<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                  FORM 10-KSB/A

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

                    FOR THE FISCAL YEAR ENDED JUNE 30, 1998

          [ ] 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 0-24352

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

                                INTERIORS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

           DELAWARE                                             13-3590047
(STATE OR OTHER JURISDICTION OF                              (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)                            IDENTIFICATION NO.)

       320 WASHINGTON STREET
        MT. VERNON, NEW YORK                                      10553
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                        (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 665-5400

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                    COMMON STOCK, PAR VALUE $.001 PER SHARE
                    ---------------------------------------
                                (TITLE OR CLASS)

 SERIES A 10% CUMULATIVE CONVERTIBLE PREFERRED STOCK, PAR VALUE $.01 PER SHARE
 -----------------------------------------------------------------------------
                                (TITLE OR CLASS)

              CLASS WB REDEEMABLE COMMON STOCK PURCHASE WARRANTS
              --------------------------------------------------
                                (TITLE OR CLASS)

              CLASS WC REDEEMABLE COMMON STOCK PURCHASE WARRANTS
              --------------------------------------------------
                                (TITLE OR CLASS)

         INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.

                                 YES [X] NO [ ]

<PAGE>

ITEM 7. FINANCIAL STATEMENTS

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements


                                                                         Page

Report of Independent Public Accountants ..............................  F-1

Consolidated Financial Statements:

Consolidated Balance Sheet as of June 30, 1998 ........................  F-2

Consolidated Statements of Income for the
years ended June 30, 1998 and 1997 ....................................  F-3

Consolidated Statements of Changes in Stockholders'
Equity for the years ended June 30, 1998 and 1997 .....................  F-4

Consolidated Statements of Cash Flows for
the years ended June 30, 1998 and 1997 ................................  F-5-6

Notes to Consolidated Financial Statements ............................  F-7-27

<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


TO THE BOARD OF DIRECTORS OF
INTERIORS, INC.:

We have audited the accompanying consolidated balance sheet of Interiors, Inc.
(a Delaware corporation) as of June 30, 1998, and the related consolidated
statements of income (earnings per share restated for 1997 -- See Note 2), 
changes in stockholders' equity, and cash flows of Interiors, Inc. and its
subsidiaries (subsidiary for 1997) for each of the two years in the period
ended June 30, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Interiors, Inc. as of June 30,
1998 and the results of its operations and its cash flows for each of the two 
years in the period ended June 30, 1998, in conformity with generally accepted 
accounting principles.

                                                       /s/ ARTHUR ANDERSEN LLP

NEW YORK, NEW YORK
OCTOBER 9, 1998





























                                       F-1
<PAGE>

                                INTERIORS, INC.
                           CONSOLIDATED BALANCE SHEET
                                 JUNE 30, 1998

<TABLE>
<CAPTION>
<S>                                                                <C>         
ASSETS

CURRENT ASSETS:
       Cash                                                        $  4,035,590
       Accounts receivable, net                                       3,469,444
       Inventories                                                    3,170,938
       Other current assets                                           1,696,891
                                                                   ------------

                            Total current assets                     12,372,863


INVESTMENT IN AFFILIATES                                              4,276,679


PROPERTY AND EQUIPMENT, net                                           1,294,809


OTHER ASSETS                                                          8,397,419
                                                                   ------------

                            Total assets                           $ 26,341,770
                                                                   ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
       Notes payable and current maturities of long-term debt         5,621,930
       Accounts payable and accrued liabilities                       5,637,012
                                                                   ------------

                            Total current liabilities                11,258,942

LONG TERM DEBT                                                        2,826,430

COMMITMENTS AND CONTINGENCIES (NOTE 12)

STOCKHOLDERS' EQUITY:
       Preferred stock, $.01 par value, 5,300,000 shares
            authorized, 679,438 shares issued and outstanding             6,794
       Class A common stock, $.001 par value, 60,000,000 shares
            authorized, 19,614,857 shares issued and outstanding         19,615
       Class B common stock, $.001 par value, 2,500,000 shares
            authorized, 2,105,000 shares issued and outstanding           2,105
       Additional paid-in-capital                                    21,751,749
       Accumulated deficit                                           (8,575,865)
       Notes receivable                                                (948,000)
                                                                   ------------

                            Total stockholders' equity               12,256,398
                                                                   ------------

Total liabilities and stockholders' equity                         $ 26,341,770
                                                                   ============
</TABLE>

 The accompanying notes are an integral part of this consolidated balance sheet.

                                      F-2

<PAGE>

                                INTERIORS, INC.

                              STATEMENTS OF INCOME

                   FOR THE YEARS ENDED JUNE 30, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                1998            1997
                                                            ------------    ------------
<S>                                                         <C>             <C>         
NET SALES                                                   $ 13,447,234    $  4,796,131

EXPENSES:
         Cost of goods sold                                    8,268,922       3,075,821
         Selling, general, and administrative expenses         4,082,779       2,569,697
                                                            ------------    ------------
                             Total expenses                   12,351,701       5,645,518

         Income (Loss) from operations                         1,095,533        (849,387)

OTHER EXPENSE
         Amortization of goodwill                                 42,042            --
         Interest expense                                        557,341         405,048
         Financing charges - noncash                             305,716            --
         Gain on sale of investment                                 --          (201,013)
         Consulting and management fees                         (335,000)     (1,140,000)
                                                            ------------    ------------
                             Total other expense (income)        570,099        (935,965)

         Income from operations
             before (benefit) provision for taxes                525,434          86,578

(BENEFIT) FOR INCOME TAXES                                      (108,240)        (19,346)
                                                            ------------    ------------

NET INCOME                                                  $    633,674    $    105,924
                                                            ------------    ------------

EARNINGS PER COMMON SHARE:
 (restated for 1997 -- See Note 2)
         Basic                                              $       0.04    $      (0.09)
                                                            ------------    ------------
         Diluted                                            $       0.04    $      (0.09)
                                                            ------------    ------------

WEIGHTED AVERAGE NUMBER OF SHARES USED IN COMPUTATION
         Basic                                                 7,251,193       4,527,160
                                                            ------------    ------------
         Diluted                                               8,154,083       4,527,160
                                                            ------------    ------------
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements

                                      F-3

<PAGE>

                                INTERIORS, INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                   FOR THE YEARS ENDED JUNE 30, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                           Series A              Class A               Class B
                                                                         Preferred Stock      Common Stock          Common Stock   
                                                                       ------------------------------------------------------------
                                                                       Shares    Amount     Shares     Amount     Shares     Amount
                                                                       ------    ------     ------     ------     ------     ------
<S>                                                                    <C>       <C>      <C>          <C>      <C>         <C>    
BALANCE, June 30, 1996                                                 790,000   $7,900   3,470,247    $3,470   2,039,500   $2,040 

  Net proceeds from the exercise of common stock warrants                                   822,424       822                      
  Net proceeds from the exercise of preferred stock options            350,000    3,500                                            
  Common stock issued to directors                                                           20,000        20                      
  Conversion of preferred stock to common stock                        (92,940)    (929)    278,820       279                      
  Increase in valuation of investment in Decor                                                                                     
  Conversion of Class B Common shares into Class A Common shares                            269,750       270    (269,750)   ($270)
  Common and preferred stock issued to BH Funding                      100,000    1,000     100,000       100                      
  Assumption of payroll tax liabilities - by officer in connection 
         with Italia dissolution                                                                                                   
  Common stock issued to liquidate debt                                                     300,000       300                      
  Net income through June 30, 1997                                                                                                 
                                                                    ---------------------------------------------------------------
BALANCE, June 30, 1997                                               1,147,060  $11,471   5,261,241    $5,261   1,769,750   $1,770 

  Sale of Treasury Stock                                                                                                           
  Conversion of preferred stock to common stock                       (517,622)  (5,177)  1,552,866     1,553                      
  Class B Common Shares issued                                                                                    730,000      730 
  Escrow shares                                                                           7,500,000     7,500                      
  Class A Common Shares issued for services rendered                                        226,670       227                      
  Common stock issued in connection with acquisitions                                     1,078,883     1,079                      
  Exercise of Class WA Warrants, net of expenses                                          2,607,116     2,607                      
  Warrants issued in connection with convertible debt                                                                              
  Stock dividends declared December, 1997                                                   530,331       530                      
  Conversion of Class B Common shares into Class A Common shares                            394,750       395    (394,750)    (395)
  Issuance of Preferred Stock                                           50,000      500                                            
  Conversion of promissory notes to Class A common                                          463,000       463                      
  Net income through June 30, 1998                                                                                                 
                                                                    ---------------------------------------------------------------
BALANCE, June 30, 1998                                                 679,438   $6,794  19,614,857   $19,615   2,105,000   $2,105 
                                                                       =======   ======  ==========   =======   =========   ====== 
</TABLE>

<TABLE>
<CAPTION>
                                                                   
                                                                   Additional   
                                                                    Paid-In       Accumulated    Treasury      Note
                                                                    Capital        (Deficit)      Stock     Receivable      Total
                                                                    -------        ---------      -----     ----------      -----
<S>                                                                 <C>           <C>             <C>       <C>           <C>       
BALANCE, June 30, 1996                                              $8,564,741    ($8,785,132)    ($600)    ($437,500)    ($645,081)

  Net proceeds from the exercise of common stock warrants            1,178,820                                            1,179,642
  Net proceeds from the exercise of preferred stock options            734,000                                              737,500
  Common stock issued to directors                                      14,980                                               15,000
  Conversion of preferred stock to common stock                            650
  Increase in valuation of investment in Decor                       1,624,501                                            1,624,501
  Conversion of Class B Common shares into Class A Common shares   
  Common and preferred stock issued to BH Funding                      723,900                                              725,000
  Assumption of payroll tax liabilities - by officer in connection 
         with Italia dissolution                                        75,344                                               75,344
  Common stock issued to liquidate debt                                299,700                                              300,000
  Net income through June 30, 1997                                                    105,924                               105,924
                                                                   ----------------------------------------------------------------
BALANCE, June 30, 1997                                             $13,216,636    ($8,679,208)    ($600)    ($437,500)   $4,117,830

