<PAGE>
--------------------------------------------------------------------------------
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                       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 THE QUARTER ENDED JUNE 30, 1997.
                        COMMISSION FILE NUMBER 333-11905
 
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
 
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                    <C>
              DELAWARE                              56-1977928
      (STATE OF INCORPORATION)                   (I.R.S. EMPLOYER
                                                IDENTIFICATION NO.)
 
        1300 NATIONAL HIGHWAY
     THOMASVILLE, NORTH CAROLINA                       27360
   (ADDRESS OF PRINCIPAL EXECUTIVE                  (ZIP CODE)
              OFFICES)
</TABLE>
 
                                 (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 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 AUGUST 14,
                                      1997
 
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
                                     INDEX
 
<TABLE>
<CAPTION>
                                                                                                           PAGE NO.
                                                                                                          -----------
<S>                                                                                                       <C>
 
    Part I.  Financial Information
 
    Item 1. Financial Statements
 
            Condensed Balance Sheets--June 30, 1997 and December 31, 1996...............................           1
 
            Condensed Statements of Operations for the six months and the three months ended June 30,
               1997 and 1996............................................................................           2
 
            Condensed Statements of Cash Flows for the six months ended June 30, 1997 and 1996..........           3
 
            Notes to Condensed Financial Statements.....................................................        4-11
 
    Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations......       12-14
 
    Part II. Other Information
 
    Item 6.  Exhibits and Reports on Form 8-K...........................................................          15
 
    Signature Page......................................................................................          16
 
    Exhibit Index.......................................................................................          17
</TABLE>
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
 
                            CONDENSED BALANCE SHEETS
 
                             (DOLLARS IN THOUSANDS)
 
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                                       CONSOLIDATED  CONSOLIDATED
                                                                                         COMPANY       COMPANY
                                                                                       ------------  ------------
                                                                                         JUNE 30,    DECEMBER 31,
                                                                                           1997          1996
                                                                                       ------------  ------------
<S>                                                                                    <C>           <C>
                                       ASSETS
 
Current assets:
  Cash and cash investments..........................................................   $   24,550    $   22,400
  Trade receivables..................................................................       65,270        81,810
  Investment in receivables trust....................................................       53,990        51,120
  Other receivables..................................................................       46,330        46,280
  Inventories........................................................................      566,510       526,300
  Prepaid expenses...................................................................       26,250        22,690
  Deferred income taxes..............................................................       14,080        14,080
                                                                                       ------------  ------------
    Total current assets.............................................................      796,980       764,680
Property and equipment, net..........................................................      354,230       349,330
Notes receivable.....................................................................        8,910         7,620
Other assets.........................................................................       59,750        69,100
                                                                                       ------------  ------------
    Total assets.....................................................................   $1,219,870    $1,190,730
                                                                                       ------------  ------------
                                                                                       ------------  ------------
                        LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
  Long-term debt, current............................................................   $   18,840    $   18,970
  Accounts payable...................................................................      122,680        93,030
  Accrued liabilities................................................................      141,890       153,130
                                                                                       ------------  ------------
    Total current liabilities........................................................      283,410       265,130
Long-term debt.......................................................................      406,590       425,650
Other long-term liabilities..........................................................       45,720        46,590
                                                                                       ------------  ------------
    Total liabilities................................................................      735,720       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....................................................................       64,290        31,270
Foreign currency translation.........................................................       (1,190)        1,040
                                                                                       ------------  ------------
    Total shareholder's equity.......................................................      484,150       453,360
                                                                                       ------------  ------------
    Total liabilities and shareholder's equity.......................................   $1,219,870    $1,190,730
                                                                                       ------------  ------------
                                                                                       ------------  ------------
</TABLE>
 
