (34,590)           _    
Net decrease in Masco Corporation net                                                        
  investment and advances. . . . . . . .               _                _            (22,600)
                                                   ---------       ---------        -------- 
    Net cash provided by (used for)                                                          
     financing activities. . . . . . . .            (44,380)         706,600         (21,930)
                                                   ---------       ---------        -------- 
CASH AND CASH INVESTMENTS:                                                                   
Increase (decrease) for the period . . .            (10,530)           8,850           1,350 
Balance, beginning of period . . . . . .             22,400             _             17,310 
                                                   ---------       ---------        -------- 
                                                                                             
Balance, end of period . . . . . . . . .           $  11,870       $   8,850        $ 18,660 
                                                   =========       =========        ======== 

</TABLE>

       The accompanying notes are an integral part of the financial statements.


                                          4

<PAGE>

                       LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                       NOTES TO CONDENSED FINANCIAL STATEMENTS


1. BASIS OF PRESENTATION 

     The unaudited Condensed Financial Statements include the accounts of
LIFESTYLE FURNISHINGS INTERNATIONAL LTD. (the "Company") and its subsidiary
companies as of September 30, 1997 and December 31, 1996, for the three and nine
month periods ended September 30, 1997 and for the period August 6, 1996 to
September 30, 1996. Intercompany accounts and transactions are eliminated. These
Condensed Financial Statements reflect, in the opinion of management, all
adjustments necessary for a fair presentation of the interim financial
statements. All such adjustments are of a normal and recurring nature. The
accompanying unaudited Condensed Financial Statements should be read in
conjunction with the Consolidated Financial Statements and notes thereto in the
Company's report on Form 10-K for the fiscal year ended December 31, 1996. In
the Notes to Condensed Financial Statements, all dollar amounts are shown in
thousands unless otherwise stated. 

     The financial information for the periods ended on or prior to August 5,
1996 refers to Masco Home Furnishings Group (the "Predecessor") as it existed
prior to its acquisition by the Company on August 5, 1996 (the "Acquisition").
The Predecessor was not a legal entity and included certain subsidiaries of
Masco Corporation ("Masco") whose operations consisted of the manufacture and
sale of home furnishings products including fine furniture and decorative home
furnishing fabrics. With respect to the unaudited financial information for the
interim periods of the Predecessor, it is the opinion of management that all
adjustments, which consist of normal and recurring adjustments necessary for a
fair presentation of interim combined financial statements, have been included. 

     As a result of the Acquisition and new basis of accounting resulting from
the application of the purchase method of accounting, the Company's financial
statements for the periods subsequent to the Acquisition are not comparable to
the Predecessor's financial statements for the periods prior to the Acquisition.
Operating results of the interim period are not necessarily indicative of
results that may be expected for the fiscal year ended December 31, 1997. 

     Certain prior period amounts have been reclassified to conform with current
period presentation.

2. INVENTORY

     As of September 30, 1997 and December 31, 1996, inventory balances were as
follows: 

                                                  SEPTEMBER 30,  DECEMBER 31,
                                                      1997           1996
                                                  -------------  ------------

   Finished goods . . . . . . . . . . . . . .       $242,520       $223,610
   Raw materials. . . . . . . . . . . . . . .        237,420        216,250
   Work in process. . . . . . . . . . . . . .         84,970         86,440
                                                    --------       --------
                                                    $564,910       $526,300
                                                    ========       ========


                                          5

<PAGE>

                       LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                 NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)


3. LONG-TERM DEBT

     As of September 30, 1997 and December 31, 1996, the outstanding balances of
long-term debt were as follows: 

                                                  SEPTEMBER 30,  DECEMBER 31,
                                                      1997           1996
                                                  -------------  ------------


   Revolving credit facility. . . . . . . . .       $214,000           _   
   Tranche A term loan. . . . . . . . . . . .           _           100,420
   Tranche B term loan. . . . . . . . . . . .           _           140,580
   Senior subordinated  notes . . . . . . . .        200,000        200,000
   Other borrowings . . . . . . . . . . . . .          4,030          3,620
                                                    --------       --------
                                                     418,030        444,620
   Less current portion . . . . . . . . . . .          2,320         18,970
                                                    --------       --------
                                                    $415,710       $425,650
                                                    ========       ========


     On August 15, 1997, the Company replaced the existing Revolving credit 
facility, Tranche A term loan and Tranche B term loan with a six year $400 
million senior secured revolving credit facility.  The new facility provides 
the Company with increased financial flexibility by eliminating quarterly 
principal payment requirements, reducing financing costs and reducing a 
number of restrictive covenants.

     In connection with the repayment of the existing revolving credit and term
loan facilities, the Company recorded an extraordinary non-cash charge of
$19,370 ($11,620 net of tax), consisting of the write-off of unamortized
deferred financing costs, related to the early extinguishment of debt. 