  Sale of Treasury Stock                                               479,400                      600                     480,000
  Conversion of preferred stock to common stock                          3,624
  Class B Common Shares issued                                         510,270                               (510,500)          500
  Escrow shares                                                         (7,500)
  Class A Common Shares issued for services rendered                   350,993                                              351,220
  Common stock issued in connection with acquisitions                1,748,921                                            1,750,000
  Exercise of Class WA Warrants, net of expenses                     3,775,567                                            3,778,174
  Warrants issued in connection with convertible debt                  200,000                                              200,000
  Stock dividends declared December, 1997                              529,801       (530,331)
  Conversion of Class B Common shares into Class A Common shares   
  Issuance of Preferred Stock                                          249,500                                              250,000
  Conversion of promissory notes to Class A common                     694,537                                              695,000
  Net income through June 30, 1998                                                    633,674                               633,674
                                                                   ----------------------------------------------------------------
BALANCE, June 30, 1998                                             $21,751,749    ($8,575,865)       $0     ($948,000)  $12,256,398
                                                                   ===========    ===========        ==     =========   ===========
</TABLE>

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

                                      F-4
<PAGE>

                                INTERIORS, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                   FOR THE YEARS ENDED JUNE 30, 1998 AND 1997

<TABLE>
<CAPTION>
                                                                                                      YEARS ENDED
                                                                                                        JUNE 30
                                                                                               --------------------------
                                                                                                   1998           1997
                                                                                               -----------    -----------
<S>                                                                                            <C>            <C>        
CASH FLOW FROM OPERATING ACTIVITIES:
      Net Income                                                                               $   633,674    $   105,924
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH USED IN OPERATING ACTIVITIES:
      Photo-2-Art transaction                                                                         --       (1,140,000)
      Depreciation and amortization                                                                741,722        628,416
      Provision for losses on accounts receivable                                                  228,160        228,000
      Non-cash write off of non-productive asets                                                      --          534,049
      Non-cash financing charge                                                                    305,716         50,000
      Reduction of liabilities from dissolution of subsidiary                                         --         (586,509)
      Gain from sale of investment securities                                                         --         (201,013)
      Provision for dissolution of Italia                                                             --           56,000
      Provision for issuance of stock                                                                 --           15,000
      Royalty and commissions                                                                         --          144,000
CHANGES IN ASSETS AND LIABILITIES:
      Decrease (increase) in accounts receivable, trade                                           (416,843)      (390,228)
      Decrease (increase) in inventories                                                          (138,960)       200,475
      Decrease (increase) in prepaid expenses and other current assets                            (539,347)      (585,126)
      Decrease (increase) in other assets                                                       (1,354,345)       287,887
      Increase (decrease) in accounts payable and accrued expenses                                 202,456       (606,654)
      Increase (decrease) in net liabilities and accrued expenses of discontinued operations          --          (90,557)
      Net cash used in operating activities                                                       (337,767)    (1,350,336)
                                                                                               -----------    -----------
CASH FLOW FROM INVESTING ACTIVITIES:
      Capital expenditures                                                                        (237,255)      (166,621)
      Proceeds from sales of investments securities                                                   --          372,500
      Sale of investment in Decor Group, Inc.                                                         --         (826,000)
      Business acquistions net of stock issued                                                  (1,828,000)          --
                                                                                               -----------    -----------
      Net cash used in investing activities                                                     (2,065,255)      (620,121)
                                                                                               -----------    -----------
CASH FLOW FROM FINANCING ACTIVITIES:
      Net proceeds from issuance of debt                                                         3,142,796      1,214,369
      Repayments of debt and capitalized lease obligations                                        (846,602)      (893,788)
      Net proceeds from exercise of common stock warrants                                        3,873,174      1,179,642
      Net proceeds from exercise of preferred stock options                                           --          737,500
                                                                                               -----------    -----------
      Net cash provided by financing activities                                                  6,169,368      2,237,723
                                                                                               -----------    -----------
      Net increase (decrease) in cash                                                            3,766,346        267,266
CASH, beginning of period                                                                          269,244          4,142
                                                                                               -----------    -----------
CASH, end of period                                                                            $ 4,035,590    $   271,408
                                                                                               ===========    ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
      Cash paid during the period for -
      Interest                                                                                 $   449,554    $   241,959
      Taxes                                                                                         19,943          5,973
NON-CASH FINANCIAL ACTIVITIES:
Conversion of Series A Preferred Stock to Class A Common Stock                                        --              650
Stock issuance for financing charges                                                                  --          350,000
Stock issuance for consulting services in connection with Decor acquisition                           --          350,000
Debt Financing Costs                                                                               351,220           --
Debt issued for services rendered                                                                   45,000           --
Debt and Guarantee Reduction Through Treasury Stock Issuance                                       480,000           --
Stock Issuance Financed by note or Short-Term Receivable                                           760,500           --
Debt Discount-Warrants Issued                                                                      200,000           --
Promissory Note Conversion                                                                         695,000           --
Common Stock issued for preferred dividends                                                        530,531           --
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-5

<PAGE>

                                INTERIORS, INC.
               CONSOLIDATED STATEMENT OF CASH FLOWS - (Continued)
                   FOR THE YEARS ENDED JUNE 30, 1998 AND 1997

<TABLE>
<CAPTION>
                                                         YEARS ENDED
                                                           JUNE 30
                                                  --------------------------
                                                     1998           1997
                                                  -----------    -----------
<S>                                               <C>            <C>        
Supplemental disclosure of cash flows related
      to acquisitions:
      Fair value of assets acquired,
        excluding cash                            $ 4,670,570    $        --
      Issuance of common stock                     (1,750,000)            --
      Issuance of notes payable                    (1,604,379)            --
      Payments in connection with acquisitions,
        net of cash acquired                       (1,709,818)            --

        Liabilities assumed                       $ 6,051,947    $        --

Supplemental disclosure of non cash
      items from investing activities:
      Issuance of common stock in connection
        with acquisitions                         $ 1,750,000    $        --

      Issuance of debt in connection with
        acquisitions                              $ 1,604,379    $        --
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      F-6

<PAGE>

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

-------------------------------------------------------------------------------
1.  DESCRIPTION OF BUSINESS AND ORGANIZATION
-------------------------------------------------------------------------------

ORGANIZATION

Interiors, Inc., a Delaware corporation ("Interiors" or the "Company"), is a
designer, manufacturer and marketer of a broad range of decorative accessories
for the residential, commercial, institutional and contract markets, including
museum-quality traditional and contemporary picture frames, framed wall
mirrors, framed hand-painted oil paintings, framed prints under glass, portable
and installed lighting and lighting fixtures, sculptures and decorative
tabletop accessories. Interiors primarily markets its products to retailers in
the home furnishings industry, including furniture stores, home furnishings
centers, catalog retailers, home improvement centers, department stores and
lighting retailers. The Company believes that it has a unique competitive
advantage in serving a broad range of customers because of the breadth and
depth of its product lines as well as its ability to coordinate design among
several product lines.

The majority of the Company's sales are domestic. Sales to the largest
customers totaled $4,274,521 and $1,786,000, or 32% and 38% of net sales
respectively, for the years ended June 30, 1998 and June 30, 1997. Accounts
Receivable due from the largest customers totaled approximately $451,000 and
$373,000 as of June 30, 1998 and 1997 respectively.

The Company from time to time entered into transactions with related parties
(See Note 13). To the extent that the Company is unable to attract and retain
qualified independent persons to serve on its board of directors, conflicts of
interest may arise due to these relationships.

-------------------------------------------------------------------------------
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-------------------------------------------------------------------------------

BASIS OF PRESENTATION

The consolidated statements of income, stockholders' equity and cash flows
include the accounts of Interiors, Inc. and its wholly-owned subsidiaries
Henlor, Inc. and Artmaster Studios, Inc., which are included from their
respective dates of acquisition (refer to Note 4). Accordingly, significant
intercompany accounts and transactions have been eliminated in the
consolidation. Henlor and Artmaster were subsequently merged with the 
surviving entity, Henlor, changing its name to Vanguard Studios, Inc.


REVENUE RECOGNITION

Revenue is recognized at the time finished goods, whether standard product or
custom work is shipped or acceptance is acknowledged by the customer. Payments
received for merchandise not yet shipped or accepted are reflected within
prepaid sales and customer deposits, a current liability. Historically, sales
returns have not been significant.


CASH

The Company classifies as cash and cash equivalents amounts on deposit in banks
and cash invested temporarily in various instruments with maturities of three
months or less at time of purchase.


INVENTORIES

Inventory is valued at the lower of cost or market, with cost determined using
the first-in, first-out method. Finished goods consists of those items
available for shipping.

                                      F-7
<PAGE>

INVESTMENT IN AFFILIATES

The Company accounts for its investment in affiliates under the cost method.


PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. The cost of additions and
improvements and the costs incurred in the construction of castings and the
related master molds are capitalized and expenditures for repairs and
maintenance are expensed in the period incurred. Depreciation and amortization
of property and equipment is provided utilizing straight-line and accelerated
methods over the estimated useful lives of the respective assets as follows:

                                                     YEARS
                                                     -----
                   MACHINERY AND EQUIPMENT          3 - 10
                   FURNITURE AND FIXTURES           7 - 10

Leasehold improvements are amortized over the shorter of the remaining term of
the lease or the useful life of the improvement utilizing the straight-line
method.


INCOME TAXES

The Company uses the liability method of accounting for income taxes. Under
this method, deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. Deferred income taxes have been provided for the
temporary differences between the financial reporting basis and the tax basis
of the Company's assets and liabilities (See Note 15).


GOODWILL

In connection with the acquisitions of Henlor, Inc. and Artmaster Studios, Inc.
amounts were paid in excess of the fair market value of the assets acquired.
These amounts have been recorded as goodwill and are being amortized over 40
years. It is the Company's policy to evaluate the life and amount of goodwill
on a continuous basis. Such evaluations are based on current market conditions
and expected future cash flows.


USE OF ESTIMATES IN PREPARATION OF THE FINANCIAL STATEMENTS

The preparation of financial statements in conformity with generally accepted
accounting principles requires of management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from changes in these estimates.


EARNINGS PER COMMON SHARE

For the year ended June 30, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." In accordance with
SFAS No. 128, net earnings per common share amounts ("basic EPS") were computed
by dividing net earnings by the weighted average number of common shares
outstanding, and excluding any potential dilution. For purposes of this
calculation, common shares include both Class A and B shares of common stock.
Net earnings per common share amounts assuming "diluted EPS" were computed by
reflecting potential dilution from the exercise of stock options and warrants.
SFAS No. 128 requires the presentation of both basic EPS and diluted EPS on the
income statement. Earnings per share amounts for the same prior-year periods
have been restated to conform with the provision of SFAS No. 128.

