<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-Q
        
[X]          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

              For the Quarterly Period Ended:   September 30, 1997

[ ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

          For the transition period from ____________ to ____________

                       Commission File Number:  33-96794
                                                --------

                         DECORATIVE HOME ACCENTS, INC.
                             (DEBTOR-IN-POSSESSION)
             (Exact name of registrant as specified in its charter)


     Delaware                                                   57-0998387
     --------                                                   ----------      
(State or other jurisdiction                                   (IRS Employer    
of incorporation or organization)                         Identification Number)
                                                                                


           Industrial Park Drive, Abbeville, South Carolina 29620
     -------------------------------------------------------------------
             (Address of principal executive offices) (Zip Code)

     Registrant's telephone number, including area code:  (864) 446-2123

     Indicate by check mark whether the registrant 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).
                      Yes     [X]           No     [ ]

     Indicate by check mark whether the registrant has been subject to such
filing requirements for the past 90 days.

                      Yes     [X]           No     [ ]

     As of October 30, 1997, there were 109,737 shares outstanding of the
Registrant's Class A Common Stock ($0.01 par value), 1,756,126 shares
outstanding of the Registrant's Class B Non-Voting Common Stock ($0.01 par
value), 386,040 shares outstanding of the Registrant's Class C Common Stock
($0.01 par value), 808,333 shares outstanding of the Registrant's Class D
Common Stock ($0.01 par value), 118,100 shares outstanding of the Registrant's
Class F Common Stock and 60,100 shares outstanding of the Registrant's 14%
Cumulative Redeemable Preferred Stock ($0.01 par value).


<PAGE>   2


                         DECORATIVE HOME ACCENTS, INC.
                             (DEBTOR-IN-POSSESSION)


                        QUARTER ENDED SEPTEMBER 30, 1997

                                     INDEX
          

<TABLE>
<CAPTION>
                                                                                   Page 
                                                                                    No.
                                                                                   ----
<S>                                                                                 <C>
PART I- FINANCIAL INFORMATION

      Item 1.  Financial Statements (Unaudited)
                                                                                
               Condensed Consolidated Balance Sheets as of September 30, 1997                  
                     and December 31, 1996..............................................    4  
                                                                                               
               Condensed Consolidated Statements of Operations for the three                   
                     months ended September 30, 1997 and 1996...........................    5  
                                                                                               
               Condensed Consolidated Statements of Operations for the nine                    
                     months ended September 30, 1997 and 1996...........................    6  
                                                                                               
               Condensed Consolidated Statement of Stockholders' Equity (Deficiency)           
                     for the nine months ended September 30, 1997.......................    7  
                                                                                               
               Condensed Consolidated Statements of Cash Flows for the nine months             
                     ended September 30, 1997 and 1996..................................    8  
                                                                                               
               Notes to Condensed Consolidated Financial Statements (Unaudited).........    9  
                                                                                      
      Item 2.  Management's Discussion and Analysis of Financial Condition             
               and Results of Operations................................................    12

PART II - OTHER INFORMATION

      Item 1.  Legal Proceedings........................................................    18

      Item 2.  Changes in Securities....................................................    18

      Item 3.  Defaults Upon Senior Securities..........................................    18

      Item 4.  Submission of Matters to a Vote of Security Holders......................    18

      Item 5.  Other information........................................................    18

      Item 6.  Exhibits and Reports on Form 8-K.........................................    18

      Signature Page....................................................................    19
</TABLE>




                                       2



<PAGE>   3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements

                        DECORATIVE HOME ACCENTS, INC.
                           (DEBTOR-IN-POSSESSION)
            CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands)
                                 (Unaudited)
================================================================================
<TABLE>
<CAPTION>

                                                                               September 30,           December 31,  
                                                                                 1997 (1)                1996 (2)    
                                                                              --------------           ------------  
<S>                                                                           <C>                      <C>           
ASSETS (Note 7) 
CURRENT ASSETS:
  Cash and cash equivalents                                                    $        657             $     1,980
  Accounts receivable - net of 
    allowance for doubtful accounts
    of $4,032 at September 30, 1997 and $7,014 at December 31, 1996                  31,673                  25,800
  Income taxes receivable                                                               183                     498 
  Inventories (Note 3)                                                               42,388                  32,565 
  Other current assets                                                                1,373                   1,212 
                                                                               ------------            ------------ 
          Total current assets                                                       76,274                  62,055 
                                                                                                                    
PROPERTY, PLANT AND EQUIPMENT, NET (Note 3)                                          30,347                  32,262 
OTHER ASSETS                                                                          8,248                   7,946 
INTANGIBLE ASSETS, NET                                                               12,649                  13,783 
                                                                               ------------            ------------ 
                                                                                                                    
TOTAL ASSETS                                                                   $    127,518             $   116,046 
                                                                               ============             =========== 

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
LIABILITIES NOT SUBJECT TO COMPROMISE:
  CURRENT LIABILITIES:
    Current portion of long-term debt                                          $     20,554                 124,830   
    Accounts payable (Note 7)                                                        16,991                  17,231   
    Accrued liabilities                                                               6,182                   6,176   
    Accrued interest                                                                    253                      --   
                                                                               ------------            ------------   
      Total current liabilities                                                      43,980                 148,237   
  LONG-TERM DEBT (Note 5)                                                            37,437                  34,100   
                                                                               ------------            ------------   
    TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE                                      81,417                 182,337   
                                                                               ------------            ------------   
LIABILITIES SUBJECT TO COMPROMISE (Note 7)                                          129,607                      --     
REDEEMABLE PREFERRED STOCK SUBJECT TO COMPROMISE (Note 7)                            55,678                  49,351   
REDEEMABLE COMMON STOCK SUBJECT TO COMPROMISE (Note 7)                                3,375                   2,476   
STOCKHOLDERS' EQUITY (DEFICIENCY):                                                                                    
  Common stocks                                                                           9                       9   
  Additional paid-in capital                                                             --                   6,685   
  Reduction of certain equity                                                                                         
   interest to predecessor basis                                                     (6,209)                 (6,209)  
  Accumulated deficit                                                              (136,359)               (118,603)  
                                                                               ------------            ------------   
    Total stockholders' equity (deficiency)                                        (142,559)               (118,118)  
                                                                               ------------            ------------   
                                                                                                                      
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)                        $    127,518             $   116,046   
                                                                               ============             ===========   

</TABLE>

(1)  Debtor-In-Possession.
(2)  Derived from December 31, 1996 audited consolidated financial statements.
See notes to condensed consolidated financial statements (unaudited).