    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>
                                                          FOR THE SIX MONTHS ENDED     FOR THE THREE MONTHS ENDED
                                                        ----------------------------  ----------------------------
                                                        CONSOLIDATED     COMBINED     CONSOLIDATED     COMBINED
                                                           COMPANY      PREDECESSOR      COMPANY      PREDECESSOR
                                                        JUNE 30, 1997  JUNE 30, 1996  JUNE 30, 1997  JUNE 30, 1996
                                                        -------------  -------------  -------------  -------------
<S>                                                     <C>            <C>            <C>            <C>
Net sales.............................................   $   969,630    $   981,120    $   479,400    $   490,110
Cost of sales.........................................       717,720        741,960        353,220        372,790
                                                        -------------  -------------  -------------  -------------
  Gross profit........................................       251,910        239,160        126,180        117,320
Selling, general and administrative expenses..........       172,610        189,130         86,190         93,800
                                                        -------------  -------------  -------------  -------------
  Operating profit....................................        79,300         50,030         39,990         23,520
                                                        -------------  -------------  -------------  -------------
Other expense, net:
  Interest expense....................................        22,270            780         11,050            780
  Interest expense, Masco Corporation.................            --         43,730             --         21,490
  Other, net..........................................         6,230          2,930          3,750          1,870
                                                        -------------  -------------  -------------  -------------
                                                              28,500         47,440         14,800         24,140
                                                        -------------  -------------  -------------  -------------
  Income before income taxes..........................        50,800          2,590         25,190           (620)
Income taxes..........................................        17,780          5,020          8,820          2,080
                                                        -------------  -------------  -------------  -------------
  Net income..........................................   $    33,020    $    (2,430)   $    16,370    $    (2,700)
                                                        -------------  -------------  -------------  -------------
                                                        -------------  -------------  -------------  -------------
</TABLE>
 
    The accompanying notes are an integral part of the financial statements.
 
                                       2
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
 
                       CONDENSED STATEMENTS OF CASH FLOWS
 
                             (DOLLARS IN THOUSANDS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                                        FOR THE SIX MONTHS ENDED
                                                                                      ----------------------------
                                                                                      CONSOLIDATED     COMBINED
                                                                                         COMPANY      PREDECESSOR
                                                                                      JUNE 30, 1997  JUNE 30, 1996
                                                                                      -------------  -------------
<S>                                                                                   <C>            <C>
OPERATING ACTIVITIES:
Net income..........................................................................   $    33,020     $  (2,430)
Adjustments to reconcile net income to net cash provided by operating activities:
  Depreciation and amortization.....................................................        12,770        25,500
  Fabric sample book amortization...................................................         8,110         8,330
  Bad debt provision, net...........................................................         2,320         1,590
Changes in operating assets and liabilities:
  Receivables.......................................................................         9,350         7,990
  Inventories.......................................................................       (40,210)       (8,220)
  Prepaid expenses and other assets.................................................         2,130          (880)
  Accounts payable..................................................................        29,650         3,820
  Other liabilities.................................................................       (12,410)        9,740
                                                                                      -------------  -------------
    Net cash provided by operating activities.......................................        44,730        45,440
                                                                                      -------------  -------------
INVESTING ACTIVITIES:
Net investments in receivables trust................................................        (2,870)           --
Capital expenditures................................................................       (17,170)      (13,870)
Fabric sample book expenditures.....................................................        (6,840)       (7,220)
Issuance of notes receivable........................................................            --        (3,280)
Collection of notes receivable......................................................        10,530         5,490
Other, net..........................................................................           (40)       (3,350)
                                                                                      -------------  -------------
    Net cash used for investing activities..........................................       (16,390)      (22,230)
                                                                                      -------------  -------------
FINANCING ACTIVITIES:
Net proceeds from short-term borrowings.............................................           850            --
Net repayments from accounts receivable transactions................................        (7,000)           --
Proceeds from long-term debt........................................................            --        65,460
Repayments of long-term debt........................................................       (20,040)      (66,530)
Net decrease in Masco Corporation net investment and advances.......................            --       (27,400)
                                                                                      -------------  -------------
    Net cash used for financing activities..........................................       (26,190)      (28,470)
                                                                                      -------------  -------------
CASH AND CASH INVESTMENTS:
Increase (decrease) for the period..................................................         2,150        (5,260)
Balance, beginning of period........................................................        22,400        17,310
                                                                                      -------------  -------------
Balance, end of period..............................................................   $    24,550     $  12,050
                                                                                      -------------  -------------
                                                                                      -------------  -------------
</TABLE>
 
    The accompanying notes are an integral part of the financial statements.
 
                                       3
<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 June 30, 1997 and December 31, 1996 and for the three and six
month periods ended June 30, 1997. 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 three and six month periods ended June 30,
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.
 
2. RECENTLY ISSUED ACCOUNTING STANDARDS
 
    Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125 ("SFAS 125"), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." The adoption
of SFAS 125 did not have a material impact on the Company's financial
statements.
 