A reconciliation between the numerators and denominators of the basic and
diluted EPS computations for net earnings is as

                                      F-8
<PAGE>

follows:

<TABLE>
<CAPTION>
                                Year Ended June 30, 1997                      Year Ended June 30, 1998
                          -------------------------------------------------------------------------------------
                             Income          Shares     Per Share        Income         Shares      Per Share
                           (Numerator)   (Denominator)   Amounts       (Numerator)   (Denominator)   Amounts
                          -------------------------------------------------------------------------------------
<S>                          <C>          <C>           <C>              <C>          <C>            <C>   
NET EARNINGS               $ 105,924                                   $ 633,674
LESS: DIVIDENDS 
      ON PREFERRED STOCK:   (523,530)                                   (339,719)


BASIC EPS
Net earnings attributable
to common stock             (417,606)     4,527,160     $(0.09)          293,955      7,538,882      $ 0.04

EFFECT OF DILUTIVE
SECURITIES
Stock warrants                                                                          902,890

DILUTED EPS
Net earnings attributable
to common stock and
assumed warrant 
exercises                  $(417,606)     4,527,160     $(0.09)         $293,955      8,154,083      $ 0.04
                             -------      ---------     ------          --------      ---------      ------
</TABLE>

Conversion of Series A 10% Cumulative Preferred Stock not assumed for 
computation purposes since effect would be antidilutive.  Prior Period EPS 
Data has also been restated due to an error correction required to incorporate
the deduction of preferred stock dividends, before Common EPS is calculated.

FOURTH QUARTER ADJUSTMENTS/TRANSACTION

The Company recorded approximately $550,000 of adjustments during the fourth
quarter of fiscal 1998. The adjustments relate to write-offs of certain other
assets, along with related amortization expense, interest expense and certain
other selling, general, and administrative expenses.

The Company recorded approximately $1,140,000 in expense reimbursements during
the fourth quarter of fiscal 1997. The income was primarily comprised of the
sale of assets, including inventory, other goods and services to
Photo-To-Art(TM).

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES WERE GENERATED FROM OPERATIONS AS
SCHEDULED BELOW:

                                               1998            1997

CUSTOM AND WHOLESALE DIVISION               $ 2,251,444   $   2,569,697
DECORATIVE ACCESSORIES                        1,831,335             
                                            -----------   -------------
         TOTAL                              $ 4,082,779   $   2,569,697
                                            -----------   -------------

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 131 (SFAS No. 131) " Disclosures About
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. This Statement requires that a
public business enterprise report certain financial and descriptive information
about its operating segments. At June 30, 1998, adoption of SFAS No. 131 would
not have a material effect on the Company's financial statements.

In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 

                                      F-9
<PAGE>

133 (SFAS No. 133) "Accounting for Derivative Instruments and Hedging
Activities," which is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Statement requires that an entity recognize
all derivatives as either assets or liabilities on the statement of financial
position and measure those instruments at fair value. At June 30, 1998,
adoption of SFAS No. 133 would not have a material effect on the Company's
financial statements.

-------------------------------------------------------------------------------
3.  INVESTMENT IN AFFILIATES
-------------------------------------------------------------------------------

INVESTMENT IN AFFILIATES CONSISTS OF THE FOLLOWING:

              INVESTMENT IN DECOR GROUP, INC. ("DECOR")(a)    $ 3,136,679
              INVESTMENT IN PHOTO-TO-ART(TM)("P-2-A")(b)        1,140,000
                                                              -----------
                                    TOTAL                     $ 4,276,679
                                                              


(a)    In the formation of Decor, the Company's intention was to create an
       affiliate with a corporate identity clearly separate and distinct from
       that of the Company and accordingly, pursuant to a March 3, 1996
       agreement, Decor issued to the Company 250,000 shares of its Series A
       Non-Voting Convertible Preferred Stock (sold by Interiors in February
       1997) and an option to purchase 6,666,667 shares of its Series B
       Non-Convertible Voting Preferred Stock (the "Option Shares") in exchange
       for issuance to Decor by the Company of 200,000 shares of its Class A
       Common Stock, and 200,000 shares of its Series A Convertible Preferred
       Stock (both of which have subsequently been sold by Decor) and a
       guarantee with respect to certain indebtedness should such indebtedness
       become necessary. All Decor related disclosures have been adjusted to
       reflect the following: (1) a one for two reverse stock split by Decor in
       October, 1996; and (2) Decor declared and issued a dividend on Decor
       common stock payable in the form of two shares of common stock for each
       one share of common stock held as of December 16, 1996; and, (3) a
       reverse stock split of one new share of common stock for each 3 shares
       held on October 7, 1997. Effective with the Interiors' exercise of the
       Option Shares in September 1996, for total cash consideration of $2,000,
       the Company executed a Voting Agreement (the "Voting Agreement") to vest
       the power to vote the Option Shares in a Voting Trust (the "Voting
       Trust".) The Voting Agreement terminated in July 1998. In addition,
       during the months of August and September 1996, the Company purchased
       54,934 shares of Decor's Series C Non-Voting Convertible Preferred
       Stock convertible into three shares of Decor's common stock, at a cost
       of $824,000.

       On November 12, 1996, Decor completed an initial public offering of
       certain of its securities. The proceeds of such offering were used to
       acquire the net assets of Artisan House, Inc., a designer and
       manufacturer of wall hangings. Subsequent to Decor's initial public
       offering and currently, the Company owns approximately 79% of the total
       voting stock of Decor.

       As of June 30, 1998, the Company's holding in Decor was recorded on the
       Company's financial statements under the cost method of accounting which
       was determined by the market value on November 12, 1996, of the
       Company's trading securities previously transferred to Decor during
       March 1996, plus acquisition costs, less the proportionate value of the
       securities sold during February 1997. The cost method has been used by
       Interiors as it presently has no residual equity interest (stock
       ownership is mostly through Series B Preferred shares).

       On April 21, 1998 the Company and Decor entered into an agreement and
       plan of merger approved by the respective Board of Directors upon the
       terms and subject to the conditions set forth in the agreement whereby
       each issued and outstanding share of common stock, par value $.0001 per
       share, of Decor ("Decor Common Stock"), other than shares owned by
       Interiors or Decor, will be converted into the right to receive .50
       shares of Interiors Class A Common Stock.

                                      F-10
<PAGE>

(b)   The Company entered into an agreement effective June 1, 1997, with
      "P-2-A" a company which converts photographs into large-scale canvas oil
      paintings, whereby the Company agreed to sell certain canvas related
      assets as well as other goods and services to P-2-A in exchange for
      $600,000 in equity securities of P-2-A and $50,000 in cash. This
      agreement was amended as of June 30, 1997 to reflect an increase in value
      to $1,140,000. Such amounts are reflected as a cost basis investment on
      the Company's balance sheet as of June 30, 1998. The Company owns 270,000
      shares of P-2-A stock and 120,000 warrants to purchase additional stock
      at $4.50 per share (less than 5% ownership of P-2-A.). The valuation
      ascribed to this transaction by the Company is comparable to the values
      received by unrelated investors in private placement transactions between
      those investors and P-2-A.

      For transactions with Decor and P-2-A during the years ended June 30,
      1998 and 1997, refer to Note 13.

-------------------------------------------------------------------------------
4.  ACQUISITIONS AND DISPOSITIONS
-------------------------------------------------------------------------------

      On March 10, 1998, the Company entered into, and consummated, an
      Agreement and Plan of Merger among the Company, Vanguard Acquisition
      Corp., a wholly owned subsidiary of the Company, Henlor Inc. ("Henlor")
      and the shareholders of Henlor. The transaction was structured as a
      reverse triangular merger. As a result of the merger, Henlor now is a
      wholly owned subsidiary of the Company. Henlor, through its wholly owned
      subsidiary Vanguard Studios, Inc. ("Vanguard"), designs, manufactures and
      wholesales decorative accessories furnishings for the home, including
      framed hand-painted oil paintings, framed prints under glass, wall
      mirrors, lamps, sculptures and decorative tabletop accessories. The
      acquisition of Henlor provides the Company with an expanded breadth of
      product offerings.

      Pursuant to the merger agreement, the purchase price paid to the
      shareholders of Henlor at closing consisted of a cash payment of
      $705,621 and the delivery of a subordinated promissory note in the
      aggregate principal amount of $794,379. In addition, the Company issued
      to the shareholders of Henlor an aggregate of 299,581 unregistered
      shares of its Class A Common Stock and the Company repaid indebtedness
      of Vanguard owed to the principal shareholders of Henlor in the amount
      of $294,379. All of the merger shares are being held in a one year
      escrow as security for the obligations of Henlor's former shareholders
      pursuant to the merger agreement, and the number of merger shares
      remains subject to adjustment based on the value of the merger shares of
      the second anniversary of the closing date (value of shares is fixed at
      $500,000).

      The merger was financed by (i) a bridge loan in the principal amount of
      $500,000 from United Credit Corp., the Company's senior lender, and (ii)
      the private placement of accredited investors of the Company's
      unregistered Subordinated Convertible Promissory Notes in the aggregate
      principal amount of $500,000. The aggregate purchase price was determined
      in arms-length negotiations between the Company and the shareholders of
      Henlor.

      The assets acquired pursuant to the merger agreement included, among
      other things, (i) fixed assets owned, leased or used by Henlor and
      Vanguard, including equipment, (ii) accounts receivable, (iii) inventory
      and (iv) contracts, agreements, and leases of real and personal property.
      For the foreseeable future, the Company intends to utilize such assets in
      connection with the operation of the business of Henlor and Vanguard.

      On March 23, 1998, the Company entered into, and consummated, an
      Agreement and Plan of Merger among the Company, Artmaster Studios, Inc.
      ("Artmaster"), a wholly-owned subsidiary of the Company, Merchandise
      Sales, Inc. ("MSI") and certain shareholders of MSI. The transaction with
      and into Artmaster. Artmaster designs, manufactures and wholesales wall
      decor and lighting products for the home. The acquisition of MSI provides
      the Company with an expanded breadth of product offerings.

      Pursuant to the Merger Agreement, the purchase price paid to the
      shareholders of MSI at closing consisted of the delivery of a
      subordinated promissory note in the aggregate principal amount $537,248.
      In addition, the Company issued to the shareholders of MSI an aggregate
      of 779,302 unregistered shares of its Class A Common Stock and the
      Company repaid indebtedness of MSI owed to certain creditors of MSI in
      the aggregate amount of $1,022,752 through an aggregate cash payment of
      $750,000 and the issuance of a subordinated promissory note in the
      aggregate principal amount of $272,752. All of the merger shares are
      being held in a one year escrow as security for the obligations of MSI's
      former shareholders pursuant to the merger agreement, and the number of
      merger shares remains subject to adjustment based on the value of the
      merger shares on the first anniversary of the closing date (value of
      shares is fixed at $1,200,000).

                                      F-11
<PAGE>

      The merger was financed by the Company's available working capital which
      was derived in part, from an earlier, unrelated private placement to
      accredited investors of the Company's unregistered Subordinated
      Convertible Promissory Notes. The aggregate purchase price was determined
      in arms-length negotiations between the Company and the shareholders of
      MSI.