                                      3


<PAGE>   4

                        DECORATIVE HOME ACCENTS, INC.
                           (DEBTOR-IN-POSSESSION)
       CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands)
                                 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
                                                                               
                                                                               
                                              Three Months Ended September 30, 
                                            -----------------------------------
                                                 1997 (1)                1996  
                                            ------------           ------------

<S>                                         <C>                    <C>
SALES (Note 8)                              $   40,768                  47,441 
                                                                               
COST OF GOODS SOLD                              32,700                  34,830 
                                            ----------             -----------
GROSS PROFIT                                     8,068                  12,611 
                                                                               
SELLING, GENERAL AND 
  ADMINISTRATIVE EXPENSES                        9,848                  11,850 
                                            ----------             -----------
INCOME (LOSS) FROM OPERATIONS                   (1,780)                    761 
                                                                               
INTEREST EXPENSE, NET                           (5,864)                 (4,962)
                                                                               
DEBT RESTRUCTURING FEES
  AND EXPENSES (Note 7)                         (2,381)                     -- 
                                            ----------             -----------
LOSS BEFORE PROVISION 
  FOR INCOME TAXES (Note 4)                    (10,025)                 (4,201)
                                                                               
INCOME TAX PROVISION (Note 4)                       --                  (2,720)
                                            ----------             ----------- 
                                                                               
NET LOSS                                    $  (10,025)            $    (6,921)
                                            ==========             =========== 



</TABLE>

(1)  Debtor-In-Possession.
See notes to condensed consolidated financial statements (unaudited).

                                      4





<PAGE>   5
                        DECORATIVE HOME ACCENTS, INC.
                           (DEBTOR-IN-POSSESSION)
       CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands)
                                 (Unaudited)

================================================================================

<TABLE>
<CAPTION>


                                             Nine Months Ended September 30,
                                             -------------------------------
                                                 1997 (1)             1996
                                            -------------         ------------


<S>                                         <C>                  <C>
SALES (Note 8)                              $   114,294              129,213

COST OF GOODS SOLD                               89,750               95,440
                                            -----------          -----------
GROSS PROFIT                                     24,544               33,773
                                                                               
SELLING, GENERAL AND 
  ADMINISTRATIVE EXPENSES                        28,793               35,948
                                            -----------          -----------   
                                                                               
LOSS FROM OPERATIONS                             (4,249)              (2,175)
                                                                               
OTHER INCOME (Note 6)                             3,748                   --    
                                                                               
INTEREST EXPENSE, NET                           (16,285)             (14,484) 
                                                                               
DEBT RESTRUCTURING FEES
  AND EXPENSES (Note 7)                          (3,985)                  --    
                                            -----------          -----------
LOSS BEFORE BENEFIT FOR INCOME TAXES
  AND EXTRAORDINARY ITEM                        (20,771)             (16,659)

INCOME TAX BENEFIT (Note 4)                          --                1,387
                                            -----------          -----------)
LOSS BEFORE EXTRAORDINARY  ITEM                 (20,771)             (15,272)

EXTRAORDINARY GAIN FROM FORGIVENESS OF DEBT,
  NET OF TAXES (Note 6)                           3,556                   --
                                            -----------          -----------
NET LOSS                                    $   (17,215)         $   (15,272)
                                            ===========          ============

</TABLE>
(1) Debtor-In Possession
See notes to condensed consolidated financial statements (unaudited)




                                      5


<PAGE>   6

                         DECORATIVE HOME ACCENTS, INC.
                            (DEBTOR-IN-POSSESSION)
     CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
                                (In Thousands)
                 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
                                  (Unaudited)

<TABLE>
<CAPTION>
===================================================================================================================================
                                                                                  Reduction of                           
                                                                                 Certain Equity                                     
                                                                                  Interest to                          Total 
                                                 Common           Additional      Predecessor    Accumulated       Stockholder's
                                                 Stocks         Paid-in Capital     Basis         Deficiency    Equity (Deficiency)
                                              ------------    ------------------  ------------  -------------  --------------------

<S>                                               <C>            <C>             <C>             <C>             <C>
Balances at December 31, 1996                     $         9    $     6,685     $      6,209    $  (118,603)    $      (118,118)

Accretion of redeemable common stock for the
  nine months ended September 30, 1997                                  (899)                                               (899)

Accretion of redeemable preferred stock for the
  nine months ended September 30, 1997                                  (701)                                               (701)

Preferred stock dividends accrued in-kind
  for the nine months ended September, 30, 1997                       (5,085)                           (541)             (5,626)

Net loss for the nine months ended
  September 30, 1997                                                                                 (17,215)            (17,215)
                                                  -----------    ------------    -------------   -----------     ---------------
Balances at September 30, 1997 (1)                $         9    $         -     $      6,209    $  (136,359)    $      (142,559)
                                                  ===========    ============    =============   ============    ===============


</TABLE>
(1) Debtor-In-Possession.

See notes to condensed consolidated financial statements (unaudited).

                                      6




<PAGE>   7
                        DECORATIVE HOME ACCENTS, INC.
                           (DEBTOR-IN-POSSESSION)
       CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
                                 (Unaudited)
================================================================================
<TABLE>
<CAPTION>
                                                             Nine Months Ended September 30,    
                                                               1997 (1)             1996        
                                                             ------------        -----------    
                                                                                                
<S>                                                          <C>                  <C>           
CASH FLOWS FROM OPERATING ACTIVITIES:                                                           
Net loss                                                     $  (17,215)          $ (15,272)    
Adjustment to reconcile net loss to net cash                                                    
  used in operating activities:                                                                 
  Depreciation and amortization                                   4,698               7,394     
  Deferred tax benefit                                               --              (1,818)    
  Retirement of related party debt (Note 6)                      (3,344)                 --     
  Extraordinary gain from retirement of debt (Note 6)            (3,556)                        
  Changes in operating assets and liabilities:                                                  
    Accounts receivable                                          (5,873)             (7,862)    
    Inventories                                                  (9,823)             (1,435)    
    Income tax receivable                                           315               2,258     
    Other current assets                                           (161)             (2,220)    
    Accounts payable                                               (240)              1,037     
    Accrued liabilities                                               6              (3,853)    
    Accrued interest                                             11,988              (3,464)    
                                                             ------------        -----------    
                                                                                                