3. INVENTORY
 
    As of June 30, 1997 and December 31, 1996, inventory balances were as
follows:
 
<TABLE>
<CAPTION>
                                                                                          JUNE 30,   DECEMBER 31,
                                                                                            1997         1996
                                                                                         ----------  ------------
<S>                                                                                      <C>         <C>
Finished goods.........................................................................  $  249,830   $  223,610
Raw materials..........................................................................     230,815      216,250
Work in process........................................................................      85,865       86,440
                                                                                         ----------  ------------
                                                                                         $  566,510   $  526,300
                                                                                         ----------  ------------
                                                                                         ----------  ------------
</TABLE>
 
                                       4
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
 
              NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
 
4. LONG-TERM DEBT
 
    As of June 30, 1997 and December 31, 1996, the outstanding balances of
long-term debt were as follows:
 
<TABLE>
<CAPTION>
                                                                                          JUNE 30,   DECEMBER 31,
                                                                                            1997         1996
                                                                                         ----------  ------------
<S>                                                                                      <C>         <C>
Revolving credit facility..............................................................  $       --   $       --
Tranche A term loan....................................................................      87,820      100,420
Tranche B term loan....................................................................     133,140      140,580
Senior subordinated notes..............................................................     200,000      200,000
Other borrowings.......................................................................       4,470        3,620
                                                                                         ----------  ------------
                                                                                            425,430      444,620
Less current portion...................................................................      18,840       18,970
                                                                                         ----------  ------------
                                                                                         $  406,590   $  425,650
                                                                                         ----------  ------------
                                                                                         ----------  ------------
</TABLE>
 
    The Company has negotiated with its lenders a six year $400 million senior
secured revolving credit facility to replace the existing Revolving credit
facility, Tranche A term loan and Tranche B term loan. The new facility will
provide the Company with increased financial flexibility by eliminating
quarterly principal payments, reducing financing costs on the facility and
eliminating certain restrictive covenants.
 
    The Company expects to complete the refinancing on August 15, 1997, at which
time deferred financing costs related to the existing facility of approximately
$20 million will be written off as a non-cash extraordinary item.
 
5. 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.
 
                                       5
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
 
              NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
 
5. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
                                    COMPANY
                     CONDENSED CONSOLIDATING BALANCE SHEET
                                 JUNE 30, 1997
 
<TABLE>
<CAPTION>
                                                                GUARANTOR    NON-GUARANTOR
                                                    COMPANY    SUBSIDIARIES   SUBSIDIARIES   ELIMINATIONS  CONSOLIDATED
                                                   ----------  ------------  --------------  ------------  ------------
<S>                                                <C>         <C>           <C>             <C>           <C>
ASSETS
Current Assets:
  Cash and cash investments......................  $   --      $     11,160    $   13,390     $   --        $   24,550
  Receivables....................................      --            17,180        94,420         --           111,600
  Investment in receivables trust................      --           --             53,990         --            53,990
  Inventories....................................      --           470,200        96,310         --           566,510
  Prepaid expenses...............................      --            17,220         9,030         --            26,250
  Deferred income taxes..........................      --            12,640         1,440         --            14,080
  Intercompany account...........................      --           248,830         7,830       (256,660)       --
                                                   ----------  ------------  --------------  ------------  ------------
      Total current assets.......................      --           777,230       276,410       (256,660)      796,980
Property and equipment, net......................      --           269,490        84,740         --           354,230
Notes receivable.................................      --             8,910        --             --             8,910
Other assets.....................................      --            58,330         1,420         --            59,750
Investments in affiliates........................     484,150         4,000        --           (488,150)       --
                                                   ----------  ------------  --------------  ------------  ------------
      Total assets...............................  $  484,150  $  1,117,960    $  362,570     $ (744,810)   $1,219,870
                                                   ----------  ------------  --------------  ------------  ------------
                                                   ----------  ------------  --------------  ------------  ------------
 
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
  Long-term debt, current........................  $   --      $     16,290    $    2,550     $   --        $   18,840
  Accounts payable...............................      --            97,740        24,940         --           122,680
  Accrued liabilities............................      --            97,530        44,360         --           141,890
  Intercompany account...........................      --             7,830       248,830       (256,660)       --
                                                   ----------  ------------  --------------  ------------  ------------
      Total current liabilities..................      --           219,390       320,680       (256,660)      283,410
Long-term debt...................................      --           406,590        --             --           406,590
Other long-term liabilities......................      --            44,380         1,340         --            45,720
                                                   ----------  ------------  --------------  ------------  ------------
      Total liabilities..........................      --           670,360       322,020       (256,660)      735,720
                                                   ----------  ------------  --------------  ------------  ------------
Shareholder's equity.............................     484,150       447,600        40,550       (488,150)      484,150
                                                   ----------  ------------  --------------  ------------  ------------
      Total liabilities and shareholder's
        equity...................................  $  484,150  $  1,117,960    $  362,570     $ (744,810)   $1,219,870
                                                   ----------  ------------  --------------  ------------  ------------
                                                   ----------  ------------  --------------  ------------  ------------
</TABLE>
 