      The assets acquired pursuant to the merger agreement included, among
      other things, (i) fixed assets owned, leased or used by MSI, including
      equipment, (ii) accounts receivable, (iii) inventory and (iv) contracts,
      agreements, and leases of real and personal and property. For the
      foreseeable future, the Company intends to utilize such assets in
      connection with the operation of the business of MSI and Vanguard
      Studios, Inc., another subsidiary of the Company.

      Following are pro forma statements of income information which reflects
      theses transactions as if they occured at the beginning of each year
      ended June 30, 1998 and 1997.


                                      F-12


<PAGE>


INTERIORS, INC.
PRO FORMA INTERIM FINANCIAL INFORMATION FOR INTERIORS AND COMBINED COMPANIES

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                       Interiors     Vanguard    Artmaster
                                                      12 mths to    12 mths to   12 mths to
                                                        6/30/98      6/30/98      6/30/98      Adjustments     Total

SALES AND OTHER REVENUES :
<S>                                                       <C>         <C>           <C>             <C>       <C>
 Net Sales                                                7,317       13,480        6,829              -      27,626
                                                                                                                   -
                                                  --------------------------------------------             ----------
Total Sales and Other Revenues                            7,317       13,480        6,829              -      27,626
                                                  --------------------------------------------             ----------

EXPENSES :
 Cost of goods sold                                       4,343        8,964        4,398                     17,705
 Selling, general, and administrative                     2,251        4,416        2,157              -       8,824

                                                  ---------------------------------------------            ----------
Total Expenses :                                          6,594       13,380        6,555                     26,529
                                                  ---------------------------------------------            ----------

Income (loss) from operations :                             723          100          274                      1,097

                                                              -                                        -           -
 Amortization of intangibles                                 41                                      124         165
Consulting and management fees                             (335)          67         (668)             -        (936)
INTEREST EXPENSE                                            747         (330)        (130)           449         736

Income (loss) from operations before
  (benefit) provision for taxes                             270          363        1,072                      1,132 

PROVISION FOR TAXES                                         (55)           -            -            (45)       (100)

Income(loss) from operations                                325          363        1,072                      1,232 


Basic EPS                                                  0.04                                                 0.04 
Diluted EPS                                                0.04                                                 0.04
Shares (000)                                              7,251                                                7,251
Shares (000)                                              8,154                                                8,154
</TABLE>

PRO FORMA FINANCIAL INFORMATION REFLECTS ADJUSTMENTS FOR INCREASED INTEREST
EXPENSES AND GOODWILL.


                                     F-13


<PAGE>

INTERIORS, INC.
PRO FORMA INTERIM FINANCIAL INFORMATION FOR INTERIORS AND COMBINED COMPANIES

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                    Interiors     Vanguard      Artmaster   Adjustments  Combined
                                                     yr. end      9mo. end       yr. end    
                                                     6/30/97       7/31/97       3/28/97    

SALES AND OTHER REVENUES :
<S>                                                  <C>           <C>           <C>           <C>        <C>
Net Sales                                            $ 4,652       $ 9,700       $ 8,292                  $22,644
Royalty & commission revenues                            144                                                  144
Proceeds from sales to Photo-To-Art                    1,140                                                1,140
                                                  ------------------------------------------            ---------
Total Sales and Other Revenues                         5,936         9,700         8,292                   23,928
                                                  ------------------------------------------            ---------

EXPENSES :
 Cost of goods sold                                    3,076         6,099         5,955                   15,130
 Selling, general, and administrative                  2,570         3,380         2,477                    8,427
 Amortization of intangibles                                                                   441            441
                                                  ------------------------------------------            ---------
Total Expenses                                         5,646         9,479         8,432                   23,998
                                                  ------------------------------------------            ---------

Income (loss) from operations                            291           222          (140)                     (70)

GAIN ON SALE OF INVESTMENT                               201                                                  201
OTHER INCOME (EXPENSE), Net                                0           163             8                      171 
INTEREST EXPENSE                                        (405)         (321)         (125)    (297)         (1,148)

Income (loss) from operations before
  (benefit) provision for taxes                           87            64          (257)                    (846)

(BENEFEIT) PROVISION FOR TAXES                           (19)            4             1                      (14)

Income(loss) from continuing operations              $   106       $    60       $  (258)                 $  (832)


Basic EPS                                            $(0.09)                                              $ (0.24)
Diluted EPS                                          $(0.09)                                              $ (0.24)
Shares (000)                                          4,527                                                 5,606
Shares (000)                                          4,527            300           779                    5,606
</TABLE>

PRO FORMA FINANCIAL INFORMATION REFLECTS ADJUSTMENTS FOR INCREASED INTEREST
EXPENSES AND GOODWILL.


                                     F-14


<PAGE>

      DISSOLUTION OF ITALIA COLLECTION, INC. ("ITALIA")

      Because of the declining revenues and high operating costs, on December
      16, 1996, the Board of Directors decided to discontinue and dissolve
      Italia. On December 27, 1996, a Notice of Public Auction was distributed
      by Italia, advising all interested parties that a public auction of all
      the assets of Italia consisting of molds, equipment, models and inventory
      listed in a Security Agreement entered into between Italia, as debtor and
      United Credit Corporation, as secured party, was to occur. The auction
      took place on January 10, 1997 and the Company was the successful bidder,
      thereby acquiring all of the assets of Italia in consideration for a
      payment of $2,000 and the assumption by the Company of the liabilities of
      Italia to United Credit Corp., which as of June 30, 1997 totaled
      approximately $806,000. Since the financial statements of Italia are
      consolidated into those of the Company, Italia's liabilities have already
      been reflected on the Company's historical consolidated financial
      statements. At June 30, 1997, the Company made the adjustments necessary
      to properly restate recorded assets and liabilities, together with a
      general reserve of approximately $56,000. These adjustments included
      approximately $586,000 write-off of debt recorded based on the advice of
      the Company's legal counsel (as the Company is not legally liable for
      such liabilities). Further the Company wrote-off approximately $534,000
      in assets related to its Italia subsidiary, which were not considered to
      benefit the Company's future operations.

-------------------------------------------------------------------------------
5.  INVENTORIES
-------------------------------------------------------------------------------

The components of inventory are as follows:

                                                          JUNE 30,1998

              RAW MATERIALS                               $  1,591,564
              WORK IN PROCESS                                  414,192
              FINISHED GOODS                                 1,165,182
                                                          ------------
                                        TOTAL             $  3,170,938
                                                          ------------

-------------------------------------------------------------------------------
6.  OTHER CURRENT ASSETS
-------------------------------------------------------------------------------

The components of other current assets are as follows:

                                                          JUNE 30,1998

              PREPAID EXPENSES                            $    598,871
              DUE FROM AFFILIATES                              527,379
              DUE FROM INVESTORS                               250,000
              OTHER                                            320,641
                                                          ------------
                                        TOTAL             $  1,696,891
                                                          ------------

                                      F-15
<PAGE>

-------------------------------------------------------------------------------
7.  PROPERTY AND EQUIPMENT, AT COST
-------------------------------------------------------------------------------

The components of property and equipment are as follows:

                                                          JUNE 30, 1998

              Machinery and equipment                     $   3,399,404
              Furniture and fixtures                            531,007
              Leasehold improvements                          1,153,797
                                                          -------------
                                                              5,084,208
              Accumulated depreciation
              and amortization                               (3,789,399)
                                                          -------------
              TOTAL                                       $   1,294,809
                                                          -------------

    Depreciation expense was approximately $485,000 and $200,000 for the years
    ended June 30, 1998 and 1997, respectively.

-------------------------------------------------------------------------------
8.  OTHER ASSETS
-------------------------------------------------------------------------------

The components of others assets are as follows:

                                                          JUNE 30,1998

              GOODWILL                                    $  6,677,228
              OTHER                                          1,720,191
                                                          ------------
              TOTAL                                       $  8,397,419
                                                          ------------

    The Company has not completed its evaluation of its allocation of the
    purchase price of both Henlor and MSI's net assets. The Company has,
    however, determined that approximately $163,000 of such amount has been
    allocated to the opening inventories acquired in order to reflect their
    fair value. Upon completion of the evaluation, the remaining unallocated
    portion of the purchase price will be amortized over a period not to exceed
    40 years.

-------------------------------------------------------------------------------
9.  ACCRUED LIABILITIES
-------------------------------------------------------------------------------

                                                          JUNE 30, 1998

              SALARIES AND EMPLOYEE BENEFITS              $     599,008
              PAYROLL TAXES (a)                                 165,949
              EMPLOYEE SETTLEMENTS (b)                          291,156
              RENT                                              244,988
              DEFERRED RENT                                      82,657
              UNION DUES AND BENEFITS (c)                       226,291
              PROFESSIONAL FEES                                 251,351
              INSURANCE                                          10,970
              INTEREST                                          198,900
              ROYALTIES & COMMISSIONS                           185,500
              INCOME TAXES                                       37,731
              OTHER                                             130,511
                                                          -------------
              TOTAL                                       $   2,425,012
                                                          -------------

                                     F-16
<PAGE>



(a)   As of June 30, 1998, the Company has aggregate unpaid New York State
      payroll taxes of approximately $122,500.

      In March 1998, the Company entered into a payout arrangement with New
      York State to satisfy $99,000 of back payroll withholding taxes through
      twenty-eight monthly installments of $3,500 and one final installment of
      $1,270. The balance of the payout arrangement was approximately $75,000
      as of June 30, 1998. In June 1998, the Company entered into an additional
      payout arrangement with New York State to satisfy approximately $47,500
      of back taxes through nine payments of $5,275 starting in July 1998.

(b)   Pursuant to the Company's June 30, 1996 settlement with Ann Stevens (the
      "Settlement") a former executive of the Company and sister of the 
      President and Chief Executive Officer, the Company issued to Michael
      Levine as escrow agent (the "Escrow Agent") 1,250,000 unregistered shares
      of the Company's Class B Common shares (the "Escrow Shares".) The Company
      issued additional Class A common stock aggregating 12,500,000 through
      September 1998 in accordance with the anti-dilution terms of the 
      agreement. The Escrow Agent shall not vote the Escrow Shares unless the
      Company defaults on its obligations under the Agreement. Upon 
      satisfaction of such obligations, the Escrow Agent shall return the 
      Escrow Shares to the Company. To date the Company has not defaulted on 
      this agreement and has accrued $291,156 as of June 30, 1998, in 
      connection with the settlement.