      Net cash used in operating activities                     (23,205)            (25,235)    
                                                             ------------        -----------    
                                                                                                
CASH FLOWS FROM INVESTING ACTIVITIES:                                                           
    Purchase of property and equipment                           (1,649)             (4,073)    
    Other long-term assets                                         (302)                564     
                                                             ------------        -----------    
                                                                                                
      Net cash used in investing activities                      (1,951)             (3,509)    
                                                             ------------        -----------    
                                                                                                
CASH FLOWS FROM FINANCING ACTIVITIES:                                                           
    Net borrowings under revolving line of                                                      
     credit and other debt obligations                            3,833              31,282     
    Net borrowings under bridge loan                             20,000                  --     
    Redeemable preferred stock dividends paid                        --              (1,750)    
                                                             ------------        -----------    
                                                                                                
      Net cash provided by financing activities                  23,833              29,532     
                                                             ------------        -----------    
                                                                                                
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                 (1,323)                788     
                                                                                                
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                  1,980                 169     
                                                             ------------        -----------    
                                                                                                
CASH AND CASH EQUIVALENTS AT END OF PERIOD                    $     657            $    957     
                                                             ============        ===========    
SUPPLEMENTAL CASH FLOW INFORMATION                                                              
    Interest paid                                             $   4,297               1,405     
    Non-cash activities:                                                                        
       Forgiveness of debt (Note 6)                           $   6,900                  --     
</TABLE>


(1)  Debtor-In-Possession.
See notes to condensed consolidated financial statements (unaudited).



                                       7
<PAGE>   8


DECORATIVE HOME ACCENTS, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 30, 1997 AND 1996

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

1. BASIS OF INTERIM PRESENTATION

      The accompanying unaudited condensed consolidated financial statements
      have been prepared in accordance with generally accepted accounting
      principles for interim financial information and the instructions of
      Regulation S-X.  Accordingly, they do not include all of the information
      and footnotes required by generally accepted accounting principles for
      complete financial statements.  In the opinion of management, all
      adjustments (consisting of normal recurring accruals) considered
      necessary to present fairly the Company's financial  position as of
      September 30, 1997 and the results of its operations and its cash flows
      for the nine months ended September 30, 1997 and 1996 have been included.
      Operating results for the three and nine months ended September 30, 1997
      are not necessarily indicative of the results that may be expected for
      the year ending December 31, 1997. Certain information and footnote
      disclosures normally included in annual financial statements prepared in
      accordance with generally accepted accounting principles have been
      condensed or omitted pursuant to the Securities and Exchange Commission's
      rules and regulations.  The condensed financial statements should be read
      in conjunction with the Company's audited financial statements for the
      year ended December 31, 1996 and the notes thereto.

      For interim reporting, the Company's subsidiary, Home Innovations. Inc.
      ("HII") uses an estimated gross profit based on information provided  by
      its accounting and financial systems.  At year-end, inventories of the
      Company are stated at the lower of cost, determined using the first-in,
      first-out ("FIFO") method, or market.

      As discussed in Note 7, on September 29, 1997, the Company filed a
      petition under Chapter 11 of the United States Bankruptcy Code.
      Simultaneous with the filing, the Company filed a proposed plan of
      reorganization (the "Proposed Plan") and a related disclosure statement.
      The Proposed Plan makes provision for the conversion of all of the
      Company's 13% Senior Notes (the "Senior Notes") and its 14% Redeemable
      Preferred Stock (the "Preferred Stock") to common stock and the full
      payment in cash of all pre-petition general unsecured claims.  The
      financial statements of the Company have been prepared on a going concern
      basis, which contemplates continuity of operations, realization of assets
      and satisfaction of liabilities in the ordinary course of business.  In
      the event that a restructuring and the related exit financing are not
      consummated, the ability of the Company to continue as a going concern is
      doubtful.

      In accordance with Statement of Position 90-7, "Financial Reporting by
      Entities in Reorganization Under the Bankruptcy Code" issued by the
      American Institute of Certified Public Accountants ("SOP 90-7"),
      subsequent to the September 29, 1997 Chapter 11 filing and until the
      confirmation of a plan of reorganization, all pre-petition liabilities
      that are subject to compromise under the plan of reorganization (the
      $118.1 million principal amount of 13% Senior Notes plus all accrued and
      unpaid interest on the Senior Notes), the 14% Redeemable Preferred Stock
      and the Redeemable Common Stock are classified on the condensed
      consolidated balance sheet as subject to compromise.  These liabilities
      are recorded at the amounts expected to be allowed as claims in the
      Chapter 11 case rather than as estimates of the amounts for which those
      allowed claims may be settled as a result of the capital restructuring
      plan described in Note 7.

      As of the effective date of the plan of reorganization, the Company will
      adopt "fresh start" reporting as defined in SOP 90-7.  In accordance with
      "fresh start" reporting, the reorganization value of the Company will be
      allocated to the emerging entity's specific tangible and identifiable
      intangible assets.  Any excess reorganization value will be reported as
      "reorganization value in excess of amounts allocable 


                                      8

<PAGE>   9

      to identifiable assets."  As a result of the adoption of "fresh start"
      reporting, the Company's post-emergence ("successor") financial statements
      will not be comparable with its pre-emergence ("predecessor") financial
      statements including the historical financial statements included in this
      quarterly report.    

      The accompanying statements of operations reflect certain restructuring
      fees and expenses consisting of professional fees and expenses directly
      related to the debt restructuring and reorganization.  Interest expense on
      the Senior Notes has been reported to September 29, 1997, the petition
      date.  Such interest expense was not reported subsequent to that date
      because it will not be paid during the bankruptcy case and will not be an
      allowed claim under the capital restructuring plan.  The difference
      between the reported interest expense and stated contractual interest
      expense is insignificant for the one-day period until September 30, 1997.

2. ORGANIZATION

      The accompanying interim consolidated financial statements as of
      September 30, 1997, include the accounts of Decorative Home Accents, Inc.
      ("DHA" or the "Company") and its wholly-owned subsidiaries, The Rug Barn,
      Inc. (the "Rug Barn") and Home Innovations, Inc. (and its wholly owned
      subsidiaries).

      All significant intercompany transactions and accounts have been
      eliminated.

