<PAGE>   1

                     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 Quarterly Period Ended:   June 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.
           (Exact name of registrant as specified in its charter)


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


           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            No

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

                              Yes            No

     As of September 15, 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.

                         QUARTER ENDED JUNE 30, 1997

                                    INDEX

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

      Item 1. Financial Statements (Unaudited)

              Condensed Consolidated Balance Sheets as of June 30, 
                  1997 and December 31, 1996.............................  4

              Condensed Consolidated Statements of Operations for the 
                  three months ended June 30, 1997 and 1996..............  5

              Condensed Consolidated Statements of Operations for 
                  the six months ended June 30, 1997 and 1996............  6

              Condensed Consolidated Statement of Stockholders' 
                  Equity (Deficiency) for the six months 
                  ended June 30, 1997....................................  7

              Condensed Consolidated Statements of Cash Flows for 
                  the six months ended June 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.
            CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
                                 (UNAUDITED)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                      June 30,    December 31, 
                                                        1997        1996(1)
                                                     ---------     ----------
<S>                                                  <C>           <C>
ASSETS
CURRENT ASSETS
  Cash and cash equivalents                          $      621    $    1,980
  Accounts receivable - net of allowance for
    doubtful accounts of $4,697 at June 30,
    1997 and $7,014 at December 31, 1996                 26,073        25,800
  Income taxes receivable                                   160           498
  Inventories (Note 3)                                   39,033        32,565
  Other current assets                                    2,554         1,212
                                                     ----------    ----------
    Total current assets                                 68,441        62,055

PROPERTY, PLANT AND EQUIPMENT, NET (Note 3)              31,153        32,262
OTHER ASSETS                                              7,596         7,946
INTANGIBLE ASSETS, NET                                   13,027        13,783
                                                     ----------    ----------
TOTAL ASSETS                                         $  120,217    $  116,046
                                                     ==========    ==========

LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
  Current portion of long-term debt (Note 5)         $  132,376    $  124,830
  Accounts payable                                       14,168        17,231
  Accrued liabilities                                     5,421         6,176
  Accrued interest                                        7,901            --
                                                     ----------    ----------   
    Total current liabilities                           159,866       148,237

LONG-TERM DEBT (Note 5)                                  33,831        34,100
REDEEMABLE PREFERRED STOCK                               53,554        49,351
REDEEMABLE COMMON STOCK                                   3,044         2,476
STOCKHOLDERS EQUITY (DEFICIENCY):
  Common stock                                                9             9
  Additional paid-in capital                              1,915         6,685
  Reduction of certain equity interest to 
    predecessor basis                                    (6,209)       (6,209)
  Accumulated deficit                                  (125,793)     (118,603)
                                                     ----------    ----------
    Total stockholders' equity (deficiency)            (130,078)     (118,118)
                                                     ----------    ----------

TOTAL LIABILITIES AND STOCKHOLDERS EQUITY 
(DEFICIENCY)                                         $  120,217    $  116,046
                                                     ==========    ==========
</TABLE>

(1) Derived from December 31, 1996 audited consolidated financial statements.

See notes to condensed consolidated financial statements (unaudited).



                                        3



<PAGE>   4



                        DECORATIVE HOME ACCENTS, INC.
       CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
                                 (UNAUDITED)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                    Three Months Ended June 30,
                                                    ---------------------------
                                                        1997            1996
                                                    ----------       ----------
<S>                                                 <C>              <C>
SALES (Note 8)                                      $   37,629       $   42,989

COST OF GOODS SOLD                                      29,224           31,774
                                                    ----------       ----------
GROSS PROFIT                                             8,405           11,215

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES             9,555           12,362
                                                    ----------       ----------
LOSS FROM OPERATIONS                                    (1,150)          (1,147)

INTEREST EXPENSE, NET                                   (5,225)          (4,917)

DEBT RESTRUCTURING FEES AND EXPENSES (Note 1)           (1,604)              --
                                                    ----------       ----------
LOSS BEFORE PROVISION FOR INCOME TAXES                  (7,979)          (6,064)

INCOME TAX BENEFIT                                          --            2,001
                                                    ----------       ----------
NET LOSS                                            $   (7,979)      $   (4,063)
                                                    ==========       ==========

</TABLE>

See notes to condensed consolidated financial statements (unaudited).