                                       6
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
 
              NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
 
5. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
                                    COMPANY
                     CONDENSED CONSOLIDATING BALANCE SHEET
                               DECEMBER 31, 1996
 
<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>
 
                                       7
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
 
              NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
 
5. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
                                    COMPANY
                CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
                     FOR THE SIX MONTHS ENDED JUNE 30, 1997
 
<TABLE>
<CAPTION>
                                                                  GUARANTOR   NON-GUARANTOR
                                                      COMPANY    SUBSIDIARIES  SUBSIDIARIES   ELIMINATIONS  CONSOLIDATED
                                                     ----------  -----------  --------------  ------------  ------------
<S>                                                  <C>         <C>          <C>             <C>           <C>
Net sales..........................................  $   --       $ 877,240     $  213,710     $ (121,320)   $  969,630
Cost of sales......................................      --         661,000        178,040       (121,320)      717,720
                                                     ----------  -----------  --------------  ------------  ------------
  Gross profit.....................................      --         216,240         35,670         --           251,910
Selling, general and administrative expenses.......      --         148,320         24,290         --           172,610
                                                     ----------  -----------  --------------  ------------  ------------
  Operating profit.................................      --          67,920         11,380         --            79,300
Other expense, net.................................     (33,020)     24,720         (4,810)        41,610        28,500
                                                     ----------  -----------  --------------  ------------  ------------
  Income before income taxes.......................      33,020      43,200         16,190        (41,610)       50,800
Income taxes.......................................      --          14,540          3,240         --            17,780
                                                     ----------  -----------  --------------  ------------  ------------
  Net income.......................................  $   33,020   $  28,660     $   12,950     $  (41,610)   $   33,020
                                                     ----------  -----------  --------------  ------------  ------------
                                                     ----------  -----------  --------------  ------------  ------------
</TABLE>
 
                                  PREDECESSOR
                  CONDENSED COMBINING STATEMENT OF OPERATIONS
                     FOR THE SIX MONTHS ENDED JUNE 30, 1996
 
<TABLE>
<CAPTION>
                                                             GUARANTOR   NON-GUARANTOR
                                                            SUBSIDIARIES  SUBSIDIARIES   ELIMINATIONS   COMBINED
                                                            -----------  --------------  ------------  ----------
<S>                                                         <C>          <C>             <C>           <C>
Net sales.................................................   $ 864,990     $  252,150     $ (136,020)  $  981,120
Cost of sales.............................................     666,180        211,800       (136,020)     741,960
                                                            -----------  --------------  ------------  ----------
  Gross profit............................................     198,810         40,350         --          239,160
Selling, general and administrative expenses..............     154,370         34,760         --          189,130
                                                            -----------  --------------  ------------  ----------
  Operating profit........................................      44,440          5,590         --           50,030
Other expense, net........................................      39,240          5,980          2,220       47,440
                                                            -----------  --------------  ------------  ----------
  Income (loss) before income taxes.......................       5,200           (390)        (2,220)       2,590
Income taxes..............................................       5,290           (270)        --            5,020
                                                            -----------  --------------  ------------  ----------
  Net loss................................................   $     (90)    $     (120)    $   (2,220)  $   (2,430)
                                                            -----------  --------------  ------------  ----------
                                                            -----------  --------------  ------------  ----------
</TABLE>
 
                                       8
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
 
              NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
 
5. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
                                    COMPANY
                CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
                     FOR THE SIX MONTHS ENDED JUNE 30, 1997
 