3. BALANCE SHEET COMPONENTS

     Inventories are summarized as follows (in $000's):

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

     Raw materials                  $      19,025         $     13,964
     Work-in-process                        3,411                2,654
     Finished goods                        19,952               15,947
                                    -------------         ------------
                                    $      42,388         $     32,565
                                    =============         ============

     Property, plant and equipment is summarized as follows (in $000's):

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

      Land                          $         862         $        862
      Buildings, and improvements          17,035               16,782
      Furniture and fixtures                6,064                5,296
      Machinery and equipment              16,169               15,536
                                    -------------         ------------
                                           40,130               38,476
      Accumulated depreciation            (11,158)              (7,594)
                                    -------------         ------------
                                           28,972               30,882
      Construction in progress              1,375                1,380
                                    -------------         ------------
                                    $      30,347         $     32,262
                                    =============         ============



                                      9
<PAGE>   10




4.   INCOME TAXES

      The Company's income tax benefit for the nine months ended September 30,
      1997 was calculated at an effective rate of 38%.  Such tax benefit has
      been fully offset by an increase in the tax valuation allowance because
      management of the Company cannot be assured that the net deferred income
      tax asset will be realized.

4.   LONG-TERM DEBT

      On November 12, 1996, the Company and certain subsidiaries entered into a
      Loan and Security Agreement (the "Agreement") providing for revolving
      loans ("Loans") and letters of credit ("Letters of Credit") in an
      aggregate principal amount of up to $50 million, subject to borrowing
      limitations, for a three year period. The Agreement may be renewed from
      year to year thereafter at the mutual agreement of the parties. The
      initial borrowing  of $35.4 million on November 12, 1996 was utilized to
      repay amounts owed to the Company's prior lender. Borrowings under the
      $50 million Revolving Credit Facility bear interest, at the Company's
      discretion, at a rate of 5/8% per annum in excess of the Prime Rate or
      3-1/4% per annum in excess of the Eurodollar Rate. The borrowings are
      secured by a first priority lien on the accounts receivable and
      inventories of the Company's subsidiaries.  In accordance with the
      Agreement, the Company is required to maintain a minimum adjusted
      tangible net worth, as defined, the payment of cash dividends on the
      Company's common stock is prohibited and there are limitations on the
      ability of the Company to incur additional indebtedness and make loans,
      advances and investments.

      On March 1, 1997, the Agreement was amended to provide for a line of
      credit pursuant to which the lender made supplemental loans
      ("Supplemental Loans") of $5 million. The Supplemental Loans were repaid
      on May 27, 1997.  Additionally, on May 23, 1997, the Agreement was
      amended for, among other things, changes in certain covenants including
      the tangible net worth calculation.

      At September 30, 1997, the Company's aggregate outstanding borrowings
      under the Revolving Credit totaled approximately $34.7 million.  There
      were no Events of Default (as defined) under the Agreement, as amended,
      at September 30, 1997.  In connection with the Chapter 11 filing by the
      Company and its subsidiaries, the Agreement was amended to provide for
      the availability of Loans and Letters of Credit to the Company as
      debtor-in-possession under Chapter 11.  See Note 7 - Capital
      Restructuring Plan.

      The Company did not make the scheduled interest payment of approximately
      $7.7 million on its Senior Notes due on June 30, 1997.  See Note 7 -
      Capital Restructuring Plan.

      In March 1997, $6.9 million of the Company's Senior Notes were returned
      to the Company.  See Note 6 - Related Party Transaction.

      Pursuant to the restructuring discussed in Note 7 - Capital Restructuring
      Plan, an institutional investor provided the Company with a secured term
      loan facility of up to $20 million (the "Secured Term Loan Facility") of
      which $15 million was advanced to the Company on May 23, 1997 and the
      balance was advanced to the Company on July 9, 1997.

      On October 3, 1997, an institutional investor provided the Company with a
      $3.75 million term loan.  See Note 7 - Capital Restructuring Plan.

6.   RELATED PARTY TRANSACTION

      During 1996, two of the Company's officers, who also were members of the
      Board of Directors, resigned.  Subsequent to their resignation, certain
      allegations concerning wrongful acts were made by the 


                                      10
<PAGE>   11

      Company and certain stockholders.  On March 11, 1997, in consideration of
      the release and discharge from all claims, damages, and causes of action,
      the two former officers/directors returned to the Company 965,101 shares 
      of the Company's Class A Common Stock, 6,900 shares of the Company's 
      Class F Common Stock, $6.9 million of the Company's Senior Notes and 
      $448,000 in cash.  During the first quarter of 1997, the Company recorded
      approximately $3.7 million as other income and approximately $3.6 million
      as an extraordinary gain as a result of this settlement and forgiveness 
      of debt.

7.   CAPITAL RESTRUCTURING PLAN

      On May 15, 1997, the Company reached an agreement in principle for a
      comprehensive capital restructuring plan with the Company's preferred
      stockholder, TCW Special Credits Fund V - The Principal Fund ("Fund V")
      and the beneficial owners of approximately 76% of the principal amount of
      the Senior Notes, Magten Asset Management Corp., solely as agent for
      various of its investment advisory clients in their respective accounts at
      Magten ("Magten"), and CIGNA.  The restructuring plan, if effective, will,
      among other things, (i) convert the $118.1 million outstanding principal
      amount of Senior Notes, plus all accrued and unpaid interest thereon, into
      92.5% of the Company's common stock to be outstanding following the
      restructuring (the "New Common Stock"), (ii)  exchange all of the 
      Redeemable Preferred Stock for 7.5% of the New Common Stock along with a 5
      year warrant to purchase up to 7.5% of the New Common Stock on a fully
      diluted basis and, (iii) exchange  all of the remaining classes of common
      stock for a 5 year warrant to purchase up to 2.5% of the New Common Stock
      on a fully diluted basis.  In connection with the capital restructuring
      plan, the Company did not pay interest on the Senior Notes due on June 30,
      1997.