                                      4




<PAGE>   5




                        DECORATIVE HOME ACCENTS, INC.
       CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
                                 (UNAUDITED)
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                     Six Months Ended June 30,
                                                    ---------------------------
                                                        1997            1996
                                                    ----------       ----------
<S>                                                 <C>              <C>
SALES (Note 8)                                      $   73,526       $   81,772

COST OF GOODS SOLD                                      57,050           60,610
                                                    ----------       ----------
GROSS PROFIT                                            16,476           21,162

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            18,945           24,098
                                                    ----------       ----------
INCOME (LOSS) FROM OPERATIONS                           (2,469)          (2,936)

OTHER INCOME (Note 6)                                    3,748               --

INTEREST (EXPENSE), NET                                (10,421)          (9,522)

DEBT RESTRUCTURING FEES AND EXPENSES (Note 1)           (1,604)              --
                                                    ----------       ----------
LOSS BEFORE PROVISION FOR INCOME TAXES
  AND EXTRAORDINARY ITEM                               (10,746)         (12,458)

INCOME TAX BENEFIT                                           -            4,107
                                                    ----------       ----------
LOSS BEFORE EXTRORDINARY ITEM                          (10,746)          (8,351)

EXTRAORDINARY GAIN FROM FORGIVENESS OF DEBT,
  NET OF TAXES                                           3,556               --
                                                    ----------       ----------
NET LOSS                                            $   (7,190)      $   (8,351)
                                                    ==========       ==========
</TABLE>

                                      

See notes to condensed consolidated financial statements (unaudited).


                                      5

<PAGE>   6


                        DECORATIVE HOME ACCENTS, INC.
           CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                         (DEFICIENCY) (IN THOUSANDS)
                    FOR THE SIX MONTHS ENDED JUNE 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 six months
  ended June 30, 1997                                (568)                                                 (568)

Accretion of redeemable 
  preferred stock for the
  six months ended June 30, 1997                     (453)                                                 (453)

Preferred stock dividends 
  paid in-kind for the six
  months ended June 30, 1997                       (3,749)                                               (3,749)

Net loss for the six months 
  ended June 30, 1997                                                                 (7,190)            (7,190)
                                   --------      --------         ---------       ----------         ----------
Balances at June 30, 1997          $      9      $  1,915         $  (6,209)      $ (125,793)        $ (130,078)
                                   ========      ========         =========       ==========         ==========

</TABLE>


See notes to condensed consolidated financial statements (unaudited).


                                      6



<PAGE>   7


                        DECORATIVE HOME ACCENTS, INC.
        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
                                 (UNAUDITED)
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                     Six Months Ended June 30,
                                                    ---------------------------
                                                        1997            1996
                                                    ----------       ----------
<S>                                                 <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income less                                     $   (7,190)      $   (8,351)
Adjustment to reconcile net loss to net cash
  used in operating activities:
  Depreciation and amortization                          3,001            4,925
  Deferred tax benefit                                      --           (4,107)
  Retirement of related party debt (Note 6)             (6,900)              --
  Changes in operating assets and liabilities:
    Accounts receivable                                   (273)           4,956
    Inventories                                         (6,468)          (1,694)
    Income tax receivable                                  338             (331)
    Other current assets                                (1,344)          (1,514)
    Accounts payable                                    (3,063)          (1,768)
    Accrued liabilities                                   (751)            (849)
    Accrued interest                                     7,901              582
                                                    ----------       ----------
      Net cash used in operating activities            (14,749)          (8,151)
                                                    ----------       ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment                  (1,134)          (1,938)
    Other long-term assets                                 347           (2,074)
                                                    ----------       ----------
      Net cash used in investing activities               (787)          (4,012)
                                                    ----------       ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Net borrowings under revolving line of credit       14,177           13,744
    Redeemable preferred stock dividends paid               --           (1,750)
                                                    ----------       ----------
      Net cash provided by financing activities         14,177           11,994
                                                    ----------       ----------
DECREASE IN CASH AND CASH EQUIVALENTS                   (1,359)            (169)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD         1,980              169
                                                    ----------       ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD          $      621       $       --
                                                    ==========       ==========
SUPPLEMENTAL CASH FLOW INFORMATION
    Interest paid                                   $    2,520       $   10,418
    Non-cash activities
      Forgiveness of debt (Note 6)                  $    6,900               --