4. GUARANTOR FINANCIAL STATEMENTS

     In connection with the issuance of its 10 7/8% Senior Subordinated Notes
due 2006 (the "Notes"), the Company's domestic operating subsidiaries
("Guarantor Subsidiaries") fully and unconditionally guaranteed the Company's
performance under the Notes on a joint and several basis. The Guarantor
Subsidiaries are direct or indirect wholly-owned subsidiaries of the Company.
The remaining subsidiaries are direct or indirect subsidiaries of the Guarantor
Subsidiaries. There are no restrictions under the Company's financing
arrangements on the ability of the Guarantor Subsidiaries to distribute funds to
the Company in the form of cash dividends, loans or advances. The following
financial data provides information regarding the financial position, results of
operations and cash flows of the Guarantor Subsidiaries (condensed
consolidating/combining  financial data). Separate financial statements and
other disclosures concerning the Guarantor Subsidiaries are not presented
because management has determined that such information would not be material to
the holders of the Notes. 

     For purposes of the condensed consolidating/combining financial data, the
Guarantor Subsidiaries include substantially all domestic subsidiaries of the
Company (other than special purpose subsidiaries formed in connection with the
Company's receivables financing facility (the "Receivables Subsidiaries") and
certain subsidiaries with substantially no assets or operations). The Guarantor
Subsidiaries account for their investments in the non-guarantor subsidiaries on
the equity method. The Company also accounts for its investments in the
Guarantor Subsidiaries and the Receivables Subsidiaries on the equity method.
The principal elimination entries are to eliminate the investments in
subsidiaries and intercompany balances and transactions. 


                                          6

<PAGE>

                       LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                 NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)


4. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)

                                               Company
                                  Condensed Consolidating Balance Sheet
                                          September 30, 1997
                                        (Dollars in thousands)
                                             (Unaudited)

<TABLE>
<CAPTION>

                                      Guarantor     Non-Guarantor
                           Company   Subsidiaries   Subsidiaries   Eliminations   Consolidated
                          ---------  ------------   -------------  ------------   ------------

<S>                       <C>       <C>              <C>           <C>            <C>
ASSETS
Current Assets:
  Cash and cash
    investments . . . . .  $   _     $   (1,560)      $ 13,430      $    _         $   11,870 
  Receivables . . . . . .      _         33,110         89,080           _            122,190 
  Investment in                                                                               
    receivables trust . .      _              _         59,900           _             59,900 
  Inventories . . . . . .      _        471,920         92,990           _            564,910 
  Prepaid expenses. . . .      _         23,530         10,210           _             33,740 
  Deferred income taxes .      _         12,640          1,440           _             14,080 
  Intercompany account. .      _        253,280          5,800       (259,080)              _ 
                           --------  ----------       --------      ---------      ---------- 
    Total current assets       _        792,920        272,850       (259,080)        806,690 
                                                                                              
Property and equipment,                                                                       
  net . . . . . . . . . .      _        271,780         84,050           _            355,830 
Notes receivable. . . . .      _         10,300           _              _             10,300 
Other assets. . . . . . .      _         37,140          1,730           _             38,870 
Investments in affiliates   485,360         250           _          (485,610)           _    
                           --------  ----------       --------      ---------      ---------- 
Total assets. . . . . . .  $485,360  $1,112,390       $358,630      $(744,690)     $1,211,690 
                           ========  ==========       ========      =========      ========== 
                                                                                              
LIABILITIES AND                                                                               
  SHAREHOLDER'S                                                                               
  EQUITY                                                                                      
Current Liabilities:                                                                          
  Long-term debt,                                                                             
    current . . . . . . .  $   _     $     _          $  2,320      $    _         $    2,320 
  Accounts payable. . . .      _         99,930         26,220           _            126,150 
  Accrued liabilities . .      _         99,200         38,420           _            137,620 
  Intercompany account. .      _          5,800        253,280       (259,080)           _    
                           --------  ----------       --------      ---------      ---------- 
                                                                                              
    Total current                                                                             
      liabilities . . . .      _        204,930        320,240       (259,080)        266,090 
                                                                                              
Long-term debt. . . . . .      _        415,710           _              _            415,710 
Other long-term                                                                               
  liabilities . . . . . .      _         43,190          1,340           _             44,530 
                           --------  ----------       --------      ---------      ---------- 
    Total liabilities . .      _        663,830        321,580       (259,080)        726,330 
                           --------  ----------       --------      ---------      ---------- 
Shareholder's equity. . .   485,360     448,560         37,050       (485,610)        485,360 
                           --------  ----------       --------      ---------      ---------- 
    Total liabilities and                                                                     
    Shareholder's equity   $485,360  $1,112,390       $358,630      $(744,690)     $1,211,690 
                           ========  ==========       ========      =========      ========== 