<TABLE>
<CAPTION>
                                                                GUARANTOR    NON-GUARANTOR
                                                     COMPANY    SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
                                                     --------   ---------    ---------    ---------    ---------
<S>                                                  <C>        <C>          <C>          <C>          <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES:.........  $  --      $ 37,310     $  7,420     $  --        $ 44,730
                                                     --------   ---------    ---------    ---------    ---------
INVESTING ACTIVITIES:
Net investments in receivables trust...............     --         --          (2,870)       --          (2,870)
Capital expenditures...............................     --       (14,470)      (2,700)       --         (17,170)
Fabric sample book expenditures....................     --        (6,840)       --           --          (6,840)
Collection of notes receivable.....................     --        10,530        --           --          10,530
Other, net.........................................     --         --             (40)       --             (40)
                                                     --------   ---------    ---------    ---------    ---------
    Net cash used for investing activities.........     --       (10,780)      (5,610)       --         (16,390)
                                                     --------   ---------    ---------    ---------    ---------
FINANCING ACTIVITIES:
Net proceeds from short-term debt..................     --           850        --           --             850
Net repayments from accounts receivable
  transactions.....................................     --         --          (7,000)       --          (7,000)
Repayments of long-term debt.......................     --       (19,750)        (290)       --         (20,040)
Intercompany accounts, net.........................     --          (980)         980        --           --
                                                     --------   ---------    ---------    ---------    ---------
    Net cash used for financing activities.........     --       (19,880)      (6,310)       --         (26,190)
                                                     --------   ---------    ---------    ---------    ---------
CASH AND CASH INVESTMENTS:
Increase (decrease) for the period.................     --         6,650       (4,500)       --           2,150
Balance, beginning of period.......................     --         4,510       17,890        --          22,400
                                                     --------   ---------    ---------    ---------    ---------
Balance, end of period.............................  $  --      $ 11,160     $ 13,390     $  --        $ 24,550
                                                     --------   ---------    ---------    ---------    ---------
                                                     --------   ---------    ---------    ---------    ---------
</TABLE>
 
                                       9
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
 
              NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
 
5. GUARANTOR FINANCIAL STATEMENTS (CONTINUED)
                                  PREDECESSOR
                  CONDENSED COMBINING STATEMENT OF CASH FLOWS
                     FOR THE SIX MONTHS ENDED JUNE 30, 1996
 
<TABLE>
<CAPTION>
                                                             GUARANTOR   NON-GUARANTOR
                                                            SUBSIDIARIES  SUBSIDIARIES   ELIMINATIONS   COMBINED
                                                            -----------  --------------  ------------  ----------
<S>                                                         <C>          <C>             <C>           <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES:................   $  17,990     $   29,710     $   (2,260)  $   45,440
                                                            -----------  --------------  ------------  ----------
 
INVESTING ACTIVITIES:
Capital expenditures......................................     (11,630)        (2,240)        --          (13,870)
Fabric sample book expenditures...........................      (7,220)        --             --           (7,220)
Issuance of notes receivable..............................      (3,280)        --             --           (3,280)
Collection of notes receivable............................       3,180          2,310         --            5,490
Other, net................................................      (4,100)         3,930         (3,180)      (3,350)
                                                            -----------  --------------  ------------  ----------
    Net cash provided by (used for) investing
      activities..........................................     (23,050)         4,000         (3,180)     (22,230)
                                                            -----------  --------------  ------------  ----------
 
FINANCING ACTIVITIES:
Increase (decrease) in Masco Corporation net investment
  and advances............................................       3,140        (35,980)         5,440      (27,400)
Increase in other debt....................................         800         64,660         --           65,460
Payment of other debt.....................................        (830)       (65,700)        --          (66,530)
                                                            -----------  --------------  ------------  ----------
    Net cash provided by (used for) financing
      activities..........................................       3,110        (37,020)         5,440      (28,470)
                                                            -----------  --------------  ------------  ----------
 
CASH AND CASH INVESTMENTS:
Decrease for the period...................................      (1,950)        (3,310)        --           (5,260)
Balance, beginning of period..............................       4,540         12,770         --           17,310
                                                            -----------  --------------  ------------  ----------
Balance, end of period....................................   $   2,590     $    9,460     $   --       $   12,050
                                                            -----------  --------------  ------------  ----------
                                                            -----------  --------------  ------------  ----------
</TABLE>
 
                                       10
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
 
              NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
 
6. PRO FORMA SUPPLEMENTARY DATA
 
    The following pro forma supplementary data for the six months ended June 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.
 