</TABLE>


See notes to condensed consolidated financial statements (unaudited).


                                      7




<PAGE>   8




DECORATIVE HOME ACCENTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 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 June
      30, 1997 and the results of its operations and its cash flows for the six
      months ended June 30, 1997 have been included.  Operating results for the
      three and six months ended June 30, 1997 are  not necessarily indicative
      of the results that may be expected for the year ending December 31,
      1997. Certain information and note 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 and notes thereto for the year
      ended December 31, 1996.

      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
      pre-negotiated filing under the provisions of Chapter 11 of the United
      States Bankruptcy code in order to effect a financial reorganization of
      the Company.  The plan of reorganization makes provision for the payment
      of all pre-petition trade debt following the confirmation of the plan.
      The financial statements of the Company are 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 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 date, 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 and the 14% Redeemable Preferred Stock) will be classified
      on the condensed balance sheets as liabilities subject to compromise.


      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 to identifiable
      assets."  As a result of the adoption of such "fresh start" reporting,
      the Company's post-emergence financial statements ("successor") will not
      be comparable with its pre emergence financial statements ("predecessor")
      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 expense directly
      related to the debt restructuring and reorganization.



                                      8



<PAGE>   9


2.    ORGANIZATION

      The accompanying interim consolidated financial statements as of June 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.

      All significant intercompany transactions and accounts have been
      eliminated.

3.    BALANCE SHEET COMPONENTS

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

<TABLE>
<CAPTION>
                                          JUNE 30,        DECEMBER 31,
                                            1997             1996
                                         ----------        ----------
           <S>                           <C>               <C>
           Raw materials                 $   17,550        $   13,964
           Work-in-process                    2,401             2,654
           Finished goods                    19,082            15,947
                                         ----------        ----------
                                         $   39,033        $   32,565
                                         ==========        ==========
</TABLE>


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

<TABLE>
<CAPTION>
                                          JUNE 30,        DECEMBER 31,
                                            1997             1996
                                         ----------        ----------
           <S>                           <C>               <C>
           Land                          $      862        $      862
           Buildings and improvements        16,999            16,782
           Furniture and fixtures             6,020             5,296
           Machinery and equipment           15,912            15,536
                                         ----------        ----------
                                             39,793            38,476
           Accumulated depreciation          (9,922)           (7,594)
                                         ----------        ----------
                                             29,871            30,882
           Construction in progress           1,282             1,380
                                         ----------        ----------
                                         $   31,153        $   32,262
                                         ==========        ==========
</TABLE>

4.    INCOME TAXES

      The Company's income tax benefit for the six months ended June 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.

5.    LONG-TERM DEBT

      On November 12, 1996, the Company and certain subsidiaries entered into a
      Loan and Security Agreement (the "Agreement") with a revolving credit
      facility to provide 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 the prior lender
      under the Company's former Revolving Credit Facility. Borrowings under 
      the $50 million Revolving Credit Facility bear interest, at the Company's
      discretion, at a rate of 5/8% 
     
                                      9



<PAGE>   10


      percent per annum in excess of the Prime Rate or 3-1/4% percent 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. 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 in accordance with the
      Agreement.  Further, 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 ("Supplemental Facility") pursuant to which the lender made
      supplemental loans ("Supplemental Loans") of $5 million. At June 30,
      1997, the Company's outstanding borrowings under the Revolving Credit
      Facility and the Supplemental Facility totaled approximately $30.1
      million.