</TABLE>

                                          7

<PAGE>

                       LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                 NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)


4. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)

                                       COMPANY
                        CONDENSED CONSOLIDATING BALANCE SHEET
                                  DECEMBER 31, 1996
                                (Dollars in thousands)

<TABLE>
<CAPTION>

                                                      Guarantor     Non-Guarantor
                                         Company     Subsidiaries   Subsidiaries  Eliminations  Consolidated
                                        ---------    ------------   ------------- ------------  ------------

<S>                                      <C>          <C>              <C>        <C>          <C>
ASSETS
Current Assets:
  Cash and cash investments .             $   _        $    4,510       $ 17,890   $    _        $   22,400 
  Receivables . . . . . . . .                 _            41,130         86,960        _           128,090 
  Investment in receivables                                                                                 
    trust . . . . . . . . . .                 _              _            51,120        _            51,120 
  Inventories . . . . . . . .                 _           431,910         94,390        _           526,300 
  Prepaid expenses. . . . . .                 _            15,100          7,590        _            22,690 
  Deferred income taxes . . .                 _            11,440          2,640        _            14,080 
  Intercompany account. . . .                 _           245,140         12,500    (257,640)            _  
                                          --------     ----------       --------   ---------     ----------
    Total current assets. . .                 _           749,230        273,090    (257,640)       764,680 
Property and equipment, net .                 _           265,190         84,140        _           349,330 
Notes receivable. . . . . . .                 _             7,620           _           _             7,620 
Other assets. . . . . . . . .                 _            55,430         13,670        _            69,100 
Investments in affiliates . .              453,360         14,790           _       (468,150)          _    
                                          --------     ----------       --------   ---------     ----------
    Total assets. . . . . . .             $453,360     $1,092,260       $370,900   $(725,790)    $1,190,730 
                                          ========     ==========       ========   =========     ==========
                                                                                                            
LIABILITIES AND 
  SHAREHOLDER'S 
  EQUITY
Current Liabilities:
  Long-term debt, current . .             $   _        $   17,350       $  1,620   $    _        $   18,970 
  Accounts payable. . . . . .                 _            71,230         21,800        _            93,030 
  Accrued liabilities . . . .                 _           109,950         43,180        _           153,130 
  Intercompany account. . . .                 _            12,500        245,140    (257,640)          _    
                                          --------     ----------       --------   ---------     ----------
    Total current liabilities                 _           211,030        311,740    (257,640)       265,130 

Long-term debt. . . . . . . .                 _           424,430          1,220        _           425,650 
Other long-term liabilities .                 _            35,670         10,920        _            46,590 
                                          --------     ----------       --------   ---------     ----------
    Total liabilities . . . .                 _           671,130        323,880    (257,640)       737,370 
                                          --------     ----------       --------   ---------     ----------
Shareholder's equity. . . . .              453,360        421,130         47,020    (468,150)       453,360 
                                          --------     ----------       --------   ---------     ----------
    Total liabilities and                                                                                   
     shareholder's equity . .             $453,360     $1,092,260       $370,900   $(725,790)    $1,190,730 
                                          ========     ==========       ========   =========     ==========

</TABLE>

                                                                     8

<PAGE>

                       LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                 NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)


4. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)

                                                 COMPANY
                             CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                              FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
                                         (DOLLARS IN THOUSANDS)
                                               (UNAUDITED)
                                                    

<TABLE>
<CAPTION>

                                                           Guarantor      Non-Guarantor
                                               Company    Subsidiaries    Subsidiaries    Eliminations  Consolidated
                                              ---------   ------------    -------------   ------------  ------------
                                                                                        
<S>                                          <C>          <C>               <C>           <C>           <C>
Net sales . . . . . . . . . . . . . . .       $    _       $1,311,380        $327,140      $(187,650)    $1,450,870
Cost of sales . . . . . . . . . . . . .            _           989,600        273,660       (187,650)     1,075,610
                                              ---------    -----------       --------      ---------     ----------
  Gross profit. . . . . . . . . . . . .            _           321,780         53,480             _         375,260
Selling, general and administrative 
  expenses. . . . . . . . . . . . . . .            _           222,730         36,770             _         259,500
                                              ---------    -----------       --------      ---------     ----------
  Operating profit. . . . . . . . . . .            _            99,050        16,710              _         115,760
Other (income) expense, net . . . . . .         (47,970)        45,800         (2,470)        48,270         43,630
                                              ---------    -----------       --------      ---------     ----------
  Income (loss) before income taxes 
    and extraordinary item. . . . . . .          47,970         53,250         19,180        (48,270)        72,130