(c)   Union Agreement - Effective April 1, 1998, the Company signed a five-year
      (with an additional two-year automatic renewal) union contract for its
      members under the terms of a collective bargaining agreement. None of the
      Company's employees have been on strike, or threatened to since the
      Company's inception and the Company believes its relationship with all of
      its personnel is satisfactory. The Company owes the Union approximately
      $235,000 as of this filing and has agreed to retire this amount through
      monthly payments of $11,000.

-------------------------------------------------------------------------------
10.  NOTES PAYABLE
-------------------------------------------------------------------------------


      NOTES PAYABLE                                              JUNE 30, 1998
      -------------                                              -------------

      BANK LINE OF CREDIT (a)                                    $    285,000

      NOTES PAYABLE, DUE APRIL 28, 1999 TO BH FUNDING,
      BEARING INTEREST AT 15% PAYABLE QUARTERLY (d)                   375,000

      NOTES PAYABLE DUE DECEMBER 31, 1998 TO
      EKISTICS CORP., BEARING INTEREST AT 12%, PAYABLE MONTHLY (b)    250,000

      FINANCING AGREEMENT WITH A SECURED LENDER (c)                   892,213

      NOTES PAYABLE, DUE MARCH 31, 1999 TO AN INDIVIDUAL
      BEARING INTEREST AT 10% (e)                                     810,000

      NOTE PAYABLE, DUE DECEMBER 1, 2000, TO AN INDIVIDUAL
      BEARING INTEREST AT 8% PAYABLE QUARTERLY (f)                    794,379

      FINANCING AGREEMENT WITH A SECURED LENDER (g)                 2,560,338

      NOTE PAYABLE, DUE APRIL 16, 2001, TO MORGAN STEEL               250,000
      LTD.  BEARING INTEREST AT 15% PAYABLE MONTHLY (h)

      NOTES PAYABLE DUE MARCH 19, 2000 BEARING INTEREST
      BEARING INTEREST AT 6% PAYABLE QUARTERLY (i)                  1,700,000

      PROMISSORY NOTES (j)                                            555,000

      Discount                                                       (180,000)

                                      F-17
<PAGE>

      OTHER NOTES PAYABLE                                             156,430
                                                                 ------------
               TOTAL                                                8,448,360
                                                                 ------------
      LESS CURRENT PORTION                                          5,621,930
                                                                 ------------
      LONG-TERM PORTION                                          $  2,826,430
                                                                 ------------


(a)      This line of credit bears interest at a rate of prime plus 1% (9.50%
         as of the date of this filing). The Company is paying the remaining
         balance off at $12,000 per month.

(b)      During November, 1997 the company borrowed $250,000 from Ekistics
         Corp. This loan is due December 31, 1998 and bears interest of 12% per
         annum.

(c)      During February 1996 Interiors entered into an agreement with United
         Credit Corporation ("UCC") a New York based lender whereby it borrowed
         pursuant to an asset-related formula. The agreement remains in effect,
         and may be terminated by either party upon notice to the other and
         payment of the commitment fee for the unexpired term of this
         agreement. The lender advanced the Company 80% of eligible
         receivables. Upon collection of the receivable, the lender remits the
         balance of 20%. Interest is calculated on the daily cash balance at
         the rate of prime plus 9% per annum (17% as of the date of this
         filing) or a minimum of 18% per annum against a minimum monthly
         defined compensation of $3,000. In addition, the secured lender
         received personal guarantees from Max Munn, President and Chief
         Executive Officer of the Company, and his spouse.

         The Company had outstanding secured financing with Infinity Investors,
         Ltd., totaling approximately $188,000 at September 30, 1997. This loan
         was secured by 600,000 shares of the Company's Class A common stock
         (the "Infinity Collateral") that had been held in Treasury Stock. UCC
         paid approximately $188,000 to Infinity, on December 17, 1997, which
         consisted of all of the Company's then outstanding debt to Infinity
         and received title to the Ininity Collateral. The Company consented to
         UCC's peaceful possession of the Infinity Collateral in exchange for a
         reduction of the Company's debt in the amount of $480,000. This debt
         reduction shall occur simultaneously with UCC's disposal of the
         Infinity Collateral. This debt reduction totaled $180,000 as of
         December 31, 1997 and has been reflected in shareholders' equity as a
         sale of Treasury Stock. The balance of $300,000 was used to satisfy
         debt previously guaranteed on Interiors and indemnified by Decor
         (dating back to March 1996). The payment of the guarantee was intially
         recorded as expenses during the year ended June 30, 1998, with a
         corresponding receivable of $300,000 from Decor recorded and was also
         reflected in equity as a sale of Treasury Stock.

(d)      In February 1997, the Company received a loan from BH Funding, LLC
         ("BH") in the aggregate principal amount of $600,000 to be utilized to
         repay certain indebtedness of the Company and for continued operating
         expenses. The Company in order to collateralize the loan to BH pledged
         and assigned to BH and granted to BH a continuing security interest
         in the Company's 6,666,667 shares of Series B Non-Convertible
         preferred Stock of Decor, and the Company's 54,934 shares of Series C
         Convertible Preferred Stock holdings in Decor Group, Inc to BH. In
         connection with this agreement, the Company transferred to BH 100,000
         shares of Series A Preferred Stock and 100,000 shares of Class A
         Common Stock. The fair market value of these shares on the date of
         issuance was allocated as follows: $350,000 as acquisition consulting
         on the Decor transaction; $350,000 as interest on the loan (to be
         amortized over the life of the loan using the effective interest
         method); and $25,000 as additional expense of the Company's sale of
         its 250,000 Series A Convertible Preferred Stock holdings in Decor
         Group, Inc. During the year ended June 30, 1998 the company repaid
         $225,000 leaving a balance of $375,000 as of June 30, 1998. In July
         1998, the Company entered into an agreement with BH Funding whereby
         all unpaid accrued interest was waived upon the Company's full
         repayment of the principal balance of the debt. The related
         unamortized debt issuance costs will be written off during the first
         quarter of fiscal 1999 against the gain on forgiveness of the debt
         (accrued interest) resulting in an immaterial amount.

(e)      In connection with Interiors recent acquisition of Merchandise Sales,
         Inc. (MSI), the Company issued a total of 

                                      F-18
<PAGE>
         $810,000 in 10% subordinated promissory notes to the former
         shareholders due March 31, 1999.

(f)      In connection with Interiors recent acquisition of Henlor, Inc.
         (Henlor), the Company caused its subsidiary to issue $794,379 in 8%
         subordinated promissory notes to the former shareholders. On December
         1, 1998 Henlor will make a principal payment of $100,000. On March 1,
         1999, and every three months thereafter, Henlor will make a principal
         repayment of $86,797.

(g)      On April 19, 1995 Vanguard Studios entered into an agreement with
         Capital Factors, Inc., a Florida based lender, whereby it borrowed
         pursuant to an asset-related formula. The agreement, including various
         revisions, remains in effect as of June 30, 1998. According
         to the agreement, the lender, upon confirmation of shipments, will
         advance the company 85% of the receivable. Interest is calculated on
         the daily cash balance at the rate of 6.75% above the Prime Rate
         (15.25% as of the date of this filing). The maximum loan amount is set
         at $3,000,000, which includes a borrowing limit of $1,200,000 on
         inventory, based on 50% of the total inventory reported. On October
         17, 1997, the Company arranged for additional financing from this
         lender in the form of a term loan for $152,000. Interest will be
         calculated at 1.75% above the Prime Rate. This loan will be payable in
         monthly installments concluding on September 1, 2000.

(h)      During April 1998, the Company issued a convertible note in the amount
         of $250,000. This note is due April 16, 2001, and bear interest at
         15% per annum payable monthly. This debenture is convertible at the
         holders' election into Class A Shares at the rate of $1.75 per share.
         Class B Warrants to purchase 15,000 shares of Class A Common Stock and
         Class C Warrants to purchase 15,000 shares of Series A Preferred Stock
         were issued in connection with this note. These options were valued
         using the Black Scholes model and the discount was determined to be
         immaterial to the consolidated financial statements.

(i)      During March 1998, the Company issued convertible notes in the amount
         of $1,700,000. These notes are due March 19, 2000 and bear interest at
         6% per annum payable quarterly. Any default in payment of interest
         triggers a default interest rate of 16% per annum. The holders have
         the right, from and after 180 days after the issuance of the notes to
         convert up to one-half of the outstanding and unpaid principal portion
         of the notes into Class A shares based upon a formula involving the
         five previous trading days of the shares. The terms of these notes
         required issuance of 175,000 two-year warrants to purchase Class A
         Common Stock at $1.75 per share. Warrants to purchase 198,333 shares
         of Class A common stock were issued in connection with these notes.
         These options were valued using the Black Scholes model and discount
         was recorded accordingly.

(j)      During March, 1998 the Company issued convertible subordinated notes
         in the aggregate principle amount of $1,270,000. These notes are due
         March 17, 2001 and bear interest at 15% per annum payable quarterly.
         These notes are secured by stock of Henlor and are convertible at the
         election of the holders into Class A Shares at the range of
         $1.50-$1.75 per share. The associated capitalized deferred issuance
         expenses were charged to operations. The terms on this note required
         issuance of 100,000 two-year warrants with an exercise price of $1.75
         per warrant for each Class A Common Share. As of June 30,1998,
         $695,000 of these notes were converted into Class A Shares and
         Warrants to purchase 286,000 shares of Series A Preferred Stock and
         27,000 shares of Class A common stock were issued in connection with
         these notes. The warrants were valued using the Black Scholes formula
         and discount was recorded accordingly.

         Aggregate Maturities of Notes Payable over the next five years
         (inclusive of aggregate amounts due under Financing Agreements which
         are classified as current) are as follows:

                  1999                       $5,621,930
                  2000                        1,991,586
                  2001                          791,586
                  2002                           43,258
                  2003                               --
                                             ----------
                    TOTAL                    $8,448,360

-------------------------------------------------------------------------------
11. SHAREHOLDERS EQUITY
-------------------------------------------------------------------------------

         DESCRIPTION OF SECURITIES

         COMMON STOCK

         Class A Shares. The Certificate of Incorporation of the Company
         authorizes the issuance of up to 60,000,000 Class A Shares. Each Class
         A Share is entitled to one non-cumulative vote per share on all
         matters on which stockholders' may vote at meetings of stockholders.
         The Class A Shares are not convertible into any other securities of
         the Company.

                                      F-19
<PAGE>

         Class B Shares. The Certificate of Incorporation of the Company
         authorizes the issuance of up to 2,500,000 Class B Shares. Each Class
         B Share is entitled to five non-cumulative votes per share on all
         matters on which stockholders may vote at meetings of stockholders.
         The Class B Shares are convertible on a one-for-one basis at any time
         after issuance at the option of the holder into Class A Shares.