<TABLE>
<CAPTION>
                                                                                                   SIX MONTHS
                                                                                                      ENDED
                                                                                                  JUNE 30, 1996
                                                                                                   (DOLLARS IN
                                                                                                    MILLIONS)
                                                                                               -------------------
<S>                                                                                            <C>
Net sales....................................................................................       $   981.1
Gross profit.................................................................................           243.8
Operating profit.............................................................................            65.5
Net income...................................................................................            18.7
</TABLE>
 
    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.
 
                                       11
<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 six months and three months ended June 30, 1996 represent the results of the
Predecessor.
 
     COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1997 TO THE THREE MONTHS
                              ENDED JUNE 30, 1996
 
    Net sales were $479.4 million for the three months ended June 30, 1997, a
decrease of $10.7 million, or 2.2%, from $490.1 million for the comparable
period of 1996. Net sales of fine furniture decreased 3.5% to $411.4 million for
the three months ended June 30, 1997 from $426.5 million for the comparable
period of 1996. Fine furniture sales were negatively impacted by the Company's
strategy of exiting less profitable product lines and relatively soft major
retailer sales. Net sales of decorative home furnishing fabrics increased 6.9%
to $68.0 million for the three months ended June 30, 1997 from $63.6 million for
the comparable period of 1996.
 
    Gross profit was $126.2 million for the three months ended June 30, 1997, an
increase of $8.9 million, or 7.6%, from $117.3 million for the Predecessor's
comparable period of 1996. Gross profit margins increased to 26.3% for the three
months ended June 30, 1997 from 23.9% for the comparable period of 1996. This
increase was primarily attributable to the Company's continuous improvement
initiatives and the benefit of reduced depreciation expense which resulted from
the allocation of the purchase price of the Acquisition.
 
    Selling, general and administrative expenses were reduced to $86.2 million
for the three months ended June 30, 1997, a decrease of $7.6 million, or 8.1%,
from $93.8 million for the comparable period of 1996. As a percentage of net
sales, selling, general and administrative expenses improved to 18.0% for the
three months ended June 30, 1997 from 19.1% for the comparable period of 1996.
Selling expense was 11.4% of net sales as compared to 11.3% for 1996, and
general and administrative expenses decreased to 6.6% of net sales from 7.8% in
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.
 
    Operating profit increased to $40.0 million for the three months ended June
30, 1997, an increase of $16.5 million, or 70.2%, from $23.5 million for the
comparable period of 1996. As a percentage of net sales, operating profit
increased to 8.3% for the three months ended June 30, 1997 from 4.8% for the
comparable period of 1996. This improvement was achieved primarily for the
reasons discussed above.
 
    Interest expense was $11.1 million for the three months ended June 30, 1997,
a decrease of $11.2 million, or 50.2%, from the comparable period of 1996. This
decrease was a result of lower average debt outstanding during the three months
ended June 30, 1997 when compared to the Predecessor's advances from Masco
outstanding during the comparable period of 1996. The reduced interest expense
from the lower level of debt after the Acquisition combined with approximately
$128 million of principal repayments made since August 5, 1996 were partially
offset by higher average borrowing rates.
 
                                       12
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
       COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 TO THE SIX MONTHS
                              ENDED JUNE 30, 1996
 
    Net sales were $969.6 million for the six months ended June 30, 1997, a
decrease of $11.5 million, or 1.2%, from $981.1 million for the comparable
period of 1996. Net sales of fine furniture decreased 1.6% to $834.4 million for
the six months ended June 30, 1997 from $848.0 million for the comparable period
of 1996. Fine furniture sales were negatively impacted by the Company's strategy
of exiting less profitable product lines and relatively soft major retailer
sales. Net sales of decorative home furnishing fabrics increased 1.6% to $135.2
million for the six months ended June 30, 1997 from $133.1 million for the
comparable period of 1996.
 
    Gross profit was $251.9 million for the six months ended June 30, 1997, an
increase of $12.7 million, or 5.3%, from $239.2 million for the Predecessor's
comparable period of 1996. Gross profit margins increased to 26.0% for the six
months ended June 30, 1997 from 24.4% for the comparable period of 1996. This
increase was primarily attributable to the Company's continuous improvement
initiatives and the benefit of reduced depreciation expense which resulted from
the allocation of the purchase price of the Acquisition.
 
    Selling, general and administrative expenses were reduced to $172.6 million
for the six months ended June 30, 1997, a decrease of $16.5 million, or 8.7%,
from $189.1 million for the comparable period of 1996. As a percentage of net
sales, selling, general and administrative expenses improved to 17.8% for the
six months ended June 30, 1997 from 19.3% for the comparable period of 1996.
Selling expense was 11.1% of net sales as compared to 11.3% for 1996, and
general and administrative expenses decreased to 6.7% of net sales from 8.0% in
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.
 