Income taxes. . . . . . . . . . . . . .            _            20,230          3,930             _          24,160
                                              ---------    -----------       --------      ---------     ----------
  Income (loss) before extraordinary 
    item. . . . . . . . . . . . . . . .          47,970        33,020          15,250        (48,270)        47,970
Extraordinary item - loss on early 
    extinguishment of debt (net of 
    income taxes of $7,750) . . . . . .              _         (11,620)          _              _           (11,620)
                                              ---------    -----------       --------      ---------     ----------
Net income (loss) . . . . . . . . . . .       $  47,970    $    21,400       $ 15,250      $ (48,270)    $   36,350
                                              =========    ===========       ========      =========     ==========

</TABLE>

                                                                  9

<PAGE>

                                  LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
 
                            NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)


4. GUARANTOR FINANCIAL STATEMENTS (Continued)

                                                  Company
                              Condensed Consolidating Statement of Operations
                            for the period August 6, 1996 to September 30, 1996
                                          (Dollars in thousands)
                                                (Unaudited)

<TABLE>
<CAPTION>

                                                                Guarantor       Non-Guarantor
                                                    Company     Subsidiaries    Subsidiaries   Eliminations   Consolidated
                                                   ---------    ------------    -------------  ------------   ------------

<S>                                                <C>            <C>             <C>           <C>            <C>
Net sales . . . . . . . . . . . . . . . . . .       $   _          $291,780        $86,820       $(46,340)      $332,260
Cost of sales . . . . . . . . . . . . . . . .           _           220,300         71,840        (46,340)       245,800
                                                    --------       --------        -------       --------       --------
  Gross profit. . . . . . . . . . . . . . . .           _            71,480         14,980           _            86,460

Selling, general and administrative 
  expenses. . . . . . . . . . . . . . . . . .           _            45,640          9,480           _            55,120
                                                    --------       --------        -------       --------       --------
  Operating profit. . . . . . . . . . . . . .           _            25,840          5,500           _            31,340
Other expense, net. . . . . . . . . . . . . .        (11,740)         7,110            910         14,470         10,750
                                                    --------       --------        -------       --------       --------
  Income before income taxes. . . . . . . . .         11,740         18,730          4,590        (14,470)        20,590
Income taxes. . . . . . . . . . . . . . . . .           _             6,990          1,860           _             8,850
                                                    --------       --------        -------       --------       --------
  Net income. . . . . . . . . . . . . . . . .       $ 11,740       $ 11,740        $ 2,730       $(14,470)      $ 11,740
                                                    ========       ========        =======       ========       ========

<CAPTION>

                                                  PREDECESSOR
                                  CONDENSED COMBINING STATEMENT OF OPERATIONS
                               FOR THE PERIOD JANUARY 1, 1996 TO AUGUST 5, 1996
                                            (DOLLARS IN THOUSANDS)
                                                  (UNAUDITED)

                                                      Guarantor      Non-Guarantor
                                                     Subsidiaries    Subsidiaries    Eliminations  Consolidated
                                                     ------------    -------------   ------------  ------------
                                                                                        
<S>                                                   <C>              <C>           <C>           <C>

Net sales . . . . . . . . . . . . . . . . . . . .      $1,014,270       $294,360      $(160,740)    $1,147,890
Cost of sales . . . . . . . . . . . . . . . . . .         780,000        251,390       (160,740)       870,650
                                                       ----------       --------      ---------     ----------
  Gross profit. . . . . . . . . . . . . . . . . .         234,270         42,970             _         277,240
Selling, general and administrative expenses. . .         182,510         39,720             _         222,230
                                                       ----------       --------      ---------     ----------
  Operating profit. . . . . . . . . . . . . . . .          51,760          3,250             _          55,010
Other expense, net. . . . . . . . . . . . . . . .          44,570          9,280          2,320         56,170
                                                       ----------       --------      ---------     ----------
  Income (loss) before income taxes . . . . . . .           7,190         (6,030)        (2,320)        (1,160)
Income taxes (credit) . . . . . . . . . . . . . .           8,910         (2,080)            _           6,830
                                                       ----------       --------      ---------     ----------
  Net loss. . . . . . . . . . . . . . . . . . . .      $   (1,720)      $ (3,950)     $  (2,320)    $   (7,990)
                                                       ==========       ========      =========     ==========

</TABLE>

                                                                   10

<PAGE>


                                  LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
                            NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)


4. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)

                                                     COMPANY
                                 CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
                                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
                                             (DOLLARS IN THOUSANDS)
                                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                           Guarantor       Non-Guarantor
                                                Company    Subsidiaries    Subsidiaries   Eliminations   Consolidated
                                               ---------   ------------    -------------  ------------   ------------