      Pursuant to the capital restructuring plan, Magten provided the Company
      with a secured term loan facility of up to $20 million (the "Secured Term
      Loan Facility") of which $15 million was advanced to the Company on May
      23, 1997 and the balance was advanced to the Company on July 9, 1997.
      Magten also earned a $5 million closing fee, which will be waived under
      certain conditions set forth in the credit agreement with respect to the
      Secured Term Loan Facility; the Company has not recorded a liability for
      such closing fee.  Additionally, the indenture that governs the Senior
      Notes was modified to permit the Company to incur the Secured Term Loan
      Facility.  Pursuant to the Proposed Plan, the Secured Term Loan Facility
      is to be repaid with the proceeds of a rights offering of Common Stock.
      Pursuant to certain agreements, dated September 26, 1997 (the "Exercise
      Agreements"), Magten and Fund V each agreed to exercise all rights and/or
      oversubscription options issued to them in the rights offering so that
      the Company will receive sufficient proceeds from the rights offering to
      enable it to pay in full in cash all of the indebtedness under the
      Secured Term Loan Facility.  A portion of the proceeds from the Secured
      Term Loan Facility were used to retire the Supplemental Facility
      described in Note 5.  In connection with the Secured Term Loan Facility
      provided by Magten, the Company's existing working capital lender and
      Magten entered into an inter-creditor agreement.  The Proposed Plan and
      the Exercise Agreements are subject to various conditions.

      The Company and its subsidiaries, on September 29, 1997, filed voluntary
      petitions under the provisions of Chapter 11 of the United States
      Bankruptcy Code the Proposal in order to effect the Proposed Plan.
      Concurrent therewith, the Company filed the Proposed Plan with the United
      States Bankruptcy Court for the Southern District of New York (the
      "Bankruptcy Court").  The Proposed Plan provides for the payment in full
      of all pre-petition general unsecured claims following the confirmation
      of the Proposed Plan.  The Company is prohibited from making payment on
      any pre-petition obligations during the course of the Chapter 11 cases.
      In the event that a restructuring is not consummated, management of the
      Company believes that the Company's inability to pay all of the current
      obligations and service its debt as required raises substantial doubt
      about the Company's ability to continue as a going concern.

      In connection with the Chapter 11 filing, the Company (with approval of
      the Bankruptcy Court) has entered into a debtor-in-possession term loan
      agreement ("Term Loan") with Magten.  On October 3, 1997, the Term Loan
      provided $3.75 million of borrowings.  The Term Loan is secured by all of
      the





                                      11
<PAGE>   12
      assets of the Company and its subsidiaries and the common stock of the 
      Company's subsidiaries.  Magten also earned a $937,500 closing fee,
      which will be waived under certain conditions set forth in the credit
      agreement with respect to the Term Loan; the Company has not recorded a
      liability for such closing fee.  Pursuant to the Proposed Plan, any
      amounts outstanding on the Term Loan as of the effective date of the
      Proposed Plan are to be repaid with the proceeds from a new secured term
      loan of up to $7.5 million to be funded by Magten.  Funding of this $7.5
      million term loan is subject to various conditions.  The Company has
      commenced discussions with Magten regarding alternative methods of
      funding this $7.5 million cash requirement.

      Subsequent to the Chapter 11 filing, the Company (with approval of the
      Bankruptcy Court) entered into a debtor-in-possession financing agreement
      with Congress Financial Corporation, which amended the pre-petition
      Agreement.  The terms of this financing substantially conform to the
      Company's previous agreement with Congress.

      Accounts payable included pre-petition claims of approximately $17.0
      million at September 29, 1997.  In accordance with the Bankruptcy Code
      these pre-petition claims may not be paid until emergence from Chapter
      11.  Liabilities subject to compromise include the Senior Notes of
      approximately $118.1 million and all accrued but unpaid interest of
      approximately $11.7 million.

      In connection with the capital restructuring plan, the Company entered
      into employment retention agreements with certain key management
      personnel.  The agreements provide for, among other things, a guaranteed
      bonus payment in March 1998 if the individual is employed by the Company
      on that date.  The maximum obligation of the Company for payments under
      these agreements is $1.1 million.  During the nine months ended September
      30, 1997 a charge of $768,000 was recorded in respect of these retention
      agreements.  On February 28, 1997, the Company also entered into amended
      and restated employment and non-competition agreements with certain
      officers.  Each of such agreements provides that if the applicable
      officer's employment is terminated within 90 days following a change of
      control of the Company, by (i) the Company without good cause, (ii) a
      successor to the Company without good cause or (iii) the officer, then
      the Company shall pay the officer a specified amount in cash; the
      aggregate amount of the payments for all such officers is approximately
      $2.5 million.

      In connection with the restructuring plan, the original license with
      Calvin Klein, Inc. was terminated on April 26, 1997 and, on April 27,
      1997, Calvin Klein, Inc. and DHA Home, Inc. entered into an interim
      license agreement (the "Interim License Agreement") with similar terms
      and conditions.  As part of the Interim License Agreement, the Company
      changed the name of Calvin Klein Home, Inc. to DHA Home, Inc.  The
      Interim License Agreement expires upon the earlier of April 30, 1998, or
      the completion of the restructuring plan.  The Company believes that
      Calvin Klein, Inc. has committed upon the consummation of the
      restructuring to enter into a new multiple year license agreement on
      similar terms and conditions that would extend through the year 2004.
      DHA Home continues to work with Calvin Klein, Inc. on long-range plans
      for Calvin Klein licensed products.  Notwithstanding DHA Home's belief,
      Calvin Klein, Inc. has asserted that no assurances can be given that any
      such license will be entered into and Calvin Klein, Inc. has not
      committed to enter into any such long-term license. At September 30,
      1997, the carrying amount of the Calvin Klein license agreement is
      approximately $7.5 million, which is calculated based on the original
      contract period ending in 2004.  If the above described capital
      restructuring plan is not completed, Calvin Klein, Inc. may not renew its
      license agreement with the Company.  Failure to renew the license
      agreement on a long-term basis would result in a charge to earnings for
      the unamortized balance of the license agreement and may otherwise have a
      material adverse effect on the Company's future results of operations.

8.   THE RUG BARN, INC. SALES DECLINE

      Through September 1997, the Company has experienced a significant decline
      in sales at The Rug Barn, Inc.  Demand for the Rug Barn's core product of
      two and three layer cotton throws has continued to decline in the
      giftware distribution channel served by the Rug Barn.  Through September
      1997, order 


                                      12
<PAGE>   13




      bookings have declined approximately 50% compared to the same period in 
      1996.  Management of the Company has addressed the sales decline through
      reductions in fixed overhead costs and planned expanded product offerings.
      The fixed overhead reductions are expected to be  completed by December
      31, 1997.  The new product offerings will include both internally
      manufactured and outsourced products targeted at the giftware distribution
      channel.  Management does not expect that the new product offerings will
      have a favorable impact on 1997 operating results and expects that the
      operations at the Rug Barn will incur an operating loss through December
      31, 1997.