         The holders of Class A Shares and Class B Shares (collectively,
         "Common Stock"): (i) have equal ratable rights to dividends from funds
         legally available therefor, when, as and if declared by the Board of
         Directors of the Company; (ii) are entitled to share ratably in all of
         the assets of the Company available for distribution to holders of
         Common Stock, upon liquidation, dissolution or winding up of the
         affairs of the Company; and (iii) do not have preemptive or
         subscription rights and there are no redemption or sinking fund
         provisions applicable thereto. All shares of Common Stock issued and
         outstanding are duly authorized, fully paid and nonassessable. Except
         as otherwise required by law, the holders of Common Stock shall vote
         together as a single class on all matters.

         PREFERRED STOCK

         The Certificate of Incorporation of the Company authorizes the
         issuance of up to 5,300,000 shares of Preferred Stock, $.01 par value
         per share. Of this amount 2,870,000 shares have been designated as
         Series A, 10% Cumulative Convertible Preferred Stock (the "Series A
         Preferred Shares"). The Board of Directors is authorized to issue
         shares of Preferred Stock from time to time in one or more series and,
         subject to the limitations contained in the Certificate of
         Incorporation and any limitations prescribed by law, to establish and
         designate any such series and to fix the number of shares and the
         relative conversion rights, voting rights and terms of redemption
         (including sinking fund provisions) and liquidation preferences. If
         shares of Preferred stock are issued with voting rights, such issuance
         could affect the voting rights of the holders of the Company's Class A
         Shares by increasing the number of outstanding shares having voting
         rights, and by the creation of class or series voting rights. Shares
         of Preferred Stock with conversion rights could potentially increase
         the number of Class A Shares outstanding. Issuance of Preferred Stock
         could, under certain circumstances, have the effect of delaying or
         preventing a change in control of the Company and may adversely affect
         the rights of holders of Class A Shares. Also, Preferred Stock could
         have preferences over the Class A Shares (and other series of stock)
         with respect to dividends and liquidation rights.


         SERIES  A 10% CUMULATIVE CONVERTIBLE PREFERRED STOCK

         The Series A Preferred Stock consists of 2,870,000 shares. After
         September 17, 2000, each Series A Preferred Share is redeemable by the
         Company in whole or in part at $5.50 per share upon 30 days prior
         written notice. Each Series A Preferred Share is convertible, subject
         to adjustment, into three shares of Class A Common Stock of the
         Company. The Series A Preferred Stock is entitled to a dividend, prior
         to any payment of dividends on the Class A or Class B Common Stock, of
         $0.50 per share per annum payable in semi-annual installments of $0.25
         per share. If the Series A Preferred Stock dividend is not paid, it
         accumulates until paid in full to date. The Company may elect to pay
         the Series A Preferred Stock dividend either in cash or in shares of
         Class A Common Stock, which Class A Common Stock shall be issued for
         such purposes on the basis of the average closing prices of the Class
         A Common Stock for the ten business days prior to the date of
         declaration of the Series A Preferred Stock dividend. The Series A
         Preferred Stock shall not have any right to vote except to the extent,
         if any, required by Delaware law. Upon liquidation of the Company,
         each Series A Preferred Share is entitled to receive $5.00 plus
         accrued and unpaid dividends before any payment is made to the holders
         of Common Stock.

         In December 1997, the Company's Board of Directors declared a stock
         dividend equivalent to $0.75 per share to its series A 10% Cumulative
         Convertible Preferred Stockholders of record as of the close business
         on December 10, 1997 (The "Record Date"). Accordingly, 530,331 shares 
         of the Company's Class A Common Stock was issued for this purpose 
         retained earnings was charged $530,331 in January 1998 in conjunction 
         with the issuance of these shares.

         As of June 30, 1998, the Company has not declared or established a
         record date for a dividend for its Series A 10% Cumulative Convertible
         Preferred Stock for the period October 1997 through June 30, 1998.
         Cumulative but unpaid dividends on Series A 10% Cumulative Preferred
         Stock as of June 30, 1998 total approximately $510,000.

         EQUITY TRANSACTIONS

         During September 1996, the Company issued: 10,000 shares of its Class
         A Common shares to an outside director of the Company, and 10,000
         shares of its Class A Common share to various individuals named by
         another outside director of the Company. These shares bear a
         restrictive legend. Pursuant to the issuance of these shares, $15,000
         was charged against earnings for the year ended June 30, 1997.
<PAGE>
         In April 1996, the Company's investment banking firm arranged for the
         private placement of 175,000 shares of the Company's Common a Stock
         and 50,000 shares of the Company's Series A Preferred Stock. These
         shares, all of 


                                      F-20
<PAGE>

         which carried a restrictive legend and were issued on April 24, 1996
         to various independent investors (the "investors") generating gross
         proceeds of $431,251. The Company realized net proceeds of $310,609
         which was used to pay certain outstanding liabilities. The Company
         registered the above shares on August 13, 1997.

         The Company has not paid and does not anticipate paying any cash
         dividends on it Class A Shares, Class B Shares, or Series A Preferred
         Shares in the foreseeable future, but instead intends to retain all
         working capital and earnings, if any, for use in the Company's
         business operations, and in the expansion of its business.

         Pursuant to a March 3, 1996 agreement relating to the capitalization
         of Decor Group, Inc, ("Decor"). Decor issued to the Company 250,000
         shares of its Series A Non-Voting Convertible Preferred Stock and an
         option to purchase 10,000,000 share of its Series B Non-Convertible
         Voting Preferred Stock (the "Option Shares") in exchange for issuance
         to Decor by the Company of 200,000 share of its Class A Common Stock,
         (which has been sold) and a guarantee with respect to 200,000 shares
         of its Series A Convertible Preferred Stock ( which has been sold) and
         a guarantee with respect to certain indebtedness should such
         indebtedness become necessary. 

         On June 30, 1997, the Company issued 300,000 Shares of Class A Stock
         to Mr. Hide Tashiro in settlement of certain amounts owned to Mr.
         Tashiro and claims by the Company of amount due from Mr. Tashiro and
         his affiliates. (See "Commitments ad Contingency").

         Pursuant to the Company's June 30, 1996 settlement with Ann Stevens 
         (the "Settlement") a former executive of the Company and sister
         of the President and Chief Executive Officer, the Company issued to
         Michael Levine as escrow agent (the "Escrow Agent") 1,250,000
         unregistered shares of the Company's Class B Common shares (the "Escrow
         Shares".) The Escrow Agent shall not vote the Escrow Shares unless the
         Company defaults on its obligations under the agreement. Upon
         satisfaction of such obligations, the Escrow Agent shall return the
         Escrow Shares to the Company. To date the Company has not defaulted on
         this agreement, and has accrued $291,156 as of June 30, 1998 in 
         connection with the settlement.

         WARRANTS AND OTHER

         Except as otherwise set forth herein, the Company has not material
         commitments for capital expenditures. In order to fund growth over the
         long term, the Company anticipates possible future issuance of its
         securities resulting in further dilution to its security holders.


         STOCK OPTION PLANS

         The 1994 Plan. On June 20, 1994, the Company adopted the Interiors,
         Inc. 1994 Stock Option and Appreciation Rights Plan (the "1994 Plan"),
         which provides for the granting of options to officers, employees and
         consultants to purchase not more than an aggregate of 250,000 Class A
         shares. Directors of the Company are not eligible to participate in
         the 1994 Plan. The 1994 Plan provides for the grant of options
         intended to qualify as "incentive

                                      F-21
<PAGE>

         stock options" under the Internal Revenue Code of 1986, as amended
         (the "Code") as well as options which do not so qualify.

         Pursuant to the 1994 Plan, the Board of Directors or a stock option
         committee established by the Board to administer the 1994 Plan
         determines that persons to whom options are granted, the number of
         Class A shares subject to option, the period during which the options
         may be exercised and the option exercise price. With respect to
         incentive stock options, no option may be granted more than ten years
         after the effective date of the 1994 Plan or exercised more than ten
         years after the date of grant (five years if the optionee owns more
         than ten percent of the Class A Shares of the Company at the time of
         grant). Additionally, with respect to incentive stock options, the
         option price may not be less than 100% of the fair market value of the
         Class A Shares on the date of the grant (110% if the optionee owns
         more than ten percent of the Class A Share of the Company at the time
         of grant). The fair market value of the Class A Shares will be
         determined by the Board or the Committee in accordance with the 1994
         Plan as follows: If the Class A Shares are not listed and traded upon
         a recognized securities exchange, on the basis of recent purchases and
         sales of Class A Shares in arms-length transactions or based on the
         last reported sale or transaction price for such stock on the date
         grant or, if the shares are traded on a recognized securities exchange
         or quoted on the NASDAQ National Market System upon the basis of the
         last reported sale or transaction price on the date of grant or, if
         the shares were not traded on such date, on the date nearest preceding
         that date. Subject to certain limited exceptions, options may not be
         exercised unless, at the time of exercise, the optionee is in the
         service of the Company.

         The Board of Directors or the Committee may, in its discretion, at any
         time prior to the exercise of any option, grant in connection with
         such option the right to surrender part or all of such option to the
         extent the option is exercisable, and receive an amount (payable in
         cash, Class A Shares or combination thereof as determined by the Board
         or the Committee) equal to the difference between the then fair market
         value of the shares issuable upon the exercise of the option (or
         portions thereof surrendered) and the exercise price of the option or
         portion thereof surrendered.

         The Director Plan. On June 20, 1994 the Board of Directors approved
         the 1994 Director Stock Option and Appreciation Rights Plan (the
         "Director Plan"). The Director Plan was adopted to provide an
         incentive to Directors through automatic and discretionary grants of
         stock options. The Director Plan provides for the grant of options
         intended to qualify as "incentive stock options" under the Code as
         well as options which do not so qualify.

         The Director Plan may be administered by a committee appointed by the
         Board of Directors of the Company (the " Committee"). Options under
         the Director Plan may be granted to each person who is a Director of
         the Company on the date of grant. All Directors of the Company are
         eligible to receive options of the Director Plan.