    Operating profit increased to $79.3 million for the six months ended June
30, 1997, an increase of $29.3 million, or 58.6%, from $50.0 million for the
comparable period of 1996. As a percentage of net sales, operating profit
increased to 8.2% for the six months ended June 30, 1997 from 5.1% for the
comparable period of 1996. This improvement was achieved primarily for the
reasons discussed above.
 
    Interest expense was $22.3 million for the six months ended June 30, 1997, a
decrease of $22.2 million, or 50.0%, from the comparable period of 1996. This
decrease was a result of lower average debt outstanding during the six months
ended June 30, 1997 when compared to the Predecessor's advances from Masco
outstanding during the comparable period of 1996. The reduced interest expense
from the lower level of debt after the Acquisition combined with approximately
$128 million of principal repayments made since August 5, 1996 were partially
offset by higher average borrowing rates.
 
                                       13
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
                        PRO FORMA RESULTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                            SIX MONTHS ENDED
                                                                              JUNE 30, 1996
                                                                               (DOLLARS IN
                                                                                MILLIONS)
                                                                           -------------------
<S>                                                                        <C>
Net sales................................................................       $   981.1
Gross profit.............................................................           243.8
Operating profit.........................................................            65.5
Net income...............................................................            18.7
</TABLE>
 
    (a) The Note to Financial Statements captioned "Pro Forma Supplementary
Data" as set forth in Note 6 of the accompanying financial statements of this
report should be read in conjunction with this information.
 
    For purposes of the discussion that follows, the results of the six months
ended June 30, 1997 are compared with the pro forma results of the six months
ended June 30, 1996 (giving effect to the Acquisition transactions as if they
had occurred on January 1, 1996). On a pro forma basis, the Company's operating
income increased from $65.5 million to $79.3 million, an increase of 21.1%, and
net income increased from $18.7 million to $33.0 million, an increase of 76.5%.
Results benefited from initiatives to trim less profitable product lines and
reduce manufacturing expense, as well as lowering selling, general and
administrative costs, combined with lower interest expense.
 
                        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 six months ended June 30, 1997 was $44.7 million, a
decrease of $0.7 million from $45.4 million in the comparable period of 1996.
 
    The Company made principal payments on its long-term debt of $20.0 million
for the six months ended June 30, 1997. Transactions under the Receivables
Facility resulted in net repayments of $7.0 million and an increased investment
in the receivables trust of $2.9 million. Capital expenditures totaled $17.2
million for the six months ended June 30, 1997.
 
    The Company has negotiated with its lenders a six year $400 million senior
secured revolving credit facility to replace the existing Revolving credit
facility, Tranche A term loan and Tranche B term loan. The new facility will
provide the Company with increased financial flexibility by eliminating
quarterly principal payments, reducing financing costs on the facility, and
eliminating certain restrictive covenants.
 
    The Company expects to complete the refinancing on August 15, 1997, at which
time deferred financing costs related to the existing facility of approximately
$20 million will be written off as a non-cash extraordinary item.
 
                                       14
<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
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER    DESCRIPTION OF EXHIBITS
---------  -------------------------------------------------------------
<C>        <S>
  10.1+    Third Amendment, dated as of July 15, 1997, to Stockholders'
            Agreement
 
   27+     Financial Data Schedule
</TABLE>
 
    (b) No reports on Form 8-K were filed by the registrant during the three
months ended June 30, 1997.
 
------------------------
 
+  Filed herewith
 
                                       15
<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: August 14, 1997                 BY: /s/ RONALD J. HOFFMAN
     ---------------------------------------------------------------------------
 
                                          Ronald J. Hoffman
                                          Vice President, Chief Financial
                                          Officer and Treasurer
                                          (Chief Financial Officer and
                                          Authorized Signatory)
 
                                       16
<PAGE>
                    LIFESTYLE FURNISHINGS INTERNATIONAL LTD.
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
  EXHIBIT
  NUMBER                                              DESCRIPTION OF EXHIBITS
-----------  ---------------------------------------------------------------------------------------------------------
<S>          <C>
   10.1      Third Amendment, dated as of July 15, 1997, to Stockholders' Agreement
 
    27       Financial Data Schedule
</TABLE>
 
                                       17