      The Supplemental Loans under the Supplemental Facility 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.   There were no Events of Default (as defined)
      under the Agreement, as amended, at June 30, 1997.  In connection with
      the pre-negotiated Chapter 11 filing by the Company and its subsidiaries,
      the Agreement was amended.  See Note 7 - Capital Restructuring Plan.

      The Company's did not make the scheduled interest payment of
      approximately $7.7 million on its Senior Notes due on June 30, 1997.  As
      a result the Company has reclassified $118.1 million of long-term debt as
      a current liability.  See Note 7 regarding the Company's planned
      financial reorganization.

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

      Pursuant to the restructuring discussed in "Note 7 - Capital
      Restructuring Plan," Magten provided the Company with a secured term loan
      facility of up to $20 million (the "Secured Term Loan Facility") ($15
      million was advanced to the Company on May 23, 1997 and an additional $5
      million was advanced to the Company on July 9, 1997).

6.    RELATED PARTY TRANSACTION

      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 as other income and approximately $3.6 million
      as an extraordinary gain in the first quarter of 1997, 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 with
      certain of the Company's bond holders and equity holders providing for a
      comprehensive capital restructuring plan.  The restructuring agreement
      was entered into by 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
      advisor clients in their respective accounts at Magten ("Magten"), and
      CIGNA.  The restructuring plan will, among other things, (i) convert the
      $118.1 million principal amount still outstanding on the 13% Senior Notes
      plus all accrued and unpaid interest on the Senior Notes into 92.5% of
      the Company's common equity,  (ii)  exchange all the Company's 14%
      redeemable preferred stock into 7.5% of the common equity along with a 5
      year warrant to purchase up to 7.5% of the fully diluted common equity
      and, (iii) exchange  all of the classes of common stock into a 5 year 
      warrant to purchase up to 2.5% of the fully diluted equity.  In 


                                      10



<PAGE>   11

      connection with the Company's capital restructuring plan, the Company
      did not pay interest on the Senior Notes due on June 30, 1997.

      Pursuant to the restructuring, Magten provided the Company with a secured
      term loan facility of up to $20 million (the "Secured Term Loan
      Facility") ($15 million was advanced to the Company on May 23, 1997 and
      an additional $5 million 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.  Additionally, the indenture that governs the
      Senior Notes was modified to permit the Company to incur the Secured Term
      Loan Facility.  It is contemplated that the Secured Term Loan Facility
      will be repaid with the proceeds of a rights offering to purchase
      additional shares of the Company's common stock upon a consummation of
      the restructuring.  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 was 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 restructuring plan and the Exercise Agreements
      are  subject to various conditions.

      On September 29, 1997, a pre-negotiated filing under the provisions of
      Chapter 11 of the United States Bankruptcy Code was made by the Company
      and its subsidiaries in order to effect the restructuring plan.
      Concurrent therewith, the Company filed its plan of reorganization with
      the United States Bankruptcy Court for the Southern District of New York
      (the "Bankruptcy Court") that reflects the proposed restructuring plan
      described above. The plan of reorganization provides for the payment in
      full of all unpaid pre-petition trade debt following the confirmation of
      the plan.  The Company is prohibited from making payment on any
      pre-petition obligations during the course of the Chapter 11 filing.  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 pre-negotiated Chapter 11 filing, the Company
      (with approval of the Bankruptcy Court) has entered into a
      debtor-in-possession post-petition term loan agreement ("Term Loan") with
      Magten.  The Term Loan provided $3.75 million of borrowings and is
      secured by all of the assets of the Company and its subsidiaries and the
      common stock of the Company's subsidiaries.  Any amounts outstanding
      under the Term Loan agreement as of the effective date of the
      restructuring will 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.