         The Director Plan provides for the granting of options to Directors in
         such amount and, subject to the terms of the Director Plan, upon such
         terms as the Board or Committee determines in its discretion in order
         to reward the recipient director for extraordinary service to the
         Company. In addition, on the second Monday of May of each year each
         person who is then a director of the Company shall be automatically
         granted an option to purchase 10,000 of the Company's Class A Shares,
         subject to adjustment as provided for by the Director Plan. The
         aggregate number of shares for which options may be issued pursuant to
         the Director Plan is 250,000 shares. The exercise price for options
         granted under the Director Plan must be equal to the fair market value
         per Class A Share on the date of grant. The fair market value of the
         Class A Shares will be determined by the Board or the Committee in
         accordance with the Director Plan as follows: If the Class A share are
         not listed and traded upon a recognized securities exchange, on the
         basis of recent purchase and sales of Class A Share in arms-length
         transactions or based on the last reported sale or transaction price
         for such stock on the date of grant or, if the share are traded on a
         recognized securities exchange or quoted on the NASDAQ National Market
         System up the last reported sales or transaction price on the date of
         grant or, if the shares were not trade on such date, on the date
         nearest preceding that date. Each option granted under the Director
         Plan expire ten years after the date of grant, unless a less period is
         specified by the Committee.

         In the event an optionee ceases to be an option, he may exercise only
         such options as are exercisable at the time he ceases to be a
         Director, within the original term of the option. Options which are
         not exercisable at the time an optionee ceases to be a Director shall
         terminate. In event an optionee dies, the Director Plan provides for
         the exercise of an option on behalf of the deceased Director.


                                      F-22
<PAGE>

         As of June 30, 1998, an aggregate of 1,032,500 options are exercisable
         at prices ranging from $1.00 to $3.50.

         The Company accounts for its plan under APB Opinion No. 25, under
         which no compensation cost has been recognized as all options granted
         during 1996 and 1997 have been granted at the fair value of Company's
         common stock. Had compensation cost for these plans been determined in
         accordance with SFAS 123, the Company's net income and EPS would have
         been reduced as follows:

                                       YEAR ENDED JUNE 30   YEAR ENDED JUNE 30
                                       ------------------   ------------------
                                            1998                    1997

         NET INCOME   AS REPORTED....     $633,674                $105,924
                      PRO FORMA......      (88,232)                105,924

         BASIC EPS    AS REPORTED....        $.04                   $(.09)
                      PRO FORMA......       $(.06)                  $(.09)

         DILUTED EPS  AS REPORTED....        $.04                   $(.09)
                      PRO FORMA......       $(.06)                  $(.09)


Under SFAS No. 123, the fair value of each option is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 1998: (1) expected life of option is 2-5
years; (2) dividend yield of 0%; (3) expected volatility of 93%; and (4) risk
-free interest rate of 6.0%.

Because SFAS No. 123 method of accounting has not been applied to options
granted prior to July 1, 1995 resulting pro forma compensation cost may not be
representative of the to be expect in future years.

-------------------------------------------------------------------------------
12. COMMITMENTS AND CONTINGENCIES
-------------------------------------------------------------------------------

OPERATING LEASES

On January 1, 1997, the Company entered into a lease agreement that provides
for the leasing of a 70,000 square foot site which serves as the Company's
principal office and manufacturing facility. The term of the lease expire
December 31, 2001, with an option by the Company for a five-year extension.
This lease requires minimum annual lease payments of approximately $168,000
(net of $63,000 sublease to P-2-A).

P-2-A has agreed to sublease approximately 21,000 square feet of office and
manufacturing space from the Company at an annual rental rate of $63,000 per
year lease rent escalations. The term of the sublease is from June 1, 1997 to
December 31, 2001. Minimum annual lease payments approximate $442,800.

The Company leases its facilities in California under operating leases
expiring in December 1999. Minimum annual lease payments approximate $442,800.

In addition, the Company leases showroom facilities in High Point, North
Carolina (three showrooms), San Francisco, California (three showrooms), New
York, New York (two showrooms), Dallas, Texas (two showrooms) and Atlanta,
Georgia, as well as a small retail outlet in Yonkers, New York. The showroom
sizes range from 300 square feet to approximately 9,800 square feet and rent
aggregates approximately $480,000 per annum.

The approximate future minimum lease on payments per fiscal year under
operating leases exclusive of sublease income are as follows:


                   1999                           1,141,503
                   2000                             785,223
                   2001                             338,883
                   2002                             219,580

                                      F-23
<PAGE>
                   2003                              54,798

Rent expense charged to operation, which includes escalation charges, for the
years ended June 30, 1998 and 1997, amounted to $560,224 and $307,941
respectively, excluding sublease income.

UNION AGREEMENT

Effective April 1, 1998, the Company signed a five-year (with an additional
two-year automatic renewal) union contract for it members under the terms of a
collective bargaining agreement. None of the Company's employees have been on
strike, or threatened to since the Company's inception and the Company believes
its relationship with all of its personnel is satisfactory. The Company owes
the Union approximately $235,000 as of this filing and has agreed to retire
this amount through monthly payments of $11,000.

CONSULTING ARRANGEMENTS

Refer to Note 13 for discussion of these arrangements.

LEGAL PROCEEDINGS

Interiors is subject to claims and litigation and other claims arising in the
ordinary course of its business. In management's opinion, Interiors is not
presently a party to any such litigation or claims the outcome of which would
have a material adverse effect on its financial position or its results of
operations.

-------------------------------------------------------------------------------
13. RELATED PARTY TRANSACTIONS
-------------------------------------------------------------------------------

During the year ended June 30, 1998, the Company advanced the President and CEO
amounts aggregating $77,000. These amounts were repaid subsequent to year end.

In May 1996, the Company entered into a two year Management Services Agreement
with Decor whereby the Company will advise Decor on the manufacturing, sale,
marketing and distribution of Decor's products as well as providing Decor with
accounting and administrative services and advice on strategic planning joint
ventures, acquisitions, and other long term initiatives. Pursuant to this
agreement (as amended), the Company will be paid on an annual basis the greater
of (1) $135,000 as a Management Fee, (2) 1.5% of excess cashflow as defined in
the agreement. Additional transfers of funds from Decor to the Company will be
subject to the attainment by Decor of excess cash flow totaling $4,000,000 per
year through December 31, 1999. During the fourth quarter of 1998, the Company
charged Decor $125,000 for various services considered to be outside the scope
of the Management Fee, including engineering and marketing studies. At June 30
1998, the Company has accrued approximately $260,000 of fees pursuant to the
agreement and the fiscal 1998 additional fee.

P-2-A has agreed to sublease approximately 21,000 square feet of office and
manufacturing space from the Company at an annual rental rate of $63,000 per
year plus rent escalations. The term of the sublease is from June 1, 1997 to
December 31, 2001. In addition, the current supply contract between the Company
and P-2-A has been amended to continue for a term of seven (7) years. Sales to
P-2-A for the years ended June 30, 1998 and 1997 were approximately $360,000
and $365,000 respectively. During the year ended June 30, 1998, the Company
provided consulting services to P-2-A in the amount of $75,000. As of June 30,
1998, P-2-A owed the Company $150,676.

Pursuant to an April 21, 1998 resolution of the Company's Board of Directors
relating to the guarantee of the Company's obligations to the former
shareholders of Henlor, Inc. and other continuing guarantees by Laurie Munn,
wife of the Company's President and Chief Executive Officer, the Company agreed
to defer certain payments on notes receivable from Laurie Munn. As restructured
interest accrued on the combined balance of $948,000 at 6.6%, interest will be
due April 21, 1999, and annually thereafter no interest has been accrued as of
June 30, 1998. The principal is due on April 21, 2003. 

On April 4, 1996, the Company's Board of Directors resolved to issue 250,000
shares of the Company's Class B Common Stock to Laurie Munn, wife of the
Company's President and Chief Executive Officer. This issuance is in
consideration for a down payment $250, Ms. Munn's 6.6% note to the Company
providing for principal of $437,500 to be paid to the Company in five equal
annual installments of $105,561.90 and Ms. Munn's guaranty and pledge of her
assets for certain Company debt. The company obtained an appraisal at that time
to determine the fair market values of this transaction. The shares were issued
to Ms. Munn on April 8, 1996. A Promissory Note and Security Agreement, whereby
the shares will collateralize the Promissory Note, was executed by the Company
and Ms. Munn pursuant to these terms. The Promissory Note remains outstanding.

On January 9,1998, Laurie Munn, wife of the Company's President and CEO,
obtained an option to purchase the above 1,250,000 Escrow Shares at fair value
at the date of the grant. Due to the substance of this grant, the wife of the
CEO, Laurie Munn's options are accounted for as if she is an employee of the
Company. This option was issued to Laurie Munn in consideration, amongst other
things, for her continuing personal guarantees of Company obligations to
several lenders, including BH Funding. In addition, Laurie Munn purchased
730,000 shares of Class B common stock at $.70 per share, the approximate

                                    F-24
<PAGE>

fair value of such shares at the time of the purchase. The purchase price is
due in annual installments through January 2005 at an interest rate of 6.6%.
The purchased stock is the collateral for this obligation.

In March, 1997 the Company borrowed $100,000 at 6 1.2% per annum interest from
Laurie Munn, wife of Max Munn, the Company's CEO. The loan is evidence by
demand promissory note. This note was repaid in October 1997.

Effective June 30, 1996, the Company entered into a consulting agreement with
Morris Munn, father of the Company's President and Chief Executive Officer,
under which he will provide the Company with the following: design and
fabrication of new molds for sculpture, recommend and implement improvements in
antiquing, woodworking, gliding and carving processes, and attend trade shows.
As part of this agreement, over the subsequent five-years, the Company will
payment Mr. Munn $54,000 per annum in equal bi-weekly installments, and issue
to Mr. Munn options to purchase up to 350,000 shares of the Company's Series A
Preferred Stock. These options were fully exercised during July to September
1996, generating net proceeds to the Company totaling $787,500. 

The Company currently has employment agreements with five key executives. Under
these agreements the Company has committed to total aggregate base compensation
per year of approximately $815,000 plus other normal customary fringe benefits,
stock options, bonuses and annual increase in compensation. The employment
agreements generally have terms of three to five years.

-------------------------------------------------------------------------------
14. PROFIT SHARING AND DEFERRED COMPENSATION PLANS
-------------------------------------------------------------------------------

In July 1991, the Company started a qualified Profit Sharing Plan for all
nonunion employees and a nonqualifed Deferred Compensation Plan for certain key
employees. The Company has not made any contributions to the Qualified Profit
Sharing Plan or the Deferred Compensation Plan since its initial contribution
during the fiscal year ended June 30, 1992.