9.   LEGAL PROCEEDINGS

      On July 29, 1997, a fixture supplier of the Company filed suit seeking
      $1.9 million in damages claiming that the Company failed to fulfill its
      obligations under a supply arrangement. Management of the Company intends
      to vigorously defend against the suit.  Further, management expects to
      contest the claim during the course of its Chapter 11 case.  Management
      does not expect that the ultimate resolution of the claim will have a
      material adverse impact on the Company.



                                      13


<PAGE>   14


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

      INTRODUCTION
      The following discussion provides management's assessment of the results
      of operations and liquidity and capital resources of DHA.  This
      discussion should be read in conjunction with the respective unaudited
      condensed consolidated financial statements of DHA and the notes thereto
      included elsewhere in this Form 10-Q and the audited consolidated
      financial statements of DHA and the notes thereto for the year ended
      December 31, 1996 reported on Form 10-K with the Securities and Exchange
      Commission.

      RESULTS OF OPERATIONS

      COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 WITH THREE MONTHS
      ENDED SEPTEMBER 30, 1996

      NET SALES
      Net sales decreased by approximately $6.7 million, or 14.1%, to $40.8
      million for the three months ended September 30, 1997 compared to $47.4
      million for the three months ended September 30, 1996. The Company
      experienced weakened sales during 1997 in its gift division, The Rug
      Barn, Inc.  Sales of the gift division decreased by $8.3 million, or
      55.8%, for the three months ended September 30, 1997 compared to the
      three months ended September 30, 1996.  As discussed in Note 8 to the
      Condensed Consolidated Financial Statements, order bookings for the gift
      division for the nine months ended September 1997 have declined
      approximately 50% from the comparable 1996 period.  Accordingly, the
      Company expects to experience continued weakening in sales from the gift
      division during 1997.   This decrease was partially offset by an increase
      in sales of the Calvin Klein Home Collection line.

      GROSS PROFIT
      Gross profit decreased by approximately $4.5 million, or 36.1%, to $8.1
      million for the three months ended September 30, 1997 from $12.6 million
      for the three months ended September 30, 1996.  Gross profit as a
      percentage of net sales decreased to 19.8% for the three months ended
      September 30, 1997 from 26.6% for the three months ended September 30,
      1996.  The decline in the gift division sales accounted for approximately
      $4.7 million of the decrease in gross profit.  Additionally, gross profit
      margin as a percentage of sales was negatively impacted by the reduction
      in gift division sales.  Historically, gross profit margins achieved on
      products in the gift division have been higher than those earned on the
      Company's other product lines.

      SELLING, GENERAL & ADMINISTRATIVE EXPENSES
      Selling, general and administrative ("SG&A") expenses decreased
      approximately $2.0 million, or 16.9%, to $9.8 million for the three
      months ended September 30, 1997 from $11.9 million for the three months
      ended September 30, 1996.  SG&A expenses decreased as a percentage of net
      sales decreased to 24.2% for the three months ended September 30, 1997
      from 25.0% for the three months ended September 30, 1996. The decrease in
      SG&A expenses was primarily due to the gift division's lower sales volume
      which resulted in decreases in variable expenses.  Additionally, the 1996
      results included approximately $1.1 million of goodwill amortization.  As
      noted below, the Company wrote-off its unamortized goodwill at December
      31, 1996 and accordingly, there was no goodwill amortization in 1997.

      Prior to the fourth quarter of 1996, the Company evaluated the
      recoverability of goodwill by determining whether the amortization of the
      goodwill balance over its remaining amortization period could be
      recovered through undiscounted future operating cash flows of the
      acquired operations.  In the fourth quarter of 1996, the Company changed
      its method for evaluating the recoverability of goodwill to a method
      whereby the carrying amount is compared to its estimated fair value, and
      any excess carrying amount is determined to be impaired.  Based on an
      evaluation of the recoverability of goodwill at December 31, 1996, the
      Company concluded that its unamortized balance of goodwill, $79.7
      million, was impaired and recorded a pre-tax charge for such amount in
      the 1996 consolidated statement of operations.



                                      14
<PAGE>   15

      INTEREST EXPENSE, NET
      Interest expense increased approximately $902,000, or 18.2%, to $5.9
      million for the three months ended September 30, 1997, from $5.0 million
      for the three months ended September 30, 1996.  During the first nine
      months of 1997 the Company's short-term and long-term borrowings
      increased by approximately $16.9 million net of a $6.9 million reduction 
      for a related party transaction.  See Note 6 - Related Party Transaction.

      DEBT RESTRUCTURING FEES AND EXPENSES
      The accompanying statements of operations reflect certain restructuring
      fees and expenses consisting of professional fees and expenses directly
      related to the debt restructuring and reorganization.  For the three
      months ended September 30, 1997 the Company incurred approximately $2.4
      million in restructuring fees and expenses.

      INCOME TAXES
      The Company's income tax benefit for the three months ended September 30,
      1997 was calculated at an effective rate of 38% before being offset by an
      increase in the tax valuation allowance.  Management of the Company
      cannot be assured that the net deferred income tax asset will be
      realized.  Therefore, the deferred tax asset has been fully reserved.

      COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 WITH NINE MONTHS ENDED
      SEPTEMBER 30, 1996

      NET SALES
      Net sales decreased approximately $14.9 million, or 11.6%, to $114.3
      million for the three months ended September 30, 1997 compared to $129.2
      million for the three months ended September 30, 1996. The sales decline
      is attributable primarily to a $14.5 million decrease in the Company's
      gift division sales for the nine months ended September 30, 1997 compared
      to the nine months ended September 30, 1996.  As discussed in Note 8 to
      the Condensed Consolidated Financial Statements, order bookings through
      September, 1997 for the gift division have declined approximately 50%
      from the comparable 1996 period.  Accordingly, the Company expects to
      experience continued weakening in sales from the gift division during
      1997.  Also, negatively impacting the sales for the 1997 period were
      liquidity shortages faced by the Company.  Given the limited resources,
      the Company attempted to service only its most significant customers.