<S>                                           <C>           <C>             <C>            <C>            <C>
NET CASH PROVIDED BY 
  (USED FOR) OPERATING 
  ACTIVITIES: . . . . . . . . . . . . .        $   _         $  40,470       $ 30,100       $   _          $ 70,570
                                               --------      ---------       --------       --------       --------
INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . .            _           (20,950)        (2,970)          _           (23,920)
Fabric sample book expenditures . . . .            _           (10,160)            _            _           (10,160)
Net investments in receivables 
  trust . . . . . . . . . . . . . . . .            _                _          (8,780)          _            (8,780)
Issuance of notes receivable. . . . . .            _            (2,950)            _            _            (2,950)
Collection of notes receivable. . . . .            _            11,370             _            _            11,370
Other, net. . . . . . . . . . . . . . .            _            1,570          (3,850)          _            (2,280)
                                               --------      ---------       --------       --------       --------
     Net cash used for investing
       activities . . . . . . . . . . .            _           (21,120)       (15,600)          _           (36,720)
                                               --------      ---------       --------       --------       --------

FINANCING ACTIVITIES:
Proceeds from long-term debt. . . . . .            _           234,000           _              _           234,000
Repayments of long-term debt. . . . . .            _          (261,000)          _              _          (261,000)
Net repayments of short-term 
  debt. . . . . . . . . . . . . . . . .            _               930           (520)          _               410
Net repayments from accounts
  receivable transactions . . . . . . .            _                _         (17,000)          _           (17,000)
Deferred financing costs. . . . . . . .            _              (790)            _            _              (790)
Intercompany accounts, net. . . . . . .            _             1,440         (1,440)          _              _   
                                               --------      ---------       --------       --------       --------
     Net cash provided by (used 
       for) financing activities. . . .            _           (25,420)       (18,960)          _           (44,380)
                                               --------      ---------       --------       --------       --------
CASH AND CASH 
  INVESTMENTS:
Increase (decrease) for the period. . .            _            (6,070)        (4,460)          _           (10,530)
Balance, beginning of period. . . . . .            _             4,510         17,890           _            22,400
                                               --------      ---------       --------       --------       --------
Balance, end of period. . . . . . . . .        $   _         $  (1,560)      $ 13,430       $   _          $ 11,870
                                               ========      =========       ========       ========       ========

</TABLE>

                                                                   11

<PAGE>

                             LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
                        NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)


4. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)

                                                   COMPANY
                               Condensed Consolidating Statement of Cash Flows
                             for the period August 6, 1996 to September 30, 1996
                                           (Dollars in thousands)
                                                 (Unaudited)


<TABLE>
<CAPTION>

                                                           Guarantor      Non-Guarantor
                                               Company     Subsidiaries   Subsidiaries    Eliminations  Consolidated
                                               -------     ------------   -------------   ------------  ------------

<S>                                           <C>           <C>             <C>            <C>           <C>
NET CASH PROVIDED BY 
  OPERATING ACTIVITIES: . . . . . . . . . . .  $   _         $  29,040       $ 22,630       $ (2,730)     $  48,940
                                               --------      ---------       --------       --------      ---------
INVESTING ACTIVITIES:
  Capital expenditures. . . . . . . . . . . .      _            (2,120)          (650)          _            (2,770) 
  Fabric sample book expenditures . . . . . .      _              (950)          _              _              (950)
  Net investments in receivables trust. . . .      _           (62,770)          _              _           (62,770) 
  Acquisition of businesses, net of cash 
   acquired . . . . . . . . . . . . . . . . .      _          (645,430)          _              _          (645,430) 
  Receivable from acquisition of 
   businesses . . . . . . . . . . . . . . . .      _           (41,260)          _              _           (41,260)
  Other, net. . . . . . . . . . . . . . . . .      _            11,670         (7,910)         2,730         6,490 
                                               --------      ---------       --------       --------      ---------
   Net cash used for investing activities . .      _          (740,860)        (8,560)         2,730       (746,690)
                                               --------      ---------       --------       --------      ---------

FINANCING ACTIVITIES:
  Proceeds from long-term debt. . . . . . . .      _           525,000           _              _           525,000
  Net repayments of short-term debt . . . . .      _           (25,010)        (2,200)          _           (27,210)
  Net proceeds from sale of accounts 
   receivable . . . . . . . . . . . . . . . .      _           167,000           _              _           167,000
  Capital contribution. . . . . . . . . . . .      _            76,400           _              _            76,400
  Deferred financing costs. . . . . . . . . .      _           (34,590)          _              _           (34,590)
                                               --------      ---------       --------       --------      ---------
  Net cash provided by (used for) 
  financing activities. . . . . . . . . . . .      _           708,800         (2,200)          _           706,600
                                               --------      ---------       --------       --------      ---------

CASH AND CASH INVESTMENTS:
  Increase (decrease) for the period. . . . .      _            (3,020)        11,870           _             8,850
  At August 6 . . . . . . . . . . . . . . . .      _              _                _            _                 _
                                               --------      ---------       --------       --------      ---------
  At September 30 . . . . . . . . . . . . . .  $   _         $  (3,020)      $ 11,870       $   _         $   8,850
                                               ========      =========       ========       ========      =========

</TABLE>

                                                                    12

<PAGE>

                                  LIFESTYLE FURNISHINGS INTERNATIONAL LTD.