-------------------------------------------------------------------------------
15. PROVISION (BENEFIT) FOR INCOME TAXES
-------------------------------------------------------------------------------

The income tax (benefit) provision consists of:

                                                  YEAR ENDED JUNE 30
                                                  ------------------
                                               1998              1997
         CURRENT INCOME TAXES:

         FEDERAL                             $_______           $______
         STATE AND LOCAL                       52,543            10,654
         DEFERRED INCOME TAX                 (160,783)          (30,000)
                                             ---------          --------
            TOTAL                             108,240           $19,346




The benefit from the Company's net operating loss ("NOL") carry forward for
Federal income tax purposes is approximately $4,500,000 (which expire through
2011). The deferred tax asset of approximately $1,500,000 is comprised
primarily of net operating losses. The utilization of such NOL's maybe limited
in the future due to changes in ownership.

Through June 30, 1996, all deferred tax assets were fully reserved. For the
years ending June 30, 1998 and 1997, the Company has determined it is "more
likely than not" that at least a portion of its deferred tax assets with be
utilized. Accordingly, the previously recorded valuation allowance has been
reduced by $30,000 for the year ended June 30, 1997 and by approximately
$161,000 in 1998.


                                      F-25
<PAGE>

The reduction of the valuation allowance in both 1998 and 1997 was calculated
at the statutory federal income tax rate. State income taxes have been recorded
based upon the applicable state requirements.

-------------------------------------------------------------------------------
16. SUBSEQUENT EVENTS
-------------------------------------------------------------------------------

On July 7, 1998, the Company entered into Stock Purchase Agreement (the
"Bentley Agreement"), with Bentley International, Inc. a Missouri corporation
("Bentley") and on July 30, 1998, the Company consummated the transactions
contemplated by the Agreement. Pursuant to the Agreement, the Company purchased
all the issued and outstanding shares (the "Shares") of Windsor Art, Inc., a
Missouri corporation and a wholly-owned subsidiary of Bentley ("Windsor"). As a
result of the purchase of the Shares, Windsor is now a wholly-owned subsidiary
of the Company. Windsor manufacturers and distributes decorative mirrors and
framed prints to furniture stores, mass merchants, hotels and designers
throughout the United States.

The assets acquired pursuant to the Bentley Agreement included, among other
things (i) fixed assets owned, leased or used by Windsor, including equipment
(ii) accounts receivable, (iii) inventory and (iv) contracts, agreements, and
leases of read and personal property. For the foreseeable future, the Company
intends to utilize such assets in connection with the operation of the business
of Windsor.

The purchase price paid to Bentley for the Shares consisted of a cash payment
of $1,706,992 (financed by $2,250,000 in convertible promissory notes issued by
the Company) and the delivery of two secured, subordinated promissory notes in
the aggregate principal amount of $5,300,000 (the "Notes"). As a condition
precedent to the Bentley Agreement, the Company and Bentley entered into and
consummated a pledge agreement on July 30, 1998 (the "Pledge Agreement").
Pursuant to the Pledge Agreement, the Company pledged the Shares as collateral
for the Notes and security for the obligations of the Company under the
Agreement. Until the debt is repaid by the Company, the former shareholder and
the President and CEO of the Company have agreed to vote the shares as a block.

Concurrently with the Closing, the Company entered into and consummated, a
securities Purchase and Registration Rights Agreement (the "Securities Purchase
Agreement") by and between the Company and Bentley. Pursuant to the Securities
Purchase Agreement, the Company purchased 150,000 shares of common stock of
Bentley and a warrant to purchase 300,000 shares of common stock of Bentley
(collectively, the "Bentley Shares"). The purchase price paid to Bentley for
the Bentley Shares consisted of 1,500,000 shares of the Company's Class A
Common Stock (the "Interiors Shares") issued by the Company. The Interior
shares will be held in escrow for one year from the Closing as security for the
obligations of Bentley to the Company.

The former owner of Bentley entered into a consulting agreement with the
Company aggregating $782,000 over a four-year period, and was granted a warrant
to purchase 50,000 Class A Shares.

On August 14, 1998, the Company consummated the transactions contemplated by
that certain Agreement and Plan of Merger (the "Troy Merger Agreement") dated
July 2, 1998 by and among the Company, Troy Acquisition Corp. ("Newco"), Troy
Lighting, Inc. ("Troy"), and certain shareholders of Troy. Pursuant to the Troy
Merger Agreement, Newco merger with and into Troy, with Troy continuing as the
surviving corporation and as a wholly-owned subsidiary of the Company. Troy
manufactures and distributes portable and installed lighting and light
fixtures.

The purchase price paid by the Company consisted of $250,000 in cash and Class
A Common Stock of the Company ("Class A Shares") with a fair market value of
$975,000 (the "Troy Merger Shares"). In addition, the Company agreed to repay
$1,700,000 to extinguish obligations of Newco to certain former shareholders of
Troy. The Troy Merger Shares are to be held in escrow as collateral for certain
obligations of the former shareholders of Troy. If the Troy merger Shares are
worth less than $1,053,000 as of July 2, 1999, less amount in the escrow
account and amounts paid for any resolved claims,


                                      F-26
<PAGE>

the Company is required to issue additional Class A Shares to the former Troy
shareholders equal in value to such deficiency. If the Troy Merger Shares are
worth more than $1,053,000 as of July 2, 1999, the former Troy shareholders are
required to return Class A Shares to be Company equal in value to such excess
amount.

The cash portion of the purchase price paid pursuant to the Troy Merger
Agreement and the repayment of certain Troy indebtedness was financed by
unsecured borrowing of $1,500,000 from United Credit Corporation and cash on
hand.

The assets acquired pursuant to the Troy Merger Agreement included, among other
things, (i) fixed assets owned, leased or used by Troy, including equipment,
(ii) receivable, (iii) inventory and (iv) contracts agreements, and lease of
real and personal property. For the foreseeable future, the Company intends to
utilize such assets in connection with the operation of the business of Troy.

In conjunction with the issuance of the Convertible Debentures, the Company
issued Common Stock Purchase Warrants ("A Warrants") to the holders of the 
Convertible Debentures. The A Warrants expire five years from their respective
dates of issue and allow the holders to purchase 1,339,286 Class A Shares
in the aggregate at an exercise price equal to the lessor of (i) 120% of the 
closing bid price of the Class A Shares on the trading day immediately
preceding the respective issuance dates of the A Warrants, plus an amount equal
to the Exercise Premium (as defined below) or (ii) 120% of the closing bid
price of the Class A Shares on the Reset Date, which shall be a single date
during the period commencing on the 91st day after the respective issuance
dates of the A Warrants through and including the 210th day after the
respective issuance dates of the A Warrants, to be designated by the holder of
the A Warrant, plus an amount equal to the Exercise Premium. The "Exercise
Premium" will be equal to 1/2 of the closing bid price of the Class A Shares on
the trading day immediately preceding the exercise date of the A Warrant in
question, less $4.11 per Class A Share, unless such closing bid price is less
than $4.11 per share, in which case the Exercise Premium shall be $0.00.



                                      F-27

<PAGE>
              
Item 8. Changes In and Disagreements With Accountants on Accounting and
        Financial Disclosure

        None.

                                    PART III

Items 9, 10, 11, and 12 are incorporated by reference from the Company's
definitive Proxy Statement to be filed by the Company with the Securities and
Exchange Commission no later than October 28, 1998.

Item 13.  Exhibits, Financial Statements and Reports on Form 8-K

(a)      1.   Financial Statements:

              The Financial Statements are incorporated herein as part
              of Item 7 of this Report.

         2.   Exhibits:

              See Index on Page E-1 of this Report.

(b)       Reports on Form 8-K:

          The following reports on Form 8-K were filed during the last quarter
          of fiscal year ended June 30, 1998:
                                     
         (a)    Company's Current Report on Form 8-K, as filed with the
                Commission on March 25, 1998 and as amended by the Company's
                Current Report on Form 8-K/A as filed with the Securities and 
                Exchange Commission on May 26, 1998;

         (b)    Company's Current Report on Form 8-K, as filed with the
                Commission on April 6, 1998 and as amended by the Company's
                Current Report on Form 8-K/A as filed with the Securities and
                Exchange Commission on May 29, 1998;

         (c)    Company's Current Report on Form 8-K, as filed with the 
                Securities and Exchange Commission on August 10, 1998 and as
                amended by the Company's Current Report on Form 8-K/A as filed
                with the Securities and Exchange Commission on October 9, 1998;
                and

         (d)    Company's Current Report on Form 8-K, as filed with the 
                Securities and Exchange Commission on August 28, 1998 and as
                amended by the Company's Current Report on Form 8-K/A as filed
                with the Securities and Exchange Comission on October 9, 1998.

The Company's Current Report on Form 8-K, as filed with the Securities and
Exchange Commission on March 25, 1998 and as amended by the Company's Current
Report on Form 8-K/A as filed with the Securities and Exchange Commission on
May 26, 1998 includes the description of the acquisition of Henlor and the
financial statements of Henlor which have been audited by Thomashow, Brown &
Paialii, independent public accountants, as indicated in their report with
respect thereto. The Company's Current Report on Form 8-K, as filed with the
Securities and Exchange Commission on April 6, 1998 and as amended by the
Company's Current Report on Form 8-K/A as filed with the Securities and
Exchange Commission on May 29, 1998 includes the description of the acquisition
of MSI and the financial statements of MSI which have been audited by Kellogg &
Andelson, independent public accountants, as indicated in their report with
respect thereto. The Company's Current Report on Form 8-K, as filed with the
Securities and Exchange Commission on August 10, 1998 and as amended by the
Company's Current Report on Form 8-K/A as filed with the Securities and
Exchange Commission on October 9, 1998 includes the description of the 
acquisition of Windsor and financial statements of Windsor which have been
audited by Rubin, Brown, Gornstein & Co., independent public accountants, as
indicated in their report with respect thereto. The Company's Current Report on
Form 8-K, as filed with the Securities and Exchange Commission on August 28, 
1998 and as amended by the Company's Current Report on Form 8-K/A as filed with
the Securities and Exchange Commission on October 9, 1998 includes the 
description of the acquisition of Troy and financial statements of Troy which
have been audited by Deloitte & Touche LLP, independent public acountants, as
indicated in their report with respect thereto.
<PAGE>

                                   SIGNATURES


In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.

                                            INTERIORS, INC.

                                            By: /s/ MAX MUNN
                                               ------------------------------
                                                Name:  Max Munn
                                                Title: President, Chief
                                                       Executive Officer and 
                                                       Chief Financial Officer


In accordance with the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.

Signature                          Title                          Date
---------                          -----                          ----

/s/ MAX MUNN             President, Chief Executive        October 16, 1998
-----------------------  Officer, Chief Financial Officer
Max Munn                 and Director

/s/ ROGER LOURIE         Director                          October 16, 1998
-----------------------
Roger Lourie

/s/ RICHARD JOSEPHBERG   Director                          October 16, 1998
-----------------------
Richard Josephberg

                                      S-1