      GROSS PROFIT
      Gross profit decreased approximately $9.2 million, or 24.7%, to $24.5
      million for the nine months ended September 30, 1997 compared to $33.8
      million for the nine months ended September 30, 1996.  Gross profit as a
      percentage of sales decreased to 21.5% for the nine months ended
      September 30, 1997 from 26.2% for the nine months ended September 30,
      1996.  The decline in the Company's gift division sales accounted for
      approximately $8.1 million of the decrease in gross profit.
      Additionally, gross profit margin as a percentage of sales was negatively
      impacted by the reduced gift division sales.  Historically, gross profit
      margins achieved on products in the gift division have been higher than
      those earned on the Company's other product lines.

      SELLING, GENERAL & ADMINISTRATIVE EXPENSES
      Selling, general and administrative expenses decreased approximately $7.2
      million, or 19.9%, to $28.8 million for the nine months ended September
      30, 1997 from $35.9 million for the nine months ended September 30, 1996.
      SG&A expenses decreased as a percentage of sales to 25.2% for the nine
      months ended September 30, 1997 from 27.9% for the nine months ended
      September 30, 1996.  The decrease in SG&A expenses was partially due to
      the decreased sales volume and the resulting reduction in variable
      expenses.  Commissions decreased $1.3 million for the nine months ended
      September 30, 1997 compared to the same period in 1996.  Also, salaries
      and benefit expenses decreased approximately $600,000 for the nine months
      ended September 30, 1997.  Finally, the 1996 results included
      approximately $3.2 million of goodwill amortization.  As discussed above,
      the Company wrote-off its unamortized goodwill at December 31, 1996 and
      accordingly, there was no goodwill amortization in 1997.



                                      15
<PAGE>   16


      OTHER INCOME AND EXTRAORDINARY GAIN
      During 1996, two of the Company's officers who were members of the Board
      of Directors resigned.  Subsequent to their resignation, certain
      allegations concerning wrongful acts were made by the Company and certain
      stockholders.  On March 11, 1997, in consideration of the release and
      discharge from all claims, damages, and all causes of action, the two
      former officers and members of the Board of Directors returned to the
      Company 965,101 shares of the Company's Class A Common Stock, 6,900
      shares of the Company's Class F Common Stock, $6.9 million of the
      Company's Senior Notes and $448,000 in cash.  The Company recorded
      approximately $3.7 million (estimated fair market value of bonds) as
      other income and approximately $3.6 million as an extraordinary item in 
      the first quarter of 1997, as a result of this settlement and 
      forgiveness of debt.

      INTEREST EXPENSE, NET
      Interest expense increased approximately $1.8 million, or 12.5%, to $16.3
      million for the nine months ended September 30, 1997, from $14.5 million
      for the nine months ended September 30, 1996.  During the first nine
      months of 1997 the Company's short-term and long-term borrowings
      increased by approximately $16.9 million net of a $6.9 million reduction
      for a related party transaction.  See Note 6 - Related Party Transaction.

      INCOME TAXES
      The Company's income tax benefit for the nine months ended September 30,
      1997 was calculated at an effective rate of 38% before being offset by an
      increase in the tax valuation allowance.  Management of the Company
      cannot be assured that the net deferred income tax asset will be
      realized.  Therefore, the deferred tax asset has been fully reserved.

      DEBT RESTRUCTURING FEES AND EXPENSES
      The accompanying statements of operations reflect certain restructuring
      fees and expenses consisting of professional fees and expense directly
      related to the debt restructuring and reorganization.  For the nine
      months ended September 30, 1997 the Company incurred approximately $4.0
      million in restructuring fees and expenses.

      SEASONALITY
      The Company's business is seasonal in nature with its highest sales
      levels historically occurring during the third and fourth fiscal
      quarters, which includes the holiday selling season.

      LIQUIDITY AND CAPITAL RESOURCES
      During the first nine months of 1997, the Company experienced significant
      liquidity constraints as a result of losses incurred during the first
      nine months of 1997 and the fourth quarter of 1996 and the payment of the
      $8.1 million, interest on the Company's 13% Senior Notes on December 31,
      1996.  During the first nine months of 1997, the Company experienced a
      significant reduction in vendor trade credit and was forced to operate
      largely on a cash-in-advance or cash-on-delivery basis.  As a result, the
      Company was unable to service all of its customers.  Also, operating
      efficiencies of the Company's plants were negatively affected due to the
      restricted raw material purchasing ability.  In connection with the
      capital restructuring plan discussed herein, the Company received a cash
      infusion of $20 million pursuant to a secured term loan facility.  Upon
      filing Chapter 11, the Company obtained debtor-in-possession financing
      from Congress Financial Corporation ("Congress") on terms substantially
      conforming with the Company's pre-filing date revolving credit facility
      ("Revolving Credit Facility") with Congress, together with $3.75 million
      of post-petition term loans from Magten to provide additional liquidity.
      Upon successful completion of the restructuring, management believes that
      a new revolving credit facility can be obtained which will be sufficient
      to operate the Company's business.  In the event that a restructuring and
      the related exit financing are not consummated, the ability of the
      Company to continue as a going concern is doubtful.




                                      16
<PAGE>   17


      The Revolving Credit Facility provides for  revolving loans  and letters
      of credit up to  a maximum principal amount equal to the lesser of (a)
      $50 million or (b) a specified borrowing base, which is based on eligible
      receivables and inventory of the Company and its operating subsidiaries
      ("Borrowing Subsidiaries"). The Revolving Credit Facility (or a similar
      credit facility) is essential for the Company's working capital needs.

      In accordance with the Revolving Credit Facility, the Company is required
      to maintain a minimum adjusted tangible net worth, as defined, and the
      payment of cash dividends on the Company's common stock is prohibited.
      Further, there are limitations on the Company's ability to incur
      additional indebtedness and make loans, advances and investments.  On May
      23, 1997, the Revolving Credit Facility was amended for, among other
      things, changes in certain covenants including the tangible net worth
      calculation.  There were no Events of Default (as defined) under the
      Revolving Credit Facility, as amended, at September 30, 1997.

      On September 30, 1997, the Company had approximately $2.5 million
      available for borrowing under the Revolving Credit Facility borrowing
      base formula based on underlying collateral.  Borrowings under the
      Revolving Credit Facility are made on a daily basis to meet requirements
      for that business day and repayments are made on a daily basis through
      the application of cash collections from trade accounts receivable.