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

      In connection with the restructuring, 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 to the Company for payments under these agreements
      is $1.1 million.  During the six months ended June 30, 1997 a charge of
      $512,000 was recorded for 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 an amount in cash, which amount for all such officers
      aggregates approximately $2.5 million.
       
                                      11



<PAGE>   12


      In connection with the restructuring plan discussed elsewhere herein, the
      original license with Calvin Klein, Inc. was terminated on April 26, 1997
      and on April 27, 1997, Calvin Klein 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.  Upon the consummation of
      the restructuring, the Company believes that Calvin Klein has committed
      to enter into a new multiple year license agreement on similar terms and
      conditions that would extend through the year 2004.  DHA Home also
      believes that it has a good relationship with Calvin Klein and continues
      to work with Calvin Klein on long-range plans for Calvin Klein license
      products.  Notwithstanding DHA Home's belief, Calvin Klein has asserted
      that (i) no assurances can be given that any such license will be entered
      into and (ii) Calvin Klein has not committed to enter into any such
      long-term license. At June 30, 1997, the carrying amount of the Calvin
      Klein license agreement is $7,809,000, which is calculated based on the
      original contract period ending in 2004.  If the above described
      restructuring 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 bookings have declined approximately 50% compared to the same
      period in 1996.  Management of the Company is addressing 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 favorably impact 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, against the Company 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 settlement of the
      claim will have a material adverse impact on the Company.


                                      12



<PAGE>   13


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 statement 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 JUNE 30, 1997 WITH THREE MONTHS ENDED
      JUNE 30, 1996

      NET SALES

      Net sales for the three months ended June 30, 1997 decreased by
      approximately $5.4 million, or 12.5%, to $37.6 million from $43.0 million
      for the three months ended June 30, 1996.  The Company experienced
      weakened sales during 1997 in its gift division (The Rug Barn, Inc.).
      Sales from the gift division decreased $3.3 million, or 40%, for the
      three months ended June 30, 1997 compared to the three months ended June
      30, 1996.  As discussed in Note 8 to the Condensed Consolidated Financial
      Statements, order bookings for the gift division through September 1997
      have declined approximately 50% for the comparable 1996 period.
      Accordingly, the Company expects to experience continued weakening in
      sales from the gift division during 1997. In addition, the gift division
      was negatively impacted by delivery problems for product offerings
      sourced from other manufacturers. The liquidity shortages faced by the
      Company in 1997 significantly impacted the Company's ability to service
      its customer base.  Given the limited resources, the Company attempted to
      service its most significant customers.

      GROSS PROFIT

      Gross profit decreased approximately $2.8 million, or 25.1%, to $8.4
      million for the three months ended June 30, 1997 from $11.2 million for
      the three months ended June 30, 1996.  Gross profit as a percentage of
      sales declined to 22.3% for the three months ended June 30, 1997 compared
      to 26.1% for the three months ended June 30, 1996.  The decrease
      primarily resulted from the decline in the Company's gift division sales
      which accounted for approximately $1.9 million of the decrease in gross
      profit.  Historically, gross profit margins achieved on products in the
      gift division have been higher than those earned on the Company's other
      product lines.  The Company also experienced efficiency losses in its cut
      and-sew plants as a result of liquidity constraints negatively impacting
      raw material purchases.

      SELLING, GENERAL & ADMINISTRATIVE EXPENSES

      Selling, general and administrative ("SG&A") expenses decreased
      approximately $2.8 million, or 25.4%, to $9.6 million for the three
      months ended June 30, 1997 from $12.4 million for the three months ended
      June 30, 1996.  SG&A expenses decreased as a percentage of sales to 25.4%
      for the three months ended June 30, 1997 from 28.8% for the three months
      ended June 30, 1996. This decrease in SG&A expenses was due to a decrease
      in salaries and benefit expenses of approximately $200,000 and decreases
      in other variable general and administrative expenses of approximately
      $1.6 million for the three months ended June 30, 1997.  Additionally, the
      1996 results included approximately $1.0 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
      

                                      13



<PAGE>   14

      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 has recorded a pre-tax charge
      for such amount in the 1996 consolidated statement of operations.