                             NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)


4. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)

                                                   PREDECESSOR
                                   CONDENSED COMBINING STATEMENT OF CASH FLOWS
                                FOR THE PERIOD JANUARY 1, 1996 TO AUGUST 5, 1996
                                             (Dollars in thousands)
                                                   (Unaudited)

<TABLE>
<CAPTION>

                                               Guarantor    Non-Guarantor
                                              Subsidiaries  Subsidiaries   Eliminations   Consolidated
                                              ------------  -------------  ------------   ------------

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

NET CASH PROVIDED BY OPERATING 
  ACTIVITIES: . . . . . . . . . . . . . . . .  $ 30,270       $ 20,110       $ (2,350)      $ 48,030
                                               --------       --------       --------       --------

INVESTING ACTIVITIES:
  Capital expenditures. . . . . . . . . . . .   (14,130)        (2,390)          _           (16,520) 
  Fabric sample book expenditures . . . . . .    (8,380)             _           _            (8,380)
  Collection of notes receivable, net . . . .     1,450          1,340           _             2,790
  Other, net. . . . . . . . . . . . . . . . .    (4,530)         7,290         (5,400)        (2,640)
                                               --------       --------       --------       --------
   Net cash provided by (used for) 
    investing activities. . . . . . . . . . .   (25,590)         6,240         (5,400)       (24,750)
                                               --------       --------       --------       --------

FINANCING ACTIVITIES:
  Proceeds from long-term debt. . . . . . . .       800         86,960           _            87,760
  Net repayments of short-term debt . . . . .      (800)       (86,290)          _           (87,090)
  Net decrease in Masco Corporation net 
   investment and advances. . . . . . . . . .    (4,900)       (25,450)         7,750        (22,600)
                                               --------       --------       --------       --------
   Net cash used for financing activities . .    (4,900)       (24,780)         7,750        (21,930)
                                               --------       --------       --------       --------

CASH AND CASH INVESTMENTS:
  Increase (decrease) for the period. . . . .      (220)         1,570           _             1,350
  At January 1. . . . . . . . . . . . . . . .    4,540          12,770           _            17,310
                                               --------       --------       --------       --------
  At August 5 . . . . . . . . . . . . . . . .  $  4,320       $ 14,340       $   _          $ 18,660
                                               ========       ========       ========       ========

</TABLE>

                                                               13

<PAGE>

 
                       LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
                                           
                 NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
                                           

5. PRO FORMA SUPPLEMENTARY DATA

     The following pro forma supplementary data for the nine months ended
September 30, 1996 gives effect to the Acquisition transactions as if they had
occurred on January 1, 1996. The pro forma supplementary data is provided for
informational purposes only and should not be construed to be indicative of the
Company's results of operations had the Acquisition transactions been
consummated on the dates assumed and does not project the Company's results of
operations for any future date. 

                                                        NINE MONTHS
                                                           ENDED
                                                    SEPTEMBER 30, 1996
                                                   (DOLLARS IN MILLIONS)
                                                   ---------------------

          Net sales . . . . . . . . . . . . . . .        $1,480.2
          Gross profit. . . . . . . . . . . . . .           369.1
          Operating profit. . . . . . . . . . . .           104.4
          Net income. . . . . . . . . . . . . . .            31.4


The primary adjustments applied to the historical predecessor financial
statements to arrive at the pro forma presentation include the following: 

(a)  Adjustment to reflect elimination of goodwill amortization of approximately
     $14.2 million on an annualized basis. 

(b)  Adjustment of approximately $15.9 million on an annual basis to reflect
     decreased depreciation for write-down of property and equipment from the
     allocation of the estimated fair value of the net assets. 

(c)  Adjustment to reflect the reduction of interest expense due to the
     elimination of interest expense on Masco net advances offset by the impact
     of interest expense on the financing arrangements incurred at the
     acquisition. 

(d)  Adjustment to eliminate the operating results of businesses acquired by
     FURNISHINGS INTERNATIONAL INC. from Masco but not contributed to the
     Company. 


                                          14

<PAGE>

                       LIFESTYLE FURNISHINGS INTERNATIONAL LTD.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS


RESULTS OF OPERATIONS

     For purposes of the discussions that follow, the results of operations for
the periods ended on or prior to August 5, 1996 represent the results of the
Predecessor.  The results of the Predecessor and the results of the Company have
been combined to derive information for the three and nine months ended
September 30, 1996.

   COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997 TO THE THREE MONTHS
                             ENDED SEPTEMBER 30, 1996

     Net sales were $481.2 million for the three months ended September 30,
1997, a decrease of $17.8 million, or 3.6%, from $499.0 million for the
comparable period of 1996. Net sales of fine furniture decreased 3.5% to $416.3
million for the three months ended September 30, 1997 from $431.6 million for
the comparable period of 1996. Fine furniture sales were negatively impacted by
the Company's strategy of exiting less profitable products, relatively soft
major retailer sales including reduced shipments to two large customers who
filed for protection under Chapter 11 of the United States Bankruptcy Code. Net
sales of decorative home furnishing fabrics decreased 3.7% to $64.9 million for
the three months ended September 30, 1997 from $67.4 million for the comparable
period of 1996 as the continuing growth of leather as a replacement for fabric
in upholstered furniture negatively impacted fabric sales. 

     Gross profit was $123.4 million for the three months ended September 30,
1997, a decrease of $1.1 million, or 0.8%, from $124.5 million for the
comparable period of 1996. Gross profit margins increased to 25.6% for the three
months ended September 30, 1997 from 25.0% for the comparable period of 1996. 
This increase was primarily attributable to the Company's continuous improvement
initiatives and the benefit of lower depreciation expense. 

     Selling, general and administrative expenses were reduced to $86.9 million
for the three months ended September 30, 1997, a decrease of $1.3 million, or
1.5%, from $88.2 million for the comparable period of 1996. The decrease in
general and administrative expenses reflects the benefits of the Company's cost
reduction initiatives, elimination of goodwill amortization, and the net
decrease in general and administrative expenses which the Company has incurred
on a stand-alone basis compared to the management fees previously charged by
Masco.   These reductions were largely offset by higher bad debt expenses
resulting from the bankruptcy filings previously mentioned. As a percentage of
net sales, selling, general and administrative expenses increased to 18.1% for
the three months ended September 30, 1997 from 17.7% for the comparable period
of 1996. Selling expense was 11.0% of net sales as compared to 10.8% for 1996,
and general and administrative expenses were 7.1% of net sales compared to 6.9%
in 1996. The higher bad debt expenses and the lower sales resulted in selling,
general and administrative expenses being higher as a percentage of net sales.

     Operating profit increased to $36.5 million for the three months ended
September 30, 1997, an increase of $0.2 million, or 0.6%, from $36.3 million for
the comparable period of 1996. As a percentage of net sales, operating profit
increased to 7.6% for the three months ended September 30, 1997 from 7.3% for
the comparable period of 1996. This improvement was achieved primarily for the
reasons discussed above. 

     Interest expense was $10.5 million for the three months ended September 30,
1997, a decrease of $5.6 million, or 34.8%, from the comparable period of 1996.
This decrease was a result of lower average debt outstanding during the three
months ended September 30, 1997 when compared to the Predecessor's advances from
Masco and the Company's debt outstanding during the comparable period of 1996. 


                                          15

<PAGE>

                       LIFESTYLE FURNISHINGS INTERNATIONAL LTD.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)


      COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 TO THE NINE MONTHS
                               ENDED SEPTEMBER 30, 1996
                                           

     Net sales were $1,450.9 million for the nine months ended September 30,
1997, a decrease of $29.2 million, or 2.0%, from $1,480.1 million for the
comparable period of 1996. Net sales of fine furniture decreased 2.3% to
$1,250.7 million for the nine months ended September 30, 1997 from $1,279.7
million for the comparable period of 1996. Fine furniture sales were negatively
impacted by the Company's strategy of exiting less profitable products,
relatively soft major retailer sales including reduced shipments to two large
customers who filed for protection under Chapter 11 of the United States
Bankruptcy Code. Net sales of decorative home furnishing fabrics decreased 0.1%
to $200.2 million for the nine months ended September 30, 1997 from $200.4
million for the comparable period of 1996 as the continuing growth of leather as
a replacement for fabric in upholstered furniture negatively impacted fabric
sales. 

     Gross profit was $375.3 million for the nine months ended September 30,
1997, an increase of $11.6 million, or 3.2%, from $363.7 million for the
comparable period of 1996. Gross profit margins increased to 25.9% for the nine
months ended September 30, 1997 from 24.6% for the comparable period of 1996. 
This increase was primarily attributable to the Company's continuous improvement
initiatives and the benefit of lower depreciation expense. 

     Selling, general and administrative expenses were reduced to $259.5 million
for the nine months ended September 30, 1997, a decrease of $17.9 million, or
6.5%, from $277.4 million for the comparable period of 1996. The decrease in
general and administrative expenses reflects the benefits of the Company's cost
reduction initiatives, elimination of goodwill amortization, and the net
decrease in general and administrative expenses which the Company has incurred
on a stand-alone basis compared to the management fees previously charged by
Masco. These reductions were largely offset by higher bad debt expenses
resulting from the bankruptcy filings previously mentioned. As a percentage of
net sales, selling, general and administrative expenses improved to 17.9% for
the nine months ended September 30, 1997 from 18.7% for the comparable period of
1996. Selling expense was 11.1% of net sales, the same as in 1996, and general
and administrative expenses decreased to 6.8% of net sales from 7.6% in 1996. 