      Cash used in operating activities totaled approximately $23.2 million for
      the nine months ended September 30, 1997 compared to use of cash of $25.2
      million for the nine months ended September 30, 1996.  The Company's
      inventory and accounts receivable increased approximately $9.8 million
      and $5.9 million, respectively.  The increased use of cash for inventory
      was a result of (i) the Company's change in product mix which resulted in
      longer lead times (resulting primarily from the increased sales in the
      Calvin Klein Home Collection line), (ii) the loss of vendor trade credit
      which has required the disbursement of cash earlier in the production
      cycle and (iii) and a seasonal increase in the Company's bath division
      inventory.  Of the Company's $17.0 million net loss, approximately $4.0
      was used to fund the debt restructuring fees and expenses.  The reduction
      in cash used for interest expense was due to the timing of the Company's
      December 31, 1996 interest payment that was made in the first quarter of
      1997.  In addition, the Company did not make its scheduled interest
      payment of approximately $7.9 million due on June 30, 1997 on its Senior
      Notes.

      Cash used in investing activities was approximately $2.0 million for the
      nine months ended September 30, 1997 compared to $3.5 million used for
      the nine months ended September 30, 1996.   The Company used $1.6 million
      for the nine months ended September 30, 1997 for purchases of property
      and equipment compared to $4.1 million used for the first nine months of
      1996.  This reduction in capital expenditures is a result of the
      Company's limited liquidity.

      Cash provided by financing activities totaled approximately $23.8 million
      for the nine months ended September 30, 1997 compared to $29.5 million
      for the nine months ended September 30, 1996.  This change is primarily
      due to the operating losses for 1997 and increased working capital
      requirements.

      See Footnote 7 - Capital Restructuring Plan.

      INFLATION
      Although the operations of the Company are generally influenced by
      economic conditions, the Company does not believe that inflation had a
      material effect on the results of operations during the six months ended
      September 30, 1997 and 1996.   The Company has been historically able to
      mitigate the impact of the increases in the spot market prices of cotton
      through fixed price purchase contracts.

      EFFECT OF COMPLIANCE WITH ENVIRONMENTAL PROTECTION PROVISIONS
      Compliance with Federal, State and local provisions that have been
      enacted or adopted regulating the discharge of materials in the
      environment, or otherwise relating to protection of the environment, has
      not 

                                      17
<PAGE>   18


      had, and is not expected to have, a material adverse effect on the 
      capital expenditures, net income or competitive position of the Company.

      PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
      The statements contained in this Item 2 (Management's Discussion and
      Analysis of Financial Condition and Results of Operations) that are not
      historical facts are forward-looking statements subject to the safe
      harbor created by the Private Securities Litigation Reform Act of 1995.
      The Company cautions readers of this Quarterly Report on Form 10-Q that a
      number of important factors could cause the Company's actual results in
      1997 and beyond to differ materially from those expressed in any such
      forward-looking statements.  These factors include, without limitation,
      the general economic and business conditions affecting the retail
      industry, the Company's ability complete its plan of reorganization,
      competition from a variety of firms ranging from small manufacturers to
      large textile mills, the seasonality of the Company's sales, the
      volatility of the Company's raw material cost, the Company's dependence
      on key personnel and the risk of loss of a material customer or a
      significant license.  These and other factors are more fully described in
      the Company's previous filings with the Securities and Exchange
      Commission including, without limitation, the Company's Prospectus dated
      November 10, 1995.


                                      18
<PAGE>   19


PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

      On July 29, 1997, a fixture supplier of the Company filed suit against
      the Company claiming that the Company failed to fulfill its obligations
      under a supply arrangement.  The alleged damages are approximately $1.9
      million.  Management of the Company intends to vigorously defend the
      suit.  Further, management expects to contest the claim during the course
      of its Chapter 11 case.  Management does not expect that the ultimate
      resolution of the claim will have a material adverse impact on the
      Company.

      As contemplated by the Company's capital restructuring plan, the Company
      filed a pre-voluntary petition under of Chapter 11 of the United States
      Bankruptcy Code on September 29, 1997.  See Note 7 to the Condensed
      Consolidated Financial Statements contained in Part I of this Form 10-Q.

      The Company is involved in various routine legal proceedings incidental
      to the conduct of its business.  Management believes that none of these
      legal proceedings, except for the Chapter 11 filing, could have a
      material adverse impact on the financial condition or results of
      operations of the Company.

ITEM 2.  CHANGES IN SECURITIES
           NONE

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

      (a)  On June 30, 1997 the Company failed to make a scheduled
           interest payment of approximately $7.7 million on its Series B 13%
           Senior Notes due on June 30, 1997.  The principal amount of the
           Senior Notes is $118.1 million.  The terms of the indenture
           governing the Company's Senior Notes provide that such a failure to
           pay interest when due results in an event of default on such
           indebtedness and as a result, the holders of these debt securities
           are entitled to accelerate the debt represented thereby.  In
           addition, under the indenture, as a consequence of the Chapter 11
           bankruptcy filing by the Company, the Senior Notes were
           automatically accelerated and became immediately due and payable.

      (b)  The Company did not make a scheduled dividend payment in kind
           of approximately $1.9 million on its Redeemable Preferred Stock
           ($0.01 par value).

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
           NONE

ITEM 5.  OTHER INFORMATION
           NONE

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a)  EXHIBITS
            SEE EXHIBIT INDEX.

     (b)  REPORTS ON FORM 8-K

            Form 8-K filed on October 16, 1997 under Item 3 regarding the
            Company's filing a pre-negotiated Chapter 11 under the United
            States Bankruptcy Code.

                                      19

<PAGE>   20


                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned thereunto duly authorized.


                                             Decorative Home Accents, Inc.
                                             -----------------------------------
                                             (Registrant)


 Date:  February 27, 1998                    /s/ Jay N. Baker
 -----------------------                     -----------------------
                                             Jay N. Baker*
                                             Chief Financial Officer


 *Duly authorized to sign on behalf of the Registrant.





                                      20

<PAGE>   21


                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
EXHIBIT                               
NUMBER         DESCRIPTION
-------        -----------

<S>            <C>
10.1           Credit Agreement dated October 1, 1997 between Decorative Home 
               Accents, Inc. and the Lenders, defined therein.

27             Financial data schedule
</TABLE>



                                      21