      INTEREST EXPENSE, NET

      Interest expense increase approximately $308,000, or 6.3%, to $5.2
      million for the three months ended June 30 , 1997 from $4.9 million for
      the three months ended June 30, 1996.  Short-term and long-term
      borrowings increased by approximately $7.3 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 expense directly
      related to the debt restructuring and reorganization.  For the three
      months ended June 30, 1997 the Company incurred approximately $1.6
      million in restructuring fees and expenses.

      INCOME TAXES

      The Company's income tax benefit for the three months ended June 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 SIX MONTHS ENDED JUNE 30, 1997 WITH SIX MONTHS ENDED JUNE
      30, 1996

      NET SALES

      Net sales for the six months ended June 30, 1997 decreased approximately
      $8.2 million, or 10.1%, to $73.5 million from $81.8 million for the six
      months ended June 30, 1996.  The sales decline is primarily attributable
      to a $6.2 million decrease in the Company's gift division sales for the
      six months ended June 30, 1997 compared to the gift division sales for
      the six months ended June 30, 1996.  As discussed in Note 8 to the
      Condensed Consolidated Financial Statements, order bookings through for
      the gift division 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.In
      addition, the gift division was negatively impacted by delivery problems
      for product offerings sourced from other manufacturers. The liquidity
      shortages faced by the Company in 1997 significantly impacted the
      Company's ability to service its customer base.  Given the limited
      resources, the Company attempted to service its most significant
      customers.

      GROSS PROFIT

      Gross profit decreased approximately $4.7 million, or 22.1%, to $16.5
      million for the six months ended June 30, 1997, compared to $21.1 million
      for the six months ended June 30, 1996.  Gross profit as a percentage of
      sales decreased to 22.4% for the six months ended June 30, 1997 from
      25.8% for the six months ended June 30, 1996.  The decrease primarily
      resulted from the decline in the Company's gift division sales which
      accounted for approximately $3.4 million of the decrease in gross profit.
      Historically, gross profit margins achieved on products in the gift
      division have been higher than those earned on the Company's other
      product lines.  The Company also experienced efficiency losses in its cut
      and-sew plants as a result of liquidity constraints negatively impacting
      raw material purchases.


                                      14



<PAGE>   15


      SELLING, GENERAL & ADMINISTRATIVE EXPENSES

      Selling, general and administrative expenses decreased approximately $5.2
      million, or 21.4%, to $18.9 million for the six months ended June 30,
      1997 from $24.1 million for the six months ended June 30, 1996.  SG&A
      expenses decreased as a percentage of sales to 25.8% for the six months
      ended June 30, 1997 from 29.4% million for the six months ended June 30,
      1996.  This decrease in SG&A expenses was due to a decrease in salaries
      and benefit expenses of approximately $860,000 and decreases in other
      variable general and administrative expenses of approximately $2.2
      million for the six months ended June 30, 1997.  Additionally, the 1996
      results included approximately $2.1 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.

      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 as other income and approximately $3.6 million
      in the first quarter of 1997, as a result of this settlement and
      forgiveness of debt.

      INTEREST EXPENSE, NET

      Interest expense increase approximately $899,000, or 9.4%, to $10.4
      million for the six months ended June 30 , 1997 from $9.5 million for the
      six months ended June 30, 1996.  Short-term and long-term borrowings
      increased by approximately $7.3 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 six months ended June 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 six months
      ended June 30, 1997 the Company incurred approximately $1.6 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 half of 1997, the Company experienced significant
      liquidity constraints as a result of poor operating performance during
      the fourth quarter of 1996 and a December 31, 1996 payment of the $8.125
      million interest on the Company's Senior Notes.  Additionally, the
      Company experienced a significant reduction in vendor trade credit and 
      was forced to operate on a cash-in-advance or cash-on-delivery basis.  
      As a