     Operating profit increased to $115.8 million for the nine months ended
September 30, 1997, an increase of $29.4 million, or 34.0%, from $86.4 million
for the comparable period of 1996. As a percentage of net sales, operating
profit increased to 8.0% for the nine months ended September 30, 1997 from 5.8%
for the comparable period of 1996. This improvement was achieved primarily for
the reasons discussed above. 

     Interest expense was $32.8 million for the nine months ended September 30,
1997, a decrease of $27.9 million, or 46.0%, from the comparable period of 1996.
This decrease was a result of lower average debt outstanding, partially offset
by higher average borrowing rates, during the nine months ended September 30,
1997 when compared to the Predecessor's advances from Masco and the Company's
debt outstanding during the comparable period of 1996.


                                          16

<PAGE>

                       LIFESTYLE FURNISHINGS INTERNATIONAL LTD.


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)



                           LIQUIDITY AND CAPITAL RESOURCES

     The Company's liquidity needs arise primarily from debt service on the
indebtedness incurred in connection with the Acquisition, working capital needs
and the funding of capital expenditures. The Company's principal source of cash
to fund its liquidity needs is its net cash from operating activities and
availability of borrowings under its revolving credit facility. Net cash from
operating activities for the nine months ended September 30, 1997 was $70.6
million, a decrease of $26.4 million from $97.0 million in the comparable period
of 1996. 

     The Company made net principal payments on its long-term debt of $26.6
million and net repayments of $17.0 million under its accounts receivable
securitization facility for the nine months ended September 30, 1997.  Since
August 5, 1996, the Company has reduced its debt levels by $135.3 million and
its accounts receivable securitization balance by $5.0 million.  On October 31,
1997, the Company paid an additional $15.0 million of principal on its revolving
credit facility.

     On August 15, 1997, the Company replaced the existing Revolving credit
facility, Tranche A term loan and Tranche B term loan with a six year $400
million senior secured revolving credit facility.  The new facility provides the
Company with increased financial flexibility by eliminating quarterly principal
payment requirements, reducing financing costs and reducing a number of
restrictive covenants.

     In connection with the repayment of the existing revolving credit and term
loan facilities, the Company recorded an extraordinary non-cash charge of $19.4
million ($11.6 million net of tax), consisting of the write-off of unamortized
deferred financing costs, related to the early extinguishment of debt. 

     Capital expenditures totaled $23.9 million for the nine months ended
September 30, 1997, an increase of $4.6 million from the comparable period of
1996.


                                          17

<PAGE>

                              PART II. OTHER INFORMATION


                       LIFESTYLE FURNISHINGS INTERNATIONAL LTD.




  Items 1, 2, 3, 4, and 5 are not applicable. 


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         (a) Exhibits 

   EXHIBIT
   NUMBER                          DESCRIPTION OF EXHIBITS
---------------  ---------------------------------------------------------------

      10+        Restated Credit Agreement dated as of August 15, 1997, among
                 FURNISHINGS INTERNATIONAL INC., the Company, the subsidiary
                 borrowers named therein, the lenders named therein and The
                 Chase Manhattan Bank, as Swingline Lender, Administrative Agent
                 and Collateral Agent, The First National Bank of Chicago, as
                 Issuing Agent and as Co-Agent, and CIBC, as Co-Agent.

      27+        Financial Data Schedule


      (b) No reports on Form 8-K were filed by the registrant during the three
months ended September 30, 1997. 

___________

+ Filed herewith 


                                          18

<PAGE>

                                      SIGNATURE
                                           
     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. 



                           LIFESTYLE FURNISHINGS INTERNATIONAL LTD.


Date:  November 10, 1997   BY: /s/ RONALD J. HOFFMAN
                           -------------------------


                           Ronald J. Hoffman
                           Vice President, Chief Financial Officer and Treasurer
                           (Chief Financial Officer and Authorized Signatory)


                                          19

<PAGE>

                       LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
                                    EXHIBIT INDEX
                                           


   EXHIBIT
   NUMBER                               DESCRIPTION OF EXHIBITS
---------------  ---------------------------------------------------------------

    10+          Restated Credit Agreement dated as of August 15, 1997, among
                 FURNISHINGS INTERNATIONAL INC., the Company, the subsidiary
                 borrowers named therein, the lenders named therein and The
                 Chase Manhattan Bank, as Swingline Lender, Administrative Agent
                 and Collateral Agent, The First National Bank of Chicago, as
                 Issuing Agent and as Co-Agent, and CIBC, as Co-Agent.

    27+          Financial Data Schedule


___________

+ Filed herewith 


                                          20