                                      15



<PAGE>   16

      result, the Company was unable to service all of its customers.  Also,
      operating efficiencies of the Company's plants were negatively impacted
      due to the restricted raw material purchasing ability.  The comprehensive
      restructuring plan discussed herein provided additional liquidity to the
      Company through the $20 million secured term loan facility.  Additionally,
      the committed post-petition term loans form Magten will provide additional
      liquidity. Finally, the Company expects to receive debtor-in-possession
      financing from Congress Financial Corporation ("Congress") on terms
      substantially conforming with the Company's revolving credit facility
      ("Revolving Credit Facility") with Congress.  Management believes that
      these sources of liquidity combined with operating cash flow will be
      adequate to service the working capital needs of the Company as well as
      funding operating losses at the Rug Barn.  In the event that a
      restructuring and the related financing are not consummated, the ability
      of the Company to continue as a going concern is doubtful.

      The Company's Revolving Credit Facility provides for a revolving loan
      facility and letters of credit based on specified levels of underlying
      collateral with 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.

      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 in accordance with the Revolving Credit
      Facility.  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 June 30, 1997.

      On June 30, 1997, the Company had approximately $2.6 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 for requirements for that business day
      and repayments are made on a daily basis by cash collections from trade
      accounts receivables.

      Cash used in operating activities was approximately $14.7 million for the
      six months ended June 30, 1997 compared to use of cash of $8.2 million
      for the six months ended June 30, 1996.  The principal reason for the
      change is due to the timing of the Company's $8.1 million interest
      payment paid in the first quarter of 1997 on its Senior Notes.  The
      company did not make its scheduled interest payment due on June 30, 1997
      on its Senior Notes.  Inventories increased $6.5 million during the first
      six months of 1997 compared to an increase of $1.7 million during the
      same period in 1996.  The Company used approximately $3.1 million to
      reduce trade payables as a result of decreasing support from the
      Company's vendors.

      Cash used in investing activities was approximately $787,000 for the six
      months ended June 30, 1997 compared to $4.0 million used for the six
      months ended June 30, 1996.   The Company used $1.1 million for the six
      months ended June 30, 1997 for purchases of property and equipment
      compared to $1.9 million used for the first six months of 1996.  This
      reduction in capital expenditures is a result of the Company's limited
      liquidity.  Cash used for long-term assets decreased by approximately
      $2.4 million in the first six months of 1997 compared to the first six
      months of 1996.  This resulted from ongoing systems conversions programs
      which were cut back in 1997 due to liquidity constraints.

      Cash provided by financing activities was approximately $14.2 million for
      the six months ended June 30, 1997 compared to $12.0 million for the six
      months ended June 30, 1996.  This change is primarily due to the
      operating losses for 1997 and additional working capital requirements.

      See Footnote 7 -  Capital Restructuring Plan.

                                      16



<PAGE>   17



      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
      June 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 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.


                                      17



<PAGE>   18



PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

      On July 29, 1997, a fixture supplier of the Company filed suit seeking
      $1.9 million against the Company claiming that the Company failed to
      fulfill its obligations under a supply arrangement.  Prayed damages are
      approximately $1.9 million.  Management of the Company intends on
      vigorously defending the suit.  Further, management expects to contest
      the claim during the course of its Chapter 11 case.  Management does not
      expect that the ultimate settlement 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-negotiated filing under the provisions 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 pre-negotiated 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)  The Company did not 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
           indebtedness under the Senior Notes was 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
                 NONE

                                      18




<PAGE>   19


                                  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: November 14, 1997                      /s/ Jay N. Baker
      -----------------                      -----------------------------
                                                 Jay N. Baker*
                                                 Chief Financial Officer


* Duly authorized to sign on behalf of the Registrant.


                                      19




<PAGE>   20


                                EXHIBIT INDEX
                                -------------

<TABLE>
<CAPTION>


EXHIBIT
NUMBER     DESCRIPTION
------     --------------------------------------------------------------------
<S>        <C>
27         Financial data schedule



</TABLE>



                                      20